January 4, 2016

Ohio's Finances Worse than They Appear

Adam Millsap

Assistant Director, L. Charles Hilton Jr. Center for the Study of Economic Prosperity and Individual Opportunity, Florida State University

Eileen Norcross

Vice President of Policy Research
Summary

Most Ohioans would probably agree that their state’s finances are managed relatively well. According to Mercatus Center at George Mason University research, which ranks states’ fiscal health, they’re right. Ohio ranks seventh nationwide, and several of the states placed higher have the advantage of massive oil and gas revenue.

Most Ohioans would probably agree that their state’s finances are managed relatively well. According to Mercatus Center at George Mason University research, which ranks states’ fiscal health, they’re right. Ohio ranks seventh nationwide, and several of the states placed higher have the advantage of massive oil and gas revenue.

The fiscal health of Ohio is an important topic for more than just government accountants. Business owners, taxpayers, private and public sector employees, and retirees all have a stake. Understanding Ohio’s fiscal health gives residents and policymakers the opportunity to address any issues now before they get worse. But most policymakers, let alone average citizens, don’t have the training or information to judge their state’s full financial picture.

The Mercatus Center study uses data from each of the 50 states’ annual, audited financial report for the year 2013 (the latest available dataset) to rank them in five categories – cash solvency, budget solvency, long-run solvency, service-level solvency, and trust fund solvency – which were then compiled to create an overall ranking. For Ohio, there’s much to be proud of. However, no state is without its problems.

Ohio’s strong ranking was largely driven by its relatively high level of cash on hand, placing it fourth in cash solvency, which measures a state’s ability to cover its short-term bills. A strong cash position also gives a state the ability to cover a temporary decline in tax revenue in the event of a recession. Ohio shouldn’t have any trouble with this in the near future.

Unfortunately, Ohio doesn’t look as healthy in the long-term. It ranks 37th in long-run solvency, which measures the ability of a state to cover its long-term debts and the amount of cushion it has in the event of a lasting shock to its finances. Ohio’s long-term liabilities were $3,728 per resident in 2013, which is almost $1,000 higher than the national average. While the state is well-positioned for a temporary hiccup, if revenues were to unexpectedly decline in the future, it might be difficult to pay the bills.

The bad news extends to Ohio’s trust fund solvency, in which it ranks ahead of only New Mexico and Alaska, due to large unfunded pension obligations to its state workers. These obligations will not be fixed overnight – they equaled more than half of total state income in 2013. Ohio’s long-running reluctance to fully fund its pension program threatens its ability to keep its promises to public sector retirees.

As one of us was born and raised in the Buckeye State, we know that Ohio has a lot to offer businesses and residents. It’s is a great place to live and work, and to remain that way, it needs to get parts of its fiscal house in order. Large, unfunded pension obligations cast a shadow on Ohio’s long-term financial outlook, and the implicit threat of higher taxes or drastic, emergency spending cuts will inevitably scare some people away.

Ohio’s political leaders have an opportunity to deal with the state’s fiscal problems before they become a detriment to residents’ way of life – but the longer they put things off, the more painful the solution will be.