Wednesday, June 22, 2016

Maryland Should Improve Its Fiscal Scorecard

On June 1, 2016, the Mercatus Center at George Mason University released its 2016 edition of “Ranking the States by Fiscal Condition,” which analyzes each U.S. state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pen­sions and healthcare benefits.
Despite recent news that Maryland received positive bond ratings, the state nevertheless ranks 41st (out of 51 including Puerto Rico) in overall fiscal solvency in the new Mercatus Center study, falling four spots from 37th in 2015. In the study, fiscal solvency breaks down into five categories:
  • Cash solvency. Does Maryland have enough cash on hand to cover its short-term bills? Compared to other states, Maryland is cash insolvent, ranking 43rd out of 51 and falling four spots from 39th in 2015.
  • Budget solvency. Can Maryland cover its fiscal year spending with current revenues? No, Maryland revenues cover 98% of expenses. This ranks Maryland 46th in the country as opposed to 44th in 2015. 
  • Long-run solvency. Can Maryland meet its long-term spending commitments and will there be enough money to cushion it from economic shocks or other long-term fiscal risks? No, Maryland’s net asset ratio is -0.19 and for the second year in a row Maryland ranks 43rd in long-run solvency.
  • Service-level solvency. How much “fiscal slack” does Maryland have to increase spending if citizens demand more services? Maryland ranks in the top half of U.S. states at 16. But this is not an improvement from 2015 when Maryland was ranked 11th.
  • Trust-fund solvency. How much debt does Maryland have and how large are its unfunded pension and healthcare liabilities? Fortunately, Maryland ranks 18th, which is only a slight decrease from 2015 when it was ranked 17th.

Notably, Maryland’s unfunded pension liability is below the national average and its funded ratio is 100%. This means the value of the state’s assets are greater than the value of the state’s pension obligations. In fact, commendably, Maryland is the only state with a funded ratio of 100%. The national average is 74%.
But when it comes to state spending more generally, Maryland’s total primary debt per capita is $2,880, while the national average is only $2,144. Maryland’s ratio of debt to state personal income is below the national average of 6.0% at 5.3%. In other words, Maryland does not have a revenue problem; it has a spending problem!
A short-term plan for fixing Maryland’s fiscal health should go hand-in-hand with Governor Hogan’s reformist goals when he first took office. By reducing tax and regulatory burdens, as FSF President Randolph May and I discussed in a January 2016 Perspectives from FSF Scholars, Maryland will attract more economic activity that has been migrating over state lines for years. Creating an economy of “permissionless innovation” will incentivize entrepreneurs to open up shop in Maryland. This is the path to improving Maryland’s fiscal scorecard.