For Oklahoma, other states: financial gaps, per-taxpayer burdens are Good, Bad and Ugly
Published: February 2nd, 2011
by Patrick B. McGuigan
A national group dedicated to careful and detailed study of state government accounting is more than half way through a meticulous project to assess the fiscal state of every American state. With a burst of several new reports in January, the Institute for Truth in Accounting (IFTA), based in Chicago, Illinois, is on its way to completing the “state of the state” analysis for all 50 states.
This group has finished analyses of 29 states, thus far. Ranked from best to worst, they range from Nebraska, with a positive balanced sheet, to the three worst: Connecticut, New Jersey and Hawaii.
Oklahoma is 18th “best” of the 29 – or 12th worst, if you look at it that way.
To hold many statistical and other factors constant, the Institute’s investigations have worked from Fiscal Year 2009 data.
The worst of the states examined thus far, in the institute’s analysis, is Connecticut, described as “in a precarious financial position because it does not have the funds available to pay more than $59 billion of the state’s commitments as they come due.”
In an October 2010 release from the IFTA, David M. Walker, Founder and CEO of the Comeback America Initiative and former Comptroller General of the U.S., reflected grimly, “As a new resident of Connecticut, I was shocked to see that my new home state had an accumulated unfunded burden of about $46,000 per taxpayer as of June 30, 2009 and growing rapidly. This is the highest burden per taxpayer of any state calculated by the Institute for Truth in Accounting. Connecticut’s new Governor must lead the charge to restructure state government, including the serious unfunded pension and retiree health obligations facing the state’s taxpayers.
Connecticut’s comptroller reports assets of $29.3 billion, but IFTA’s review of the state’s final and official financial report for 2009 found “41.8 billion of off-balance sheet retirement liabilities.” The institute could be fairly described as highly critical of historically rosy assumptions about returns on government pension investments, a view that many believed was affirmed by actual events in the Great Recession of 2008-10.
The institute’s critical analysis of the situation in Connecticut flowed from careful analysis of the state’s Comprehensive Annual Financial Report (CAFR). Those unfunded liabilities for government pensions and retirements are recurring and devastating themes in the institute’s examinations of the various states. Among journalists who regularly delve into the details of state finances, fiscal burdens, debt and hidden debt, the CAFRs (pronounced K-furs) are considered, properly used, the best sources of information for discerning actual debt levels.
In its investigation of Connecticut’s situation, the Institute “determined that more than $14.8 billion of the state’s assets cannot be easily converted to cash to pay state bills as they come due. These assets consist of capital assets, including infrastructure, buildings and land, and assets that are restricted by law or contract. This means the state does not have the funds needed to pay for more than $59.8 billion of state obligations.”
Most of the unfunded obligations flow from Connecticut’s “state employees’ and teachers’ retirement benefits. Years of over-promising retirement benefits, while shortchanging funding, have resulted in the state’s retirement systems being underfunded by over $41.8 billion. As of June 30, 2009, the state had set aside only 38 cents to pay for each dollar of benefits promised. As of that date only $25.5 billion was deposited into the retirement systems, even though the actuaries calculated that a minimum of $67.3 billion should have already been contributed.”
At the time the Connecticut analysis was completed, Sheila Weinberg, founder and CEO at the IFTA, said, “To truly balance the state’s budget, the Governor and legislature should not push our costs into the future. And a state budget is not balanced if the retirement plans are not adequately funded.”
In the Institute’s analyses thus far, the second worst state is New Jersey. While the Garden State listed $74,021,137,000 in assets on June 30, 2009, the combination of Capital ($39,9348,666,000) and Restricted (9,877,244,000) Assets left only $24,195,227,000 to pay bills.
The latter number, in the Institute’s analysis, was far short of the $131,438,850,000 needed to pay obligations. This made the financial burden of each New Jersey taxpayer $42,700.
The third most troubling per-taxpayer financial debt burden has been listed for Hawaii.
In a report circulated on January 24, the Institute concluded Hawaii did not have the resources needed “to pay for almost $18.2 billion of the State’s commitments as they come due. In the Aloha State, each taxpayer’s share of this financial burden equals $39,600.”
Although Hawaii law mandates a balanced budget, Weinberg says, “If governors and legislatures had truly balanced the state’s budget, no taxpayer’s financial burden would exist. A state budget is not balanced if past costs, including those for employees’ retirement benefits, are pushed into the future.”
While Hawaii’s reported assets totaling $19.6 billion, the 2009 financial report shows “$11.9 billion of off-balance sheet retirement liabilities. More than $15.6 billion of the State’s assets cannot be easily converted to cash to pay State bills of $22.2 billion as they come due. These assets consist of capital assets, including infrastructure, buildings and land, and assets the use of which is restricted by law or contract.” In this analysis, Weinberg says, “The State does not have the funds needed to pay for almost $18.2 billion of state obligations.”
In the increasingly familiar story across the United States of America, the majority of the unfunded Hawaiian obligations are in the form of pension and retirement benefits for employees of the state government.
