Best and worst-run states: Survey of all 50

12/5/2014

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.

Each year, 24/7 Wall St. attempts to answer this question by surveying various aspects of each state. To determine how well states are managed, we examine key financial ratios, as well as social and economic outcomes. This year, North Dakota is the best-run state in the country for the third consecutive year, while Illinois replaced California as the worst-run state.

Selecting appropriate criteria to compare the 50 states is difficult because there is so much variation among the states. As a result, policy decisions that may work in one state might not work in another. Some states are rich in natural resources, while others rely on high-skilled sectors such as technology and business services. Some depend disproportionately on one industry, while others' economies are more balanced. Further, some states are more rural, while others are highly urbanized and densely populated.

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.

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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.

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Some of the changes in rankings can be attributed to states' GDP per capita levels and labor force growth, both of which were incorporated in our analysis for the first time this year. For example, California's GDP per capita of $53,497 in 2013, 12th highest in the nation, helped it move up on this list. Also, Florida's ranking was bolstered by a 3.8% increase in the labor force between 2009 and 2013, the fourth highest.

To determine how well each state is run, 24/7 Wall St. examined data from numerous sources. From the U.S. Census Bureau, we looked at each state's finances for the 2012 fiscal year, including revenue, tax collection, pension funding, debt, and expenditure. In order to identify how each state's economy was performing, we reviewed data on unemployment rates, exports, and GDP. We looked at poverty, educational attainment, violent crime rates, and foreclosures to assess social outcomes and residents' well-being.

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%.

BEST-RUN STATES

1. North Dakota

> Debt per capita: $2,880 (19th lowest)
> Credit Rating (S&P/Moody's): AAA/Aa1
> 2013 unemployment rate: 2.9% (the lowest)
> Median household income: $55,759 (19th highest)
> Poverty rate: 11.8% (10th lowest)

North Dakota is 24/7 Wall St.'s best-run state for a third consecutive year. People have been flocking to North Dakota: more than 5% of the population in 2013 had migrated from another state or country since 2010. One reason for this is the surging economy. Last year, the state's GDP rose by 9.7%, the most in the nation. Much of this growth came from the mining industry, which includes oil and gas extraction. In recent years, oil extraction in North Dakota has grown exponentially, driven by drilling in the Bakken formation. This has made the state the second largest oil producer behind Texas. Job growth has also been rapid. North Dakota's 2.9% unemployment rate was the lowest in the nation last year.

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2. Wyoming

> Debt per capita: $2,269 (12th lowest)
> Credit Rating (S&P/Moody's): AAA/NGO
> 2013 unemployment rate: 4.6% (6th lowest)
> Median household income: $58,752 (13th highest)
> Poverty rate: 10.9% (6th lowest)

Wyoming's economy grew by 7.6% last year, the second fastest growth rate in the country behind only North Dakota, and several times the U.S. growth rate of just under 2%. Further, Wyoming is exceptionally productive, with a GDP per capita of $67,857, trailing only Alaska and North Dakota. Wyoming also has extremely strong state finances, with reserves equal to more than 50% of its 2014 general fund expenditures, an AAA credit rating from S&P, and far less debt than most states. A huge reason for the state's strong economy and financial position is the energy industry. Wyoming accounted for 39% of all coal produced in the U.S. in 2012, far more than any other state. All eight of the largest U.S. coal mines are located in the state's Powder River Basin. Wyoming is also a major oil and natural gas producer.

3. Nebraska

> Debt per capita: $1,110 (2nd lowest)
> Credit Rating (S&P/Moody's): AAA/NGO
> 2013 unemployment rate: 3.9% (3rd lowest)
> Median household income: $51,440 (25th highest)
> Poverty rate: 13.2% (17th lowest)

Nebraska has long had low unemployment rates, even during the Great Recession. Last year, just 3.9% of the state's workforce was unemployed, the third lowest rate in the nation. Further, the state's economy grew by 3% last year, tied for the 10th highest rate in the country. Contributing to this growth was a strong agriculture industry, which accounted for 6.3% of the state's output in 2013, more than in all but two other states. Nebraska also received high marks for its low debt — at just $1,110 per capita in fiscal 2012, it was second lowest amount in the nation. Nebraska's constitution prohibits it from borrowing more than $100,000 in bond debt.

