GOP States in Better Budget Shape Than Democratic Ones

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By Jonathan Nicholson

Oct. 31 — Kansas's recent budget problems have proven that Republican beliefs about the ability of tax cuts to goose the economy and fill government coffers are misguided, according to Democrats.

The state government, seeming to underscore the problem, recently stopped issuing a quarterly report on its economy that was originally intended to track an expected growth spurt after taxes were cut.

Kansas is not the only state where a Republican governor and statehouse face budget problems. Energy-producing states like Oklahoma and North Dakota, hit hard by the falling price of oil, have also had to make cutbacks. But an analysis by Bloomberg BNA of state-level budget data found that Republican-run states are, in general, in better budget shape than their Democrat-controlled counterparts.

Those states are more likely to have higher balances in reserve funds, higher ratings by credit agencies and less in long-term liabilities. The only measure where Democratic states do better is on their credit outlooks. Republican states are more likely to have been given a negative assessment of their near-term fiscal prospects.

‘Tired of Divided Government.’

While it is true that state economies and finances can be influenced by larger national and regional economic events, the strength of Republican state balance sheets gives the national GOP potential political ammunition. Republican leaders have made the argument this year that if they were given control over Congress and the White House, they could make progress on important issues, including the budget.

“I’m tired of divided government. It doesn’t work very well,” House Speaker Paul Ryan (R-Wis.) said Sept. 29. “We’ve gotten some good things done. But the big things—poverty, the debt crisis, the economy, health care—these things are stuck in divided government. That’s why we think a unified Republican government’s the way to go.”

According to the bipartisan National Conference of State Legislatures, there are 22 states where Republicans hold the governor’s mansion as well as both chambers of the legislature. In contrast, Democrats enjoy the same situation in only eight states.

The Republican states run the gamut from sparsely populated ones like Wyoming and Idaho to more populous ones like Ohio and Michigan. They also include Alabama, Arizona, Arkansas, Florida, Georgia, Indiana, Kansas, Mississippi, Nevada, North Carolina, North Dakota, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah and Wisconsin. The Democratic states are clustered mainly along the coasts: California, Connecticut, Delaware, Hawaii, New York, Oregon, Rhode Island and Vermont.

GOP States More Creditworthy

The Bloomberg BNA analysis looked at a variety of indicators of fiscal health, including:

  •  state general obligation bond and issuer ratings given by credit ratings agencies;
  •  the outlooks for those ratings being maintained;
  •  the levels of state budget reserves on hand; and
  •  levels of long-term liabilities like pensions, retiree health-care costs and debt.

There are caveats to the data, of course. For one thing, it is unclear how much policies put in place by state government can change that state’s circumstances.

In addition, the results of policies can take a long time to play out. Barb Rosewicz, research director at the Pew Charitable Trusts, said an example of that is pension liabilities, which are the biggest long-term liability in 37 of the 50 states.

“That, again, is a consequence of decisions that have been made over a generation or more,” she said.

John Hicks, executive director with the nonpartisan National Association of State Budget Officers (NASBO), echoed that sentiment. “Some of the things you’re looking at take years to create,” he said.

Still, on most measures of budget balance examined by Bloomberg BNA, the Republican-controlled states came out ahead.

The average rating for a GOP-controlled state was better under all three major credit ratings agencies—Moody’s Investors Service, Standard & Poor’s and Fitch Ratings—than the average Democrat-controlled state as of the end of August.

Converting the conventional range of ratings, from “A” to “AAA,” to numerical values by assigning a point for each “A,” the average Republican state had a rating equivalent to 2.35 with Moody’s, or slightly better than a “AA” rating. In comparison, the average Moody’s rating for a Democratic state was 2.25. For Standard & Poor’s, the difference was slightly more pronounced, with a GOP average of 2.41 compared to a Democratic average of 2.13.

For Fitch, the average Republican state was even better, at 2.53, equivalent to two-and-a-half “A”s out of a possible three, while the Democratic states’ average was 2.25. Fitch does not provide ratings coverage of some Republican states that Moody’s and Standard & Poor’s rated as only “AA” states, such as Arizona and Kansas, which likely helped bring up the Republican average.

‘Rainy Day’ Funds Higher

In terms of reserve “rainy day” cash to help Republican states through an economic downturn, on average they had about twice as much on hand as their Democratic counterparts, according to data compiled by NASBO.

