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April 2014 Brief: Volume 21, Number 11

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What Is the State’s Fiscal Condition? And Why?


by Deborah Thornton



As Iowans finish filing our income taxes, we hope both to not have to pay more or to receive a large refund. The overall fiscal condition of state government, controlled by both the Legislature and the Governor, has much to do with whether or not we get our money back.


Iowa, according to the national ranking of state fiscal conditions by the Mercatus Center at George Mason University in Arlington, Virginia, is in pretty good financial condition. Mercatus issued a new analysis in January ranking all 50 states on four major solvency criteria: cash, budget, long-run financial condition, and service-level requirement.[1] Each has several internal components.


We rank 18th overall, behind states such as Alaska, South and North Dakota, Nebraska, and Wyoming – and well ahead of New Jersey, Connecticut, Illinois, Massachusetts, and California – the coastal (mostly) problem children. Interestingly, all five top states have a Republican Governor and Legislatures.[2] Four of the five bottom states have Democrat chief executives, and all Legislatures are Democrat controlled. Also, interestingly, all the high-ranked states have limited, or part-time, Legislative sessions, while the bottom states basically have year-round, full-time Legislatures. More time in session apparently does not result in better financial decisions.


On cash solvency, Iowa ranks 17, based upon the cash, quick, and current ratios of money available compared to the current liabilities. This reflects how much tax money is on hand to actually pay bills such as salaries, equipment, and services owed by state government.


In the overall budget solvency, Iowa ranks 16. The budget factor is made up of both the operating ratio (total revenues divided by total expenses) and the surplus per capita. The surplus is figured by dividing the change in net assets by population.


The long-run financial condition (13th) ranking is made up of the net asset, long-term liability, and long-term liability per capita ratios. A key determinant of this ranking is the long-term state government employee pension liability. Here, Iowa ranks better than most, but state pensions are still not fully funded and no further reforms were passed this Legislative session.


The final category, that of service-level requirements, is most nebulous in that the service demands of citizens vary greatly depending on what role citizens of a state want their government to play. Do we want everything done for us? And only the best? Are workers satisfied with a lower level of services, in return, presumably, for a lower level of taxation? How much “wants” do citizens demand versus “needs?”


The taxes, revenue, and expenses per capita make up this ranking, and Iowa was scored at a relatively low 34. This would generally indicate that we are taxed fairly highly for the value of the general services we receive. According to Mercatus, service-level data is basically a ranking of government efficiency.


According to the report, “States with high budget solvency but lower service-level solvency may have difficulty meeting the cost for increased services in the event of an increase in public demand for services”[3] ― at least without initiating either income or sales tax increases. The author further said, “Higher taxes and revenue per capita suggest a higher tax and revenue burden on state residents…the government is already providing an expensive level of services…and may not be allocating resources in the most efficient or productive manner.”[4]


The lower service-level score would seem to reflect the demand for high spending in both education (55 percent of state budget) and medical care, the next largest category. Government health-care costs are a function of both having more elderly and low-income citizens in the state population and are heavily influenced by federal government actions such as Obamacare. On the education side, given both the continuing stagnation in the number of Iowa children being educated and in the results of this education, based on national test scores – but consistent and steady increases in the amount spent on education – the low service-level score potentially indicates that our education taxes are not being spent effectively and efficiently.


It is unfortunate that no further significant education reform was passed during this year’s Legislative session and that liberal members of both the House and Senate only spent their time agitating for even higher spending increases, instead of proactively looking for more effective use of the money we are already spending.


If these members of the Legislature are sincerely interested in improving the educational outcomes for our children, versus simply supporting their special interest group campaign contributors, they would embrace the efforts of groups such as Democrats for Education Reform and support initiatives such as expanded or liberal open enrollment and Education Savings Accounts (ESAs).


Until they do, Iowa will continue to score only “OK” in national rankings – just like our children.


[1] Sarah Arnett, “State Fiscal Condition: Ranking the 50 States,” January 14, 2014, #14-02The Mercatus Center, George Mason University, <> accessed on March 18, 2014.
[2] Ibid. p. 8.
[3] Ibid. pp. 18-19.
[4] Ibid. p. 16.


Deborah D. Thornton is a Research Analyst with Public Interest Institute, Mount Pleasant, Iowa. Contact her at


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