Retiree Obligations, Lack of Cash Hampers Michigan's Fiscal Condition

Retiree obligations and cash solvency for short-term expenses are hampering Michigan's fiscal condition, according to a new report.

The Mercatus Center at George Mason University recently published its “Ranking the States by Fiscal Condition” report. According to the report's fiscal guidelines, Michigan ranks 35th, down one spot from the previous year.

The report, authored by Senior Research Fellow Eileen Norcross and research assistant Olivia Gonzalez, reviewed each state's annual audited financial report for the 2014 fiscal year, breaking the numbers into five categories:

• Cash solvency — the ability of a state to pay its short-term obligations.
• Budget solvency — a state’s ability to cover fiscal year spending with current revenues.
• Long-run solvency — the ability of a state to pay its long-term obligations.
• Service-level solvency — the ratio of taxes, revenues, and spending as compared to personal income.
• Trust-fund solvency — the total debt of each state, including its unfunded liabilities.

In this year's ranking, Michigan declined in terms of budget solvency because the state budget increased faster than revenue projections. Michigan advanced in three categories during the fiscal year: Long-run solvency moved up one spot from 25th to 24th; service-level solvency advanced three spots from 33rd to 30th; and trust-fund solvency progressed three spots from 35th to 32nd. The state remained at 34th for cash solvency.

The state falls short of the national average in all five major categories. Most notably, Norcross and Olivia Gonzalez peg Michigan’s unfunded pension liabilities at $123 billion, 42 percent above the national average. These unfunded liabilities, combined with other post-employment benefit plans and state debt, result in future expenses equal to about 38 percent of total state personal income.

"Michigan exhibited average fiscal performance," Norcross said. "On a short-term basis, Michigan has less cash than is needed to cover short-term bills in the event of a recession. Revenues exceeded expenses by one percent, leaving the state with a surplus of $64 per capita."

In the Great Lakes region, Michigan scored ahead of Illinois (47) but behind Ohio (11), Indiana (17) and Wisconsin (29).

This year’s top performers were Alaska, Nebraska, Wyoming, North Dakota, and South Dakota. Occupying the bottom five spots were the states of Connecticut, Massachusetts, New Jersey, Illinois, and Kentucky.

In its executive summary, the report points to underfunded pensions as the largest fiscal burden on each state. Even states that are performing well in fiscal matters must, it says, “take stock of their long-term fiscal health before making future policy decisions."