Fiscal Outlook: Ranking the States
Have you ever wondered where your state ranks in terms of its fiscal outlook? Eileen Norcross, a senior research fellow at the Mercatus Center at George Mason University, recently compiled just such a ranking.
We spoke with Norcross to learn more. The conversation has been edited for clarity and brevity.
In general, what gets states into financial trouble?
The states that were at the bottom of the ranking are generally states that have a high amount of debt or unfunded pension obligations, and OPEB [other post-employment benefits] liabilities, relative to state personal income. Also, their funding ratios are pretty weak, and they have a high level of long-term liabilities as a percent of total assets. There are flags in there that in the long term, there's a lot of debt on the books.
And in the short term, some of those states at the bottom also in 2013 had a weak cash position or a weak budgetary position, so they had insufficient assets to cover short-term liabilities, or revenues were less than expenses by a small factor. I do stress, though, that those short-term figures really do reflect one year. Going forward, you'd expect that probably to change. It might still be picking up from the recession as well.
So, for the states in poor fiscal health, it's mainly debt and unfunded liabilities that are weighing them down?
Absolutely. All states, I argue, use accounting measures that have underestimated their full pension liability, and that has caused a systematic underfunding — but some states went beyond that, and they decided to skip on payments because they thought they were over-funded, or they issued a bond to cover a pension payment. States that did that habitually over a period of decades are the ones with bigger holes.
Why is Alaska such an outlier in terms of its fiscal health?
Alaska just had a very large amount of cash coming in that year. If you go back and look at the numbers, they're just an order of magnitude away from everyone else in terms of their cash and in terms of their revenues in that year. Going forward, as oil prices drop, so do those numbers. When we update the study you're going to see those numbers change, because oil prices affected their revenues and have put some stress on the budget.
But that's why. It was just a windfall year for them, and that's reflected in the rankings. The short term is given more weight than the long term. And it's a relative ranking, so North Dakota is second relative to Alaska.
What effect did the 2008 recession have on states' fiscal health?
The 2008 recession led states to have to undertake all kinds of actions to balance the books, so you're seeing drawing down on rainy-day funds, the moving around of assets to cover liabilities, issuing bonds to cover short-term spending or longer-term commitments, so a lot of that factored into the results you see in 2013 — these kind of measures to cover holes and getting to the short run can have a medium-term impact on the finances.
Is there any correlation that you noticed between red or blue states having poor or healthy fiscal strength?
I didn't look at that as a factor, though there's literature out there that looks at the relationship between what party is in control of what branch of government over time and what's the impact. But I think you can see regional differences. And I would stress that states with a long-term position that's weak, that position was built over a period of years. That can cover many administrations or many legislatures' decisions over time.
Do you have any policy recommendations for states that are in financial trouble?
I'd say this for any of the states — you have to look at the long-term liabilities and assess how resources need to be applied to those debts. Pensions are considered guaranteed in many states, by either statute or constitution. And they know this. It's a big fiscal obligation. It's starting to consume more resources going forward, so I'm just hoping this draws attention to the difficulty of keeping that all in balance in the short term and the long term when your pensions or your OPEB get to that point — that sort of crisis point.
It becomes very difficult to make policy changes. And I'd say to the other states, don't let the pension or the OPEB get to that point. If you've got these liabilities growing on the books and it's still manageable, then it's important to make sure, if you're getting windfall revenues, that they're being put toward the long term, not the short term.
So you think it's beyond politics?
I think a lot of it is. Certainly politics figures into the whole thing — how legislatures and governors make decisions over time, how do they prioritize. Politicians tend to focus on the short-term, and I think that's the story here. But it's a 30-year story that we've got these pension benefits we can promise them, we can issue debt, we don't have to think about that until tomorrow. Tomorrow is now in these states. And you see that in cities, too — Chicago, or you see that in Puerto Rico. That's the past coming to you today, past decisions coming to you now.
Andrew Desiderio is a RealClearPolitics intern.