A new study for the Mercatus Center at George Mason University ranks each US state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pensions and healthcare benefits. This 2016 edition updates the version the Mercatus Center published in 2015. Using the approach pioneered in 2015, the 2016 edition presents information from each state’s audited financial report in an easily accessible format, this time including Puerto Rico to provide a benchmark of poor fiscal performance.
Growing long-term obligations for pensions and healthcare benefits continue to strain the finances of state governments, highlighting the fact that state policymakers must be vigilant to consider both the short-term and the long-term consequences of their decisions. Understanding how each state is performing in regard to a variety of fiscal indicators can help policymakers as they consider the consequences of policy decisions.
The study also highlights some of the limits of the financial data reported by state governments. States release these data years after they are most relevant, and because the information is highly aggregated, analysts and the public have difficulty discerning the true fiscal position of any state.
SUMMARY AND KEY FINDINGS
The financial health of each state can be analyzed through the states’ own audited financial reports. By looking at states’ basic financial statistics on revenues, expenditures, cash, assets, liabilities, and debt, states may be ranked according to how easily they will be able to cover short-term and long-term bills, including pension obligations.
This ranking of the 50 states and Puerto Rico is based on their fiscal solvency in five separate categories:
Alaska, Nebraska, Wyoming, North Dakota, and South Dakota rank in the top five states.
Kentucky, Illinois, New Jersey, Massachusetts, and Connecticut rank in the bottom five states, largely owing to the low amounts of cash they have on hand and their large debt obligations.
To be considered a “big mover,” a state must have shifted position by more than five spots between the 2015 and 2016 editions (which use the latest available data, from fiscal years 2013 and 2014, respectively). A change in ranking of five or fewer places is not considered a significant change in the underlying metrics.
For the most part, states’ overall fiscal performance remained relatively constant. Only Delaware and Iowa dropped significantly in the overall ranking of fiscal condition. But there were big movers in each of the five categories that make up the overall ranking:
Updating the fiscal condition of the states with another year of data shows that most states’ fiscal performance remains relatively constant, but the signs of fiscal stress persist. Underfunded pensions and healthcare benefits continue to put pressure on state finances. Even states that appear to be fiscally robust—perhaps owing to large amounts of cash on hand or revenue streams from natural resources—must take stock of their long-term fiscal health before making future public policy decisions. These fiscal pressures point to areas for policymakers to direct their efforts. They also highlight areas where improved financial reporting could give the public a clearer picture of states’ fiscal health.