In the 2025 "Financial State of the States" report, Truth in Accounting (TIA) paints a stark picture of fiscal irresponsibility across the U.S., with unfunded pension liabilities emerging as one of the most pressing threats to long-term state solvency. These liabilities represent promised retirement benefits to public employees—such as teachers, firefighters, and state workers—that governments have committed to but failed to adequately fund. By shortchanging pension contributions today, states are effectively borrowing from the future, shifting massive costs onto tomorrow's taxpayers. This practice not only undermines balanced budgets but also erodes public trust in government accounting. Drawing from the most recent audited financial reports (primarily fiscal year 2024, with some states using 2023 data due to delays), TIA reveals a collective national shortfall that underscores the urgency for reform.

The National Scale: A $832 Billion Hole in Pension Promises

At the heart of the issue is a staggering $832 billion in unfunded pension liabilities across all 50 states. This figure arises from states' failure to set aside sufficient assets to cover the full cost of promised benefits. On average, states have funded only 72 cents for every dollar of pension benefits owed, leaving a 28% gap that must eventually be filled through higher taxes, reduced services, or further borrowing. This underfunding is exacerbated by volatile stock markets, where "paper gains" from investments can temporarily mask the problem but evaporate during downturns, as highlighted in the report's discussion of market volatility (page 12).

Unfunded pensions are the largest driver of overall state debt, contributing to a total $765 billion in money needed to pay bills when offset against available assets. Combined with $514 billion in unfunded Other Post-Employment Benefits (OPEB, mainly retiree healthcare), retirement obligations account for the bulk of the $2.9 trillion in total state liabilities against just $2.2 trillion in assets. TIA's methodology strips away restricted or capital assets (such as buildings and infrastructure) that cannot be realistically sold to pay short-term bills, providing a clearer view of the "money needed to pay bills." This results in a per-taxpayer calculation: the Taxpayer Burden™ or Surplus™, which divides the shortfall or excess by the number of federal income tax filers in each state.

The report emphasizes that this crisis stems from systemic accounting tricks. States often exclude full pension costs from annual budgets, treating them as future problems rather than current expenses. As noted on page 17, this is akin to "charging earned benefits to a credit card without having the money to pay off the debt." Unlike private-sector pensions protected by the 1974 Employee Retirement Income Security Act (ERISA), public plans lack similar safeguards, allowing elected officials to underfund them for political gain—keeping taxes low or funding popular programs today at the expense of retirees and future generations.

Variations Across States: Sunshine vs. Sinkhole

TIA categorizes states into "Sunshine States" (those with surpluses after covering all bills, including pensions) and "Sinkhole States" (those with burdens). Of the 50 states, 25 are Sinkholes, unable to cover their obligations, while the other 25 have varying degrees of surplus. The burden is unevenly distributed, with some states managing risks through prudent funding and others digging deeper holes due to chronic undercontribution and optimistic assumptions about investment returns.

• Top Sunshine States (Lowest Pension Burdens, Overall Surpluses): These states have not only funded pensions adequately but often overfunded them or maintained strong overall reserves. For instance:

  • North Dakota ranks #1 with a $63,300 Taxpayer Surplus, despite $5.1 billion in unfunded pensions—offset by oil revenues and conservative budgeting.

  • Alaska (#2, $48,500 Surplus) has $8.7 billion in unfunded pensions but benefits from its Permanent Fund, which restricts principal for long-term stability.

  • Wyoming (#3, $27,200 Surplus) shows $9 billion in unfunded pensions but strong mineral royalties help maintain a cushion.

  • Utah (#4, $14,400 Surplus) and Tennessee (#5, $10,900 Surplus) stand out for proactive reforms, like Utah's well-funded systems and Tennessee's halved pension debt through extra contributions and strong returns.

• Overall, Sunshine States tend to have smaller populations, resource-based economies, or disciplined fiscal policies. They averaged better funding ratios, with some like South Dakota even showing overfunded retiree benefits.

