Virginia state finances — not the gold standard we thought.
by James A. Bacon
Once upon a time, Virginia was widely regarded as the Best State to Do Business. No longer. That reality is slowly making an impression in government and economic development circles, and I sense a growing awareness that Virginia can’t continue doing things the same way it always has.
Virginia also has long enjoyed a reputation for fiscal rectitude, due mainly to its AAA bond rating, the maintenance of which is a bipartisan priority. However, Virginia’s fiscal solvency is slipping, too — and the problem runs deeper than temporary problems caused by cutbacks in federal spending. I don’t get the sense that this reality is yet sinking in.
In research for George Mason University’s Mercatus Institute, “Ranking the States by Fiscal Condition,” Eileen Norcross rates the financial health of U.S. states in FY 2013 based on short-and long-term criteria. Virginia ranks only 21st on the list, lagging Alabama and South Carolina, among other states. (For those on Boomergeddon watch, the states with the most precarious finances are New York, Connecticut, Massachusetts, New Jersey and, of course, the U.S. poster boy for fiscal irresponsibility, Illinois.)
The key insight here is that balancing the budget is only one measure of fiscal health. “State spending may be large relative to the economy and thus be a drain on resources,” writes Norcross. Also, she adds, “The state may define budgetary balance to exclude certain funds or to mask debts, thus obscuring the true cost of spending or the resources required to finance long-term obligations.”
The report compiles five measures of financial strength:
Cash solvency. Can the government pay bills that are due over a 30- to 60-day horizon? On average, the states have a ratio of cash to short-term liabilities of 2.3 to one. Virginia ranks 30th most solvent by this measure.
Budget solvency. Can the state government meet its fiscal year obligations? In other words, are revenues running ahead of spending? Virginia’s capacity by this measure ranked 29th nationally.
Long-Run solvency. This ratio represents the proportion of long-term liabilities — bonds, outstanding loans, claims and judgments, compensated employee absences — relative to total assets. Virginia ranks 27th by this measure.
Service-level solvency. This measure captures how much “fiscal slack” states have by measuring the size of taxes, expenses and revenues relative to state personal income. It is a general measure of whether a government has room to raise taxes or increase spending. Virginia ranks 5th — the only measure it which it stands out as being in solid shape.
Trust fund solvency. The final measure factors in long-term obligations such as long-term debt, pension obligations and other post-employment obligations (such as health insurance for retirees). Virginia ranks 15th by this measure.
(Hat tip: Tim Wise)
