Pensions

Florida ranks No. 1 in fiscal health – Greene Publishing, Inc.

Lazaro Aleman: Greene Publishing, Inc.

A just-released study of the 50 states’ financial condition by the Mercatus Center at George Mason University, in Virginia, puts Florida at the head of the pack in terms of its fiscal health.

Released on Tuesday, July 11, the Mercatus Center’s 4th annual “Ranking the States by Fiscal Condition”, authored by Eileen Norcross and Olivia Gonzalez, ranks Florida No. 1 nationwide, based on its short- and long-term debt and other key fiscal obligations, such as unfunded pensions and healthcare benefits.

Closely following Florida in fiscal health in descending order are North Dakota, South Dakota, Utah and Wyoming.

At the other end of the spectrum, or at the bottom of the heap — depending on how one chooses to view it — are New Jersey at 50th place, preceded in ascending order by Illinois, Massachusetts, Kentucky and Maryland at 46th place.

The study found that the five top-performing states tended to have higher levels of cash, low unfunded pensions and strong operating positions.

The study ranked the states based on their fiscal solvency in five key metrics:

• Cash solvency:  Did a state have enough cash on hand to cover its short-term bills?

• Budget solvency: Could a state cover its fiscal year spending with current revenues, or did it have a budget shortfall?

• Long-run solvency: Could a state meet its long-term spending commitments? In other words, did it have sufficient money to cushion it from economic shocks or other long-term fiscal risks?

• Service-level solvency: How much “fiscal slack” did a state have to increase its spending if its citizens demanded more services?

• Trust fund solvency: How large was each state’s unfunded pension and healthcare liabilities?

Among the study’s findings:

• A low debt and strong cash position helps maintain fiscal discipline. The authors found that first-place Florida, in particular, demonstrated that it was possible for a state to achieve fiscal wellbeing, despite having a relatively large population and high pension costs arising from its many aging residents.

• Oil and gas revenues play a role in short-term fiscal health. Such revenues, however, are volatile and subject to change, the authors point out. They further note that the five top-performing states owed some of their success to unpredictable revenue sources, such as fluctuating oil prices.

• Pensions and health care still pose long-term challenges to top-performing states. While the five top states were considered fiscally healthy in comparison with the other states because of their significant ready cash and relatively low short-term debt obligations, each faces substantial long-term challenges because of their pension and healthcare benefits systems.

• The ranking of the top five states are not static but subject to change. Alaska and Nebraska, for example, dropped from among the top five on the previous year, allowing for Florida and Utah to move up.

Specific to Florida, the study found that besides being a destination state due in large part to its climate, geography and other natural assets, the Sunshine State also affords its residents and businesses additional inducements, including no personal income or estate taxes and one of the nation’s lowest per-capita spending.

The study praised Florida for its ability to attain fiscal leanness without sacrificing its residents’ quality of life. It attributed that leanness to the state’s adherence to healthy practices, including maintaining a balanced budget, keeping taxes and expenditures low, and supporting institutions that allow for both.

The study further underscored that legislative term limits and citizens’ ability to amend the state constitution through initiatives facilitated Florida policymakers’ ability to maintain fiscal responsibility.

Two areas of concern for Florida, the authors cautioned, were its large retiree population, which puts increasing pressure on government services; and the state economy’s heavy dependence on tourism, given that the latter industry generally creates lower-wage service jobs.

The authors make the point that a state’s fiscal health matters because it affects all its citizens in one form or another, by determining a state’s ability to attract businesses, how much taxes it imposes, what services it provides, and how well it provides for its public-sector employees.

The authors conclude that the drivers of strong fiscal performance remain unchanged. Top-performing states, they write, 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.

The two caution, however, that 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 long-term fiscal health before making public policy decisions,” Norcross and Gonzalez conclude.

The Mercatus Center describes itself as a nonprofit research, education, and outreach think tank that advocates free-market approaches to public policy.

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