You are on page 1of 41

Journal of Public Budgeting, Accounting & Financial Management

Using financial statements to provide evidence on the fiscal sustainability of the states
Elizabeth Plummer, Terry K. Patton,
Article information:
To cite this document:
Elizabeth Plummer, Terry K. Patton, (2015) "Using financial statements to provide evidence on the fiscal sustainability of the
states", Journal of Public Budgeting, Accounting & Financial Management, Vol. 27 Issue: 2, pp.225-264, https://doi.org/10.1108/
JPBAFM-27-02-2015-B004
Permanent link to this document:
https://doi.org/10.1108/JPBAFM-27-02-2015-B004
Downloaded on: 15 December 2017, At: 05:04 (PT)
Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT)

References: this document contains references to 0 other documents.
To copy this document: permissions@emeraldinsight.com
The fulltext of this document has been downloaded 1 times since 2015*
Access to this document was granted through an Emerald subscription provided by emerald-srm:320271 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service
information about how to choose which publication to write for and submission guidelines are available for all. Please visit
www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of
more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online
products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics
(COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.

*Related content and download information correct at time of download.

J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 27 (2), 225-264 SUMMER 2015

USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE
FISCAL SUSTAINABILITY OF THE STATES
Elizabeth Plummer and Terry K. Patton*
Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT)

ABSTRACT. This descriptive study shows how the government-wide financial
statements can be used, with adjustments, to provide evidence on a state’s
fiscal sustainability. We compute “adjusted total net assets” (AdjTNA), which
equals a state’s assets (not including its capital assets) minus the state’s
liabilities and obligations, including the UAAL for pension and OPEB not
reported on the Statement of Net Assets. AdjTNA provides information about
a state’s ability to sustain its current fiscal structure, given its current
financial resources. Primary results suggest that 40 states have a negative
AdjTNA value, with a median -$6.7 billion per state (-$5,230 per household).
Sensitivity analysis suggests 48 states have a negative AdjTNA value, with a
median -$20.7 billion per state (-$16,200 per household). The paper
discusses the important policy implications of these results.

INTRODUCTION
State governments’ spending commitments and long-term
liabilities continue to grow and outpace revenues. These trends have
led to increased concern about states’ fiscal sustainability, which is
most commonly defined as a state government’s long-run ability to
consistently meet its financial responsibilities with available
resources (Rose, 2010; Chapman, 2008). While sustainability is a
long-run concern, much of the academic and media attention focuses
on states’ current-year budgets and whether state revenues will be
--------------------------------
* Elizabeth Plummer, Ph.D., is an Associate Professor, Department of
Accounting, Texas Christian University. Her research and teaching interests
are in taxation and state and local governmental financial reporting. Terry K.
Patton, Ph.D., is the Robert Madera Distinguished Professor of Accounting,
Department of Accounting, Midwestern State University. His research and
teaching interests are in state and local governmental financial reporting.

Copyright © 2015 by PrAcademics Press

226 PLUMMER & PATTON

sufficient to meet budgeted expenditures (See Bradbury, 2010;
Cooper, 2011; Dye, 2004; Eaton & Maher, 2011; Edgerton,
Haughwout, & Rosen, 2004; Giertz & Giertz, 2004; Khimm, 2011;
McGuire & Steuerle, 2003; McNichol, Oliff, & Johnson, 2012;
Poterba, 1994; Poterba & Rueben, 2001; Rueben, Hoo, & Yilmaz,
2006; Sheffrin, 2004; Vara, 2012). Although a budget deficit or
surplus can be an important indicator of whether a state faces
immediate economic pressures, the budget focuses on a state’s
Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT)

