New Study Measures Financial Transparency Among State Governments

Annual Report Finds Audit Issues With States

PDF: **Click here to download the full report**

News Release from Truth in Accounting

Chicago, Illinois, Nov. 16, 2021  -- Twenty-two states earned distinction this year for providing the public with candid and transparent information about their government’s fiscal health, according to a new study from Truth in Accounting (TIA). The watchdog organization’s Financial Transparency Score report focuses on the important-but-obscure annual financial reports on file in statehouses across the country, and measures their contents against widely accepted best practices from the private sector. This report is based on fiscal year (FY) 2020, which includes the onset of the pandemic and the most recent reports available for all 50 states.

Overall the 50 states’ transparency scores worsened compared to the previous years. Several states faced audit issues due to challenges with the CARES Act and unemployment insurance. Only 37 states’ financial reports received clean audit opinions, which is down 10 states from last year.

Other factors preventing states from receiving better scores include timeliness in reporting and the use of outdated pension information. No states published their reports within 100 days of their fiscal year end, yet most corporate financial reports are issued within 45 days of their respective fiscal year ends.

“State governments have historically struggled to provide the public with meaningful information about their financial health,” said TIA founder and CEO Sheila Weinberg. “We have seen reporting efforts hampered in the past by conflicts of interest, out-of-date information, and tardy publication. The COVID-19 pandemic further hindered state governments’ ability to be transparent.”

For example, state and local governments have long downplayed the true scale of looming retirement benefit obligations, including pensions and retiree health care, by using creative accounting methods to omit figures from their balance sheets. In fiscal year (FY) 2018, however, the most recent fiscal year, state and local governments that use Generally Accepted Accounting Principles were required to report their unfunded liabilities related to other post-employment benefits (OPEB).

TIA’s Financial Transparency Score Report measures the states on an easily understandable 0-100 scoring scale, with a perfect score of 100 signifying an ideal timely, truthful, and transparent performance. While no state earned a perfect score in this year’s analysis, TIA regards a score of 80 or above as noteworthy. The top-scoring states this year include:

• Utah - 88 points
• Maryland - 87 points
• South Dakota - 87 points
• New Hampshire - 86 points
• Maine - 86 points
• Virginia - 85 points
• Washington - 84 points
• Hawaii - 84 points
• Tennessee - 84 points
• West Virginia - 84 points
• South Carolina - 84 points
• Idaho - 83 points
• Wyoming - 83 points
• Mississippi - 82 points
• Indiana - 82 points
• Kansas - 82 points
• Pennsylvania - 82 points
• Rhode Island - 82 points
• Vermont - 82 points
• Oregon - 81 points
• Massachusetts - 80 points
• Wisconsin - 80 points

Truth in Accounting found several areas where state governments can improve the transparency of their future financial reports. Maryland is the only state that accurately reported its 2018 pension numbers; all of the other pension figures were marred by different valuation dates or outdated numbers. These factors, combined with the shortcomings mentioned above, mean that all 50 states were unable to accurately report their true financial condition. State finance officials should remedy these shortcomings in their future public reports.

The significance of these governmental actions can be illustrated with an analogy to the private sector: imagine if a large corporation directed its own audits, ignored reporting deadlines, and shortchanged promised employee retirement funds. Unfortunately, federal, state, and local governments often disregard the expected financial standards that apply to private sector entities within their jurisdictions.

State government financial reports would have to meet the following common-sense standards to earn a perfect score of 100 in TIA’s transparency methodology:

• Receive a clean opinion from an independent auditor (This criterion also applies to the annual report of the state government’s largest pension plan.)
• Include a net position not distorted by misleading and confusing deferred items
• Report all retirement liabilities on its balance sheet (statement of net position)
• Be published within 100 days of the government’s fiscal year-end
• Be easily accessible online
• Be searchable with useful links from the table of contents and bookmarks
• Be audited by an independent auditor who is not an employee of the government (This criterion also applies to the annual report of the state government’s largest pension plan.)
• Measure the net pension liability using the same date as the annual report

Last year’s Financial Transparency Score report is available here for your reference.

Truth in Accounting is a non-partisan think tank dedicated to educating and empowering citizens with understandable, reliable, and transparent government financial information. Sheila Weinberg is a Certified Public Accountant with more than 40 years of experience in the field.

PDF: **Click here to download the full report**