The Corner

How Solvent Is Your State?

The Mercatus Center, where I work, has just put out a study that examines states’ abilities to meet their financial obligations. For the most part . . . they can’t. Most states have seen gains in tax revenues and pension assets after the recession, but according to the Government Accountability Office, this hasn’t been enough to transform their long-term fiscal outlooks, which remain mostly negative. The GAO’s simulations predict that states will have repeated annual difficulties balancing revenues and expenditures, largely because of rising health-care costs and the cost of funding state and local pensions. Here are the best and worst of the states:

Top 10:

1. Alaska

2. South Dakota

3. North Dakota

4. Nebraska

5. Wyoming

6. Florida

7. Ohio

8. Tennessee

9. Montana

10. Alabama

Bottom 10:

50. New Jersey

49. Connecticut

48. Illinois


46. California

45. New York

44. Maryland

43. Hawaii

42. Pennsylvania

41. West Virginia

40. Kentucky


The author of the study, Sarah Arnett, uses four different indices (cash solvency, budget solvency, long-term solvency, and service-level solvency) to analyze the states, using each one’s FY2012 Comprehensive Annual Financial Report data, and combines the four to create the overall ranking. [As is always the case with studies like this one, the final rankings are the results of many of the choices and methodology of their authors. In this case, Arnett didn’t include borrowing costs which, if included, would likely change some of the rankings.]

The whole thing is here, with maps for each ranking and explanations about the methodology and findings. Arnett explains how the rankings should inform lawmakers about what kind of reforms work best to address the states’ fiscal problems. For instance, we know that, depending on how they’re designed, balanced-budget amendments or tax-and-expenditure limits may not live up to expectations.

It’s interesting to compare these rankings with the index produced by Jason Sorens and Will Ruger in their Freedom in the Fifty States study – no matter how you slice it, New Jersey, New York, California, and Illinois are always at the bottom of the heap, or not far from it. I’ve written about the connection between economic freedom, prosperity, and migration between states, here. My main conclusion based on Sorens’s and Ruger’s work: People follow jobs and jobs follow freedom.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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