Senior Research Fellow Eileen Norcross ranks each US state’s financial health based on short- and long-term debt and other key fiscal obligations, including unfunded pensions and health care benefits. The study, which builds on previous Mercatus research about state fiscal conditions, provides information from the states’ audited financial reports in an easily accessible format, presenting an accurate snapshot of each state’s fiscal health.
With new spending commitments for Medicaid and growing long-term obligations for pensions and health care benefits, states must be ever vigilant to consider both the short- and long-term consequences of policy decisions. Understanding how each state is performing in regard to a variety of fiscal indicators can help state policymakers as they make these decisions.
A closer analysis of the individual metrics behind the ranking shows how each state’s fiscal condition should be assessed. Notably, nearly all states have unfunded pension liabilities that are large relative to state personal income, indicating that all states need to take a closer look at their unfunded pensions, which represent a significant portion of each state’s economy. Another financial crisis could mean serious trouble for many states that are otherwise fiscally stable.
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 pensions.
This ranking of the 50 states is based on their fiscal solvency in five separate categories:
Cash solvency. Does a state have enough cash on hand to cover its short-term bills?
Budget solvency. Can a state cover its fiscal year spending with current revenues? Or does it have a budget shortfall?
Long-run solvency. Can a state meet its long-term spending commitments? Will there be enough money to cushion it from economic shocks or other long-term fiscal risks?
Service-level solvency. How much fiscal “slack” does a state have to increase spending should citizens demand more services?
Trust fund solvency. How much debt does a state have? How large are its unfunded pension and health care liabilities?
Top Five States
Alaska, North Dakota, South Dakota, Nebraska, and Florida rank in the top five states.
While these states are considered fiscally healthy relative to other states because they have significant amounts of cash on hand and relatively low short-term debt obligations, each state faces substantial long-term challenges concerning its pension and health care benefits systems.
Bottom Five States
Illinois, New Jersey, Massachusetts, Connecticut, and New York rank in the bottom five states, largely owing to low amounts of cash on hand and large debt obligations.
High deficits and debt obligations in the forms of unfunded pensions and health care benefits continue to drive each state into fiscal peril. Each holds tens, if not hundreds, of billions of dollars in unfunded liabilities—constituting a significant risk to taxpayers in both the short and the long term.
How financially healthy is your state? Most states are nearly back to normal since the Great Recession, although there are troubling signs that many states are still ignoring the risks on their books, mainly in underfunded pensions and health care benefits. 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.