The Republican state average reserve fund totaled 9.13 percent of annual expenditures, compared to 4.53 percent for Democratic states, according to NASBO’s latest “Fiscal Survey of the States,” a report on state budget trends and data issued twice a year. The NASBO data were the states’ estimates for their 2016 fiscal years and part of the survey released June 21.

For all 50 states, the rainy day total fell between the average of the two parties’ figures, at 6.5 percent.

The Republican states’ percentages were driven up by three outliers—Wyoming, Texas and North Dakota—states that rely heavily on energy production but also have to deal with its attendant price volatility. Wyoming had the highest “rainy day” reserve percentage, at 54.5 percent of annual spending, while Texas had the next highest percentage, at 18.1 percent, followed by North Dakota, at 15.7 percent. Even without those states, though, the GOP state “rainy day” average was a higher 5.3 percent of annual spending.

Unlike any of the Democratic states, some Republican states reported having nothing in the way of “rainy day” reserves. They included Arkansas, Kansas and Nevada.

Less Long-Term Liabilities

When it came to long-term liabilities, the picture was similar. The Pew Charitable Trusts in its “Fiscal 50” analysis compiles state data on the amount of liabilities states owe. By adding those liabilities—pension, retiree health-care costs and debt—and dividing by the state’s personal income—the sum total of residents’ wages and salaries and other forms of income—Pew came up with a percentage meant to measure states’ long-term fiscal health.

As with “rainy day” reserves, Republican states’ balance sheets again proved healthier than the average and much healthier than Democratic states. The Republican state average of liabilities to state income was 10.1 percent, less than half of the Democratic states’ 20.8 percent. For all 50 states, the figure was 14.8 percent.

In Republican states, the long-term liability percentage ranged from a high of 21.1 percent in Mississippi to a low of 1.1 percent in South Dakota.

For Democratic states, the range was from Hawaii’s 46.1 percent to Oregon’s 6.7 percent. Oregon was the only one of the eight Democratic-controlled states with its percentage in single digits, while 12 of the 22 GOP states held that distinction.

‘Pro-Growth, Pro-Jobs.’

The one indicator where Democratic states fared better than their Republican counterparts was in credit rating agencies’ outlooks. When agencies rate state-issued debt or assign the state an underlying rating, they often also include their opinion on what the next change in rating will likely be, whether negative, positive or simply unlikely to change soon.

In the Moody’s ratings, three of the 22 GOP states—Kansas, North Dakota and Oklahoma—had negative outlooks in late August. In comparison, only one Democratic state, Connecticut, had a negative outlook.

The story was similar for the Standard & Poor’s ratings. There, Oklahoma and Wyoming had negative outlooks, while no Democratic-controlled states had a negative outlook.

It is no surprise GOP-led states did better fiscally, said Jon Thompson, communications director with the Republican Governors Association.

“Governors can absolutely have an impact on the economic success of the states, and I think you see states with Republican governors succeeding financially because they champion pro-growth, pro-jobs policies, focused on making their states strong engines of economic growth and fiscally sound,” he said.

A request for comment to the Democratic Governors Association was not returned.

Divided Government Is a Push

How much budgetary credit should go to policy—instead of a state’s underlying economic fundamentals or the national economy—is subject to debate.

“I think that state economic development policies over the long term can have a positive effect, but in the near- and mid-term, federal macroeconomic policy is pretty much what has more of an influence on shaping the economic environment across regions and states,” said Kil Huh, senior director with Pew.

Hicks, with NASBO, said in some cases there is a bipartisan consensus in states on fiscal matters, no matter which party happens to be in charge. “Political culture is certainly an underlying element,” he said. “You tend to get some continuity in broad approaches, whether Democrats or Republicans.”

Notably, states with divided control may have an advantage in getting to a budget peace. Unlike the federal government, 49 of the 50 states have a constitutional balanced budget requirement.

That, according to Pew’s Rosewicz, imparts a sense of a shared mission among state lawmakers.

“It creates a different dynamic in which there is a problem-solving kind of attitude and that they need to accomplish this by the end of the year. That doesn’t mean that it’s easy, but when you just look at totally Republican and totally Democratic states, you’re kind of missing that dynamic,” she said.

Generalizations about states’ approaches to the budget can be oversimplified, Rosewicz said. While Kansas has cut taxes and has had budget problems, she said Nevada, also under Republican control, raised tobacco and business taxes in 2015. “I think you’d be able to point to examples on both sides. These states are unique and have long traditions,” she said.

To contact the reporter on this story: Jonathan Nicholson in Washington at jnicholson@bna.com

To contact the editor responsible for this story: Paul Hendrie at pHendrie@bna.com

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