December 14, 2010 States Where Punishing Tax Hikes May Loom Ask someone which states are in the worst financial condition and California will probably top the list. It is the poster child for out-of-control spending and huge public sector pension obligations.   But the Golden state isn't alone in its dire straits. And in fact, this analysis identifies a number of states that appear to be in worse shape than California, at least on the three variables examined below.   We evaluated state-by-state data for three metrics that may portend prolonged fiscal problems:   Debt service as a percent of state tax revenues Percent of accrued pension liabilities that are unfunded Number of public sector employees per 10,000 population   States in which debt service consumes a high share of revenues, or with significant pension liabilities that have not been funded, or that have bloated government payrolls are likely to solve these problems by increasing taxes or fees, or making drastic cuts in services, or both.   A state with any one of these negative characteristics may find it difficult to "move the needle" significantly in fixing the problem. But consider the challenges faced by states facing all three simultaneously, several of which are identified below.   To perform this analysis the states were arranged from best-to-worst on each of the three metrics cited above.   Each state's ranking for each of the three variables was combined into an aggregate ranking, and all states were arrayed from low to high based on the aggregate "score" to produce the accompanying map. States falling into the "worst" grouping generally have high debt service as a percent of tax revenue; large unfunded pension liabilities; and high levels of public sector employment in relation to their total population. [Place cursor over chart to enlarge]   Several of the states, such as South Carolina, Louisiana and Kentucky, fared poorly in this analysis, but have done quite well attracting new industry over the years, so the threat of impending financial stress doesn't necessarily translate into an industrial recruiting handicap. But over the long term, the financial burdens examined here will undermine the advantages enjoyed by these and other states, and underscores the need for thorough due diligence before companies invest millions in new distribution or production capacity.