ability to provide services and pay its obligations over the budgetary
cycle (i.e., the next year or two). It provides little information about the
government’s long-run ability to meet its financial responsibilities. In
addition, most academic and media focus is on a state’s operating
fund budget, even though this generally represents less than 50% of
state spending.
The purpose of this paper is to describe how a state’s
government-wide financial statements can be used, with
adjustments, to provide evidence on the state’s fiscal sustainability.
The end result of our analysis is a measure that we refer to as
adjusted total net assets (AdjTNA), which is calculated as a state’s
assets (not including its capital assets) minus the state’s known
liabilities and obligations. In short, AdjTNA provides a measure of the
effect on a state’s total net assets (less its capital assets) when
unfunded pension and OPEB liabilities are included as liabilities.
On a more conceptual level, AdjTNA provides an estimate of the
extent to which the state’s past and current revenues have been
sufficient to cover its past and current costs, and can therefore help
financial statement users better understand the extent to which
interperiod equity has been achieved. In Concepts Statement No. 4,
Elements of Financial Statements, the GASB describes interperiod
equity as being achieved when “the burden of the cost of [current
period] services is borne by present-year taxpayers and revenue
providers” rather than “shifted to future-year taxpayers or revenue
providers through an increase in the level of borrowing” or paid from
net resources accumulated in past periods (GASB 2007 and 2009).
A negative AdjTNA value suggests that a state has deferred payment
of past costs to future time periods. Although some of the past costs
will necessarily benefit future periods (e.g., roads, education), these
costs must ultimately be paid. If the costs deferred to future periods

USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 227

are significant, then states will likely have to finance these costs by
increasing future taxes or reducing future government services,
thereby affecting future taxpayers. If these costs are greater than the
amount by which government officials are willing to increase tax
revenues (because of political consequences), or greater than what
taxpayers are able to pay, then the government’s level of goods and
services given its available resources is not sustainable.1
Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT)

To compute AdjTNA, we begin with the state’s Statement of Net
Assets, which is similar to a corporation’s balance sheet. This
statement is prepared using accrual accounting for all of the
government’s activities and is designed to provide users with
“information about the probable medium and long-term effects of
past decisions on the government’s financial position and financial
condition” (GASB 1999, para. 219) (emphasis in the original). This
information is intended to help users assess a government’s “ability
to continue current service levels and meet all liabilities as they
become due, and…the extent to which interperiod equity is being
achieved” (GASB 1999, para. 233).
We make two modifications to a state’s Statement of Net Assets
in order to compute AdjTNA. The first modification is to subtract the
state’s net capital assets (e.g., roads and bridges) from total assets to
compute ‘Adjusted total assets.’ Although these capital assets have
service utility and are included as assets on a government’s
Statement of Net Assets, they would not be recorded on a business’
financial statements because they do not generate cash flows and
will most likely never be converted into a financial resource that can
be used to pay off the state’s liabilities (Mautz, 1981, 1988, 1989).2
The second modification we make is to add the unreported portion of
a state’s unfunded pension and other postemployment benefit
(OPEB) obligations to its reported liabilities. These amounts total
approximately $902 million for all states combined, and their
omission from the Statement of Net Assets significantly understates
states’ total liabilities.
Our results can be summarized as follows. We find that AdjTNA is
negative for 40 states. The mean and median values across all states
are -$18.2 billion and -$6.7 billion, respectively. Three states have
deficits exceeding $100 billion, and California’s deficit is the largest
at -$170.6 billion. These negative values suggest that, for many
states, the government’s past revenues have not been sufficient to

68). These deficits represent the costs that have been deferred to future households. This study makes several contributions to our understanding of the fiscal sustainability of state governments. 67 and No. one of our primary goals is to share with policymakers. In addition. The budgetary statements focus on a government’s short-term financial condition. A second contribution of our study is to show how recent changes in governmental accounting rules will likely affect states’ financial statements. It also suggests that the government’s level of goods and services is not sustainable given its current revenues. we rank states based on AdjTNA measured on a per-household basis. and 15 of those states have a deficit value that exceeds $10. and that paying off the state’s accumulated obligations will likely require the state governments to increase taxes or decrease services. and that the payment of these costs have been deferred to future periods. In a sensitivity analysis. As demographics change and taxpayers move between states. which generally represents less than 50% of state spending. which provides a limited understanding of a state’s medium- to long-term financial condition.g. liabilities calculated using a lower discount rate). assuming a state’s number of households remains constant. First. 228 PLUMMER & PATTON cover past costs. we present results based on alternate measures of pension and OPEB liabilities (e.. Much of the academic literature on the financial health of state governments focuses on a state’s budget. Results show that 35 states have a deficit value that exceeds $1. accountants. most research focuses on the state’s operating fund (or general fund). Our study can also help educate policymakers and academicians on how the accrual-basis financial statements can provide insight into a state’s longer-term fiscal sustainability. and economists what can—and cannot—be learned about a government’s financial health from its financial statements. The Governmental Accounting Standards Board (GASB) has recently issued two new accounting standards (Statement No. the per-household burden will increase for some states and decrease for others. which are intended to improve the accounting and financial reporting of public employee pensions by state and local . To provide perspective on the size of a state’s AdjTNA deficit Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) balance relative to the size of its constituency.000 per household.000 per household.

