Maryland's Fiscal Condition Improves Under Governor Hogan

Earlier this month, the Mercatus Center at George Mason University released its 2018 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. 

In the 2018 edition, Maryland ranks 33rd among the states in overall fiscal condition. This is an increase of 13 spots from 46th overall in 2017. Importantly, this report uses data from fiscal year 2016, which is the first full year of Maryland Governor Larry Hogan's term. As Free State Foundation President Randolph May and I have discussed in three different Perspectives from FSF Scholars, Governor Hogan has made commendable efforts to improve Maryland's business climate by eliminating or reducing unnecessary regulations and taxes. (See here, here, and here.)

In the Mercatus report, assessment of fiscal condition 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 41st but moving up five spots from 46th in 2017.

• Budget solvency. Can Maryland cover its fiscal year spending with current revenues? Yes, Maryland revenues cover 102% of expenses. This ranks Maryland 27th in the country, moving up twelve spots from 39th in 2017.

• 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 -1.69 and Maryland ranks 44th in long-run solvency, which is the same as its 2017 rank.

• 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 17th in the country, falling just one spot from last year.

• Trust-fund solvency. How much debt does Maryland have and how large are its unfunded pension and healthcare liabilities? Maryland ranks 17th, moving down three spots from 14th in 2017.

One significant issue Maryland policymakers should address is the state's looming unfunded liabilities. Maryland has nearly $21 billion in unfunded pension liabilities and has a funded ratio of 71%. This means the value of the state’s assets are 71% of the value of the state’s pension obligations. The most effective plan for decreasing Maryland's long-term debt and fixing its fiscal condition goes hand-in-hand with Governor Hogan’s efforts to improve the state's business climate.

By reducing the burdens of taxes and regulations, Governor Hogan's reforms are intended to continue to attract more businesses into Maryland. In turn, this will expand Maryland's tax base, increase tax revenue, and improve Maryland's fiscal condition by diminishing the amount of unfunded liabilities overtime. Moreover, lessening the burden on current and future taxpayers by decreasing long-term debt will stimulate the economy and create more jobs throughout Maryland.

It is fairly clear that Governor Hogan's tax and regulatory reforms are having a positive impact on Maryland's overall fiscal condition. In the first full fiscal year of Governor Hogan's term, Maryland moved up 13 spots in the Mercatus ranking. Based on the achievements that the Hogan Administration has made over the last couple of years in terms of eliminating outdated and unnecessary regulations, Maryland's fiscal health ranking should continue to improve.

In the meantime, the Maryland General Assembly should work harder to collaborate with Governor Hogan's efforts to decrease tax and regulatory burdens. This will have a positive impact on Maryland's long-term fiscal condition.

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 41^st (out of 51 including Puerto Rico) in overall fiscal solvency in the new Mercatus Center study, falling four spots from 37^th 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 43^rd out of 51 and falling four spots from 39^th in 2015.

• Budget solvency. Can Maryland cover its fiscal year spending with current revenues? No, Maryland revenues cover 98% of expenses. This ranks Maryland 46^th in the country as opposed to 44^th 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 43^rd 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 11^th.

• Trust-fund solvency. How much debt does Maryland have and how large are its unfunded pension and healthcare liabilities? Fortunately, Maryland ranks 18^th, which is only a slight decrease from 2015 when it was ranked 17^th.

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.