The new study ranking the states on fiscal accounting responsibility has Florida leading the pack while New Jersey is sitting dead last.
On “Free Slurpee Day” the Mercatus Center at George Mason University released its fourth annual “Ranking the States by Fiscal Condition,” which calculates each state’s fiscal health. Though just at the sight of the words fiscal and accounting we become instantly turned off, it’s a big reason why we are so seemingly FKD’d these days. So, stick with me.
What exactly are the researchers calculating?
Each state is required to update and/or produce a comprehensive annual financial report, or CAFR for short. Essentially, it’s a report about how well the budget worked out last year, plus all the accumulated financial (mis)management from years past. Unlike a budget, the CAFR shows all the details of the state’s financial accounting such as investment accounts that include short- and long-term debt, unfunded pensions and health-care benefits.
To illustrate: A budget is what you plan to spend for the year while the statement of your “net worth” and your accounting practices over your lifetime is the CAFR.
In this study, researchers Eileen Norcross and Olivia Gonzalez take the time to sift through each of the state’s CAFR to see which state is more likely to screw us over in the future. By looking at each state’s basic financial statistics on revenues, expenditures, cash, assets, liabilities and debt, they can rank the states based on how easily they can cover the bills, both the short-term and long-term ones.
How to determine the financial health of the states
To determine the financial health of each state, the researchers looked at five distinct categories.
- Cash solvency: Does the state have enough cash to cover its short-term bills?
- Budget solvency: Will the current (tax) revenues cover this year’s expenses or will the state come up short?
- Long-run solvency: Can the state meet its long-term spending commitments? Will it be able to withstand economic shocks or other long-term fiscal risks?
- Service-level solvency: How easy is it, or how much “fiscal slack” does the state have, to increase spending if the people want more services?
- Trust fund solvency: How large are each state’s unfunded pensions and healthcare liabilities?
These five categories aren’t all that strange. We apply a similar test to our own lives when we are trying to determine our own financial health. Can we cover emergencies? Will we be able to spend within our budget? Are we paying off our credit cards and student loan debt? Can we easily cut how much we spend or add to our spending without changing much of how much we consume? Finally, will our retirement funds actually have enough money for us when we decide to stop working?
Florida is leading the way
Florida took the cake this year for being the most fiscally responsible state. It has between 8 to 10 times the cash needed to cover its short-term bills. Florida brings in 7 percent more money than it spends. Its liabilities are 34 percent of their total assets, which is way lower than the state average of 61 percent. On top of that, the state’s total debt is low, sitting at $24.5 billion, or just 3 percent of the state’s personal income.
To compare, New Jersey is sitting at the bottom of the list as the most irresponsible state. It has no cash to cover its short-term spending and brings in 9 percent less money than it spends. While Florida’s long-term liability ratio is 34 percent, as mentioned above, New Jersey’s is 360 percent! To further compare, the Sunshine State’s debt is around 3 percent of the state’s income. For the Garden State, it is 15 percent.
With those kinds of numbers, New Jersey is the spitting image of a college dropout, carrying a $100,000 student loan debt, some unpaid hospital bills, and 15 credit cards close to being maxed out.
With these kinds of rankings and rigorous studies out for us to browse through, we can get a better understanding of why we have this weird feeling that we are on the brink of an economic apocalypse. Not only are we riddled with student loan, credit card and other types of debt, but so are the institutions that we depend on so much.
By highlighting the best (and worst) accounting practices, there is now a model to look at as a way to improve.
Previously posted at GenFKD.