Opinion: Daily Journal

A Ranking of Truth-Telling

Another day, another poor ranking for North Carolina government.

This time, it’s the new Financial State of the States report by the Institute for Truth in Accounting, an Illinois-based nonprofit that has been pushing governments to reform their accounting practices for more than a decade. Founded by a CPA and chaired by a former Ernst & Young executive, the Institute issues periodic reports that compile financial information for all 50 states – and spotlight the unfunded fiscal liabilities that state politicians tend to avoid discussing.

I’ve written before about the more than $30 billion in health benefits North Carolina has promised retired state employees despite having saved no significant assets to cover the liability. I’ve also written about the coming national rewrite of pension disclosure rules, which is about to expose the fact that North Carolina (like most other states) has a much larger unfunded pension liability than has been previously disclosed.

The new Financial State of the States report really only deals with the first of those problems, the retiree health benefit. It doesn’t redo the math on North Carolina’s pension fund. In other words, the report actually understates our state’s fiscal woes. Still, North Carolina fares poorly in the comparison. In the most recent fiscal year for which comparable data are available for all states, 2009-10, the difference between assets and liabilities came to nearly $15,000 per North Carolina taxpayer. That ranks us 35th in the nation in financial strength.

Which states fare better in this analysis? All of our neighbors, for starters. Tennessee’s average financial burden is $1,100 per taxpayer, ranking the state 10th. Virginia (17th), Georgia (21st), and South Carolina (30th) also have smaller financial burdens. Only a handful of states have financial surpluses rather than liabilities: Alaska, North Dakota, South Dakota, Wyoming, and Utah. Strong revenue collections from mining and energy production are part of the explanation, I assume.

The point of the Institute for Truth in Accounting’s work is not that North Carolina is on the verge of declaring bankruptcy. States can don’t that, for one thing. And state government takes in tens of billions of dollars in revenues every year, roughly matching the tens of billions of dollars in expenses as currently defined.

The problem is that the current definition of state government’s expenses is improper. If state government were a corporation subject to standard accounting requirements, it would be in breach of them. You see, North Carolina governments compensate their employees not only with current wages, salaries, and non-wage benefits but also the promise of future non-wage benefits. Every year we do that, we accrue a bill to be paid at a later date.

If we set aside no money to pay that bill – or use unrealistic projections of future growth in the value of our savings portfolio – then we are building a mountain of IOUs that will either have to be repudiated in the future or paid off with higher taxes. The Institute for Truth in Accounting’s report is showing us that if North Carolina chooses not to repudiate the IOUs, they will cost each taxpayer about $15,000 above currently projected taxes to pay them off.

Decades ago, when the ratio of current taxpayers to retired state employees was very large, the use of cash accounting rather than accrual accounting wasn’t such a big deal. It may have seemed reasonable to assume that future growth in taxpaying households and average incomes would generate enough revenue both to fund state government’s operating expenses and retirement benefits for its workers.

This assumption is no longer reasonable. Indeed, it is reckless. The North Carolina General Assembly has taken steps to reduce the future unfunded liability in the state health plan by changing the eligibility rules for new state employees. Now lawmakers need to start setting aside sufficient funds to pay at least some of the unfunded liability already accrued – and to strengthen the pension fund, while they are at it.

Oh, and by the way, in this one instance the “thank God for Mississippi” rule applies. It ranks 37th.

Hood is president of the John Locke Foundation and author of Our Best Foot Forward: An Investment Plan for North Carolina’s Economic Recovery.