3 Our study quantifies the states’ pension liabilities in a manner more like the new requirements and adds these amounts to the liabilities reported in the state’s Statement of Net Assets. 2014 or later). our study also uses a sensitivity analysis that incorporates evidence from the economics literature to measure what the pension liabilities would be using a lower discount rate. Second. governments that participate in cost-sharing plans will be required to recognize their proportionate share of the collective net pension liability in their financial statements. for years ended June 30. Currently. Prior to the implementation of GASB Statement No. Cost- Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) sharing plans are pension plans that pool the pension obligations for all government employers that participate in the plan. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 229 governments. Reporting a net pension liability will be a particularly important issue for local governments as they are the predominant participants in cost-sharing plans. With the implementation of GASB Statement No. In addition to our primary analysis. 68. Using a lower discount rate will result in larger liabilities reported on the government’s financial statements. the new standards will require governments to report a net pension liability on their Statement of Net Assets that is equal to the difference between the total accrued pension liability and the fair value of pension plan net assets that have been set aside to pay the pension liability. Overall. such governments did not report this amount. First. Two of the changes introduced by Statement No. Statement 67 is effective for periods beginning after June 15. 2013 (that is. 68. nor was it disclosed in the notes to their financial statements or required supplementary information. governments only report a liability if the pension contributions they are actuarially required to make exceed the amount they have actually contributed. The new standards introduce several changes that will affect state and local governments’ reporting of pension obligations. while Statement 68 is effective for periods beginning after June 15. Any accumulated pension plan assets can be used to pay benefits to the retirees of any government employer. GASB’s new standards may require governments to use a lower discount rate for underfunded pension plans. 2014. 68 are especially pertinent to our study of state governments. A major change will occur for local governments that participate in cost- sharing multiple-employer defined benefit pension plans. .

Section 3 develops our AdjTNA measure. our AdjTNA measure and related analysis provides evidence on interperiod equity and fiscal sustainability. These limitations occur for several reasons. however. and then replicate this analysis for all 50 states. and offers suggestions for future research. and can therefore help inform the GASB’s ongoing efforts to improve financial statement transparency and provide better accountability. the general fund represents less than 50% of state spending (NASBO. The remainder of this study is organized as follows. Section 6 discusses some additional issues that affect the estimates of state government liabilities. while Section 5 presents sensitivity analysis of how results differ if we use alternate measures of a state’s pension and OPEB liabilities. Section 4 presents our main results. and the final section presents conclusions. We provide a detailed description of how we calculate this measure using California as our example. a state’s budget only represents revenues and expenditures for the current year. most budgetary focus is on the fund used to control the state’s primary operating budget. If the costs deferred to future periods exceed the state’s expected revenues. p. Therefore. The next section provides an overview of a state’s financial statements using California as our example. 2009. we develop a measure (AdjTNA) that provides evidence on the extent to which the payment for a government’s past and current costs has been deferred to taxpayers in future periods. 230 PLUMMER & PATTON our results therefore provide preliminary evidence on how the financial statements would be affected by the new standards. Second. the budget provides a limited understanding of the state’s fiscal condition. policy implications. In sum. then the government’s level of goods and services given its available resources is not sustainable over the long-run. OVERVIEW OF A STATE’S FINANCIAL STATEMENTS State Budgets Although most academic and media attention is on a state’s budget. using the financial information identified. which typically is the state’s general fund. This can help policymakers and scholars evaluate the extent to which a state’s current fiscal Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) policies could affect future generations. a budget surplus or deficit only tells us about the state’s ability to .4 Third. 1). On average. First.

