The Looming Economic Nightmare for the Tri-State Area

If there’s a lesson to draw from the financial disasters in Greece, Puerto Rico and Chicago, it’s this: When governments take on too much debt and continually defer their bills, it eventually spells trouble — for both taxpayers and those who rely on government pensions or services.

It takes a long time, a lot of bad choices, and an economic shock or two to put a government on the brink.

Will the tri-state area soon face the same painful choices as Chicago Mayor Rahm Emanuel — trying to decide whether to staff schools or fund pensions?

It’s a question that led me to compile new state fiscal health rankings, using the most recent 50-state set of audited financial reports (from the 2013 fiscal year) and check their vital signs.

Do states have enough cash to cover an emergency? Can they meet their annual budget? Do they have more liabilities or assets? What are the biggest risks?

Three of the bottom five states in our union include New York, Connecticut and New Jersey.

All experienced the same lingering post-recession stress: little cash to cover short-term liabilities and revenues that barely match expenses.

And all three have large, ongoing expenses for public employees’ health care or other post-employment benefits (OPEB) and a tendency to use debt financing.

New York ranks 46th, due to a weak cash position and a small deficit in FY 2013.

The long-run measures show the state uses debt to finance everything from OPEB to local highways and bridges, mass transit and CUNY and SUNY expenses.

Issuing debt isn’t unusual, nor does it spell imminent disaster, but it does add up.

New York had $90 billion in long-term liabilities in FY 2013. That’s 63 percent of its total assets — among the highest in the nation. Its second-biggest liability is $15 billion for pay-as-you go health-care benefits for public-sector workers.

Unfunded benefits can put stress on a state’s finances, especially during recessions.

Connecticut is next at 47th.

It has more long-term obligations than it does resources. Adding to its deficit is a reliance on bonds, including debt issued to cover pension contributions and pay for OPEB benefits and compensated absences for employees.

New Jersey finishes at 49th, ahead of Illinois.

The Garden State’s cash position was better than New York’s, but its budgetary position was slightly worse, with revenues falling short of expenses, necessitating a $5 billion transfer to cover the gap.

Long-term obligations like the ongoing cost for pensions and OPEB are again the driver and are among the biggest liabilities on New Jersey’s balance sheet.

Looking at a few self-reported numbers from one fiscal year only says so much.

They’re blunt, basic, and point to broad areas where states face challenges. Like going to the doctor for the first time, the patient’s weight, blood pressure and temperature provide a benchmark, not a full diagnosis.

But the news here is sobering.

It may come as a surprise, but these rankings don’t assign blame to current governors, legislators or political parties.

States’ economies, tax systems, and past fiscal decisions — some stretching back to the booming stock market days of the ’80s and ’90s, when pensions and benefit plans looked over-funded on paper — have placed policymakers in tough situations. Often, their choice is between a rock and a hard place.

Public employees rightly expect to receive the benefits they’ve earned, and politicians must now figure out how to honor those promises while still funding ongoing services.

There is also a lesson from the tri-state area for the top three states: Alaska, North Dakota and South Dakota. Windfall revenues and a hot economy can lead to short-term spending sprees and generous promises, which can blind policymakers to debts and lull legislatures into believing that the long-term never really arrives.

But, as the tri-state area’s governors can tell them, it does.