A close look at state balance sheets shows that “fiscally conservative” doesn’t mean financially healthy — but neither does “lots of taxes.”
I recently mapped out how people’s credit and borrowing habits match with their politics. A couple weeks ago, something called the Mercatus Center at George Mason University released a map of its own. Theirs looks at how well state governments keep themselves funded and pay their debts, and I thought that would have interesting political implications too. Says the group:
The fiscal health of America’s states affects all its citizens. Indicators of fiscal health come in a variety of forms — from a state’s ability to attract businesses and how much it taxes to what services it provides and how well it keeps its promises to public-sector employees. To get a sense of a particular state’s fiscal outlook requires consulting a state’s comprehensive annual financial report (CAFR), which, at hundreds of pages, is unwieldy for even the most dedicated analyst. … The study ranks each US state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pensions and healthcare benefits.
So they did the heavy lifting, and I just compared it to the previous findings I mapped out. I assumed that GOP-run states would avoid debt much like their residents do. But it actually turned out more nuanced than that.
For instance, the state in the best fiscal condition is Florida — a state with a Republican governor and legislature, whose consumers rank 16th in the nation for good credit. But at the bottom is New Jersey — also with a Republican governor (although a Democratic legislature) and a consumer credit rating second only to Connecticut. But Connecticut ranked 37th. What gives? Wouldn’t financially responsible people elect financially responsible representatives?
Political lean isn’t the best indicator of financial stability
Other states in great fiscal shape have residents with about average or slightly above-average credit. States in the worst shape are a big mix — among the best and worst borrowers, and some in between. At a glance, then, there didn’t seem to be a big relationship.
I threw together a chart based on the rankings from both Mercatus’ map and the one I made based on LendingTree’s data a few weeks ago. As I did in that map, I colored the states according to which way they voted for president. This shows a somewhat clearer trend — but it might be misleading. Some states like divided government, and tend to pick a president and senators of the opposite party they prefer to run their state government.
But at least from this we can see some relationship between who states pick for president and how their state government operates — 21 of the 25 states with the best financial positions voted for Trump. While there are some Trump-loving states at the bottom, there are no Clinton-loving states on top.
Trump and a Republican Congress have to be frustrating a lot of those voters, then — since they’ve done nothing on taxes and haven’t proposed a serious budget.
As the study’s authors point out, the states at the top tend to keep a lot of cash on hand, keep their debt low, aim for balanced budgets, and adequately fund pensions. All of those things are good goals, but also shape the possibilities for policy — states deep in debt can’t afford tax cuts, and their healthcare probably isn’t as good. Meanwhile, borrowing can provide a lot more flexibility, if it’s managed well.
“Policymakers should take stock of both their short- and longterm fiscal health before making public policy decisions,” the study cautions.
It also shows that the makeup of the state doesn’t mean it can’t manage money well, even if it would seem to be at a disadvantage. “The first-place position of Florida in particular demonstrates that [fiscal discipline] is possible even with a relatively larger population and higher pension costs that arise from an aging population,” the study adds.
Some states are also only at the top because of temporary advantages, not necessarily good budgeting habits. Oil and gas resources prop up some states, but that probably won’t last forever. For instance, Alaska fell out of the top five this year, Wyoming dropped, and North Dakota may next year, the study concludes.
Wyoming in particular may be in trouble because it “faces substantial long-term challenges related to its pension and healthcare benefits systems.”
So the top of the list, which the Mercatus Center has been doing for five years, moves around a lot. The bottom, not so much. Illinois, New Jersey, and Massachusetts were all in the bottom five last year and still are. Massachusetts is still there and has gotten worse.
The big drops were Alaska, Colorado, Louisiana, New Mexico, Pennsylvania, and Texas. Two-thirds of those are Trump-supporting states.
Meanwhile, Connecticut, Delaware, Hawaii, Maine, Oregon, North Carolina, and Arkansas jumped up. Only two of those are Trump-supporting states. The Mercatus Center explains the shifts, and provides a model for everybody…
Top-performing states 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. 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.
Hopefully Congress gets the memo, too.
Article last modified on August 8, 2017. Published by Debt.com, LLC .