How Can States Balance Their Budgets and Go into Debt at the Same Time?

September 20, 2015

All states except Vermont have balanced budget requirements, yet states have accumulated almost $1.3 trillion of unfunded debt. How can states accumulate debt and balance their budgets at the same time? It all depends on how states count. State budgets are calculated using accounting tricks.

The largest annual cost for states is employee compensation. Employee compensation packages include benefits such as health care, life insurance, and retirement benefits. Employees of the state earn these benefits as they work; however, states are only paying the minimum required to keep these benefits afloat. Similar to how current expenses can be charged to a credit card, earned pension benefits are being "charged" to future taxpayers, and the money that should fund these benefits is used elsewhere during the current political year.

The most heavily used budgeting trick is when states choose to not fully fund retirement benefits when they are earned by employees. Although these pension benefits will not be paid out until state employees retire, these are still current compensation costs. If states didn’t offer employees pensions and Other Post-Employment Benefits (OPEB), they would have to compensate with higher salaries. By shifting the payment of employee benefits onto future taxpayers, it allows the budget to look balanced.

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