As the Institute concluded in one of its recent press releases, sent to CapitolBeatOK last month, “Years of over-promising retirement benefits, while shortchanging funding, have resulted in the state’s retirement systems being underfunded by $12.8 billion. This underfunding has recently been exasperated by drastic declines in the market value of retirement systems’ assets. As of June 30, 2009, the state had set aside only 41 cents to pay for each dollar of benefits promised. As of that date only $8.6 billion was deposited into the retirement systems, even though the actuaries calculated that a minimum of $21.4 billion should have already been contributed.”
For further details on the analysis of Hawaii, see details at the Institute’s website and especially at Hawaii State Budget Watch. These analysis include details on the unfunded pension and retirement benefits.
In the studies finished so far, Oklahoma falls in the upper-middle of the worst states (I.e 12th out of 29). At the time Weinberg finished her analysis of the Sooner State early last spring, she concluded, “The numbers are not good and they are getting worse every day. Oklahoma has only $3 billion to pay $19.4 billion of bills. Each Oklahoma family’s share of the state’s financial shortfall is $14,600.”
As for Oklahoma’s pensions and retirement programs, she reported, “years of overpromising pension benefits, while shortchanging the funding of the pension systems have resulted in the state’s pension funds being underfunded $14.8 billion. For the state’s fiscal year that ended June 30, 2009 only $1 billion was deposited, even though the pension systems’ actuaries calculated that a minimum of $1.3 billion should have been contributed.”
Former state Treasurer Scott Meacham wrote, in a letter to the governor and legislative leaders dated April 12, 2007, “The biggest problem exists with the biggest pension fund – the Teachers’ Retirement System – where actuaries indicated that nearly three times more money than is currently received is needed to properly fund the system.”
Meacham wrote then, “If this problem is left unaddressed, the system will eventually require a cash infusion of staggering proportions to meet current payment obligations. This could result in the need for the state to raise taxes or dramatically reduce funding to vital state programs. The ultimate impact of continued inaction will be borne by citizens of the state of Oklahoma.”
Meacham and other analysts have concluded the Oklahoma Teacher Retirement System is the second or third worst in the country.
Senate President Pro Tem Brian Bingman, a Sapula Republican, and House Speaker Kris Steele, a Shawnee Republican, have both identified pension reform as a critical priority for the state. However, leaders of public employee groups have said significant pension changes would be “devastating” to their members.
While discussing budget issues with reporters at last month’s unveiling of the Senate Republican caucus agenda for 2011, Bingman reflected, “We have to get serious about funding the state’s pension systems. It would take $750 million a year to fund all of them, for 20 years, to get to the 80% funding level that is considered the minimum.”
IFTA was critical of past practices in Oklahoma, telling CapitolBeatOK, “For decades governors and legislators have claimed balanced budgets, but now the state is more than $1 billion in debt.”
Last year, the State Office of Finance reported $13.8 billion of net assets. The Institute’s review of actuarial reports revealed $14.8 billion of off-balance sheet pension liabilities.The Institute says there are three questions that should be asked of legislators and the governor to determine whether or not the budget is actually balanced: “Will our bills be paid on time? Will you borrow money? Will you pay the required pension contributions?”
Weinberg warned, “Debt has become our country’s drug of choice, in the states and nationally. Until we are honest with ourselves about how much we really owe, we can’t begin to solve this problem.”
The chart accompanying this story shows where each of the 29 states so far analyzed falls in the institute’s analysis. Concerning Oklahoma’s immediate neighbors studied so far, Arkansas needs $2,470,417,000, or $3,300 a person, to cover its financial obligations. In order from best to worst, the other Sooner State neighbors thus far analyzed – and their respective listings of money needed and taxpayer’s burden – are Colorado ($8,120,963,000; $4,900), Missouri ($13,314,425,000; $7,300), Texas ($60,773,365,000; $8,900), Kansas ($8,586,288,000; $9,500), New Mexico ($7,149,440,000, $12,500) and Louisiana ($25,438,864,000, $20,300).
Besides the “Big Three” among the 29 states thus far scrutinized in the Institute’s analyses, notably high financial burdens – and the amount required per taxpayer to pay all the debts) are seen in Illinois ($120,644,877,000; $29,200), Kentucky ($31,987,538,000; $26,300), Maryland ($40,889,209,000; $20,300), California ($195,095,802,000; $18,000) and Michigan ($50,244,923,000; $16,400).
The Institute for Truth in Accounting (IFTA) describes itself as “dedicated to promoting honest, accurate, and transparent accounting at all levels of government and business. As a non-partisan, non-profit organization, the IFTA works to expose accounting deficiencies while promoting better, more accessible delivery of accurate government financial data—and, in turn, providing a foundation for more informed public policy. The IFTA provides its expertise to develop more effective accounting standards and deliver accurate government financial information to policymakers, opinion leaders, and citizens, so they can all work for a more secure financial future.”