Friday, July 10, 2015

Fiscal Condition Ranking

The Mercatus Center, a market-oriented think tank, has released a report ranking the fiscal condition of the 50 U.S. states. This is especially pertinent given the global state of public finances and the long-run viability of funding pensions and health care. Greece is dealing with the fallout of an overextended public sector and has been for the last five years. Meanwhile, the debt-to-GDP ratio of the U.S. has risen above 100% as of 2013. The solvency of the U.S. is not particularly worrisome given the low levels of interest at which the national government can borrow. However, individual states and municipalities have been running massive deficits within the U.S. This has led to some unprecedented bankruptcies and defaults. Although there have been numerous bankruptcy filings by counties, municipalities, and towns during U.S. history this collapse highlighted the magnitude of the problem in post-Great Recession America. The reasons many local governments are running deficits are very predictable: huge pension obligations; huge Medicaid costs; an assumed growth rate of state investments at unattainable levels (usually 8% or higher); high levels of state employment relative to private employment (less tax revenue to collect); an aging population that contributes less tax revenue. Many of these problems were caused and/or exacerbated by the 2008 financial crisis, but they all date back to governments over-promising benefits that they could not reasonably pay in the future based on current and future tax revenues.
West Virginia ranks in the bottom ten of the Mercatus ranking, 43rd to be exact. The state's "fiscal condition index," an aggregate of different statistics on solvency, is -1.2. For comparison Alaska, the best ranked state, has a rating of +8.26. Illinois is the worst ranked state at -1.86. Part of what is unsettling about West Virginia's public finance ranking is that many of the best ranked states have high amounts of natural resources. North Dakota, South Dakota, Alaska, Nebraska, and Florida all have either large amounts of energy resources (oil & gas), agricultural productivity, and/or natural beauty that attracts tourism. West Virginia has both high amounts of coal and natural gas activity and attractive tourism locales but still manages to be one the ten least solvent governments.

What details make the public finances of WV look bleak? The state actually did not run a deficit in the year this report was released, 2013. It had a per capita surplus of $116.65. The short term budget seems to be handled quite well. However, the state has about $6.1 billion in unfunded liabilities. WV has a ratio of Unfunded Liabilities per Personal Income of 9%. There are at least 17 states that have a liabilities per income ratio of 5% or less. Kentucky is in a much worse situation with 18% unfunded liabilities of their state's personal income, so WV is outperforming its neighbor there. WV's Current Account Ratio (Assets / Liabilities) is 2.05 whereas the national average is 3.37; the state is not too far behind average in that category. The total amount of WV pensions per state income is right on the national average at 0.29. Tax revenue taken in roughly matches the amount of state spending at a ratio of 0.18 of state income. Since WV is not a "bad" outlier in any one category it can safely be assumed that the state ranks in the bottom ten states in terms of solvency because it is consistently at or below average on the Mercatus statistics.
The relative position of WV in this list is more disheartening than the overall performance. South Dakota and Florida manage to have strong cash positions and high tax revenue despite having NO income taxes. They make up the revenue primarily through sales taxes. Similarly, North Dakota used its oil tax revenues to decrease its total debt position; West Virginia does not seem to have utilized its energy assets as well as North Dakota. West Virginia also has a high number of separate pension systems with eight. South Dakota has one - the South Dakota Retirement System. New York, one of the most populous states with a bad fiscal position, only has three separate pension obligations. If WV wants to manage its budget better it could start by consolidating the pension system and closing the unfunded liability gap. No immediate disaster appears in store for the state, but if public spending has to rise to meet the needs of the citizenry WV does not have a lot of cash to make that happen.
 Illinois we are not. But there is significant room for improvement.

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