and long-term financial health (GASB 1999. and Hildreth. or a much smaller deficit than they would otherwise have.6 The accrual-basis statements are intended to help users assess a government’s medium.. 2013). It presents not only financial assets and current liabilities. and Tu. 2012.” Total net assets generally represent the difference between a government’s cumulative revenues and costs since its inception. the GASB began requiring states to issue consolidated government-wide financial statements prepared on the accrual basis. Kioko. Government-wide Financial Statements In 2002. Johnson. states must prepare a Statement of Net Assets. 2007. Under the accrual-basis standards. Table A1). which is similar to a corporate balance sheet. This significantly affects our ability to understand a state’s overall fiscal condition by observing its budget. Poterba. . only one state (Oregon) had a general fund budget deficit in 2008 (NASBO. A negative or decreasing total net asset balance could indicate the government’s level of goods and services is unsustainable at current revenue levels. 2007. Dennis. 219 and 220). Kioko. Third. Wang. It provides little to no information about the state’s long-term financial obligations or its ability to provide services or pay its expenditures after the current budget cycle ends. 2006). or changes in budgetary measures Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) or accounting methods (e. raising taxes or cutting spending). the result is that state budgets will generally have a surplus. Table 3). but also capital assets and long-term liabilities. 1995).. 2010. 2009. These actions can be economic (e. Table A1 and 2011.5 Regardless of the action taken. paras. Prior studies have found these statements are relevant for assessing state and local governments’ credit risk and financial solvency (Plummer et al.g.g. adjusting the accounting method used to recognize revenue on a budgetary basis) (Petersen. 2003. which helps ensure that states facing a deficit will take actions to balance their budget (Hou and Smith. all states except North Dakota have some sort of balanced budget requirement for their general funds.. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 231 meet its current-year expenditures. and only 10 other states had general fund deficits in either 2009 or 2010 (NASBO. accelerating tax collections across fiscal years. The balance therefore provides evidence on the extent to which a government’s past and current revenues have been sufficient to cover its past and current costs. For example. The difference between a state’s total assets and total liabilities is referred to as “total net assets.

232 PLUMMER & PATTON Exhibit 1 presents an abbreviated version of the Statement of Net Assets for the State of California for FYE 2008. To help clarify these issues. total $102. Exhibit 1 shows that California’s total liabilities are $147.7 billion of current liabilities and $107. and equipment. after the government has paid its liabilities.8 billion. Capital assets are generally recorded on the Statement of Net Assets at their historical cost less accumulated depreciation. net of related debt. In addition. The first component is equal to the amount shown for capital assets (i.1 billion of noncurrent liabilities. net assets represent the resources available to the government to provide services. GAAP requires that the statement present two separate columns: one for a state’s governmental activities and one for its business-type activities.8 billion. Governmental activities include providing services that are normally associated with state government. buildings. capital assets represent the largest group of assets.e. However. governmental and business-type activities make up the primary governmental activities for the State of California.. roads and bridges).g. and unrestricted.7 Exhibit 1 shows that California’s total assets for FYE 2008 are $182. The most significant reported liability will generally be a state’s bonds payable. mostly federal grants. which is equal to total assets minus total liabilities. . These services are primarily supported by taxes and intergovernmental revenues. Capital assets include land. construction in progress. state highway infrastructure (roads and bridges).. California’s capital assets. minus any debt that was incurred to acquire those assets and is still outstanding. Exhibit 1 shows that California has $35 billion of TNA for FYE 2008. net of accumulated depreciation. Business-type activities include functions that normally are Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) intended to recover all or a significant portion of their costs through user fees and charges. The bottom section of the Statement of Net Assets presents total net assets (TNA). TNA is divided into three components—invested in capital assets.1 billion in bonds. those resources are not necessarily in a spendable form (e. some resources are restricted as to how they can be used. For most state governments.2 billion and represent 56% of the state’s total assets. historical cost less accumulated depreciation). Together. In theory. restricted. and California’s noncurrent liabilities include $85. with $40.

117 Total liabilities 118. is $84.841 102.473 assets Total assets 143.136 147. net of related debt.048 182.338) Total net assets 25. net of related debt.736 39. it should be noted that the resources actually used to repay the debt must come from other sources.934 25.539 20. net of related 84. The second component of TNA is .679 29.837 11.009 (66.347) 3.494 40.002 Unrestricted (69.642 107.969 Total net liabilities and net assets 143.784 LIABILITIES Current liabilities 37.815 NET ASSETS Invested in capital assets. The capital assets themselves generally will not be liquidated to repay the related debt. Although GAAP requires the state to present invested in capital assets.853 17.149 6.110 Noncurrent assets: Capital assets (net of accumulated 95.475 25.255 50 84.201 depreciation) Other noncurrent 4.784 California’s invested in capital assets.698 Noncurrent liabilities 81.736 39. Total Activities Type Activities Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) ASSETS Current Assets 43. 2008 (Amounts in Millions) Primary Government Governmental Business.048 182.305 debt Restricted 10.057 9.204 3.273 55.360 6.3 billion.912 34. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 233 EXHIBIT 1 State of California Statement of Net Assets for FYE June 30.

