The Corner

Economy & Business

How Fiscally Healthy Is Your State?

My Mercatus Center colleagues Eileen Norcross and Olivia Gonzalez’s new state fiscal ranking is out. It is a the fourth edition of the study which provides the most comprehensive snapshot to date of the financial health of all 50 states. Other rankings focus on certain aspects of fiscal health, whereas this study pulls in dozens of variables to provide a fuller picture of fiscal health. It uses a state’s own data in creating the methodology, providing carefully weighted and non-weighted rankings.

The top states in this fiscal ranking: Florida, North Dakota, South Dakota, Utah, and Wyoming.

The top states exhibit better fiscal responsibility than others. Remember it’s all relative, and being at the top doesn’t mean you are fiscally healthy and have nothing to worry about. It simply means that you are doing better than other states. These states have lower debt levels, higher cash on hand, lower liabilities, and their budgets are solvent. For all of those who claim that only small states can be fiscally healthy (relatively speaking), I would point to Florida. The state made a real effort to get to this position in spite of the size of its population.

The bottom states in this fiscal ranking won’t surprise anyone: New Jersey, Illinois, Massachusetts, Kentucky, Maryland.

These states not only have relatively high levels of debt compared to other states but have objectively high levels of debt. Not surprisingly, they are drowning in pension obligations, have poor levels of cash, and are short in revenues to cover ongoing expenses. Basically, they can’t make their ends meet, they live paycheck to paycheck and often need to resort to debt and gimmicks to pay for their everyday expenses, and they have no idea how they will face the mountain of pension liabilities that have been accumulated over the years by irresponsible lawmakers on both sides of the aisle.

Generally, the study shows that states that fail to address long-term drivers of debt including unfunded pensions and are not recession ready will continue to rank poorly. Interestingly, they are also the states that often resort to gimmicks and poor accounting techniques. They don’t measure their pension liabilities the way most states do — and their pension liabilities are far larger than their lawmakers recognize.

Norcross tells me that she weighted pretty heavily the short-term cash on hand and revenue versus expenses (budget solvency). That makes sense because it tells you a lot about states’ ability to weather a recession. However, when she removes this weight, which is interesting to do because the long run is important as well, Maryland ranks in the 30s rather than in the bottom five. However, Maryland is the only state that seems very affected by the methodology.

Also worth noting is the difference in behaviors that states exhibit when they are in such a mess. Some, such as Illinois, keep digging while others try to tackle their structural problems and be more fiscally responsible, e.g., Kentucky.

It is interesting to look at each state and see what they do right and what they need to improve. The whole thing is here.