Report: Ohio tops region for fiscal health

State ranks 11th nationally but unfunded pension liability a concern.

Regional rankings

How Ohio and neighboring states rank among all states in 2016 fiscal health rankings:

Ohio — 11th

Indiana — 17th

Michigan — 35th

Pennsylvania — 39th

West Virginia — 40th

Kentucky — 46th

Source: Mercatus Center, George Mason University

Ohio gets high grades for overall fiscal health, ranking No. 11 in the nation according to a new study that also cites concerns about the state’s public employee pension funds.

The authors of the study by George Mason University’s Mercatus Center were impressed with Ohio’s $2 billion rainy-day fund, which ranked the state No. 5 for cash solvency. That category measures whether a state has enough cash to cover short-term bills.

But the study says Ohio’s public pension funds are a problem, lumping them into the same category as beleaguered states such as Illinois, Kentucky and Connecticut.

“Ohio is especially bad when it comes to pensions,” said Mercatus research fellow Adam Millsap. “They haven’t had to do anything drastic like you hear about in Illinois and Connecticut. It’ll be interesting to see if this does catch up with Ohio.”

State officials and the bond credit-rating service Moody’s dispute that characterization. They’re satisfied that Ohio’s public pensions — which have unfunded liabilities between $55 billion and $262 billion, depending on what math is used — are in good shape.

“We believe the state has a fairly low pension liability, especially compared to other states,” Moody’s David Jacobson said.

Moody’s gives Ohio its second-best rating, Aa1.

The Mercatus Center used data from fiscal year 2014 for its study, applying financial metrics to data from each state’s most recent Comprehensive Annual Financial Report.

Zach Schiller of Policy Matters Ohio is skeptical of the report’s conclusions because he said the data isn’t current.

The report ranks Ohio 18th in budget solvency, 21st in service-level solvency, 38th in long-run solvency and 48th in trust fund solvency.

Ohio has $17.75 billion in total primary government debt, and state personal income totaled $489.7 billion in FY2014, according to the report. Both figures were nearly identical from FY2013.

The state’s unfunded pension liability hasn’t changed significantly in two years.

“A lot of the things we’re highlighting are structural and aren’t going to change very much year to year and will require long-term solutions,” Millsap said.

Ohio’s overall fiscal health ranking slipped four spots from the 2015 report, but its No. 11 ranking is better than most states in the region. Other rankings: Indiana, 17th; Michigan, 35th; Pennsylvania, 39th; West Virginia, 40th; and Kentucky, 46th.

The top five states in the Mercatus rankings were Alaska, Nebraska, Wyoming, North Dakota and South Dakota. The study acknowledges that drops in oil prices could hurt energy-dependent states such as Alaska and North Dakota in the future.

Unfunded liabilities

Ohio is one of 13 states with assets exceeding liabilities by a ratio of 4 or more, according to the Mercatus report. Its revenues exceed expenses by 5 percent.

“We look pretty good in the short run and not as good in the long run,” said Joe Nichols, a policy analyst for the Buckeye Institute. “We’re making these promises to public employees, and if we can’t meet that when the bill comes due, that’ll be really bad news for either public employees or taxpayers or possibly both.”

Ohio is the seventh-most populated state in the country, but only two states — California and Illinois — have larger unfunded pension liabilities than Ohio’s reported total of $55 billion.

State Sen. Bill Beagle, R-Tipp City, chair of the Ohio Retirement Study Council, points out that the state’s public employee pension funds meet their 30-year funding requirements.

Ohio’s public pension systems plan for return rates of up to 8.25 percent on investments. The Mercatus Center says a “risk-free” rate of 3.2 percent is more realistic. Using that measure, Ohio’s unfunded pension liability would balloon to more than $262 billion.

“I would take issue with those liability figures,” Beagle said. “I would take issue with the idea that these (pensions) are first and foremost a state liability. We haven’t put any additional taxpayer dollars into any sort of bailout in the time I’ve been in the General Assembly, and I think the plans are to be congratulated for that.

“I think it’s misleading to our public employees, our pensioners and our taxpayers to lump us in with some these systems that have unfunded liabilities that are a lot more real than ours are.”

The Ohio Retirement Study Council annual report published in March noted that all Ohio funds exceeded their actuarial interest rates over the past five years, but not in the past 10 years. Beagle said the pension plans will re-evaluate their rates of return, and that one recently lowered its expected rate to 7.5 percent.

The state’s five public state retirement systems have combined assets of $195 billion with 676,000 active contributing members, according to the ORSC report.

‘Is it meaningful?’

Schiller said getting a high national ranking isn’t as important as making infrastructure investments.

“You can come up with statistical measures that give you a ranking, but is it meaningful?” he said. “To just look at monetary measures of solvency, to me, is somewhat one-sided.

“Why do we have those assets? We have them in order to spend on public needs. Ohio has invested a lot in school buildings, but I don’t think that’s true when it comes to some other aspects of infrastructure.”