Financial State of the States
from Truth in Accounting
Editors Note: Public Interest Institute is reprinting two of the key findings from Truth in Accounting’s Financial State of the States 2015 report which should be of interest to our readers that share our support for promoting transparency at all levels of government. At the end of this article are web addresses at which you can read more of the report’s key findings, read the full report, or view specific information on the Financial State of Iowa.
Every September, [Truth in Accounting] launches our report entitled The Financial State of the States. This is a comprehensive analysis of the 50 state governments’ finances, and includes background on new finance standards coming into play, trends across the states, and key findings.
REPORT FINDINGS: HOW YOUR STATE BALANCES ITS BUDGET WHILE GOING INTO DEBT
If a state has a balanced budget requirement, you would think that means state spending is equal to money brought in during a specific year. Unfortunately, in the world of government accounting, not everything is how it appears.
All 50 states except Vermont have balanced budget requirements. Yet, even with these rules in place, states have accumulated almost $1.3 trillion of unfunded debt.
How can states rack up debt and balance their budgets at the same time? It all depends on how you count.
States balance budgets using accounting tricks, such as:
- Inflating revenue assumptions
- Counting borrowed money as income
- Understating the true costs of government
- Delaying the payment of current bills until the start of the next fiscal year, so they aren’t included in the calculation
One of the biggest accounting trick states use is to hide a large portion of employee compensation off the balance sheet and budget. Employee compensation packages include benefits like health care, life insurance, and pensions. States become obligated to pay these benefits as employees earn them.
Although these retirement costs will not be paid until the employees retire, these still represent current compensation costs. If states didn’t offer pensions and other benefits, they would have to compensate their employees with higher salaries.
States should be accountable, include these earned benefits in the budget, and fund them in the years employees earn them. Unfortunately, some elected officials have instead chosen to use money that is owed to pension funds to keep taxes low, while paying for more politically popular programs. Instead of funding promised benefits now, they have been charged to future taxpayers. By shifting the payment of employee benefits onto future taxpayers, it allows the budget to look balanced.
REPORT FINDINGS: TRUTHFUL, TIMELY, AND TRANSPARENT INFORMATION IS IMPORTANT
Without an informed electorate, democracy does not work well. Because of current structures for both accounting and reporting, citizens do not receive truthful, transparent, or timely government financial information. Without access to truthful, timely, and transparent information, how can citizens be knowledgeable participants in their government?
Lack of transparency in government finance leads to the following problems
- Accounting tricks allow elected officials to claim balanced budgets, giving citizens a false sense of security, while states sink further into debt.
- Citizens do not know the true cost of their state government, and elected officials are able to spend amounts larger than the state’s revenues.
- Complex pension schemes (that both citizens and elected officials have difficulty understanding) have racked up massive debts, putting the states even further in the red.
- Voters have re-elected leaders based on false claims that budgets were balanced.
- Legislators have created and continued new programs and increased services without knowing the true cost of government spending.
- Our representative form of government is being undermined because citizens have become cynical and do not trust their governments.
States should use financial reports from the previous year to help guide a more accurate and realistic budget for the following year. However, because financial reports are not timely, they cannot be used to assist the budgeting process. Furthermore, these budgets do not include all costs—they exclude large portions of compensation costs, because retirement benefits are earned, but not fully funded. Until this year, most pension debt was also hidden. (Thanks to GASB 68, most of the pension debt is now being reported on the face of the balance sheet.) However, some states continue to play games with pension debt, using last year’s numbers even though current data is available.
Accurate accounting requires all expenses to be reported in the state’s budget and financial statements when incurred, not when they are paid. Truthful budgetary accounting must incorporate all current compensation costs, including the portion of retirement benefits employees earn every year.
States’ efforts to begin climbing out from their current financial holes must begin with honest government accounting. Only then can responsible alternatives to place the state on stable financial footing be developed and debated. The saying goes, “if you can’t measure it, you can’t manage it.” How can states begin to find solutions to this crushing debt if they don’t know how much debt there is?
The Financial State of the States is an analysis of the financial status of each state government including their unreported pension and retirees’ health care promises.
Your readers can find links to sections of the report at:
The link for the full report is:
You can print the 2 page Financial State of Iowa from:
Truth in Accounting seeks to educate and empower citizens with understandable, reliable, and transparent government financial information. This report is reprinted with permission from Sheila A. Weinberg, founder and CEO of Truth in Accounting.
IOWA TRANSPARENCY NEWSLETTER is a monthly newsletter reporting on government transparency in our state.
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