Washington’s fiscal health ranks 30th in the country

Washington is the 30th most fiscally solvent state, according to this year’s ranking from the Mercatus Center of George Mason University. The top five states are Nebraska, South Dakota, Tennessee, Florida, and Oklahoma.

The report uses data from fiscal year 2016 in the ranking, but it includes a 10-year analysis of each state’s performance as well: The “ranking highlights the relative performance of the states in one year, but understanding financial health requires looking at the underlying objective performance of each state over time.” There is also a spreadsheet with ten years of data for each state so readers can dig in to the details.

The paper defines fiscal solvency as “whether a state is able to meet its short-term and long-term obligations without incurring excessive debt, engaging in budget gimmicks, or using other evasive tactics.” It summarizes the results for Washington:

On the basis of its solvency in five separate categories, Washington ranks 30th among the US states for fiscal health. Washington has between 1.33 and 2.48 times the cash needed to cover short-term obligations. Revenues exceed expenses by 4 percent, with an improving net position of $229 per capita. In the long run, a net asset ratio of 0.02 indicates that Washington does not have any assets remaining after debts have been paid. Long-term liabilities are higher than the national average, at 64 percent of total assets, or $8,169 per capita. Total unfunded pension liabilities that are guaranteed to be paid are $134.26 billion, or 34 percent of state personal income. OPEB are $13.75 billion, or 4 percent of state personal income.

Washington’s rank varies across those five separate categories:

  • 29th on cash solvency, which measures “whether a state has enough cash to cover its short-term bills.” The paper notes, “Although Washington has sufficient cash relative to minimum benchmarks, it still performs below the mean performance of the states.”
  • 19th on budget solvency, which measures “whether a state can cover its fiscal-year spending using current revenues.” (Washington is above the U.S. average in this category.)
  • 36th on long-run solvency, which measures “whether a state has a hedge against large long-term liabilities.” (Washington is below the U.S. average.) Washington consistently ranked poorly on this component over the ten-year period.
  • 30th on service-level solvency, which considers “whether states have enough ‘fiscal slack’ by measuring taxes, revenues, and expenses relative to state personal income.” (In other words, does a state have capacity to increase taxes or spending?) As the paper notes, “States with especially high levels of taxes, revenues, and expenses relative to state personal income are at greater financial risk should they experience a sudden downturn.” (Washington is below the U.S. average in this category.)
  • 19th on trust fund solvency, which measures “how much retirement-related debt a state has.” (Washington is above the U.S. average in this category.) Washington’s good ranking here illustrates how important it is to look at the underlying numbers and not just how we compare to other states. One component of the trust fund solvency rank is the state’s unfunded pension liability as a percent of personal income. The size of the unfunded liability depends crucially on the discount rate assumption. For example, according to the report, the funded ratio for Washington’s pensions is 84 percent under the state’s discount rate assumptions (8 percent in 2015–17). But when using a risk-free discount rate (which better reflects the true value of pension liabilities), Washington’s funded ratio is just 36 percent. Still, as our ranking here shows, that’s better than most other states.

The overall rankings this year are unweighted; in previous years, the rankings were weighted to emphasize the short term, which benefited “states with permanent trusts and a high level of cash.” On that weighted basis, Washington ranks 29th this year and 26th last year.