Unrealistic accounting poses risks to state budgets, report warns

Although nearly all states must balance their budgets, a new study by government finance watchdog Truth in Accounting suggests that most ran substantial deficits in fiscal 2023 once hidden costs are calculated.

The Financial State of the States report released last week shows that only 23 states reported a surplus for fiscal 2023, with only North Dakota, Alaska, Wyoming, and Utah receiving an ‘A’ grade for financial health.

The problem, according to Truth in Accounting’s Sheila Weinburg, is that states are not required to list future costs like pensions and retiree healthcare as part of their budgets in the years the states incur the obligation to pay them. In planning for these future costs, states need to decide how much money to put into investment funds each year. Weinberg said that states irresponsibly calculating investments will continue to grow rapidly, and don’t provide enough money to pay for these costs under many scenarios.

North Dakota finished first among all 50 states, recording a budget surplus of nearly $17 billion, or $55,600 per taxpayer. North Dakota’s strong financial performance, an improvement on last year’s, potentially results from the state’s strong economic performance with a low unemployment rate and strong energy industry.

Joining North Dakota in Truth in Acounting's Top 5 "Sunshine States" are Alaska ($55,100 taxpayer surplus); Wyoming ($23,500); Utah ($12,100); and Tennessee ($9,600).

Like many of the most financially healthy states, four of the top five best performing states are located west of the Mississippi River.

By comparison, the states with the worst deficits tend to lie in the northeast, with New Jersey being the worst last year and second worst this time, according to the report. Likewise, Connecticut finished dead last among all the states and ran a deficit of $44,300 for each taxpayer. Although Connecticut slightly improved its financial position from 2022 due to strong investment income, its financial situation may be worse than estimated because only 2022 numbers were available for unfunded retiree health benefits. The large deficit poses a potentially serious problem for the state’s budget and economy, especially if the financial markets do not perform well.

Joining Connecticut and New Jersey in the bottom five are Illinois ($37,000 taxpayer burden); Massachusetts ($25,400); and California ($17,400).

According to Truth in Accounting, deficits mostly have grown worse over time although some states like Florida have improved their financial situations; despite strong growth in the financial markets in 2023, the number of states reporting deficits only decreased by one, from 28 to 27. Weinberg recommended that states adopt accounting practices like those the Security and Exchange Commission required for large business in order to more accurately account for costs.

The states’ deteriorating financial health is especially important in an election year where politicians at all levels promise increased spending to win votes. For example, Republican presidential nominee Donald Trump recently proposed eliminating taxes on tips and was quickly joined by his Democratic rival, Kamala Harris. Voters might need to ask themselves carefully if politicians’ plans are affordable or only appear to be because of deceptive accounting.