The Mercatus Center at Virginia’s George Mason University is out with a 50-state ranking that says New York State’s “overall fiscal solvency” is among the worst in the nation.

The new study suggests that New York’s state government finances fall into the “poor” category—ranking 46th, or roughly as messed up as New Jersey (49) and Illinois (50), as illustrated in this map.

In a short-term, budgetary sense, the rank Mercatus assigns to New York seems a few notches too low. After all, compared to their counterparts in New York, governors and lawmakers in New Jersey and Illinois, in particular, have cut even more corners and kicked even more cans down the road in balancing their recent budgets. Louisiana and Pennsylvania, to name just two states with higher Mercatus rankings (35 and 41, respectively), have been dealing with growing budget shortfalls that, proportional to total revenues and spending, are worse than anything Albany has seen in years.

But even if New York actually deserves to be a cut above “poor” in a 50-state survey, the Mercatus study is useful in what it says about state finances in a broader balance sheet sense: i.e., assets (what states own) vs. liabilities (what they owe), and the ability of each state to pay its bills in the long as well as the short run.

The overall Mercatus approach, based on a complex and painstakingly documented methodology, highlights the financial danger lurking in the sort of long-term liabilities that New York pols prefer to ignore, including other post employment benefits (OPEB) and risk-adjusted pension obligations as well as bonded debt.

Digging into the numbers

The Mercatus methodology is based in large part on “full accrual” revenue and expenditure data, calculated using consistent generally accepted accounting principles (GAAP) in each state’s comprehensive annual financial reports. Since these reports are only available on a lagged basis, the numbers used in the new study actually date back to 2013. Three years down the line, fiscal conditions have shifted for the better in most states, and for the worse in some.

The summary of the Mercatus findings includes this passage:

Illinois, New Jersey, Massachusetts, Connecticut, and New York rank in the bottom five states, largely owing to low amounts of cash on hand and large debt obligations.

High deficits and debt obligations in the forms of unfunded pensions and health care benefits continue to drive each state into fiscal peril. Each holds tens, if not hundreds, of billions of dollars in unfunded liabilities—constituting a significant risk to taxpayers in both the short and the long term.

While there’s no reason to question the Mercatus math, it’s misleading to imply that New York has (or rather, had as of three years ago) anything approaching the persistent solvency problems of Illinois, in particular. In fact, as of mid-2013, Illinois had $6 billion in unpaid bills, a problem that has gotten even worse as that state’s new Republican governor battles Democratic lawmakers over needed spending cuts.  New York, by contrast, hasn’t experienced cash-flow strains since 2009.

What’s been happening in the Empire State

Although Mercatus doesn’t get into this level of detail, there are two big reasons for the relative improvement in New York’s finances over the past several years, only one of which Governor Andrew Cuomo will typically acknowledge.

First, spending growth has been relatively restrained. That’s the part the governor likes to talk about.

Second, Cuomo has maintained a fairly significant tax increase, extending (twice in four years) most of a “millionaire tax” hike initiated by Governor David Paterson in 2009 as a supposedly temporary, deficit-fighting measure. As a result, income tax collections from the highest-earning one percent of New York filers are $4 billion higher than they would be under the permanent law that was in effect through 2008, according to the Executive Budget. About $2 billion of that total has been redistributed among middle-income households in the form of temporary rates cuts and gimmicky tax credits.

Cuomo frequently implies that his ability to propose various “tax cuts” has resulted entirely from his fiscal restraint. In reality, it would be equally accurate to say that nearly all of the tax reductions enacted so far in his tenure effectively have been financed by the added revenues generated from the temporary income tax hike, which also has left the state more dependent than ever on a small number of very high-earning filers.

The retirement factor

While all public pension funds have huge shortfalls when using Mercatus’ risk-adjusted methodology, pension funds in several others states have much larger shortfalls than New York. The Mercatus methodology does reflect this as part of a broader measure of “trust fund solvency,” which takes account of New York’s very large unfunded OPEB liability as well as its comparatively better-funded pensions.

Mercatus estimated the relative “solvency” of states, in part, by calculating liabilities as a percentage of the personal income of each state’s residents. But New York, to a greater extent than any major state, exports a big slice of its tax burden. About 15 percent of the state’s personal income tax comes from non-residents, mainly New Jersey and Connecticut commuters with high incomes, who are not counted in the New York personal income base. A better relative measure of solvency and ability to pay would use overall economic output as measured by state Gross Domestic Product.

Mercatus rankings aside, here are a few of the clouds on New York’s fiscal horizon:

• The 2016 Enacted Budget Financial Plan forecasts budget gaps ranging from $2 billion in fiscal 2017 to $4 billion by 2019. Cuomo has obscured those shortfalls with a magic footnote in his financial plan, explaining that he fully expected to hold measured spending growth to 2 percent a year, which would produce “surpluses” compared to current-law trends of 4 percent annual growth.
• Since fiscal 2011, the state has borrowed $3.2 billion from its pension funds by deferring some required contributions, and it plans to borrow $1 billion through similar deferrals between now and 2020.
• The state balanced its last budget with $1 billion transferred (on an accounting pretext) from the State Insurance Fund, which is the largest provider of workers’ compensation insurance policies to businesses in New York. This year’s budget takes a final installment of $250 million from SIF.
• The state has squandered most of a $5.4 billion cash windfall from bank penalty payments on new “economic development” schemes and other projects rather than reducing debt and addressing basic infrastructure needs.

Cuomo’s comeback

Reacting to the Mercatus study yesterday, the governor cited the state’s improved credit ratings. Fair enough. However, credit ratings are focused on assessing the state’s capacity and willingness to repay its general obligation bondholders, while Mercatus is taking a broader view with its “early-warning system.” (Oh, and the rating agencies’ client is the bond issuer—in this case New York State itself.)

Cuomo’s press spokesman reportedly dismissed the Mercatus Center as “a Washington think tank with an agenda,” which was both unfair and unwarranted, if not untypical of the current administration. (The last time a Cuomo staffer questioned the motives of an independent Washington think tank was in 2012, when then-Secretary Larry Schwartz branded the Tax Foundation as “a right-wing think tank.” That didn’t stop the governor from accepting an award from the same group last fall in recognition of state business tax reforms.)