NCPA - National Center for Policy Analysis

The Fiscal Health of U.S. States

August 29, 2011

State and local governments experienced large budget shortfalls during the recent recession, and states share the burden of rising Medicaid expenditures.  Jeffrey Miron, a senior fellow at the Cato Institute and director of undergraduate studies in the department of economics at Harvard University, examines the fiscal health of the 50 U.S. states and finds that the popular perception that some states are fiscal basket cases while others are models of fiscal rectitude is accurate only in the short term; over a longer horizon, all states are in danger of fiscal meltdown.

Miron reaches five major conclusions:

  • State government finances are not on a stable path; if spending patterns continue to follow those of recent decades, the ratio of state debt to output will increase without bound.
  • The key driver of increasing state and local expenditures is health care costs, especially Medicaid and subsidies for health insurance exchanges under the Patient Protection and Affordable Care Act of 2009.
  • States have large implicit debts for unfunded pension liabilities, making their net debt positions substantially worse than official debt statistics indicate.
  • If spending trends continue and tax revenues remain near their historical levels relative to output, most states will reach dangerous ratios of debt to gross domestic product within 20 to 30 years.
  • States differ in their degrees of fiscal imbalance, but the overriding fact is that all states face fiscal meltdown in the foreseeable future.

Source: Jeffrey Miron, "The Fiscal Health of U.S. States," Mercatus Center, August 2011.

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