Truth in Accounting (TIA), a Chicago-based nonpartisan, non-profit group founded in 2002 that advocates for financial transparency in state an local government, annually issues a Financial State of the States report. In the latest report, Washington gets a ‘D’ grade, ranking No. 32 among the 50 states.
We’ll confess to not being very familiar with the group, which appears to have a balanced board of directors, many with national reputations, and capable staff. And, we note that in a 2015 competitiveness report PwC referred to TIA data in conducting its financial analysis.
PwC calculated the relative financial position of the states using Fiscal Year 2014 financial information included in the Comprehensive Annual Financial Report (CAFR) for each state. As some states did not file their Fiscal 2014 reports until that last half of calendar 2015, this is the latest available comprehensive state financial information for all 50 states. A composite of this information can be found in the State Data Lab section of Truth in Accounting’s website (www.truthinaccounting.org) and the full CAFRs can be found on the individual websites of the respective states.
So, we’re inclined to credit the group’s work. Unfortunately, the research paints a relatively bleak picture about state finances across the country. Here’s the setup.
TIA believes it is imperative to provide an honest accounting of each state’s financial condition. Therefore, we developed a sophisticated model to analyze all the assets and liabilities of all 50 states, including unreported liabilities. Since 2009, TIA has released its FSOS study annually, documenting the truth about each state’s financial position…
TIA ranks each state by its taxpayer burden or surplus. The taxpayer burden is the amount each taxpayer would have to pay to make the state debt-free. The taxpayer surplus is the amount left over after all bills are paid, divided by number of taxpayers in the state.
Most states, TIA reports, underestimate or underreport their debt obligations, with unfunded pension obligations being a major problem.
The most common accounting trick states use is hiding a large portion of employee compensation off the balance sheet and budget. Employee compensation packages include benefits such as health care, life insurance, and pensions. States become obligated to pay these benefits as employees earn them.
Although these retirement benefits will not be paid until the employees retire, they still represent current compensation costs because they were earned and incurred throughout the employees’ tenure. Furthermore, that money needs to be put into the pension fund in order to accumulate investment earnings.
Washington state systems are generally considered better funded than many, but, judging on the basis on what the Rockefeller Institute finds, that seems to be a low bar to clear.
In our 2015 foundation report, we wrote,
Even with the ongoing economic recovery, the state budget will face stress for the foreseeable future as a result of court-mandated increases in basic education funding, increased health care expenses, negotiated public employee compensation increases, and increases in other required state spending.
Given these pressures, special emphasis must be placed on controlling key budget drivers, including health care, labor costs, and debt. Some of the actions lawmakers might explore to increase budget sustainability include fully funding state pensions, creating a defined contribution plan option for state employees, and controlling state debt. (Emphasis added.)
Of Washington, TIA writes (full Washington listing at page 93 of the report),
In a 2014 Governing magazine article, TIA research director Bill Bergman explained the concept of “taxpayer burden,” which is not the same as tax burden.
An income statement captures the performance of an entity over a period of time, while a balance sheet takes a “snapshot” at a point in time. These two frames of reference help describe the difference between the Tax Foundation’s Tax Burden and Truth in Accounting’s Taxpayer Burden. The former is an income-statement measure, while the latter comes from a balance-sheet perspective. The Tax Burden compares states based on the current burden of taxes on income, from year to year. The Taxpayer Burden highlights the long-term consequences facing future taxpayers from long-term obligations.
Without doubt, both are important considerations for public officials and taxpayers.