Last week, the Mercatus Center at George Mason University released its 2018 State Fiscal Ranking report, which ranks states according to their financial condition as of June 30, 2016. On the basis of its solvency in five categories, Maryland ranked 33^rd among the 50 states.

In a story that repeats itself from the previous years, the category dragging down Maryland’s ranking the most was “long-run solvency,” which captures the size of state’s long term liabilities such as outstanding bonds, loans, and pension liabilities. Maryland ranked 44^th out of 50 states in terms of long-run solvency, with higher than national average long-run liabilities of $7,186 per capita.

According to the authors, unfunded pension liabilities was a “large portion of most state government obligations.” Maryland was no exception. According to the report’s summary section for Maryland, the state’s market value of unfunded pension liability was $117.1 billion as of 2016, or 34 percent of state personal income.

The report notes that “States with long-running structural deficits and large unfunded pension obligations tend to be states that either skipped or reduced their contributions to employee pensions …” In fact, Maryland’s lawmakers did reduce contributions in 2014, slashing additional annual contributions to the fund in half. They reduced the set-aside again in 2015.

In theory, a state that has relatively low tax rates may be able to improve its fiscal ranking by increasing taxes to fully fund its pension plans and reduce its long-run liabilities. Unfortunately, this option is not available for Maryland, which was just recently ranked the second least tax-friendly state in the nation by Kiplinger. Furthermore, Baltimore City recently raised real estate tax by $20 million annually, despite the fact that Baltimore is 4^th highest-taxed city in the U.S.

Over the years, the Maryland Public Policy Institute has recommended multiple policy options to improve the state’s financial status. However, whether it comes to growing Maryland’s businesses and economy by decreasing corporate tax rates, increasing Baltimore’s tax base by decreasing its property tax rates, or even transitioning future public employees to defined contribution plans, all policy proposals that would improve Maryland’s long term fiscal health have faced heavy pushback in the state legislature.

Recently, Jeffrey Hooke of the Johns Hopkins University and I demonstrated—in the 2018 State Pension Fund Investment Performance report—that Maryland can save approximately half a billion dollars annually by indexing instead of actively managing its pension fund. For 10 years ending June 30, 2017, the MSRPS underperformed a composite passive index of public stocks and bonds by approximately 2.2 percent over the past 10 years.

The Maryland State Retirement and Pension System’s investment portfolio returned just over 4 percent for the past 10 years, well below its assumed actuarial return rate of 7.55 percent.

Therefore, poor investment performance of the pension fund is dragging down Maryland’s fiscal ranking. Reducing management fees will be one of the most obvious ways to improve this. Some 61 percent of liberals and 86 of conservatives in Maryland agree that the state must reduce or eliminate the Wall Street fees that Maryland pays to manage pension assets.

Optimistically speaking, Maryland had ranked even lower in the fiscal ranking at 44^th out of 50 states in the 2014 version of the state ranking report. Although Maryland still ranks in the bottom half of the fiscal ranking in 2018, the small improvement suggests that change is possible.

Therefore, the 2018 ranking should serve as a wake-up call for Maryland’s legislators and encourage them to re-evaluate the policy options they previously rejected to fix Maryland’s poor fiscal condition. Among multiple options, fixing the state’s looming pension crisis will be a fundamental step to improving Maryland’s fiscal ranking in the years to come.