Calculating a state’s fiscal health is no easy task.
There are plenty of measures, but each captures a unique part of a state’s fiscal condition. There are short-term and long-term measures and measures of the ability to provide quality services for residents.
In fact, the need for a comprehensive analysis of states’ fiscal sustainability was so great — and the budget crisis so dire — in the eyes of former New York lieutenant govenor Richard Ravitch and former Federal Reserve chairman Paul A. Volcker that they formed a commission in 2011 to analyze the long-term fiscal sustainability of states. They looked at a handful of states over the years and issued their final report last week. The conclusion? Things are not so great.
“In most states there has been a studied ambiguity about long-term costs and obligations about which unions, the municipal bond industry, and politicians have been relatively passive,” they wrote.
Overall, they found that states were taking on new obligations faster than they could find the revenue to pay for them. Long-term costs, such as unfunded pensions, are increasingly squeezing state budgets, and infrastructure is underfunded. The report was comprehensive, but it didn’t offer a comparative ranking.
Enter Sarah Arnett, a public policy researcher with George Mason University’s Mercatus Center, a Koch Industries-affiliated, market-oriented think tank. Last week, Arnett posted a working paper in which she offers a new measure of fiscal health based on four sub-measures. Being a working paper, it doesn’t carry the same authority as, say, a peer-reviewed article in an academic journal, but it still offers an interesting way to look at the fiscal health of states.
Building on previous research and other indicators, she developed a ranking by fiscal condition — one that reveals a great deal of variety among states. (That’s what the interactive above shows.) Alaska is in the best condition, she found. Followed by South Dakota, North Dakota, Nebraska and Wyoming. The five states with the lowest-ranked fiscal condition are New Jersey, ranked last, Connecticut, Illinois, Massachusetts and California, which is ranked 46th.
Finding the right mix of indicators “is more art than science,” Arnett writes, but “there is still a need for transparent and nuanced measures.” Her fiscal solvency index is based off of four measures:
- Cash solvency: A measure of a government’s liquidity and ability to pay bills on time. “Cash solvency has a short time frame — 30 to 60 days — and reflects the liquidity of a state government and the effectiveness of its cash management system.”
- Budget solvency: A measure of a government’s ability to pay its expenses for the current year without creating a deficit. This is also affected by some states’ strict, balanced-budget requirements.
- Long-run solvency: A measure of a government’s ability to manage long-term obligations, such as pensions.
- Service-level solvency: A measure of a government’s ability to pay for quality health and welfare services.