Five States’ Slumping Financial Conditions Reflect Widespread Pension Problems

by Dannie Mahoney, Heartland.org, April 24, 2015

Financial conditions in many states have shown improvement in the years since the recession began in 2008, but the economies of Connecticut, Hawaii, Illinois, Massachusetts, and New Jersey have continued to deteriorate.

These five states are being called “sinkholes” because they have the highest debt per taxpayer after available assets are tapped.

The ‘Sinkhole States’

In 2013, each Massachusetts taxpayer was liable for $28,000 in debt per person. In New Jersey, each taxpayer was responsible for paying $36,000 in liabilities. Each Illinois taxpayer was on the hook for $43,400, and each Connecticut taxpayer was liable for $48,100. Hawaii taxpayers were responsible for paying $27,000 per person in unfunded debt, the lowest per capita amount among the five sinkhole states.

These five states are now in this dire financial situation because they did not make sufficient contributions to their state pension and retirement health care funds when they had the funds available to do so. This debt should be of grave concern to the citizens of these states.

According to a recent Standard & Poor’s report, the U.S. economy has been improving. Although the nation is moving up and out of the past recession, it will also eventually fall into its next downturn. The past eight recessions since 1961 have occurred on average once every 6.6 years, which means the nation is due for another to occur within the next year or two.

Accounting Gimmicks

Elected officials led their states into this debt-ridden condition by using accounting gimmicks to avoid paying into state employee pension funds. Among those accounting tricks was the failure to include shortfalls in funds for promised pensions or retiree health care benefits when they “balanced” their budgets.

Another common accounting trick has been to project and rely upon a higher rate of return on investments of pension fund money than the funds realistically could have achieved.

One example of a state using an accounting gimmick to fool taxpayers can be found in Hawaii. At first glance, Hawaii seems to have burdened its taxpayers with less debt in 2013 than in 2012, but that is not what really happened.

“The decrease in Hawaii’s taxpayer burden is deceiving because most of the decrease is related to the state playing with the rate of return on the assets in its retirees’ health care plan,” Truth in Accounting Chief Executive Officer and founder Sheila Weinberg said. “The state increased the rate from 4 percent to 7 percent.”

Decades of state officials’ use of such tricks, which amount to borrowing taxpayer money, have put these five states on the verge of financial disaster. The economic future of these states will be determined by state officials as they decide how much to contribute each year to pension funds of state retirees, all while officials desperately try to keep their states out of bankruptcy.

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Dannie Mahoney (dmahoney@truthinaccounting.org) is media relations manager for Truth in Accounting.