Ranking the States by Fiscal Condition

Abstract

For the fifth and final year, we rank states according to their financial condition. On the basis of FY 2016 financial reports of the 50 states, this study ranks the states’ fiscal solvency using 13 indicators that assess the extent to which the states can meet their obligations. State finances are analyzed according to five dimensions of solvency: cash, budget, long-run, service-level, and trust fund solvency. These five dimensions are combined to produce an overall ranking of state fiscal solvency. Nebraska, South Dakota, Tennessee, Florida, and Oklahoma rank as the top five most fiscally solvent states. Kentucky, Massachusetts, New Jersey, Connecticut, and Illinois rank as the bottom five states. This ranking highlights the relative performance of the states in one year, but understand- ing financial health requires looking at the underlying objective performance of each state over time. We complement this year’s ranking with a 10-year trend analysis of the states’ financial performance. We find that although, on average, state budgets have not fallen to the lows they reached during the recession, they also have not quite improved to prerecession levels. There has been a slight decline in average state operating ratios since FY 2014, but most states are still able to match revenues with expenses. Long-term liabilities have, on average, increased over time. Long-term liabilities increased the most significantly in FY 2015, largely as a result of new Government Accounting Standards Board rules that require states to report unfunded pension obligations on their balance sheets. Unfunded pension liabilities remain an ongoing problem for the states, and their magnitude is only more transparently revealed by these reporting changes. Pairing these findings with what we have learned from the past four editions of this study, we conclude with recommendations for future research that emphasize pairing quantitative and qualitative data in context to analyze state financial condition.