Fiscal policy

State-Based Accounting 101: Ranking Fiscal Condition

States must confront pension costs.

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One of the most boring classes I took in college was on accounting. Over the years, however, I've come to understand the importance of proper and transparent accounting. As the disastrous examples of Greece, Puerto Rico, Detroit, and Chicago demonstrate, dodging long-term obligations with rosy forecasts or risky assumptions usually ends badly. Faulty accounting can ruin a nation (Greece), shake an economy (Puerto Rico) and devastate a city (Detroit, Chicago).

New research by my Mercatus Center colleague Eileen Norcross reveals that more fiscal disasters loom in the United States. She ranks each state's financial health using data from standardized and audited Comprehensive Annual Financial Reports (CAFRs) that show short- and long-term debt along with key fiscal obligations, including unfunded pensions and health-care benefits. Beyond the ranking itself and the disastrous fiscal health of several states, the study points to worrisome structural weaknesses shared by most states. Unfortunately, she notes, these issues are mostly overlooked by ignorant or unscrupulous state officials who are blinded by poor accounting techniques.

First, let's look at the states with the best and worst fiscal conditions. At the top of the list are: Alaska (1), North Dakota (2), South Dakota (3), Nebraska (4), and Florida (5). Norcross explains, "these states are considered fiscally healthy relative to other states because they have significant amounts of cash on hand and relatively low short-term debt obligations." The bottom of the list includes: Illinois (50), New Jersey (49), Massachusetts (48), Connecticut (47), and New York (46). These states face large debt obligations and have very little cash on hand to pay short-term bills.

Norcross cautions that these numbers can be misleading. "While most have enough cash and revenues to cover the short term of the fiscal year and a relatively low level of government obligations and debt," she explains, "the long term is shakier in many states due to unfunded pension obligations and non-pension benefits—known as 'Other Post-Employment Benefits.'"

That's where the lack of proper accounting is problematic. In most states, pension liabilities are far larger than lawmakers recognize. States that skipped, reduced or issued bonds to cover pension payments are visibly and already in trouble: that's New Jersey, Illinois, Connecticut, New York, and Massachusetts.

However, even states that may look great on a cash basis, like Ohio, must still confront pension costs. Ohio is ranked seventh overall, but comes in 48th for "trust fund solvency"—an indicator that includes pensions. Unfunded pensions (on a market-valuation basis) represent 52 percent of personal income in Ohio. That's hardly sound financial ground even though the threat may be less visible for now. Montana is another state that does well overall—ranked 10th for fiscal solvency—but again, unfunded pensions represent 30 percent of its personal income.

This is why Norcross' analysis is so important. She actually digs into trust-fund solvency measures, which are often overlooked by state officials and watchdog groups alike. As she notes in her paper, this measure alone is a serious warning that without structural changes to pension systems, more states will be facing the same budgetary problems now confronting Illinois and New Jersey, where pension costs are rising rapidly in poorly funded plans.

In the end, most states won't face the same crises confronting Greece, Puerto Rico, New Jersey, and Illinois. But that will require making some adjustments today and no longer discounting the long-run or thinking that it's in a state's interest to downplay balance-sheet risks. These measures of trust fund solvency exist for a reason. Lawmakers should use them!

For the health of their finances and economies, it is essential that states measure debts with accurate accounting and better financial reporting. The good news is many states still have time to make improvements to pensions and health-care plans and put themselves on the best possible footing. As for me, I wish I paid more attention during my accounting class.

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  1. Can you provide a link to the rankings?

    1. Here

      Google, first hit. Maybe do a little work the next time?

      1. Snark. Who doesn’t cite their work when they mention a study? Bad form.

        1. True.
          http://mercatus.org/statefiscalrankings
          Comparing the top and bottom 10 states, and considering being in the top 10 a “win” and the bottom 10 a “loss”, the score is Red States: 17 Blue States: 3.

          Share that with your libtard frienemies.

          1. Libtards don’t care a whit about fiscal solvency. Eventually we’ll just tax everyone more, because, you know, taxpayers are a limitless source of cash available for redistribution.

      2. Hey BigT,

        Thanks Most Muchly!!!

        I glanced over it, and was utterly ASTOUNDED to discover that… The bi-coastal areas most likely to have voters who were far-away-and-beyond, more compassionate than all the other voters (and most especially, more-compassionate to the selfless “public servants” and retired “public servants”), were the ones in danger of imminent collapse. The folks in troglodyte “fly-over” country seem to actually be more responsible in the long run.

        Imagine that!!!

    2. Lets reduce government benefit and retirement packages, including the packages for federal workers to help cut government spending at all levels. We should not pay them so much for micro managing our lives and trampling on our rights and freedoms. Most of them are nothing but crooks anyway!

  2. Awww… New Jersey is only 49th? Missed it by 1.

    Wait.. Higher number is good, right?

  3. For the health of their finances and economies, it is essential that states measure debts with accurate accounting and better financial reporting. The good news is many states still have time to make improvements to pensions and health-care plans and put themselves on the best possible footing.

    Democracy incentivizes politicians with time to do nothing. Taking on public unions is rarely an election winner – especially in the places where the problem is the worst off. If I’m out of office long before the shit hits the fan, what incentive do I have to risk it? I can even say I’m just being realistic or pragmatic. Why sacrifice the ‘good’ I can do today for something I won’t succeed with, anyway?

    Unless you think politicians are really selfless servants of the public making wise long term decisions, there is no reason to be optimistic about any of this. If they were wise and selfless, we wouldn’t have these situations in the first place.

  4. I feel bad Veronique de Rugy for finding accounting boring. I find accounting fun then again I am an accountant.

  5. Oh, yeah sure. And next greedy, uncompassionate, selfish right wingers will be saying that it’s all the Greek’s fault they borrowed all that money and spent it on ouzo.

  6. Oh, yeah sure. And next greedy, uncompassionate, selfish right wingers will be saying that it’s all the Greek’s fault they borrowed all that money and spent it on ouzo.

  7. Oh, look: Three of the lowest-ranking states on solvency are the highest taxed. HOW CAN THIS BE?

  8. You who read this will live to see the people in the responsible states taxed to bail out the people in the irresponsible ones.

    1. If you look at which states are takers at the federal level now, you see that most of the takers are the so-called responsible states and that states like Illinois have been supporting those takers for decades.

      http://www.theatlantic.com/bus…..rs/361668/

      http://taxfoundation.org/artic…..-1981-2005

      1. Yeah, state by state comparisons for stuff like that doesn’t really make a lot of sense. Well, less sense than trying to look at their budgets.

        States vary wildly in terms of size, population, etc, and if that’s not factored in correctly, it doesn’t make sense. It can just reduce to observing that states like California are bigger than Wyoming and Rhode Island.

        Also, in terms of federal expenditures, that can vary widely. The military has a habit of shoving bases around put in the middle of nowhere. So, you drive through the red state of Texas, head north through the wasteland towards Oklahoma, and, bam, you hit Sheppard AFB, with jets and airstrips and federal employees galore. Next thing you know, shock of all shocks, a lot of federal money is flowing into Morth Texas, and now Texas is more of a “taker”, because the Feds put a base there. It’s not like the Texas state legislature made that decision.

        I think the state budget of Texas, which Texas Legislatures actually control, is a better measure than looking a federal spending.

        Really, is care more about individuals than arbitrary states, too. Who’s really winning and losing, in terms of people, not states?

  9. Would be wonderful to have an actual link to the study.

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