defined benefit plans remain the most common retirement plan for state and local government employers.. & Soto.. state govern- ments often operate employee pension plans on behalf of local governments (e. . unrestricted net assets can be a negative amount. state employees. school districts). The accounting treatment for pensions and OPEB is quite similar.g. In addition. accounts and loans receivable). legislators. which has -$66.3 billion of unrestricted net assets for FYE 2008. 92% of state and local workers with pension coverage were covered by a defined benefit plan (Munnell. cities. Public Employee Pension Plans Every state operates at least one pension plan for its employees.g. These are the unfunded liabilities with respect to pensions and OPEB (primarily healthcare). and most states offer several based on employment status (e. This is the case for California. Although defined contribution plans such as 401(k) plans dominate the private sector. Even if the balance is positive. 234 PLUMMER & PATTON restricted net assets. 2007). 2001). and Exhibit 1 shows that California has $17. Off-balance Sheet Liabilities While the Statement of Net Assets provides information on a state’s long-term liabilities. In addition. A negative unrestricted net asset balance suggests that government revenues have been insufficient and that some past costs have been shifted to future taxpayers (Wilson and Kattelus.g. teachers). The balance in unrestricted net assets represents the Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) resources available to meet ongoing obligations to citizens and creditors..0 billion of restricted net assets. In 2005. towns. The last component of TNA is unrestricted net assets. there are two significant liabilities which are—for the most part—not included on the statement. which consists of net assets that are not included in the first two components. This amount represents resources that are contractually or legally restricted as to how they can be used. a decreasing balance over time suggests that the government is using up its resources in order to provide current services. Haverstick. although these resources are not necessarily in an immediately spendable form (e. We first discuss the accounting for pensions and then discuss the accounting for OPEB.

2008: public employees. provides the Schedule of Funding Progress for five separate defined benefit pension plans for the State of California as of June 30. the burden is on the state to ensure that the retirement benefits can be paid. 2011). or the RSI contained in the pension plan’s annual report. judges (2). The required supplementary information (RSI) contained in a state’s annual report. whereas governmental accounting rules have historically required governments to use actuarial values. Exhibit 2. Accounting for defined contribution plans is straightforward. Actuarial value is based on an average of market values over the past several years. The pension fund is often independent of the state government (Freeman et al. a liability is reported on the Statement of Net Assets for the unpaid amount. Each year. The government does not guarantee the employee any specific retirement amount. and other factors. The formula generally incorporates the employee’s salary in the final years of employment. and actuarial funding methods can provide more orderly and systematic funding. the government employer generally agrees to make a series of pension contributions. Actuarial values are commonly used in the private and public sectors to help determine an employer’s annual contribution for funding purposes.8 . legislators. However. The employee’s retirement benefits depend solely on the fund’s investment performance. If for some reason the state does not contribute the required amount. The first column shows the actuarial value of assets for the pension plan.. usually expressed as a percentage of the employee’s salary. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 235 In a government defined contribution plan. the state Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) reports an expense for the amount that it is obligated to contribute to the pension fund. and teachers. These funding schedules are prepared in accordance with governmental accounting standards (GASB 25 and 27). Defined benefit plans generally pay the retired employee a lifetime annuity that is based on a pre-established formula. generally the past three to five years. corporate accounting rules require private businesses to report their pension plan’s solvency using current market values. Defined benefit plans are significantly more complex in terms of funding and accounting. Because retirement benefits are predetermined. will include a Schedule of Funding Progress that provides information on a pension fund’s level of funding. This is because market values can be volatile. Panel A. the number of years of employment.

