New independent analysis from the Reason Foundation reinforces a message Truth in Accounting has documented for years: many of America’s state and local governments look solvent on paper while their audited balance sheets tell a different story.
Reason’s August 2026 policy study, State and local government finances in America: A comprehensive analysis of debt and liquidity, examines audited Annual Comprehensive Financial Reports from more than 20,000 governments. Using eight standardized metrics of long-term solvency and short-term liquidity, the authors assign “red flags” when a government exceeds an objective stress threshold. A single flag is a warning. A cluster signals a structural problem.
That approach is different from Truth in Accounting’s Taxpayer Burden™ calculations, but it points to the same underlying reality. Officials routinely claim “balanced budgets” by counting only cash in and cash out. They leave off the costs already incurred for pensions, retiree health care, and other long-term promises. Those promises show up on the audited statements Reason used—and they are why so many governments fail both Reason’s tests and ours.
The same jurisdictions keep showing up
Reason finds a clear pattern at the state level. Northeastern and Pacific states are weighed down by legacy pension shortfalls, generous benefits, and spending that has outrun revenue. New Jersey triggers six of eight red flags—the worst in the nation—including a deeply negative unrestricted net position and extremely thin cash reserves. Connecticut follows with four flags and the highest per-capita debt burden. California, Illinois, Hawaii, Massachusetts, and North Dakota each show three. Twenty-three states show none.
Those names will be familiar to anyone who reads Truth in Accounting’s Financial State of the States. In our 2025 report, covering fiscal year 2024, 25 states did not have enough money to pay their bills. Collectively, the 50 states held $2.2 trillion in assets available to pay $2.9 trillion in obligations—a $765 billion hole driven largely by $832 billion in unfunded pension liabilities and $514 billion in unfunded other post-employment benefits (OPEB), mainly retiree health care. The deepest sinkholes were New Jersey, Connecticut, Illinois, Massachusetts, and California.
Reason’s red-flag map and TIA’s Taxpayer Burden ranking are not identical methodologies. They do not have to be. When two independent analyses, using governments’ own audited numbers, keep identifying the same states, the problem is not the scorekeepers.
Cities and overlapping governments make the picture worse
The local results are more uneven—and, in some places, more alarming. Among large cities, Chicago and New York City each trigger red flags on seven of eight metrics: high debt loads, deeply negative unrestricted net positions, and cash positions too thin to absorb a shock. Among the 100 largest counties, Nassau County, New York, and Miami-Dade County, Florida, each draw five flags. Fiscal stress is especially common in large school districts; only two of the 100 largest show zero flags.
Reason also does something TIA has long urged citizens to do: look at the stack of governments sitting on the same taxpayer. The study notes that Chicago residents face red flags from the state, the county, the city, and the school district. Combining state, county, and city obligations, Reason estimates a burden of roughly $49,431 per Chicago resident.
That stacking is not an accounting curiosity. It is how a household that never voted for a school-board bond, a county sales tax, and a state pension enhancement still inherits all three. TIA’s city work has shown the same layering in different language. In our latest Chicago analysis, the city alone had far too little in assets available to cover its bills, producing a Taxpayer Burden in the tens of thousands of dollars—before Illinois’s own shortfall is added. Chicago’s pensions remain among the worst-funded in the country, and a recent state law is expected to add more than $11 billion to the city’s unfunded pension liability.
New York City shows the same pattern at an even larger scale: enormous liabilities, a deeply negative unrestricted net position, and a retiree health plan that has set aside only pennies on the dollar.
What Reason measures and what taxpayers still need to see
Reason’s eight metrics are useful because they separate two questions governments prefer to mix together:
Long-term solvency
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Debt ratio (liabilities versus assets)
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Unrestricted net position (the discretionary cushion after restricted funds)
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Whether revenues cover expenditures
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Liabilities per resident or per student
Short-term liquidity
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Quick ratio
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Quality of receivables
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Cash as a share of assets
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Liabilities relative to annual revenues
Negative unrestricted net position is the metric that most closely tracks what TIA has been translating into Taxpayer Burden for two decades. When unrestricted net position is deeply negative, the government has already spent resources it does not have. The usual source of that hole is retirement promises booked on the statement of net position but never fully funded in the budget.
Reason mentions legacy pension shortfalls as a driver of state-level stress. That is correct, and it is still only part of the story. Pensions and OPEB are not just “long-term debt” in the same sense as a general-obligation bond. They are deferred compensation. When officials skip the contribution, they have not saved money. They have borrowed from employees and from future taxpayers without putting the loan on the operating budget.
That is why “balanced budget” requirements in 49 states and in most large cities have not produced balanced finances. Cash-basis budgeting lets governments recognize the paycheck and ignore the pension credit earned in the same year. The Annual Comprehensive Financial Report cannot hide that choice as easily. Both Reason and TIA start from that document for a reason.
Prudence is possible and visible
The study is not a brief against government. Twenty-three states show zero red flags. Many large counties and cities do, too. Reason is right that disciplined budgeting, realistic actuarial assumptions, and reserve-building are not theoretical. They are already in use.
TIA’s “Sunshine States” make the same point from the other direction. North Dakota, Alaska, Wyoming, Utah, and Tennessee have shown that a government can cover its bills, including retirement promises, and still deliver services. The difference is not geography or party label. It is whether elected officials count the full cost of government while in office.
What should happen next?
Reason’s database of more than 20,000 ACFRs is a public service. Taxpayers should use it. So should legislators, rating analysts, and journalists who still treat the adopted budget as the last word.
From Truth in Accounting’s perspective, three reforms would make these findings harder to ignore:
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Budget the incurred cost, not just the cash check. Pension and OPEB costs earned this year belong in this year’s budget, not in a footnote and a future tax increase.
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Publish audited reports on time. Several large states have been months—sometimes more than a year—late with their ACFRs. A corporation that did that would face market and regulatory consequences. A government that does it leaves citizens voting in the dark.
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Apply consistent funding and fiduciary standards to public retirement plans. Private-sector workers have ERISA. Public employees and the taxpayers who guarantee their benefits lack equivalent protection. The result is visible in New Jersey, Illinois, Chicago, and New York City.
Reason Foundation has given the country a clear, comparable set of warning lights. Truth in Accounting will keep converting those lights into a number every household can understand: what it would take, per taxpayer, to pay the bills already on the books.
The data are no longer the obstacle. The obstacle is whether officials will stop treating an incomplete budget as balanced.