In The Hole: Report Finds States Hiding $1.3 Trillion In Debt

by Andrew Collins: Much is made of the federal government’s debt, but what about debt at the state level? It may not have reached such eye-poppingly high figures, but it’s still a matter of concern. In its sixth annual Financial State of the States report, the nonpartisan accounting group Truth in Accounting (TIA) took a full account of government assets and liabilities. It found that even though many states claim to have balanced budgets, state governments have in fact accumulated a combined debt of $1.3 trillion.

“As a CPA looking at government finances, I found they were not being truthful and transparent about their financial condition,” Sheila Weinberg, founder of TIA, told Watchdog.org. “For years, citizens have been told that their home state budgets have been balanced. If that were true, state debt would be zero and Taxpayer Burden would simply not exist.”

She argues the generally accepted accounting standards the government uses are flawed for two reasons. First, she suggests that Government Accounting Standards Board that controls how the standards are set is not as independent as it sounds. Second, she notes that the government always has the power to tax, which reduces the incentive for sound fiscal policy – because if and when it comes up against a wall, it can always tax its way out.

Watchdog reporters covered the report and looked at the ramifications for their states. Here’s a state-by-state snapshot of what they found:

Seeing red in the Green Mountain State
Vermont’s $3.2 billion in debt may not seem huge compared to many of its counterparts, but with its relatively small population, Vermont’s budget shortfall works out to $14,300 for every taxpayer.

“The most common budget trick involves excluding pension benefits from annual budgets, according to the report,” wrote Watchdog reporter Bruce Parker. “Financial officers keep those liabilities off their balance sheets because the expenses don’t have to be paid until state employees retire. By ignoring expenses incurred in the present but paid in the future, states can claim to be balancing their budgets. In reality, the costs are being shifted to future taxpayers.”

These accounting tricks mean states like Vermont are in for a rude awakening next year. Weinberg said 2015 will be the last year they are used nationally, as standards have changed. Next year, states will have to add their pension liabilities to their balance sheets, and in 2017, retiree health care liabilities will also be added to state balance sheets.

A fuzzy picture
In Mississippi, Watchdog reporter Steve Wilson found that his state’s taxpayers weren’t getting the entire picture of Mississippi’s financial health. The law requires the state legislature to send the governor a balanced budget, so in order to eke out more spending, the proposed budget uses certain accounting principles to show only $139 million of the pension fund’s liability.

In reality, however, the Public Employees’ Retirement System of Mississippi, the state’s defined benefit pension plan for most state, county and municipal employees, has $4.6 billion in liabilities.

More trouble in the Northeast
Ranking just below Vermont and well below Mississippi in debt-per-taxpayer is Pennsylvania. The state neglected to list $53 billion on its balance sheets, ranking third among the 10 Northeast states in hidden debt. In total, the Keystone State’s debt works out to $15,600 per taxpayer, the 11th highest in the nation.

Watchdog reporter Andrew Staub explains how spending can get out of control but still remain largely hidden: “Much of that debt can be traced to retirement benefits, which represent more than 50 percent of state bills. The unfunded liabilities have accumulated, as the state promised billions of dollars in benefits to retirees without adequately funding them, according to Truth in Accounting.”

The New York exodus
New York State was another hefty spender with $77 billion in unfunded liabilities for an average of $20,700 per taxpayer – second highest in the Northeast. Watchdog Arena writer Nicholas Fondacaro noted that each taxpayer’s share could grow even larger if New York’s exodus of workers continues.

Not so sunny in Sacramento
When California Governor Jerry Brown released his spending proposal last June, the Los Angeles Times wrote that California’s budget was “flush with cash.” The state claimed it had cut spending by $6.6 billion from 2013 to 2014, but due to obfuscating by the aforementioned accounting methods, TIA found that California’s hidden debt actually amounts to $111 billion.

From bad to worst
At the bottom of the pack is New Jersey, which TIA ranks as the worst spender with $160 billion in debt, or $52,300 per taxpayer. Upon further investigation by New Jersey Watchdog, however, reporter Mark Lagerkvist noted that the report actually understates the debt, and the proper figure is actually $10 billion higher. The discrepancy stemmed from a new valuation in State Treasury records that found New Jersey’s responsibility for unfunded retiree and employee health benefits has increased to $65 billion.

Local governments in New Jersey have troubles of their own. “The $170 billion hole does not include the debts of New Jersey’s local government units, which face a collective shortfall of $50 billion for pensions and health benefits,” wrote Lagerkvist. “Nor does it encompass the bond debts and other liabilities of the state’s 21 counties, 565 municipalities and 610 school districts.”

Not all doom and gloom
Though the overall picture is bleak, the debt situation isn’t quite as troubling in some states. Nebraska’s financials, for example, are actually in decent shape. The state has $5 billion in liquid assets and $3 billion in bills, for a “surplus” of $2 billion — or $2,800 per taxpayer. Even though Nebraska’s pension funds are mostly funded, the report found that it still hides some debt, but it’s in a much more manageable position than any of the aforementioned states.

Is there any hope?
Even though 49 out of 50 states have balanced budget requirements (Vermont being the exception), TIA identifies 39 states that have dug “financial holes” for themselves, while only a handful currently run true budget surpluses. The first step in reforms of any kind is transparency, which TIA and Watchdog.org have focused on providing in our coverage of state debt. Government has proven more responsive to the electorate and much more capable of reform at the state level, so there’s still an opportunity for many of these states to turn their financial situations around.
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Andrew Collins (@ACwords) when not writing an article, spearheads Franklin Center’s social media campaigns, promoting journalism through Franklin Center, Watchdog.org, and Watchdog Wire-branded accounts on various social media platforms. Previously, Andrew worked in campaign communications and television news.

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