How a State's Age Affects Its Financial Health

The older a state is, according to new research, the more likely it is to have money problems.
by | October 3, 2018
A painting depiction of the signing of the Declaration of Independence. (John Trumbull)

SPEED READ:

  • The longer a state has been around, the more likely it is to have financial problems, according to the annual "Financial State of the States" report by the transparency organization Truth in Accounting. 
  • Politics is to blame. Older states tend to have thriving environments for special interest groups, which have been shown to suppress economic vitality by running up pension and retiree health-care debt.
 

As the nation's median age ticks up, recent research from S&P Global Ratings has warned that an older population may burden states' economic growth. As it turns out, a state's own age may also be an economic burden.

That's the suggestion from researcher William Bergman, a former financial markets analyst for the Federal Reserve Bank of Chicago and now director of research for the state debt transparency organization Truth in Accounting. Analyzing data from its annual "Financial State of the States" report, Bergman found that the longer a state has been around, the more likely it is to have financial problems.

The primary driver behind this correlation, says Bergman, is politics.

In addition to skewing older, states that have the worst financial conditions also tend to be more gerrymandered and in many cases have a higher-than-average share of lawyers in its population. Both of these characteristics can indicate a thriving environment for special interest groups, which suppress economic vitality, according to landmark research by British economist Mancur Olson in the 1980s.

This certainly appears to be the case in Illinois, Louisiana, Maryland, Massachusetts, New Jersey and Pennsylvania -- all admitted to the Union between 1787 and 1818. All six states have a high rate of lawyers per capita and are ranked by the geospatial software firm Azavea as home to some of the more gerrymandered congressional districts. These same states also rank in the lower third for taxpayer burden, according to Truth in Accounting. Louisiana's debts, at one end of the spectrum, tallied up to more than $15,000 per taxpayer. At the other end, New Jersey's equaled more than $61,000 per taxpayer.

These states, says Bergman, have allowed special interests groups to run up debt in the form of unfunded pension and retiree health-care benefits. These debts, in turn, are hurting economic growth. "You see more often the tendencies to borrow for these special interest groups as opposed to raising taxes," he says. "They're kicking the can down the road and thus putting the burden on taxpayers."

The experience of these older states should serve as a "warning" to newer ones. "It shows the importance of respecting the public purse," says Bergman, "we all have a common interest in it."

In other words, younger states like Idaho and Utah, both admitted to the Union in the 1890s, aren't necessarily doomed to face the same fate. As it stands, they both have a taxpayer surplus and relatively low levels of political machinery by traditional economic measures.

Of course, there are some outliers to Bergman's findings. Hawaii, one of the newest states in the Union, already ranks among the bottom for taxpayer burden thanks to the roughly $18 billion it owes in unfunded pension and retiree health-care benefits.

All told, 40 states have some kind of debt burden on taxpayers, much of it due to unfunded pension and retiree health-care liabilities. While some amount of debt is normal and even healthy for states, 10 states were given failing grades from Truth in Accounting because of their repeated failure to balance budgets and address growing financial burdens.

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*CORRECTION: A previous version of this read, "younger states like Iowa and Utah, both admitted to the Union in the 1890s, aren't necessarily doomed to face the same fate." It meant to refer to Idaho and Utah.