Asset Flexibility: State Rankings

March 29, 2016 |

In Brief: 

One indicator of a fiscally sustainable government is that it has some flexible assets its disposal with which to meet its debt obligations as they come due. A government with a positive “asset flexibility” ratio has some of these assets, and the higher the ratio, the better. This data visualization explores the relative performance of the 50 states according to their asset flexibility.

Introduction: Why We Measure

Citizens should be able to understand what their governments are undertaking and assess how well they are doing it. Unfortunately, it can be challenging to find the information—and the time—to make such an assessment. This is particularly true when it comes to public finances. To meet the challenge, US Common Sense has collected public financial reports in one place, extracted “top line” financial numbers, and ranked local and state governments’ relative performance on GovRank.org. 

We have extracted data on government's’ revenues and expenses, their financial flexibility, and their unfunded liabilities. To help citizens understand how sustainable their governments are, we created three summary indicators, and one overall fiscal sustainability grade per government where sufficient data was available. In this series of briefs, we explain each indicator, how well or poorly governments performed, and provide rankings and interpretation. For a full explanation of our data collection,analysis, and methodology, please refer to the GovRank project’s Methodology article.

Overview: Fiscal Sustainability and Measuring Asset Flexibility

A government is fiscally sustainable if it can meet the service needs of its current population, without jeopardizing its ability to meet the service needs of its future population. GovRank.org measures fiscal sustainability using three ratios: Budget Balance, Unfunded Pension Liability per capita, and Asset Flexibility, which we explore in this brief. 

Asset flexibility reflects the amount of flexible assets a government has at its disposal in the current fiscal year, relative to the amount of debt it holds. It captures the government’s current financial position compared to the current and future obligations it has amassed. It is calculated as unrestricted net assets/total liabilities.

Asset Flexibility = Unrestricted Net Assets/Total Liabilities

To understand unrestricted net assets, first consider the following equation:

Total Net Assets = Restricted Net Assets + Unrestricted Net Assets + Investment in Capital, Net of Related Debt,

where “net” means that debt on the asset is subtracted from the value of the asset.

  • Capital assets include property such as roads, buildings, and other infrastructure. They are not easily liquidated or converted to cash.
  • Restricted assets must be used for particular purposes—as stipulated by law, regulation, or a higher level of government—which may include capital projects, debt service, or community development.
  • Unrestricted assets are all other assets, which have no restrictions on how the government uses them. They are the most flexible accumulated resources.
  • Total liabilities are the total amount of resources a government is required to turn over to other entities (i.e. the amount it owes). Despite their name, total liabilities do not include public employee retirement benefit liabilities. These are reported elsewhere in a CAFR.

What the Ratio Tells Us: The asset flexibility ratio sheds light on a government’s fiscal sustainability by showing its (hypothetical) ability to pay off the debt it currently holds with the most flexible resources (assets) it has. The ratio is, thus, a measure of how manageable the government’s long-term, non-retirement benefit debt burden is.

Interpretation:

  • We say that the measure is somewhat hypothetical because it would be extremely rare for a government to ever have to pay all of its outstanding liabilities at once. Thus, it never needs liquid assets available to cover 100% of its obligation. However, a government that has a relatively small debt burden and/or relatively large pool of liquid unrestricted assets would be less squeezed by its debt obligations over time. A government with a growing debt burden and/or diminishing liquid assets would find itself becoming increasingly burdened by the narrowing gap over time. Thus, the higher the ratio, the greater its ability to meet its debts with resources it has available.
  • A government with a negative asset flexibility ratio has negative unrestricted net assets, which means its debt obligations are typically quite high. The larger the negative ratio, the higher the debt and the lower the asset flexibility, with the result that the government risks becoming less and less likely to meet its debts over time.

About the Data

We collected annual unrestricted net asset and total liability data for each of the 50 states from 2009 to 2014. We extracted these data points from states’ Comprehensive Annual Financial Reports, which are audited financial documents available to the public. To rank the states’ asset flexibility performance, we calculated an average of annual asset flexibility ratios (2009-2014). We then used this average to calculate the asset flexibility percentile rank. A higher percentile rank indicates a better performance. For this indicator, there were no missing data.

Asset Flexibility Results

Asset Flexibility Ratio: States </br> 2009-2014
  • The states’ mean asset flexibility ratio was 0.03, with a maximum (best performance) of 3.02 for Alaska, and a minimum (worst performance) of -0.71 for Illinois. The results mean that, in the average year, Alaska had flexible assets on hand whose value was three times greater than the state’s total liabilities. For all 50 states, the average asset flexibility ratio of 0.03 indicates that, on average, states had almost no flexible assets on hand to meet future obligations. Instead, they are reliant on future revenue streams.
  • Thirty states have a negative average net asset ratio, which means a portion of their future revenues will be needed to meet debt obligations already incurred. The smaller the ratio, the higher the debt and the lower the asset flexibility. Thus, all the states with a ratio below zero risk falling further and further into debt, whereas states above zero could cover some of their debt.
  • The ten best-performing states are less populous than the ten worst-performing. The top performers had an average population in 2014 of approximately 2.6 million people, while the bottom performers had an average of nearly 11.2 million. A variety of factors may be at work, including greater borrowing ability for populous states, since they have larger populations they can tax for revenue. State performance on the budget balance ratio also appeared to be similarly correlated with population.

Table 1. Best-Performing States by Asset Flexibility (2009-2014)

State

Asset Flexibility Percentile Rank

Average Asset Flexibility Ratio

(2009-2014)

Overall Fiscal Sustainability Percentile Rank

Pop.

(2014)

Alaska

98

3.02

68

736,732

North Dakota

96

0.90

68

739,482

Wyoming

94

0.77

98

584,153

Indiana

92

0.64

73

6,596,855

Nebraska

90

0.64

80

1,881,503

South Dakota

88

0.61

95

853,175

Tennessee

86

0.48

83

6,549,352

Oklahoma

84

0.48

90

3,878,051

Montana

82

0.42

70

1,023,579

Utah

80

0.33

78

2,942,902










Table 2. Worst-Performing States by Asset Flexibility (2009-2014)

State

Asset Flexibility Percentile Rank

Average Asset Flexibility Ratio

(2009-2014)

Overall Fiscal Sustainability Percentile Rank

Pop.

(2014)

Illinois

1

-0.71

1

12,880,580

New Jersey

2

-0.65

5

8,938,175

Connecticut

4

-0.64

3

3,596,677

California

6

-0.56

18

38,802,500

Kentucky

8

-0.54

8

4,413,457

Massachusetts

10

-0.48

10

6,745,408

Wisconsin

12

-0.41

55

5,757,564

New York

14

-0.40

20

19,746,227

Rhode Island

16

-0.37

23

1,055,173

Michigan

18

-0.33

33

9,909,877