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Think Your State Is Fiscally Sound? Think Again

It’s time to find out how deep in the red our country is.

It's that time of the year again when we find out how deep in the red our country is thanks to the 2018 edition of the Mercatus Center State Fiscal Rankings. The study authors, Eileen Norcross and Olivia Gonzalez, find that when you rank states by their fiscal health, you can identify the best and worst state. But the scariest finding is that no state is really fiscally healthy.

Norcross and Gonzalez are very transparent about each decision behind the study methodology. They use states' own audited financial data to create five different indices (cash solvency, budget solvency, long-term solvency, service-level solvency, and trust-fund solvency) to analyze and create the overall ranking. The final product is the result of many factors and deliberative choices.

Based on the most recent government data available for all states, this year, the top five most fiscally solvent states, from one to five, are Nebraska, South Dakota, Tennessee, Florida, and Oklahoma. One thing these states have in common is that they have some cash on hand and relatively low short-term obligations. That makes them relatively healthier than others.

The bottom five states in terms of fiscal solvency, from 46 to 50, are Kentucky, Massachusetts, New Jersey, Connecticut, and Illinois. These states face large debt obligations and have too little cash on hand to pay short-term bills. It doesn't take a professional accountant to understand that those bad fiscal habits could spell disaster for states during a recession or emergency.

Again, the study's most important finding is that being at the top makes you healthier than others by comparison but not necessarily healthy overall. In fact, the authors show that every single state would be in trouble if another financial crisis were to happen.

For instance, the data show that long-term liabilities have increased over time on average, with a pretty big jump since 2015. This is partly due to a recent transparency requirement by the Governmental Accounting Standards Board that makes states report unfunded pension obligations on their balance sheets. Under the older standards, states didn't have to report the true size of their pension liabilities. To understand the impact of this change, consider the following: From 2006 to 2014, long-term liabilities per capita grew by about 4 percent annually, on average. Between fiscal year 2015 and fiscal year 2016, that average ballooned by a sobering 54 percent.

The older standards were obviously inadequate to expose the true size of the pension liabilities faced by most states. The new standards, however, aren't perfect either. For instance, until next year when a new requirement will come into effect, states haven't had to report their health care liabilities, which allowed them to appear more fiscally fit than they truly were and are.

Look at Nebraska, the state in first place overall. Upon closer inspection, the state ranks 37th in budget solvency, which means that it spent more money than it made in tax revenue in 2016. Nebraska's pensions show that it's in a worse position than advertised. The state reports unfunded pension liabilities of $1.17 billion. Yet when valued on a true market basis, it's actually underfunded by $20.9 billion. Nebraska does better than most states on underfunding pensions, but it has room to improve. Its weakening budget position and growing unfunded pension obligations place more pressure on fiscal health than its top rank lets on.

Just because your state is ranked higher doesn't mean you're ready for a downturn.

Alaska is another interesting case study. The state was on the top of the ranking for several years in a row, due to its oil revenue. However, in previous reports, Norcross and Gonzalez warned that an overreliance on oil and the restrictions put on the use of oil revenue could be problematic in an age of decreasing oil prices. Sure enough, a drop in oil prices confirmed their fears. Alaska's fiscal ranking slid from first to 11th in just two years.

For this reason, I'd caution the healthier ranked states to temper their excitement. That top ranking is a little like a kid bragging about getting the best grade in math when it's a C+ and the class average is closer to an F.

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  • Rat on a train||

    No link?

  • Leo Kovalensky II||

    Interesting map. Reverend Arthur ensures us that those worst ranked states on the coast should be role models for the "backwards" states in the middle of the country.

  • Kirk Solo||

    Yeah...but, he is an uneducated dipshit though.

  • Red Tony||

    Hey, education is not knowledge. He may be very well educated.

    Still a complete dipshit.

  • coma44||

    Exactly

  • CDRSchafer||

    Blue states can lead us the way to righteous financial insolvency which can of course be blamed on Republicans. Only way to fix it is to elect more progressives hurling good money after bad while the media waves pom poms.

  • I am the 0.000000013%||

    If a super tax on the super wealthy is the answer to a state's fiscal problems, California seems like the perfect state to test that assertion.

    I wish they would go all out with confiscatory taxes on wealthy individuals and successful corporations.

  • Gilbert Martin||

    "I wish they would go all out with confiscatory taxes on wealthy individuals and successful corporations."

    Indeed, that would greatly speed their own collapse as they drive even more people to move low tax states.

    And that would be hilarious to watch.

    Hedge fund manager David Tepper WAS New Jersey's richest person - until he moved his business to Florida in 2016. That one move has cost New Jersey up to $100 million a year in lost income taxes. What was the response of the Dem New Jersey governor?
    Increase the top income tax rate from 8.97% to 10.75%.

