Arnett is currently an analyst at the Government Accountability Office. However, this report was not prepared as part of her GAO duties. The report was released through George Mason University.
Arnett used four different indices to analyze states for fiscal solvency using each state’s fiscal year 2012 reports. She then assigns a weight to each of these four indices to create the ranking. The indices that she used were (1) cash solvency, (2) budget solvency, (3) long-run solvency and (4) service level solvency.
A state’s cash solvency takes into account the cash the state can easily access to pay its bills in the near term, reflecting the state government’s liquidity. The second index, a state’s budget solvency, is its ability to create enough revenue to cover expenditures over a fiscal year.
Long-run solvency measures a state’s ability to use incoming revenue to cover all its expenditures, including long-term obligations such as pension benefits and infrastructure maintenance. The final index, service level solvency, Arnett notes, is the most difficult to measure because it reflects whether state governments have the resources to provide the residents with an adequate level of services.
Using the four solvency indices above, Arnett creates an overall State Fiscal Condition Index. The data was obtained from the states’ 2012 information. Using the overall index, she lists the following as the top 10 fiscally healthy states:
2. South Dakota
3. North Dakota
Interestingly, the top 10 states list is dominated by “red” states. As you can see below, the bottom 10 are mostly “blue” states.
The author says that although the ranking is a snapshot in time, the states at the bottom of the list are there due to years of poor financial management decisions, bad economic decisions, or a combination of the two.
She explains, for example, the two worst states, New Jersey and Connecticut, are near the bottom because revenues have not kept up with expenditures, their use of budget practices that only appeared to balance their annual budgets, and significant debt levels as a result of decades of using bonds without being able to pay for them. In addition, she says that both states have underfunded their pension systems, resulting in billions in unfunded liabilities.
According to Arnett, these are the bottom 10 states in fiscal health:
41. West Virginia
45. New York
50. New Jersey
Although ranking near the bottom, Arnett points to California is an example of a state that is improving its fiscal condition. For years, she says, California was not able to produce a balanced budget, faced severe political gridlock, and was unable to raise revenues. But now according to Arnett, after years of billion-dollar budget deficits, the 2013–2014 state budget has a projected surplus of at least $1.2 billion.
The full report ranking all 50 states can be read here.
# # #William Bruce is an Accredited Business Intermediary and Senior Valuation Analyst assisting buyers and sellers of privately held businesses in the valuation and transfer of ownership interests. He currently serves as president of the American Business Brokers Association.