screen-shot-2014-05-16-at-11024-pm-150x150-9628336Among the nation’s four most populous states, New York is better prepared than California to weather the next recession—but not as well-prepared as Florida and Texas, according to fiscal stress test results from Moody’s Investors Service.

Moody’s based its findings on three measures of fiscal health for state governments: revenue volatility, deficit coverage by reserves in a recession scenario, and revenue and spending flexibility.  On the first measure, the state governments of Texas and New York were assigned ratings of moderate volatility—although, in the Empire State’s case, recent downturns have been cushioned not just by spending reductions but by tax increases, raids on public authority cash reserves and pension borrowing. Mainly due to its relatively high fixed costs for pensions and debt services, New York shared with Florida an “in between” rating for financial flexibility, the third measure

But when it came to potential deficit coverage by reserves, Moody’s found, New York was weakest of the four big states with a coverage ratio of 0.36, which translates into 36 percent of the cash needed to cover a “first-year downturn scenario.”  Reserves in Texas and Florida, by contrast, give those states coverage ratios of 3 and 1.3, respectively. Even California was slightly stronger than New York with a coverage ratio of 0.48.

Expanding its analysis to all 20 of the most populous states, Moody’s placed Missouri, Washington and Arizona with Texas and Florida at the top of the list for fiscal preparedness.  Illinois and Wisconsin bracketed California at the bottom of the ratings.

California and New York depend heavily on steeply progressive (and volatile) income taxes, which don’t even exist at the state level in Florida and Texas.  This doesn’t prove that income taxes are associated with fiscal weakness—but it does show that the lack of an income tax doesn’t necessarily make a big state fiscally weaker.

The Moody’s report is here, by subscription only.

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About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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