    You can't fix stupid.

  • Gilbert Martin||

    "The older standards were obviously inadequate to expose the true size of the pension liabilities faced by most states. The new standards, however, aren't perfect either. For instance, until next year when a new requirement will come into effect, states haven't had to report their health care liabilities, which allowed them to appear more fiscally fit than they truly were and are."

    It's absurd that government entities have been able to operate under accounting standards that would get any publicly traded company prosecuted for fraud by the Securities and Exchange commission if they did the same.

    Of course the greatest offender is the federal government itself.

  • Overt||

    I was shocked that Colorado looks so bad. WTF Happened to my old home state?

  • Leo Kovalensky II||

    "... and then I got high?"

  • loveconstitution1789||

    Lefties took over.

    The common reason to fiscal problems are Lefties in charge.

  • CDRSchafer||

    Fiscal and most other problems. Because lefties are by definition, fools.

  • JFree||

    I think it's the slew of referenda/initiatives on the ballot over the last decade. Most are poorly structured (written by the special interest that pays to get the signatures so it appears on the ballot) and force spending on this/that/other in order to bypass TABOR restrictions on the revenue side. And TABOR itself eliminates the ability to spend money (or change the tax base) that is raised within TABOR's contraints. Basically the combo means that the state budget is being micromanaged more through special interests via citizen initiatives than it is thru an elected legislature. And it turns out that citizens are easier to corrupt (or dumber or distracted or not paying attention) than legislators are.

    The idea of direct/citizen initiatives is good. But they would work better if they were structured solely as negatives (prevention of state doing something) rather than positives (detailed actions that state is mandated to do). More of a veto on the existing legislature than a secondary legislature. Course that would prob mean courts would have to adjudicate the initiatives beforehand to determine if they are more statute vetoes or new statutes.

    But hey - at least CO hasn't sunk into the initiative cesspool that makes CA ungovernable now.

  • JFree||

    Just as an example - this Nov there are:

    4 'normal' constitutional initiatives that are truly constitutional (dealing with citizen rights or basic govt structure)
    2 'normal' constitutional initiatives that are constitutional if a bit micromanagey (means of redistricting)
    3 constitutional initiatives that are purely budgetary/micromanagement
    4 statute propositions that simply impose permanent spending/regulation decisions on the legislature

    The 'bluebook' sent out to voters describing those was 70 pages (plus the same for the Spanish translation). Most voters won't read that at all - they will simply default to a for/against based on their personality or on the ad campaigns.

  • loveconstitution1789||

    Go Georgia #18!

    Georgia state fiscal rankings

    It will get worse as Lefties move here in droves.

  • Dan Bongard||

    Of the top five and bottom five, the ones that clearly deserve their positions are Nebraska and South Dakota (in the top five) and Kentucky (in the bottom five).

    As for the others -- Tennessee, Oklahoma, and (especially) Florida receive net federal subsides of thousands of dollars per resident. Massachusetts, New Jersey, Connecticut, and Illinois, on the other hand, pay thousands of dollars more to the feds, per capita, than they get in benefits. So crediting the first group with being in better financial shape than the latter group is a bit much.

    Nebraska and South Dakota manage to be financially stable despite being net taxpayers, and Kentucky is a basket case despite being on the dole. So those three definitely deserve their spots. :)

  • BigChiefWahoo||

    Is the amount of federal tax collected and federal funds expended in a given state at all relevant to that state's internal financial condition? Federal taxes are supposedly collected to finance things states can't do individually. The fact that navy bases are best located on the coasts is not really relevant to a state's financial/fiscal condition.

  • Gilbert Martin||

    " The fact that navy bases are best located on the coasts is not really relevant to a state's financial/fiscal condition."

    Yes the folks claiming federal "subsidies" are playing fast and loose with the definition.

    Not all federal spending that occurs in a state is a "subsidy" to that state.

  • Migrant Log Chipper||

    Those figures about federal funds dummy^^^^^^ uses are mostly social security payments which are separate from general expenditures. It never is pointed out because it throws cold water on lefty memes.

  • Stevecsd||

    Many of these states, due to their bloated and financially ruinous defined benefit pension plans, may be facing bankruptcy in the future. California's unfunded amount is about $107 billion, with an estimated $1 TRILLION for all states. They would be better off switching all new employees to a defined contribution plan, like most private employers, who have pension plans, have done.

  • Kevin Tyssen||

    I am not at all surprised to find my home state is dead last.

  • BillyG||

    when we find out how deep in the red our country is

    Based on that map, "in the red" will one day be viewed as a fiscally sound adjective while "in the blue" is for those who are in debt over their heads and still spending money like crazy.

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