The Best and Worst Run States in America: A Survey of All 50 - 24/7 Wall St.

by Alexander E.M. Hess, Thomas C. Frohlich, Alexander Kent, and Ashley C. Allen, 24/7 Wall St., December 3, 2014 (excerpts)

How well run is your state? Assessing a state’s management quality is hardly easy. The current economic climate and standard of living in any given state are not only the results of policy choices and developments that occurred in the last few years, but can also be affected by decisions made decades ago, and by forces outside a state’s control.…

This year, a number of the best-run states again benefit from an abundance of natural resources. North Dakota, Wyoming, Alaska, and Texas are among the top 10 best-run states, and in all four, the mining industry — which includes fossil fuel extraction — is a major contributor to state GDP. Due in large part to the mining sector, North Dakota and Wyoming led the nation in real GDP growth in 2013. And Alaska has utilized its oil wealth to build massive state reserves and to pay its residents an annual dividend.

Although less than in years past, the lingering effects of the housing crisis still have a negative impact on several of the worst-run states. In five of the 10 worst-run states — Arizona, Georgia, Illinois, New Jersey, and Rhode Island — home values declined by 10% or more between 2009 and 2013. Worse still, in states such as Arizona and Rhode Island, the housing market remains well below its peak, reached just before the start of the recent recession.

While some states’ economic fortunes are closely tied to the rise and fall of individual industries, which are often outside their control, each state must make the best of its own situation. Governments, as stewards of their own economies, need to prepare for the worst, including the collapse of a vital industry. Good governance is about balancing tax collection and state expenditure in a way that provides essential services to residents without sacrificing a state’s long-term fiscal health. Many of the best-run states in the country set money aside each year for emergencies. Should the Alaskan economy run into trouble, the state has enough money in reserve to match more than 21 months of general fund spending.

The scale and complexity of state institutions often make addressing problems at the state level extremely difficult. As a result, our list of the best- and worst-run states tends to remain largely unchanged from one year to the next.

There were a few states that made remarkable improvements, however. California, Colorado, Florida, and Hawaii all moved up by at least 10 positions on our ranking. Improvements in important factors, such as GDP growth and home value increases, contributed to improved rankings in a number of these states….

While each state is different, states at both ends of the list share certain characteristics. For example, people living in the worst-run states were apt to have lower standards of living. Violent crime rates were typically higher in these states, and the share of the population in poverty or with at least a high school diploma was lower than the national rate.

The worst-run states also tended to have weak fiscal management, reflected by low pension funding, sparsely padded coffers, and poor credit ratings from Moody’s Investors Service and Standard & Poor’s (S&P). Illinois, the worst-run state in America, received lower ratings than any other state from both agencies. By contrast, the majority of the 10 best-run states had perfect ratings from both agencies.

Unemployment rates were also relatively low in the nation’s best-run states. North Dakota, the top-ranked state, had an unemployment rate of 2.9% last year, the best in the U.S. In all, eight of the 10 best-run states were among the 10 states with the lowest unemployment rates. Meanwhile, unemployment was much more prevalent in the worst-run states. Illinois and Rhode Island, both among the lowest-rated states, also had the nation’s second- and third-worst unemployment rates in 2013, at 9.2% and 9.5%.…

12. Hawaii

> Debt per capita: $5,981 (9th highest)

> Credit Rating (S&P/Moody’s): AA/Aa2

> 2013 unemployment rate: 4.8% (8th lowest)

> Median household income: $68,020 (4th highest)

> Poverty rate: 10.8% (5th lowest)

Hawaii collected more than $3,900 in tax revenue per person in fiscal 2012, among the highest amounts in the nation that year. However, Hawaii also had among the highest levels of state debt that year, at nearly $6,000 per person. Moody’s cited several challenges in assigning the state an Aa2 credit rating, including its vulnerability to tourism downswings, low pension funding levels, and high debt ratios. Of course, Hawaii’s credit rating is still firmly investment grade, and the state has more than a few positives in its favor as well. For example, just 6.7% of the state’s population did not have health insurance last year, the second best rate of any state and well below the 14.5% nationwide rate. This has likely been in no small part due to the Hawaii Prepaid Health Care Act, now 40 years old, which requires employers to provide coverage to regular employees….

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