New Jersey: Worse than Mercatus thinks

The Mercatus Center ranks New Jersey dead last among the 50 states in fiscal solvency and provides a handy chart:

Of course numbers can be made to lie but after condensing the report for easier ingestion for myself (and you) it looks like New Jersey was overrated.

WORKING PAPER: State Fiscal Condition Ranking the 50 States by Sarah Arnett (condensed excerpts):

Fiscal condition describes a government’s ability to meet its financial and service obligations.

ICMA model defines four types of solvency (NJ”s rank):

1. Cash: liquidity and ability to pay bills on time (36)
2. Budget: ability to meet current year spending obligations without causing a deficit (50)
3. Long-run: ability to pay for all costs including those that may occur years into the future (50)
4. Service-level: ability to provide and pay for the level and quality of services required to meet a community’s general health and welfare needs (39)

Data comes from 2012 CAFRs for each state.  Financial Indicators (with the solvency type from above that they are part of):

• Cash ratio (1): cash / current liabilities
• Quick ratio (1) : (cash + receivables) / current liabilities
• Current ratio (1): current assets / current liabilities
• Operating ratio (2): total revenues / total expenses
• Surplus (deficit) per capita (2): change in net assets / population
• Net asset ratio (3): net assets / total assets
• Long-term liability ratio (3): long-term liabilities / total assets
• Long-term liability per capita (3): long-term liabilities / population
• Tax per capita (4): total taxes / population
• Revenue per capita (4): total revenues / population
• Expenses per capita (4): total expenses / population

Weights applied to each solvency measure: .35 x (1) + .35 x (2) + .2 x (3) + .1 x (4)
For New Jersey:
.35 x -1.72 + .35 x -2.84 + .2 X -5.12 + .1 x -1.99 = -2.81

“New Jersey was ranked at the bottom in budget solvency, largely due to a decrease in net assets of $6.4 billion.  According to the state CAFR, despite improvements in tax revenues in fiscal year 2012, New Jersey has still not returned to the revenue levels it achieved before the recession.” (page 21)

“At the bottom of the [long-term liabilities] rankings are New Jersey and Illinois.  New Jersey faces long-run solvency problems due in part to nearly 15 years of underfunding its state and local pensions.  It has an estimated unfunded pension liability of around $25.6 billion as well as $59.3 billion in unfunded liabilities for the health benefits of retired teachers, police, firefighters, and other government workers.” (page 21)

“Although the ranking represents a snapshot in time, the states at the bottom are there due to years of poor financial management decisions, bad economic conditions, or a combination of both.  New Jersey and Illinois face similar problems of tax revenues that have not kept up with expenditures, use of budget practices that only appeared to balance their annual budgets, and significant debt levels as a result of decades of using bonds without being able to pay for them.” (page 24)

Why New Jersey is overrated:

1. $25.6 billion in pension liabilities!!!?? The real number is at least six times as much and rising and the .2 factor that Mercatus applies to this long-term  solvency type understates its importance.
2. A major source of pain here is property taxes which is completely excluded from this study.  There New Jersey also ranks last but by a far greater margin.
3. Because of those high property taxes we have a cap on local budgets which is full of holes and has not contained the rise in taxes but what it has done is encourage massive amounts of debt at the local level (also excluded from the study).  For example, if you want to maintain those make-work jobs and contracts for your ‘supporters’ then pretend there is a need for a new courthouse or a restaurant/clubhouse/banquet center so you can bond for that $40 million and siphon off a few million to support your political infrastructure.

And why New Jersey will not improve on their ranking any time soon:
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