• Bottom Sinkhole States (Highest Pension Burdens): These are weighed down by massive unfunded pensions, often in densely populated or industrialized states where public employee unions and legacy costs amplify the problem.

  • New Jersey (#50, $44,500 Burden) has one of the worst shortfalls, with unfunded pensions contributing heavily to its $44.5 billion money needed.

  • Connecticut (#49, $44,500 Burden) faces $38.8 billion in total shortfall, driven by $49.8 billion in unfunded pensions (though offset slightly by overfunded OPEB).

  • Illinois (#48, $38,800 Burden) is notorious for pension woes, with $147.5 billion in unfunded liabilities (based on 2023 data), making it a poster child for underfunding.

  • Massachusetts (#47, $24,900 Burden) and California (#46, $21,800 Burden) round out the bottom, with California's $294.1 billion overall shortfall including massive pension gaps exacerbated by delayed reporting.

• Sinkhole States often rely on "pay-as-you-go" approaches for benefits, pushing costs forward. For example, Illinois and New Jersey have pension funding ratios well below the national average, compounded by court-mandated protections that limit reforms.

To illustrate the disparities, here's a summary table of unfunded pension liabilities for select states (extracted from state breakdowns in the report, in billions of USD):

State Category	State Example	Unfunded Pensions	Taxpayer Burden/Surplus	Notes
Top Sunshine	North Dakota	$5.1	+$63,300	Strong reserves from energy sector.
	Alaska	$8.7	+$48,500	Permanent Fund protects principal.
	Wyoming	$9.0	+$27,200	Mineral royalties bolster funding.
Mid-Range	Florida	Not specified (overall surplus)	+$2,900	Balanced through tourism and no income tax.
	Texas	$60.0	-$1,100	High but offset by economic growth.
Bottom Sinkhole	Illinois	$147.5 (est. from prior)	-$38,800	Chronic underfunding; delayed reports.
	Connecticut	$49.8	-$44,500	Legacy costs from public unions.
	New Jersey	Not specified (high)	-$44,500	Worst overall burden.

(Note: Exact unfunded pension figures vary by state; totals aggregate to $832 billion nationally.)

Contributing Factors and Risks

The report attributes much of the burden to market volatility (page 12), where pension assets are valued at market rates but can fluctuate wildly. Governments amortize these changes to avoid "volatility" in reports, but TIA argues this hides risks from taxpayers. For example, strong 2024 market performance (unrealized gains often exceeding 10-20%) reduced reported liabilities in many states, but a downturn could reverse this overnight.

Other factors include:

• Delayed Reporting: Seven states (e.g., California, Illinois) hadn't released 2024 reports by August 2025, forcing reliance on outdated data and obscuring current burdens (pages 24-26).

• Accounting Loopholes: States use cash-basis budgeting, excluding full pension costs (page 18). GASB standards allow deferred inflows/outflows that distort net positions (page 29).

• Federal Aid Fade: Post-COVID funding masked issues, but a return to 2019 levels could cut $300 billion nationally, straining pension contributions (page 11).

Without reforms, these burdens could lead to bailouts, as TIA warns: Will fiscally irresponsible states like Illinois seek federal help, burdening taxpayers in sound states?

Path Forward: Transparency and Accountability

TIA calls for urgent action, including adopting full accrual (FACT-based) accounting in budgets, applying ERISA-like standards to public pensions, and releasing timely reports (within 100 days). Citizens are urged to demand reforms like TIA's Fiscal Transparency Act. 

In conclusion, unfunded pension liabilities represent a ticking time bomb for America's states, with $832 billion in promises hanging over taxpayers' heads. While Sunshine States demonstrate that prudent management is possible, Sinkholes highlight the dangers of delay. As TIA founder Sheila Weinberg emphasizes, truthful accounting is essential in ensuring governments live within their means and protect both retirees and future generations. Without change, the burden will only continue to grow, threatening national economic stability.

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