4. Iowa

> Debt per capita: $1,995 (10th lowest)
> Credit Rating (S&P/Moody's): AAA/Aaa
> 2013 unemployment rate: 4.6% (6th lowest)
> Median household income: $52,229 (21st highest)
> Poverty rate: 12.7% (14th lowest)

Iowa's 2013 unemployment rate of just 4.6% was sixth lowest in the nation. This has likely contributed to the low percentage of residents without health insurance. Just 8.1% of Iowans did not have health care coverage in 2013, the fourth lowest rate in the nation. The state also had the 12th highest GDP growth rate in the nation last year, at 2.9%. Agriculture, in particular, contributed substantially to economic growth. As of last year, agriculture, forestry, fishing, and hunting accounted for 5.8% of GDP in Iowa, more than in all but three other states. Iowa was is the nation's top producer of corn and soybeans, as well as the top producer of hogs, according to the U.S. Department of Agriculture's 2012 Census of Agriculture.

5. Minnesota

> Debt per capita: $2,441 (16th lowest)
> Credit Rating (S&P/Moody's): AA+/Aa1
> 2013 unemployment rate: 5.1% (9th lowest)
> Median household income: $60,702 (9th highest)
> Poverty rate: 11.2% (7th lowest)

Minnesota residents are among the nation's wealthiest. A typical household reported income of $60,702 in 2013, among the highest nationwide. Similarly, the median home in Minnesota was valued at more than $180,000 that year, among the higher home values in the nation. Valuable property partly explains the state's strong tax revenue — the state generated nearly $3,800 per capita in fiscal 2012, more than all but a handful of states. Also, Minnesota's unemployment rate of just 5.1% in 2013 was among the nation's lowest. Minnesota also boasts a highly educated workforce. More than 92% of adults 25 and older had attained at least a high school diploma, while 33.5% had at least a bachelor's degree, both among the highest rates nationwide.

WORST-RUN STATES

50. Illinois

> Debt per capita: $4,992 (11th highest)
> Credit Rating (S&P/Moody's): A-/A3
> 2013 unemployment rate: 9.2% (3rd highest)
> Median household income: $56,210 (17th highest)
> Poverty rate: 14.7% (25th lowest)

Illinois is the worst-run state in the nation. Like many other low-ranked states, more people left Illinois than moved there. Illinois lost more than 137,000 residents due to migration between the middle of 2010 and July 2013. A poor housing market may partly explain the exodus. Median home values fell 16.2% between 2009 and 2013, the second largest drop nationwide. Illinois has extremely poor finances by many measures. Just 39.3% of Illinois' pension liabilities were funded as of 2013, worse than any other state. Further, the state's reserves are estimated at just 0.5% of its general fund expenditure, the second lowest reserves rate nationwide. Both Moody's and S&P gave Illinois the worst credit ratings of any state, at A3 and A- respectively. According to Moody's, the state's rating reflects its low fund balances and high pension obligations, as well as its "chronic use of payment deferrals to manage operating fund cash."

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49. New Mexico

> Debt per capita: $3,621 (20th highest)
> Credit Rating (S&P/Moody's): AA+/Aaa
> 2013 unemployment rate: 6.9% (24th highest)
> Median household income: $43,872 (6th lowest)
> Poverty rate: 21.9% (2nd highest)

New Mexico struggles with poverty and low incomes. Nearly 22% of New Mexico residents lived in poverty last year, the second highest rate after Mississippi. A typical household in New Mexico earned less than $44,000 in 2013, below all but a handful of states. The state's crime rate was also higher than in all but one other state, with 613 violent crimes reported per 100,000 residents in 2013. Like several other states at the bottom of the list, people left New Mexico faster than they moved into the state. Between the middle of 2010 and July 2013, the state lost 9,750 residents to migration alone. S&P recently revised its outlook on New Mexico's credit rating to negative from stable. The revision was based on New Mexico's weak economic recovery from the recession and over-reliance on government aid and the energy sector.

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48. Mississippi

> Debt per capita: $2,405 (14th lowest)
> Credit Rating (S&P/Moody's): AA/Aa2
> 2013 unemployment rate: 8.6% (6th highest)
> Median household income: $37,963 (the lowest)
> Poverty rate: 24.0% (the highest)

Mississippi had the least productive economy in the nation with a GDP per capita of just $32,421 in 2013. By comparison, U.S. GDP per capita was $49,115 that year. Many residents also struggled to find work in the state. Mississippi's unemployment rate was 8.6% last year, among the highest in the nation. Poor economic productivity and few jobs may explain the state's low incomes. Last year, the median household income in Mississippi was just $37,963, and 12% of households reported incomes of $10,000 or less, both were the worst of any state. Mississippi had the lowest cost of living in the country in 2012. However, very low incomes still make life difficult for many residents. Mississippi had the nation's highest poverty rate in 2013, when 24% of the population lived below the poverty line. It also had the second highest share of households that used food stamps last year, at 19.4%.

