Maryland’s Fiscal Health Is Poor Even as Business Climate Improves

On July 11, 2017, the Mercatus Center at George Mason University released its 2017 edition of “Ranking the States by Fiscal Condition,” which analyzes each state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pensions and healthcare benefits. And CNBC recently released “America’s Top States for Business 2017,” which ranks each state by the attractiveness of its business climate.

Despite Governor Larry Hogan’s thus far commendable efforts to reform Maryland’s business climate, the state nevertheless ranks 46^th in overall fiscal solvency in the new Mercatus Center study, falling five spots from 41^st in 2016. The data used in the Mercatus study comes from fiscal year 2015, which only covers the first six months of Governor Hogan’s administration. So his reform efforts will not be recognized in this study. But it is still important to see how Maryland ranks relative to other states.

In the Mercatus study, fiscal solvency is broken 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 46^th and falling three spots from 43^rd in 2016.

• Budget solvency. Can Maryland cover its fiscal year spending with current revenues? Yes, Maryland revenues cover 101% of expenses. This ranks Maryland 39^th in the country moving up seven spots from 46^th in 2016.

• 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 -1.83 and Maryland ranks 44^th in long-run solvency, moving down one spot from 43^rd in 2016.

• 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^th for the second year in a row.

• Trust-fund solvency. How much debt does Maryland have and how large are its unfunded pension and healthcare liabilities? Maryland ranks 14^th, moving up four spots from 18^th in 2016.

Maryland’s unfunded liabilities may be small relative to other states, but they are large relative to Maryland’s current assets. Maryland has a funded ratio of 74%. This means the value of the state’s assets are 74% of the value of the state’s pension obligations. Although 74% is consistent with the national average, Maryland has over $20 billion in unfunded liabilities.

Despite Maryland’s poor ranking in the new Mercatus study, Governor Larry Hogan has done a commendable job starting to transform Maryland’s business climate. As Free State Foundation President Randolph May stated in a January 2017 Perspectives from FSF Scholars, Governor Hogan’s Regulatory Reform Commission has identified specific areas where Maryland can reduce regulatory barriers. Also, in May 2016, Governor Hogan reduced or eliminated over 155 fees, claiming to save businesses and taxpayers over $60 million over the next five years.

These efforts have helped propel Maryland upward in CNBC’s new ranking “America’s Top States for Business 2017.” Since Governor Hogan took office in January 2015, Maryland has moved up eleven spots to 25^th in CNBC’s 2017 ranking. Notably, Maryland currently ranks 4^th in technology and innovation, 7^th in overall economy, 11^th in workforce, and 15^th in access to capital.

Despite the positive direction of Maryland’s business climate, the Mercatus study shows how the decisions of past administrations, along with past legislatures, have created long-term debt and left Maryland with one of the worst fiscal situations in the country. In a couple of years when the data used in the Mercatus study takes into account the reforms made by the Hogan administration, it will be interesting to see whether the improvements to Maryland’s business climate have positively impacted Maryland’s fiscal health.

The most effective plan for fixing Maryland’s fiscal health should go hand-in-hand with Governor Hogan’s reformist goals when he first took office. The Maryland General Assembly should work with Governor Hogan to reduce tax and regulatory burdens. This would enable Maryland to attract economic activity that has migrated over state lines in past years. Creating an economy more conducive to “permissionless innovation” will incentivize entrepreneurs to open up shop in Maryland. This will expand Maryland’s tax base, increase tax revenue, and improve Maryland’s fiscal health by reducing the amount of unfunded liabilities. Reducing the burden on current and future taxpayers by decreasing long-term debt will stimulate the economy and create more jobs throughout the state of Maryland.

The Maryland General Assembly should support Governor Hogan’s efforts to reform Maryland’s tax and regulatory environment and attract more businesses into the state.