States experience financial trouble

(Flickr / P.O. Arnäs)

(Flickr / P.O. Arnäs)

Can your state pay its bills? In coming years, a surprising number of states may be in trouble.

A new report by the Mercatus Center sheds new light on the state of finances for all 50 states and Puerto Rico. Researchers Eileen Norcross and Olivia Gonzalez looked at several measures of fiscal solvency and uncovered some alarming trends.

Puerto Rico comes in dead last in the rankings for overall solvency, which is unsurprising given its recent debt crisis. But several other states are surprisingly close to Puerto Rico’s position, the study found.

A state’s budget solvency score measures whether a state is operating with consistent surpluses or deficits each year. Norcross and Gonzalez determined this value with an “operating ratio,” which indicates whether a state has enough revenue coming in (from taxes or other sources) to pay all of its expenses.

Unfortunately, 11 states did not have enough revenue to cover their expenses in fiscal year 2014, and many of those states recorded deficits that same year.

Cash solvency is another short-term measure that examines how liquid, or easily convertible to cash, a state’s assets are in order to pay its bills quickly. The average “quick ratio” is 3.18, meaning the average state has more than three times the cash and liquid assets of its short-term liabilities.

However, one state — Illinois — and Puerto Rico have quick ratios of less than one, meaning they are at very high risk of not meeting their short-term liabilities.

Often overlooked, especially by politicians, are the crucial measures of long-term financial solvency that the authors measured. Long-run solvency measures a state’s ability to protect against future financial shocks, while service-level solvency examines whether states have the ability to raise taxes more in the future without severely harming the economy.

Trust fund solvency is particularly concerning for a number of states. States with low trust fund solvency rankings have high unfunded pension obligations and state debt in relation to income. Though these may not seem like worrying problems at the moment, they will continue to worsen unless politicians take action right away.

Unfortunately, since so many of these fiscal measures are difficult to understand, the public hasn’t spoken up enough to move elected officials to take decisive action.

In Illinois, for example, Republican Gov. Bruce Rauner was elected on a promise to fix the state’s looming public pension crisis. But the Democrat-controlled legislature and State Supreme Court have blocked any attempt at meaningful reform. It makes for good politics now, but when the bills come due, the state’s economy will be severely threatened.

The Mercatus Center report helps translate important financial warnings into everyday language. You can look up your state on the infographic here to see how it rates.

Though Alaska, Nebraska, and Wyoming lead the list in solvency measures, there are still things those states could work to improve. But for states at the bottom of the list — Illinois, New Jersey, Massachusetts, and Connecticut — the Mercatus report should serve as a call to action.

After all, even Puerto Rico may have a second chance with recent legislation introduced by House Republicans. Reform is possible, but if we don’t act now, many of these states will have no money left to pay the benefits they’ve promised.

Published on Opportunity Lives

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