New Report Highlights Maine’s Poor Fiscal Health

July 13, 2015 Posted by Nathan Strout - No Comments

Maine ranks 42 in the nation on fiscal health according to a new study from the Mercatus Center at George Mason University.  Such low rankings are not new to Maine—in the past year the state has ranked poorly in studies on tax burden and economic outlook.  So while it may come as no surprise to informed Mainers that the Pine Tree State ranked poorly in yet another survey, what is interesting is what new data this report brings to our attention.

In the study, Ranking the States by Fiscal Condition, author Eileen Norcross ranks the states on fiscal solvency, defined as their ability to pay for long- and short-term debt, as well as unfunded pensions and other benefits.    Yet the overall rankings are only a snapshot of the states’ fiscal health.  It’s when we dive into the individual metrics for each state that a more detailed picture of their fiscal health emerges.

Norcross separates fiscal solvency into five categories; cash solvency, budget solvency, long-run solvency, service-level solvency, and trust fund solvency.  Each category looks at a different aspect of a state’s fiscal health.  For instance, service-level solvency looks at whether a state can afford an increase in services.  Long-run solvency looks at whether a state can afford its long term obligations or withstand economic shock.  By looking at Maine’s ranking in each category, we can more accurately understand Maine’s weaknesses and why it ranks so low overall.

Dead Last

Maine’s rankings vary widely throughout the five categories.  While Maine never breaks into the top ten in any category, it ranks dead last in one—cash solvency.  Cash solvency is defined as “the state’s ability to pay its immediate bills over a 30- or 60-day time frame.”  Essentially, the report says that Maine can barely afford, or is at risk of not paying, it’s short term debts/obligations.

cash solvency

Strangely enough, most coverage of this report have remarked that overall, states fared well on short-term fiscal solvency, while they simultaneously ignored growing unfunded pensions and other post-retirement benefits that were becoming increasingly unstable.  Maine ranks around the middle of the pack on unfunded pension liability, and yet it is last on cash solvency.

Digging into this category, we find that Maine’s cash ratio, one of three metrics that factor into Norcross’ cash solvency category, is 0.34.  That means that Maine only has a third of the cash on hand to cover its upcoming payments over the next two months.  Now, if one adds less liquid assets than cash, Maine’s ratio rises to 1.40.  However, this still falls short of “a ratio of two [which] indicates sufficient assets to cover short-term liabilities,” writes Norcross.

High Debt and Unfunded Pensions

Even though Maine’s ranking in other categories isn’t as low as cash solvency, the report doesn’t paint a pretty picture.  For instance, as of 2013 the state carried almost $1 billion in debt, of which almost a third was accounted for in bonds.  That works out to a debt of $720 per person in the State of Maine.  Norcross notes that general debt detracts from a state’s fiscal slack, making it less capable of withstanding to economic shocks.

“A closer analysis of the individual metrics behind the ranking shows how each state’s fiscal condition should be assessed. Notably, nearly all states have unfunded pension liabilities that are large relative to state personal income, indicating that all states need to take a closer look at their unfunded pensions, which represent a significant portion of each state’s economy. Another financial crisis could mean serious trouble for many states that are otherwise fiscally stable.”

Maine’s Fiscal Status

It is, of course, important to note that the data used in this report is from 2013.  Since that time, Governor LePage has made efforts to increase the state’s rainy day fund to provide greater fiscal stability.  However, the “cascade” in the state budget, which directs revenue to non-essential projects in the case of a surplus, remains a significant hurdle to filling a rainy day fund.

Criticism of Maine’s fiscal solvency is not new, but it remains difficult to tell whether Maine is improving or regressing on the issue.  Few comparative fiscal solvency reports are issued annually, and often the metrics used change year to year.  A previous report released by the Mercatus Center, which is similar although not necessarily comparable, placed Maine in the bottom five states for fiscal solvency.  In the past couple years, credit rating agencies have downgraded Maine’s rating over budgetary imbalance.

As legislators look back at the budget they passed, they should use the Mercatus report to determine whether they adequately addressed the state’s fiscal issues.  Lawmakers in Augusta need to make the hard decisions to ensure that Maine’s budget is fiscally responsible in the long- and short-term.