States’ Surplus Celebrations Lead to Debt Hangovers

States’ Surplus Celebrations Lead to Debt Hangovers
April 10, 2014

The Final Four college basketball season has concluded, but legislative budget season continues. Some states are celebrating “surpluses” by seeking new spending opportunities. 

Can citizens trust politicians offering another round of surplus spending? Truth in Accounting’s analysis shows 43 states have more debt than they can cover with available assets. Most state “surpluses” do not come close to covering this debt. Much of state government debt is unfunded pension and retirement health promises, which should have been paid every year, as part of employee compensation. Only seven states have enough assets to cover their liabilities: Nebraska, North Dakota, South Dakota, Tennessee, Utah and Wyoming.   

Because 49 of the 50 states are required to balance their budget every year, states should not create debt other than bonds for large infrastructure projects. So how can elected officials claim balanced budgets while they are actually accumulating debt?

Government Math Doesn’t Add Up

The problem lies in how they count. Government budgets focus on the checkbook, and if funds are available to cover the year’s checks, they declare the budget balanced. “Government math” games include holding bills until the next fiscal year, and counting loan proceeds as “funds available” in the checkbook.    

Unfortunately, much government debt is hidden from public view. When planning yearly spending, elected officials don’t consider their “credit card balance,” including promises to pay future pension and retirement health costs. Much like a spendaholic spouse, they hide the payment promises from taxpayers and employees.  Citizens are not able to dig out the truth from lengthy, complex government financial reports. 

Growth in Unfunded Promises

Both citizens and government employees are surprised to learn retirement promises are at risk, or taxes must be raised to pay them. Other surprises occur when the “minimum balance” (retirement funding) grows to where it crowds out spending on services and education. Since 2009, during an economic recovery, the average of states’ unfunded retirement promises has grown from $18.3 billion to $22.31 billion. Of this total, $11.5 billion is retirement health promises; typically “pay-as-you-go,” with no investment fund supporting them.

Truth in Accounting believes states should estimate their year-end financial position (including “credit card” debt) at the same time they plan yearly income and spending (the checkbook). FACT-based budgeting (Full Accrual and Counting Techniques) would show the public both plans before the budget is brought to a vote.    

The longer the celebration, the worse the hangover can be. Tax increases or spending cuts are both painful cures for government “debt hangovers.” Truthful, transparent, timely government reporting can enable elected officials and citizens to develop recovery plans from spending binges that weren’t paid for. 

Internet Info

“2012 Financial State of the StatesTM,” Truth in Accounting: http://heartland.org/policy-documents/2012-financial-state-states