Accounting Methodology

Researchers at Truth in Accounting™ (TIA) use a thorough approach to determine the state of government finances. This approach compares all bills–including those related to retirement systems–to all of a state’s assets available to pay these liabilities.

Former U.S. Comptroller General David Walker says, “While other organizations have compared the states’ unfunded retirement liabilities, only [The Institute for Truth in Accounting] has determined the overall financial condition of every state.” 

TIA™ begins its analysis by identifying all assets, including capital assets (e.g., buildings, roads, bridges, parks, etc.) and other assets (e.g., cash, investments, and money in fund accounts). Some of these assets are available to pay a state’s bills or liabilities while others are restricted by law or contract. The restricted assets are removed from the total, as are capital assets because they cannot be easily converted to cash. The result is a calculation of a state’s Assets Available to Pay Bills.

TIA™ then identifies Total Bills, which include liabilities disclosed in a state’s financial report such as accounts payable, bonded indebtedness (bonds), and pension and Other Post-Employment Benefit (OPEB) obligations found in the state’s and its retirement systems’ Comprehensive Annual Financial Reports (CAFRs). Since we removed capital assets from our computation of Assets Available to Pay Bills, we also subtract from Total Bills the amount of debt related to the financing of the capital assets. Only liabilities incurred to date are included in Total Bills, and special care is taken to calculate the state government’s share of multiemployer and cost-sharing retirement plans. TIA™ calculates Money Needed (or Available) to Pay Bills by subtracting the Total Bills from the Assets Available to Pay Bills.

The bottom line is expressed as Taxpayer Burden or Surplus. This represents the bills a state has elected to fund as they come due on a per-taxpayer basis and in today’s value.

It is clear from TIA’s™ analysis that the vast majority of state governments have made promises that far exceed their ability to pay. Most states are violating the spirit of balanced budget requirements by obscuring the incurred costs of government retiree benefits off-balance sheet. The methodology described above more closely adheres to Generally Accepted Accounting Principles (GAAP), which include the cost of long-term liabilities in financial reporting. 

For more information on TIA’s™ methodology, including details on the process used to calculate the states’ share of multi-employer pension and Other Post-Employment Benefit (OPEB) plans, click here.