Maine ranks among the bottom 10 states and Puerto Rico in terms of fiscal health, according to a George Mason University study released Wednesday.

According to the study, by the Virginia college’s Mercatus Center, Maine fell eight places from the previous year to land at No. 43. The center advocates for free markets and is funded by corporate donations from Koch Industries, ExxonMobil and others.

Problems for Maine include a below-average amount of cash on hand to cover short-term liabilities, and a lack of “fiscal slack” to raise taxes or increase spending if needed, the study’s authors said.

However, Maine officials said the study, which is based on financial reports from fiscal year 2014, is outdated, and that Maine’s fiscal health has improved considerably since then.

“In fiscal ’14, we had very tight cash,” said Maine State Controller Doug Cotnoir. Since then, the LePage administration has made structural changes that have increased the state’s cash solvency, he said. “We have more revenue this year than we needed.”

The study’s emphasis on short-term economic health did not work in Maine’s favor, nor did the state’s relatively high taxes. In general, states with lower taxes performed the best because they had the greatest ability to boost revenue by implementing or raising taxes if needed.

“All it is is a reflection of the underlying tax structure in a state,” said Charles Lawton, chief economist for Planning Decisions Inc. and a weekly columnist for the Portland Press Herald. “This is intended to address a fiscal agenda that the Mercatus Center favors.”

Michael Allen, Maine’s associate commissioner for tax policy, noted that just because states with low taxes could potentially raise them, that does not mean they would actually do so.

“I think it doesn’t take into account political realities,” he said.

The study’s methodology also gave a marked advantage to states with large incomes from natural resources, Lawton said.

Four of the top five states ranked by the study – Alaska, Nebraska, Wyoming and North Dakota – all have benefited from a domestic petroleum boom that created large surpluses of cash for those states but may not continue into the long term. Only South Dakota, which was ranked No. 5, does not have an active oil industry.

The lowest-ranked states – Kentucky, Illinois, New Jersey, Massachusetts and Connecticut – have relatively low amounts of cash on hand and large debt obligations, but not necessarily the weakest economies. In the study, California ranked No. 44 overall, just below Maine.

Not surprisingly, Puerto Rico ranked below all 50 states in the study. The U.S. territory is on the verge of bankruptcy with government debt of more than $70 billion.

The study used each state’s audited financial reports to examine the following five characteristics:

• Cash solvency: Does a state have enough cash on hand to cover its short-term bills?

• Budget solvency: Can a state cover its fiscal year spending with current revenues, or does it have a budget shortfall?

• Long-run solvency: Can a state meet its long-term spending commitments? Will there be enough money to cushion it from economic shocks or other long-term fiscal risks?

• Service-level solvency: How much “fiscal slack” does a state have to increase spending if citizens demand more services?

• Trust fund solvency: How much debt does a state have? How large are its unfunded pension and health care liabilities?

In Maine, the weakest areas were cash solvency and budget solvency.

The study found that Maine ranked 44th among the 50 states in its ability to cover short-term bills, which include accounts payable, vouchers, warrants and short-term debt. It ranked 40th in its ability to cover its fiscal year spending using current revenues, with a shortfall of $20 per capita.

Maine performed above average in two areas: long-run solvency and trust fund solvency.

It ranked 20th among the 50 states in its ability to hedge against large long-term liabilities, with relatively adequate assets available to cushion the state from potential shocks or long-term fiscal risks.

Maine ranked 24th in terms of its overall debt level, with relatively small unfunded pension liabilities, other post-employment benefits liabilities and state debt compared to state personal income.

Cotnoir said Maine’s unfunded pension liability is even lower now than it was during the period on which the study is based.

Finally, Maine ranked 36th in service-level solvency, which measures how high taxes, revenues and spending are when compared to state personal income.

Cotnoir said states with lower populations always come out looking relatively worse than larger states when such figures are reduced to a per-capita basis, as was done in the Mercatus Center study.

Lawton, the economist, said the fact that Maine’s lowest ranking of 44th was related to short-term solvency, and its overall ranking was 43rd, shows that the overall score was heavily weighted toward short-term fiscal health. Maine is in a much stronger position with regard to its long-term fiscal health, he noted.

Still, that does not mean the study’s findings should be ignored.

“Every state could improve its fiscal, operational efficiency,” Lawton said.

J. Craig Anderson can be contacted at 791-6390 or at:

canderson@pressherald.com

Twitter: @jcraiganderson

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