Why Illinois, Connecticut, and New Jersey keep fiscal black marks

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WASHINGTON – The weight of massive debt obligations have kept Illinois, Connecticut and New Jersey at the bottom of the 50 states based on fiscal health rankings in a report released this week by the Mercatus Center at George Mason University.

The report reaffirms findings by S&P Global and other organizations. S&P Global issued a report last month showing these three states were among five with the worst funded pension plans.

Illinois and Connecticut were among five state retirement systems reported to be under 50% funded in an April report released by Pew Charitable Trusts.

New Jersey was identified in a recent report by the National Association of State Budget Officers as the only state with the dubious distinction of not having any money stashed away to weather an economic downturn.

The Mercatus Center report is the fifth and final annual installment of a multi-year fiscal ranking of the states that shows some made significant improvements in their fiscal health on a year-to-year basis.

Kansas moved up 15 slots in the rankings to 17 because of increased solvency in its trust funds while New Hampshire and Maryland each moved up 13 slots, to 12 and 33 respectively, mostly driven by improvements in their budget solvency.

The reports use five factors for the state rankings – short-term cash solvency, budget solvency, long-term solvency, the capacity to raise taxes, and trust fund solvency.

Each factor was given equal weight. Previous rankings gave greater weight to short-term cash solvency and budget solvency.

“In states with a lot of cash reserves, we think they were given a kind of advantage,’’ said the report’s co-author Eileen Norcross, vice president of policy research and a senior research fellow at the Mercatus Center. “We removed the weights.”

Norcross said the study adjusted the pension obligations in each state on the same market basis using Treasury rates instead of the self-reported discount rates which vary by state.

“I believe it gives a more accurate picture of the true value of these promises if they are guaranteed to be paid according to statutes and constitutions in some cases,” she said, adding, “It shows a fuller picture of them.”

The data used for the analysis is taken from each state’s comprehensive annual financial reports (CAFRs) and state actuarial reports. The new report uses CAFRs for fiscal 2016 and compares them with earlier reports filed over the previous 10 years.

“There’s at least a year’s lag because of the timing of when the reports are produced,” Norcross said.

The analysis showed some states saw their fiscal conditions worsen in fiscal 2016. North Dakota experienced the steepest decline, falling 17 slots to 19 as state revenues from severance taxes on oil production dropped sharply because of declining oil prices.

Delaware fell 13 slots to 44 because its cash-on-hand to pay bills fell to 1.95 times what was needed, from a multiple of 3.32 a year earlier.

The states at the bottom of the rankings have chronic fiscal problems that have continued year after year, the study showed.

Illinois ranked either 49 or 50 each year between 2008 and 2016.

Massachusetts ranked between 45 and 50 each year from 2010 through 2016.

Another chronic bottom dweller was New Jersey, which ranked between 44 and 49 from 2012 through 2016

Nebraska, South Dakota, Tennessee, Florida and Oklahoma finished in the top five of the latest rankings.

“We see states that don’t carry a big debt load as being more fiscally solvent,” said Norcross. “They also tend to be states that typically have a better short-term position as well. They are healthier across the board.”

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