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North Dakota ranks 2nd in State Fiscal Health, but for how long?

By Jeremy Jackson, Ph.D.

A recent study released by the Mercatus Center ranks all 50 states according to their fiscal health. North Dakota ranks second in the country behind only Florida.

While it is nice to get the proverbial pat on the back for our financial prudence, the report highlights several items that are a cause for concern.

Methodology — our second-place status is contingent on how the study's authors chose to weight the five categories used in the overall score. In the weighting scheme, short-term measures of solvency are given greater weight than long-term measures. The bulk of the weight is given to two categories: cash solvency and budget solvency. If the rankings were instead made using equal weights among the categories, North Dakota's ranking falls to seventh. North Dakota's high rankings in cash solvency (6th) and budget solvency (1st) rest largely on the fact that the study relies on data from 2015. With the release of 2016 and 2017 data, our rankings will likely plummet.

Cash solvency refers to "a state's ability to pay its immediate bills over a period of 30 to 60 days." Through 2015, the state of North Dakota had a stockpile of cash in its rainy day fund. As this fund has now been depleted, our score will fall in future iterations of the report.

The same story goes for budget solvency, which is the "degree to which the state will end the fiscal year in surplus or deficit." We all know how that has panned out for North Dakota. Historic lows in agricultural commodity prices and a slumping oil market have strained key tax revenue sources.

Another cause for concern is the relative fiscal health of our neighbors. While North Dakota fares considerably better than Minnesota in the rankings, South Dakota and Nebraska are also stand out performers. In the weighted rankings, South Dakota is in third place — only one place behind North Dakota — and Nebraska ranks sixth. In the unweighted rankings, Nebraska's ranking jumps to first place, South Dakota stays at its third place spot, and North Dakota falls to seventh.

Not that seventh place is bad in a pack of 50 states, but we need to maintain our fiscal strength relative to our neighbors if we want our economy to remain competitive for entrepreneurs and industry as we seek to diversify our economy beyond energy and agriculture.

North Dakota performs particularly poorly in one measure; the state ranks last in service-level solvency. Service-level solvency refers to "how much fiscal 'slack' a state has with which to increase spending and taxes, should citizens demand more services." North Dakota ranks so poorly because the state has "higher levels of taxes, revenues and expenses as a proportion of the personal income of state residents" compared to other states.

The study concludes that North Dakota's levels of spending may be unsustainable, which we already felt in the most recent budgetary cycle.

Adam Milsap, also of the Mercatus Center, recently demonstrated a connection between service-level solvency and a state's net migration. States with low service-level solvency are less likely to attract new residents and businesses. This suggests a dire problem for a state like North Dakota, which is already struggling to meet employer demand for talent and a diversified tax base. Our neighbors, South Dakota and Nebraska, rank significantly higher at fifth and sixth, respectively.

North Dakota has much to be proud of when it comes to fiscal responsibility. However, there are signs that without continued budgetary resolve, the party will be short-lived.

This Op-Ed originally appeared in InForum.

The views and opinions expressed in his articles are those of the author and do not necessarily reflect the official policy or position of any agencies he is employed by or affiliated with.

 

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North Dakota State University
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Last Updated: Monday, July 17, 2017 11:50:11 AM
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