More Than 30 U.S. States Don’t Have Enough Cash To Pay Their Bills
May 3, 2023
"Thirty-one states, or over two-thirds of U.S. states, do not have enough cash to pay their bills. For the thirteenth year in a row, nonpartisan accounting watchdog Truth in Accounting (TIA) released its ‘Financial State of the States’ report on Tuesday describing the weak financial condition of numerous states."
To balance the budget as required by law in forty-nine states, “elected officials have not included the true costs of the government in their budget calculations and have pushed costs onto future taxpayers,” according to TIA’s methodology.
TIA divides the amount of funds needed to pay bills by the number of state taxpayers to produce what it calls the Taxpayer Burden. TIA’s analysis is based on the most recent available data from state financials; for most states, fiscal year (FY) 2021 ran from June 1, 2020, to June 30, 2021.
At the end of fiscal year 2021, all states had a total debt level of $1.2 trillion, a 26% increase from FY 2020. This news is worrisome, especially in a rising inflationary environment and one in which some economic indicators show us close to, or even in, a recession. The most indebted states’ cost of borrowing will rise making it even harder to resolve their fiscal challenges. When unemployment starts to rise, this will compound states’ fiscal challenges.
The fact that thirty-one states cannot pay their bills now is an improvement from 2018 when forty states could not pay their bills; in 2021, the number had improved to thirty-nine states. When I asked TIA CEO Sheila Weinberg, what accounted for what looks like an improvement in state finances, she says that “temporary record gains in the stock market during that time and the Covid-relief money. Governors are claiming surpluses, while their financial reports and retirement plan numbers e indicate their state is deep in debt. The governors are only looking at the short term while taxpayers need to be concerned about the future.”
As in previous years, unfunded retirement liabilities were the largest contributing factor to states’ indebtedness. Weinberg explained that “one of the ways states make their budgets look balanced, when they are not, is by shortchanging public pension and OPEB funds. This practice has resulted in a $699 billion shortfall in pension funds and a $665 billion shortfall in OPEB [other post-employment benefits] funds.”
Elected officials have promised these retirement benefits to employees, including teachers, firefighters, and police, but unfortunately most state governments have not allocated enough funds to pay these benefits. Total unfunded pension liabilities among the fifty states of $699 billion means that for every $1 of promised pension benefits, states have only set aside seventy-two cents.
The states that are in the best shape are the same as in 2021, with Alaska in the best shape. TIA calls a state that is in good shape a ‘Sunshine State.” Alaska had $41.5 billion available to pay $15.4 billion worth of obligations. Alaska’s long-term debt declined primarily due to a decrease in unearned revenue and recognizing the Coronavirus Relief Funds.
Unfortunately, New Jersey’s fiscal situation is in the worst condition of all fifty states and worsened from last year when it was ranked 29th. This is the thirteenth year in a row that New Jersey is in the Bottom 5 Sinkhole States category; it was the only state to experience a decrease in its financial condition. “The money needed to pay bills increased by more than $12.5 billion. Like all states, New Jersey’s pension plan assets experienced significant, short-term increases in values, yet the state’s portion of their Net Pension Liability increased because they assumed new pension responsibility from their local governments,” according to the TIA report.
On a positive note, New Jersey did receive good news from Moody’s Ratings in September that the credit agency had revised its outlook of New Jersey from stable to positive. Moody’s cited New Jersey’s “healthy fund balances and strong tax collections that have accommodated full pension payments and retirement of some debt. The state’s improved reserves position it to better withstand potentially less favorable economic and revenue trends in the year ahead.” However, Moody’s rating reflects New Jersey’s long-term liability and fixed cost burdens that are much higher than those of most states.
Connecticut also received good news from Standard and Poor’s, which revised its outlook of the state from stable to positive. S&P stated that Connecticut is restoring budget reserves during periods of economic and revenue growth that could insulate its finances from a recession. No doubt, taxpayers and ratings analysts will look to see how this progresses in the coming months.