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Detailed Accounting Methodology

To determine a state’s financial condition researchers at Truth in Accounting™ (TIA) uses a thorough, detailed approach comparing all of a state’s bills, including those related to retirement systems, to all of a state’s assets available to pay these liabilities.

A comprehensive analysis was required, since:

  • Comparison of a state’s unfunded retirement plans’ liabilities without consideration of other liabilities and obligations and the assets available to fund all liabilities would be incomplete.
  • Evaluating a state’s unfunded pension and OPEB liabilities without analyzing the state’s assets would be similar to judging a person’s finances by only looking at their $10,000 credit card balance without consideration that they have more than $20,000 in the bank to pay off this balance.
  • Assessing a state’s unfunded pension liabilities without considering other debt does not provide an accurate analysis because some states have issued pension bonds and other debt to fund plans’ contributions. In those cases funding of the pension plans improves, but this improvement is offset by increases in other state debt.

A key feature of the analysis, and one TIA™ believes advances the body of public knowledge regarding state finances, is the assessment of each state’s share of unfunded liabilities related to multi-employer, cost-sharing pension and OPEB plans.

  • TIA™ researchers began by identifying all assets, including capital assets (buildings, roads, bridges, parks, etc.) and other assets (cash, investment and money in fund accounts, etc.).
  • Some of these assets are available to pay a state’s bills or liabilities while the use of others are restricted by law or contract and are not available to pay bills. These restrictions include external constraints imposed by creditors, grantors, contributors or other governments as well as internal legal or constitutional provisions.
  • Capital assets were removed from TIA’s calculation of the assets available to pay a state’s bills or liabilities because they cannot be easily converted to cash.

Researchers then calculated “Assets Available to Pay Bills” by subtracting capital assets and those restricted by law or contract from total assets.

  • In the calculation of each state’s financial condition the assets and liabilities of the Primary Government and its “Discretely Presented Component Units” were included. These units include entities such as state colleges, universities, financing authorities and toll-ways. As indicated in the Kansas 2009 CAFR, “Discretely Presented Component Units are entities that are legally separate from the state, but are financially accountable to the state, or whose relationships with the state are such that exclusion would cause the state’s financial statements to be misleading or incomplete.” [Source: State of Kansas Department of Administration Division of Accounts and Reports, Comprehensive Annual Financial Report - July 1, 2008 to June 30, 2009 http://www.da.ks.gov/ar/finrept/default.htm]
  • In most states the Primary Government and Discretely Presented Component Units have balances due from and due to each other. To avoid overstating a state’s assets and liabilities TIA staff removed these receivables and payables.

Truth In Accounting™ researchers then identified “State Bills” which include liabilities disclosed in a state’s financial report such as accounts payable, bonded indebtedness, as well as pension and OPEB obligations found in the state CAFR, retirement systems’ CAFRs and actuarial valuation reports. Only liabilities incurred to date were included. Then TIA™ researchers derived the “Money Needed to Pay Bills” by subtracting the State Bills from the “Assets Available to Pay Bills”.

The result of TIA’s™ analysis is expressed as Taxpayer Burden or Surplus. This financial burden represents, on a per taxpayer basis and in today’s value, the bills a state has elected to fund as they come due rather than when they were incurred.

  • Forty one states have created an unfavorable Taxpayer Burden representing the amount needed to pay the state’s obligations per taxpayer.
  • Only nine states have a Taxpayer Surplus which represents, on a per taxpayer basis, an excess of funds available to be used to meet a state’s obligations to citizens, employees and creditors.

A financial burden accumulates when current costs are passed onto future taxpayers.

  • The “Money Needed to Pay Bills” is similar to a term used by government accountants called “Unrestricted Assets”.
  • The Money Needed to Pay Bills reported on each state’s Financial State of the State can be calculated by subtracting from the Unrestricted Assets reported on the state government-wide Statement of Net Assets the additional unfunded retirement liabilities TIA researchers found have already been incurred.

 In the analysis of retirement systems, TIA™ researchers found many states administer multiemployer, cost-sharing plans that cover employees from more than the state and local government related employers. For example these employers can include different state agencies, counties, cities, universities, colleges and school districts. In analyzing these types of plans special care was taken to calculate a state’s share of each plan’s unfunded liability.

  • A few states’ actuarial reports disclosed each employer’s share of the plan’s unfunded liability. But, because current accounting standards do not require such an allocation, many states do not provide such transparency of their multi-employer, cost-sharing plans.
  • In many states TIA researchers found it necessary to estimate the state’s liability based upon the state’s share of historical contributions.
  • Some states did not disclose an allocation of plans’ liabilities or the state’s contributions into such plans. In these cases the state’s share of multi-employer, cost-sharing plans’ unfunded liabilities was estimated based on other data available such as the percent of state employees in the plans.
  • TIA researchers reviewed other studies of state retirement systems and found that some allocate the total unfunded liabilities of multi-employer, cost-sharing plans to the states. These studies did not recognize that other employers, such as municipalities and school districts, have and will continue to contribute to such plans. For example one study indicated the unfunded liability related to the Public School Retirement System of Missouri was a state liability. TIA’s review of this plan determined the state contributes less than one percent of the plan’s total contributions. Therefore the plan’s unfunded liability was not included in TIA’s calculation of State Bills.
  • After reviewing selected school districts’ financial information, if it was determined that the state provided more than 75% of school districts’ funding, then the school districts’ share of the retirement plan’s liability was allocated to the state.

Each state’s “Money Needed to Pay Bills” amount is an approximation of the Unrestricted Assets each state would have reported on their Statement of Net Assets if the proposed amendments to OPEB reporting were in place and their reported pension liabilities were current.

This approximation does not take into consideration the amendment’s provisions regarding the assumptions used to calculate the actuarial value of assets or actuarial accrued liabilities.

TIA™ believes that the methods developed and used to complete this report have produced the most precise estimates that are currently available of every state’s actual assets and liabilities.