Mercatus Center: Washington ranks No. 26 Among the States in Fiscal Health

Washington stands in the middle of the pack when it comes to the state’s fiscal condition. That’s according to new research from the Mercatus Center at George Mason University. It’s very much a green eyeshade (does anyone remember them?) analysis. 

To get a sense of a particular state’s fiscal outlook requires consulting a state’s comprehensive annual financial report (CAFR), which, at hundreds of pages, is unwieldy for even the most dedicated analyst. But in the Mercatus Center at George Mason University’s “Ranking the States by Fiscal Condition,” now in its fourth year, Eileen Norcross and Olivia Gonzalez calculate indicators of fiscal health for all 50 states. Based on states’ 2015 financial statements, Florida ranks first as the most fiscally healthy state, while New Jersey ranks the lowest.

The study 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.

Here’s how the authors summarize Washington’s fiscal condition:

On the basis of its fiscal solvency in five separate categories, Washington is ranked 26th among the US states for its fiscal health. In the short-run, Washington has between 1.73 and 3.59 times the cash needed to cover short-term obligations. Revenues exceed expenses by 1 percent, and net position improved by $42 per capita in FY 2015. On a long-run basis, Washington has no net assets remaining after debts have been met. Long-term liabilities are 68 percent of total assets, or $8,445 per capita, which is nearly two times the average in the states. Total primary government debt is $24.82 billion, or 6.8 percent of state personal income. Unfunded pension obligations are $103.4 billion, or 28 percent of state personal income. OPEB is 3 percent of state personal income.

They break it down a bit further. A couple of concerns strike us.

  • Budget solvency measures whether a state can cover its fiscal year spending using current revenues. Did it run a shortfall during the year? (Washington ranks 43rd.)
  • Long-run solvency measures whether a state has a hedge against large long-term liabilities. Are enough assets available to cushion the state from potential shocks or long-term fiscal risks? (Washington ranks 38th.)

Measures like the constitutional budget stabilization account and the four-year balanced budget requirement help maintain the state’s fiscal stability. Washington’s robust economic growth has also helped support substantial increases in state spending, including the recent funding support for education. As we wrote in our 2017 foundation report update

Over time, and throughout various economic conditions, Washington has experienced cycles of boom-and-bust budgeting. Programs have expanded during prosperous economic times, only to be contracted during downturns. These cycles can lead to extreme uncertainty, taking a toll on students, families, public employees, and residents who rely on public services.

A commitment to sustainable budgeting replaces that uncertainty with stability, thus supporting long-range planning and ensuring a consistent level of vital services in varying economic conditions. Even with the ongoing economic recovery, our state budget will face stress for the foreseeable future. Lawmakers must remain committed to long-term sustainability.

Fiscal prudence is particularly important as the state confronts its responsibility to fully fund basic education in compliance with the Washington Supreme Court’s McCleary decision. The way lawmakers choose to meet the state’s obligation must be sustainable and supportive of continued economic health.

The recently adopted state budget represents a responsible effort at meeting the state’s obligations without jeopardizing  fiscal stability. 

Here’s a look at the top and bottom 5 states in the Mercatus assessment.

Florida, North Dakota, South Dakota, Utah, and Wyoming rank in the top five states. Top-performing states tend to have higher levels of cash, low unfunded pensions, and strong operating positions…

Maryland, Kentucky, Massachusetts, Illinois, and New Jersey rank in the bottom five states, largely a result of the low amounts of cash they have on hand and their large debt obligations. States that fail to address long-term drivers of debt and are not prepared for recessions will continue to rank poorly.

We can’t fault the overall conclusion:

Updating the fiscal condition of the states with another year of data shows that drivers of strong fiscal performance remain the same. Top-performing states tend to exhibit fiscal discipline in the form of having high levels of cash, maintaining revenues that exceed expenses, and keeping debt levels low relative to resident income. These factors can easily be threatened if a state relies too heavily on narrow tax bases and volatile revenue sources or if pension plans are not adequately funded, leading to persistently large and growing liabilities.

The lessons from this year’s study demonstrate that policymakers should take stock of both their short- and longtermfiscal health before making public policy decisions. The quality of financial reporting also plays a large role in what is known about the states’ fiscal health. This report attempts to make available financial information more accessible while also stressing the importance of improved reporting. These metrics, when used alongside other information, are intended to help policymakers identify trends in state finances and respond with policies to ensure short-run solvency and long-run fiscal stability.

Good advice.