Recent Study Evaluates State Financial Health Nationwide

The Reason Foundation, a nonprofit organization, has conducted a comprehensive review of all fifty U.S. states, examining their financial health against a set of eight key financial metrics. These indicators are designed to assess both long-term and short-term financial viability, covering factors such as debt ratio, unrestricted net position, revenues versus expenditures, liabilities per capita, quick ratio, receivable quality, cash as a percentage of assets, and solvency ratio.

Understanding the Financial Metrics

The eight financial metrics serve as red flags when a state fails to meet best practice benchmarks. Four of them are long-term indicators:

• Debt Ratio: Compares total liabilities to total assets — liabilities should not exceed assets.
• Unrestricted Net Position: Negative values suggest insufficient discretionary resources.
• Revenues Less Expenditures: When spending surpasses revenues, balance sheet health deteriorates.
• Liabilities per Capita: Amounts over $10,000 per resident are increasingly challenging for taxpayers.

The remaining four metrics focus on the short term:

• Quick Ratio: Liquid assets should cover bills due within a year.
• Quality of Receivables: High receivables (above 30% of yearly revenues) may indicate collection difficulties.
• Cash as Percentage of Assets: Holding under 10% in cash could result in vulnerability to cash flow issues.
• Solvency Ratio: Liabilities exceeding twice the annual revenues may limit borrowing or strain taxpayer capacity.

How States Rank: Winners and Red Flags

Using 2023 financial data, the report found that twenty-three states showed no red flags, demonstrating robust public finances. On the opposite end, New Jersey was found to be the worst performer, accumulating six out of eight possible red flags. Connecticut followed with four. Several states, including California, Hawaii, Illinois, Massachusetts, North Dakota, and Pennsylvania, each received three red flags. Vermont, Washington, New York, and Delaware had two.

Hawaii’s Financial Position

According to the Reason Foundation’s analysis, Hawaii faces ongoing long-term challenges. The state carries a total of $27.5 billion in liabilities, translating to $18,909 per capita—well above the $10,000 threshold highlighted as a concern in the financial metrics. While Hawaii's total assets do exceed its liabilities, significant restrictions on the use of its cash have resulted in a negative unrestricted net position of -$7.4 billion. Additionally, cash assets make up only 7.5% of total assets, placing Hawaii below the suggested 10% benchmark and highlighting possible vulnerability to cash crunches. However, the report notes that Hawaii has enough liquidity to cover its current liabilities and saw a strong annual operating surplus of $2,566 per capita for the 2023 fiscal year.

Causes Behind Hawaii’s State Liabilities

The state’s high liabilities per capita are partly attributed to its defined benefit retirement plans and the Employer-Union Trust Fund (EUTF), which promises healthcare for life to qualifying state retirees. These obligations are rare among employers today and can be particularly costly during economic downturns. While Hawaii does possess assets, much of its liquid capital is locked within various special or revolving funds. This structure can make it difficult for the state to mobilize resources quickly in response to emergencies or sudden reductions in federal funding.

Asset Structure and Policy Challenges

Hawaii’s recent financial report shows that most of its assets are held in land, buildings, and infrastructure rather than readily accessible cash. As a result, converting assets for immediate financial needs would often require selling property, a slow and cumbersome process. Given these structural challenges, the report urges state lawmakers to consider options for improving financial flexibility and resilience in the state budget.

Source: hawaiireporter.com.