A recent report by the nonpartisan accounting watchdog Truth in Accounting (TIA) has revealed concerning financial state in many U.S. states. Out of the thirty-one states assessed, more than two-thirds are facing a cash shortfall, indicating their inability to pay bills. TIA’s methodology highlights that elected officials in forty-nine states have not accounted for the true costs of government in their budget calculations, passing on these costs to future taxpayers.
TIA’s analysis, based on the latest available data from state financials for fiscal year 2021, indicates that all states collectively carry a total debt level of $1.2 trillion, which represents a 26% increase from the previous year. This news is particularly worrisome given the rising inflation and indications of a possible recession. Moreover, highly indebted states may find it even harder to resolve their fiscal challenges as borrowing costs increase.
The fact that thirty-one states cannot pay their bills represents an improvement from previous years, with the number decreasing from forty states in 2018 to thirty-nine states in 2021. However, TIA CEO Sheila Weinberg points out that this improvement may be misleading, as it is partly due to temporary record gains in the stock market and Covid-relief funds. Governors might claim surpluses, but their financial reports and retirement plan numbers reveal deep-seated debt issues, indicating a short-term focus that contrasts with taxpayers’ long-term concerns.
Unfunded retirement liabilities, particularly in pension and other post-employment benefit (OPEB) funds, remain a major contributing factor to states’ indebtedness. States tend to make their budgets appear balanced by underfunding these obligations, resulting in a substantial shortfall of $699 billion in pension funds and $665 billion in OPEB funds. This means that for every $1 promised in pension benefits, only seventy-two cents have been set aside.
Among the states, Alaska stands out as the best financially equipped, referred to as a ‘Sunshine State’ by TIA. In contrast, New Jersey faces the most precarious fiscal situation, ranking at the bottom for thirteen consecutive years. Its financial condition worsened, and the money needed to pay bills increased significantly. Although New Jersey received a positive outlook from Moody’s Ratings and Standard and Poor’s, both agencies emphasized the state’s high long-term liabilities and fixed costs compared to other states.
Connecticut, on the other hand, received positive news from Standard and Poor’s, which revised its outlook to positive. The state’s efforts to restore budget reserves during periods of economic growth could help insulate its finances from potential recessionary impacts.
As the situation continues to evolve, taxpayers and rating analysts will closely monitor the progress of states like New Jersey and Connecticut in their efforts to address fiscal challenges and build resilience in their financial outlooks.