These are tough times in Illinois. In June, Moody’s downgraded the state’s credit rating to just a couple of steps above junk-bond status. For the second straight year, the state government failed to reach a budget, and education officials braced for the prospect of closing down hundreds of schools. The situation prompted Gov. Bruce Rauner to tell reporters, “We are like a banana republic.” Yet several other states may be in even worse fiscal shape. In June, George Mason University’s Mercatus Center released a study ranking all 50 states according to their fiscal solvency, or their ability to meet short-term and long-term financial obligations. Here are the five most fiscally troubled states in the study.
As in many other states these days, there has been bitter infighting in the capital over how to allocate more limited resources. Earlier this year, after Gov. Matt Bevin (R) cut funding to the state’s public universities and colleges by 4.5 percent ($41 million) the Democratic attorney general, Andy Beshear, sued him. Bevin is eyeing some $650 million in budget cuts in the next couple of years to start paying down Kentucky’s estimated $30 billion public pension debt. These unfunded liabilities to retirees are a common thread among states with the greatest financial strain.
Incidentally, nine of the 10 states with the worst fiscal standing in that Mercatus study voted for Barack Obama in the past two presidential elections. Kentucky is the lone exception. Conversely, all 10 of the states in the best fiscal condition voted for the GOP contender in those two elections. GOP legislators don’t have all the answers in forging a budget, but the limited-government philosophy of conservatives tends to lead to greater fiscal health for cities and states.
Republican Gov. Bruce Rauner, who vowed to fix the state’s long-term public pension outlook when he took office in 2015, is at odds with the state legislature, which has long been controlled by Democrats. The government reached a partial spending agreement in late June to fund schools for another year, and human services and other obligations through the end of 2016. But for the second straight year, Illinois is operating without a budget, and the state faces high debt and other financial woes. The state’s unfunded pension liabilities of $298 billion stand out in the Mercatus study. But even in its ability to meet other long-term and short-term obligations, Illinois is near the bottom of the rankings.
3. New Jersey
The Mercatus researchers looked at five areas of fiscal health for each state: the abilities to pay short-term bills and meet long-term spending commitments are self-explanatory. So is trust fund solvency, or the ability to meet obligations such as pensions. The study also looked at budget solvency, whether or not a state’s current revenue exceeds expenses. New Jersey ranks well below average for all 50 states in all four of those categories, standing 50th in long-term solvency, and 49th in budget solvency. The only bright spot for the Garden State is it ranks 20th in service-level solvency, which measures a state’s amount of “slack” in raising taxes or increasing spending to meet fiscal obligations.
Residents in this state are on the hook for $14,517 in debt per capita, second only to New York ($17,405). As with almost two-dozen other states in the wake of the Great Recession, tax revenue in Massachusetts has not recovered to pre-recession levels; the state projects it will collect almost $1 billion less revenue than expected for the current fiscal year, forcing legislators to scramble to balance the budget. Massachusetts ranked 50th among U.S. states in cash solvency (ie. Is there enough cash on hand to pay short-term bills?). On a positive note, the state ranks 20th in terms of its ability to meet long-term commitments in pensions, retiree health care, etc.
If there’s any consolation for Connecticut, it did not finish last in the Mercatus study; that dishonor went to Puerto Rico. But among the 50 U.S. states, Connecticut ranked very poorly in several categories, including short-term and long-term solvency (ranked 49th and 47th, respectively) and budget solvency, where it ranked 50th. So how does Connecticut get out of this hole? Some residents will not like the solution. In June the governor’s office sent state agency leaders a memo to expect a 10 percent or greater cut in discretionary spending for the next two years. “As a result, we will be significantly challenged to provide all of the services and programs that many have come to expect,” the memo reads. “In many cases, I expect agencies may need to further reduce, or perhaps cease delivering altogether, certain programs or services, and additional headcount reductions may be necessary.”