47. Rhode Island

> Debt per capita: $8,761 (3rd highest)
> Credit Rating (S&P/Moody's): AA/Aa2
> 2013 unemployment rate: 9.5% (2nd highest)
> Median household income: $55,902 (18th highest)
> Poverty rate: 14.3% (24th lowest)

Rhode Island is one of only two states that declined in population in recent years. The total state population dropped by more than 1,000 between April 2010 and July 2013. Driving this change was the fact that more people left than relocated to Rhode Island. A poor job market may account for part of the exodus — 9.5% of the state's workforce was unemployed as of last year, the second highest rate nationwide. A typical home in the area was worth $232,300 in 2013, one of the highest median values in the nation. However, this was after a 13% decrease from 2009, nearly the worst drop in property values nationwide. Rhode Island's state debt level totalled 116% of revenue in fiscal 2012, one of only a few states where debt levels exceeded a year of revenue.

46. Kentucky

> Debt per capita: $3,436 (23rd highest)
> Credit Rating (S&P/Moody's): AA-/Aa2
> 2013 unemployment rate: 8.3% (7th highest)
> Median household income: $43,399 (5th lowest)
> Poverty rate: 18.8% (6th highest)

Kentucky had one of the lowest violent crime rates in 2013, at 210 incidents per 100,000 residents. But while Kentucky is relatively safe, its residents are worse-off financially than those in the vast majority of states. A typical household earned less than $44,000 in 2013, lower than in all but four other states. Due in part to the low incomes, more than 17% of Kentucky households used food stamps last year, nearly the highest rate nationwide. Low educational attainment rates likely explain in part the poor economic outcomes in Kentucky. As of 2013, just 84.1% of adults had completed at least high school, and less than 23% had completed at least a bachelor's degree. Both of these were among the lowest rates nationwide.

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45. Arizona

> Debt per capita: $2,140 (11th lowest)
> Credit Rating (S&P/Moody's): AA-/Aa3
> 2013 unemployment rate: 8.0% (12th highest)
> Median household income: $48,510 (21st lowest)
> Poverty rate: 18.6% (9th highest)

Few states received lower credit ratings than Arizona from the two largest rating agencies, S&P and Moody's. S&P awarded the state a rating of AA-, while Moody's rates Arizona an Aa3 on its scale, both worse than most states. However, Moody's recently upgraded the state's outlook on improved fund balances, as well as low debt and net pension liabilities. Additionally, as with Florida, Arizona is in the midst of a housing market recovery after a brutal downturn during the recession. Last year, home values in the state rose 9.2% from the year before, better than all states except for Nevada. Despite this, the median home value was still down by nearly 12% between 2009 and 2013, by comparison, the U.S. median home value fell 6% in that time.

24/7 WALL ST.: Don't see your state? Check out the full list

METHODOLOGY

To determine the best- and worst-run states, 24/7 Wall St. collected data in three major categories: financial position, economic outcomes, and social outcomes. We averaged the rank of each data point to create a meta rank ranging from 1-50. All data points received equal weight.

In the financial category, we included data on reserves as a percent of general fund expenditures from the Pew Charitable Trusts' "Fiscal 50: State Trends and Analysis" report published in November 2014. This data reflect the extent to which states are insulated from deteriorating economic conditions as of fiscal 2014. We also looked at data from Bloomberg on the percent of pensions that were fully funded. Data are for 2013 and reflect each state's most current fiscal year. Total tax revenue per capita, state debt per capita, and debt as a percent of revenue are all from the U.S. Census Bureau and are for fiscal 2012.

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One result of a state's fiscal prudence is a higher credit rating. We considered the most recent credit rating data from Standard & Poor's and Moody's Investors Service. Also in the economic outcomes category, we included the percent of residents without health insurance, median household income, median home value, and the value of exports per capita from the U.S. Census Bureau for 2013. From the Bureau of Economic Analysis we used data on per capita real GDP from 2013 and GDP growth, including a breakdown by industry, from 2012 to 2013. We also used 2013 unemployment figures and labor force growth between 2009 and 2013 from the Bureau of Labor Statistics. Foreclosure rates are from RealtyTrac and cover 2013.

In the social outcomes category, we examined the percent of people living below the poverty level as well as the share of each state's population with at least a high school diploma, both from the U.S. Census Bureau for 2013. Violent crime rates, published by the Federal Bureau of Investigation's 2013 Uniform Crime Report, were also considered.

This is the fifth consecutive year that 24/7 Wall St. has published this report. While many of the key elements of our analysis have remained the same, it is important to recognize how this year's report differs from previous iterations. Rather than include data on budget shortfalls, we looked at reserves as a percent of total expenditures. New to this year's report is data on per capita real GDP, labor force growth over the previous five years, total tax revenue per capita, total net migration, and a one-year change in median home values.

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