Maryland’s Gloomy Fiscal Outlook
Each type of solvency measures a different dimension of fiscal condition. Cash solvency concerns a government’s liquidity and its ability to pay its bills on time. Cash solvency has a short time frame—30 to 60 days—and reflects the liquidity of a state government and the effectiveness of its cash management system. Budget solvency concerns a government’s ability to meet the current year spending obligations without causing a deficit This type of solvency has a mid-range time frame, often one fiscal year, and may reflect the fiscal institutions within a state. For example, states with stricter balanced budget requirements may be more adept at balancing their budgets and achieving better budget solvency. Long-run solvency is a government’s ability to pay for all its costs, including those that may occur only every few years or many years into the future. While cash and budget solvency look at short-term financial management, long-run solvency looks at a government’s management of longer-term obligations, such as meeting pension obligations to current and future retirees. Service-level solvency is a government’s ability to provide and pay for the level and quality of services required to meet a community’s general health and welfare needs. Service-level solvency is determined by a number of factors, both current and future. For example, the size of a state’s revenue base and its political leaders’ willingness to collect revenues can impact service-level solvency. Related to the level and quality of services, a state’s current and future decisions about which basic services to provide will impact service-level solvency. Similarly to long-run solvency, service-level solvency depends on both current and future decisions and fiscal environments.