Fiscal responsibility and meeting budgetary obligations are hallmark traits of the states that rank highest on this list. Many states have promised public employees more than they can afford to pay and now have woefully underfunded pension systems. Across all states, an average of only 71.6% of public pensions have financial backing. Of the 10 highest ranking states on this list, seven have pension systems with greater than average funding.
In addition to long-term obligations such as pensions, states have annual budgets that must be funded. While states can often count on spending a certain amount of money per year, they cannot always rely on a set amount of tax revenue. Tax revenue can fluctuate for a variety of reasons, including volatile commodity prices, negative GDP growth, population declines, or higher unemployment. As a result, many states have rainy day funds, designed to bridge budget gaps in the event of a shortfall. States with larger than average rainy day funds were rewarded in this ranking.
A state’s ability to meet its financial obligations can hinge on its ability to attract employers and jobs. While the availability of jobs can be affected by forces outside of the government’s control, the government can enact policies that can in time attract companies and create jobs. In the best managed states, unemployment is relatively low. The annual unemployment rate in nine of the 10 best managed states is in line with or lower than the U.S. unemployment rate of 4.9% in 2016. Meanwhile, nine of 10 lowest ranking states have a higher than average unemployment rate.
Often times, a job market’s health is affected by the presence of natural resources. For example, North Dakota has topped off the list of the best managed states in each of the last five years before 2017 due in no small part to the economic boom in the state precipitated by fracking in the state’s Bakken Shale region.
The presence of natural resources, however, can be a double-edged sword. States with vast oil or coal reserves can become overly dependent on resource extraction. This increases their risk of declining revenue in the event of falling commodity prices or decreasing demand. This phenomenon occurred in several oil-rich states, including North Dakota, which fell to seventh place in this year’s ranking in the wake of falling petroleum prices, leading to job losses and near-nation leading GDP decline.
While some states have been hurt by or benefitted from circumstances that are almost entirely out of lawmakers’ control — like the presence of natural resources — other states have been directly hindered by their own policymakers.
Governors in Kansas and Oklahoma, for example, have slashed taxes in an effort to stimulate economic growth. However, the anticipated growth never came and now, with lower tax revenue, these states are face major budget shortfalls.
Illinois, which is suffering from decades of fiscal mismanagement, is an extreme example. Agreeing to more than it could ever pay in public pension negotiations, Illinois now faces one of the largest budget deficits of any state and could become the first and only state to earn a junk credit rating from Moody’s. State lawmakers just passed their first budget in two years and have increased property tax rates to help close the gap. However, higher taxes may ultimately hurt the state’s balance sheet as tens of thousands moved out of the state between July 2015 and July 2016, the largest population decline in the country.
To determine how well each state is run, 24/7 Wall St. constructed an index of numerous measures from a variety of sources. From the U.S. Census Bureau, we looked at net migration to a state from July 2015 to July 2016 as a percentage of the 2016 population. We reviewed each state’s finances for the 2015 fiscal year, including revenue, per capita tax collection, expenditure, and debt levels, all from the Census. Also from the Census, we reviewed the per capita value of a state’s exports.
Additionally, we considered pension funding ratios for each state from Washington D.C.-based think tank The Pew Research Center, as well as each state’s rainy day fund balance as a percentage of total general fund expenditures estimated for fiscal 2018 from The National Association of State Budget Officers (NASBO). NASBO defines rainy day funds as “budget stabilization funds set aside to respond to unforeseen circumstances.” Credit rating agency Moody’s Investors Service provided government general obligation ratings, and they are the most recent as of this writing.
From the U.S. Census Bureau’s 2016 American Community Survey (ACS) we also considered a range of socioeconomic factors to assess social outcomes and residents’ well-being. We looked at poverty, high school educational attainment, the percentage of adults without health insurance, median household income, and 1- and 5-year changes in median home value. Violent crime rates came from the Federal Bureau of Investigation’s (FBI) 2016 Uniform Crime Report. Annual foreclosure rates, measured as the number of housing units at some stage in the foreclosure process, were provided by housing market data tracker Attom Data Solutions and are for 2016.
To evaluate each state’s job market, we reviewed annual 2016 unemployment rates as well as jobless rates as of October 2017 from the Bureau of Labor Statistics (BLS). Additionally, we reviewed the change in a state’s labor force from 2011 to 2016. For each state’s unemployment insurance (UI) benefits system we also considered average weekly benefit amounts and as a percentage of the average weekly wage (the replacement rate), the percentage of UI claimants exhausting their benefits before finding a job (the exhaustion rate), the average duration in weeks of insurance benefits, and the percentage of unemployed individuals receiving UI benefits (the recipiency rate) from the Department of Labor’s Employment and Training Administration (DOLETA) as of the twelve months ending Q1 2017.
Lastly, to assess the strength of each state’s economy, we reviewed real GDP growth rates and per capita real GDP for 2016 from the Bureau of Economic Analysis (BEA). Also from the BEA, we considered 2015 regional price parity, a proxy for an area’s cost of living.