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Watchdog Ranks State Debts Hidden behind Shady Accounting

By: Alex Clark-Youngblood - @alexcy123 - Sep 5, 2014, 9:08 am

Whatever economic recovery may have occurred in recent years has not dissipated the long-term fiscal crises of many US states. The annual “Financial State of the States” report from the Institute for Truth in Accounting (ITA), released in late August, says the debts are merely concealed behind “budget shenanigans,” and Connecticut is the worst of the worst.

truth-in-accounting
(ITA Facebook)

According to the Chicago-based, nonpartisan advocacy organization, 41 of the 50 states find themselves with liabilities beyond their ability to pay. Many states achieve this even when they have balanced-budget constraints: “It all depends on how you count,” the ITA authors explain in the fifth edition of the report.

“The biggest trick of all is to not include millions, if not billions of dollars, of current compensation costs [for government employees] in the budget.”

The authors draw their conclusions from data and methodology that align with Generally Accepted Accounting Principles (GAAP). State governments, on the other hand, tend to flaunt these principles and rely on superficial cash-basis accounting.

The report’s key metric is the “taxpayer burden,” the dollar amount each individual taxpayer would have to send to state officials to cover the accrued liabilities. The 41 states with such a burden are the “sinkhole states,” while the report labels the nine states with genuine surpluses as “sunshine states.”

The latter group are states that operate under a fiscal surplus. In the ITA’s taxpayer-burden scenario, these state governments could instead write a check to the taxpayer.

The five worst performing and five best performing states appear below, along with their respective taxpayer-burden/surplus levels.

truth-in-accounting-table-1truth-in-accounting-table-2

The authors then comment that a closer look at the best (Alaska) and worst (Connecticut) fiscal performers reveals common challenges that state governments across the nation are confronting — as well as the right and wrong ways to respond to them.

Alaska: The Sunniest State of them All

Alaska currently holds $95.8 billion in assets. However, almost $10.9 billion of that is considered “capital assets,” which means it is tied up in land, buildings, and other infrastructure. The sale these assets to close budget shortfalls would likely undermine the state’s core needs and be a desperate policy, although it isn’t unheard of.

Another $44.4 billion of those assets are “restricted” — meaning that by law they cannot be used to pay for government expenditures. So Alaska actually has roughly $40.6 on hand to pay its $27.1 billion in outstanding bills. These bills include pensions benefits, retiree health care, state bonds, and various other forms of debt.

Thus, Alaska has a $13.5 billion fiscal surplus. Divide that amount by the number of taxpayers in the state, and officials could write a check for $46,900 to every one of them, and still achieve fiscal balance.

Gunnar Knapp, director of the Institute of Social and Economic Research at the University of Alaska, Anchorage, agrees with the evaluation of Alaska’s budget situation in general terms: “Alaska does indeed have enormous financial assets — about $50 billion in the state’s Permanent Fund and more than $10 billion in other savings accounts.”

However, he cautions against thinking that Alaska has nothing to worry about over the long term: “Where it gets tricky is that it looks like we have huge assets, and in a net sense we do, but we also have some significant future unfunded pension obligations that are going to have to be paid off … future taxpayers might find themselves having to cough up money to pay pension obligations despite having big savings in the permanent fund.”

Connecticut: The Deepest Hole in the Union

Connecticut is a completely different story. According to ITA, “state officials use antiquated budget and accounting rules to report Connecticut’s financial condition.”

On the surface, it appears Connecticut has $31.3 billion of assets available to handle her budgetary situation. However, a closer look reveals $21 billion is either tied up in capital or restricted by law. When the remainder is placed against the state’s $71.7 billion in outstanding liabilities, the tiny state faces a fiscal shortfall of $61.4 billion, or $48,100 for every taxpayer.

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The Yankee Institute for Public Policy, Connecticut.

This analysis only confirms the work of Carol Platt Liebau, president of the Yankee Institute, a free-market policy institute in Hartford: “As people who live and work in Connecticut, we are not surprised by the findings.” As with many states in the ITA report, she points to benefits for retired employees as a primary area of concern. Research done by her organization has found, “every man, woman and child in Connecticut owes a whopping $27,668 of pension debt.”

A mess of this magnitude is a result of the all too common “kicking the can” approach to budgetary accounting, she explains. According to ITA, this will inevitably result in a situation “where future taxpayers will be burdened with paying for these benefits without receiving any corresponding government services or benefits.”

Alex Clark-Youngblood Alex Clark-Youngblood

Alex Clark-Youngblood is a writer, translator, and junior editor with the PanAm Post. He is a former special education and elementary school teacher from the United States, and has worked extensively in the nonprofit sector in Honduras. Follow @alexcy123.