0% 48.588) 0.291 (1. 2008.607 (3.291) 0.734 (22.215 177.800 (13. EXHIBIT 2 State of California.4% Total OPEB $ 51 $ 63. 64). Governmental accounting rules require that governments discount pension Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) obligations using the expected return on pension assets. 2008 (Dollar Amounts in Millions) Panel A: Pension Benefits Actuarial Actuarial Unfunded value of accrued actuarial assets liability accrued Funded (AAL) liability Ratio (UAAL) Pension: (a) (b) (a) – (b) a/b Public Employees’ $122. Panel A. .864 $322. California uses rates of 7%-8% to discount the pension obligations in Exhibit 2.319 $(44.749) 0. Schedule of Funding Progress (pp. These amounts represent the pension benefits earned by current employees and retirees for work performed through June 30.220 (48.260) Source: Information for this exhibit is obtained from the State of California’s 2009 CAFR.3 Total Pension $ 277.220) Trial Courts -0.9 State Teachers’ Retirement Defined Benefit Program 155.3 Legislators’ Retirement Fund 142 103 39 137. $ $ 0. 1. 154-156).519) 87.455) Panel B: Other Post-Employment Benefits (OPEB) OPEB (a) (b) (a) – (b) a/b State of California -0.355) 86.153 $140.5 Judges’ Retirement Fund II 335 367 (32) 91.508 $(18. and the Public Employees’ Retirement Fund 2009 CAFR (p.0% University of California Retiree Health Plan 51 13.311 $ (63. The liability values are equal to the forecasted pension payments that have been earned—including expectations of future salary increases and employee tenure and life expectancy—discounted back to the valuation date. Pension and OPEB Information as of June 30. shows the actuarial accrued liability (AAL) for each plan.9% Retirement Fund Judges’ Retirement Fund 19 3. 236 PLUMMER & PATTON The second column of Exhibit 2.

or almost 30%. Note that the UAAL for OPEB exceeds the $44. The most significant benefits are for health care. and nursing-home care. only $2.5 billion for pensions. This amount has been recorded Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) as a liability because the state has not made all its required annual contributions in previous years. and the University of California System). which is the difference between the pension plan’s actuarial asset and liability values. This means that states must provide a Schedule of Funding Progress that shows the actuarial value of assets set aside for OPEB obligations. but may also include life insurance. If it was recorded on the Statement of Net Assets (Exhibit 1). whereas the state has not done this for OPEB obligations. This is because California has been accumulating assets to pay future pension obligations. GASB began requiring states to account for OPEB costs in a manner similar to that for pensions (GASB 45). these benefits are referred to as other postemployment benefits (OPEB). disability insurance. Of that total. as well as the AAL and UAAL related to OPEB. Panel B of Exhibit 2 provides the Schedule of Funding Progress for California’s OPEB obligations as of June 30. California presents information for three OPEB plans (general government. Beginning with 2007. governments generally did not report an OPEB liability in their financial statements.5 billion.3 billion. Prior to the GASB’s change in accounting standards. For OPEB benefits. Panel B shows a cumulative UAAL of $63. the state’s total liabilities would increase from $147.1 billion is included as a liability on California’s Statement of Net Assets.8 billion to $190. The remaining $42. even though pension obligations are more than five times as large as OPEB obligations ($322. Some states have increased OPEB . The UAAL represents the present value of benefits earned to date that are not covered by current plan assets.2 billion. Panel A shows that four of the five pension plans are underfunded and that the UAAL for all pension plans combined is $44. trial courts. The columns in the OPEB schedule are analogous to those of the pension funds in Panel A. Other Post-Employment Benefits (OPEB) States generally offer retired employees benefits other than pensions. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 237 The third column of Exhibit 2 provides the Unfunded Actuarial Accrued Liability (UAAL).4 billion of the total UAAL amount is not included anywhere on the face of the state’s financial statements. Collectively.3 billion versus $63. 2008.3 billion).

1981. 1989. The first modification we make is to subtract the state’s net capital assets from total assets to arrive at “Adjusted total assets. Capital assets owned by a state government generally would not meet the definition of an asset if they were owned by a private-sector business and would not be recorded as an asset on a private-sector business’ financial statements because they do not generate cash flows (Mautz. This recorded liability reflects Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) the required funding contribution that the state did not make in prior years. only a small portion of the state’s OPEB liability is reported on the face of a state’s financial statements. 2001). they have “present service capacity that the government presently controls” (GASB. likely because the required financial disclosures have forced governments to quantify and disclose the magnitude of their unfunded OPEB.3 billion of the $63.3 billion is included as a liability on the Statement of Net Assets.” The second modification we make is to add the unrecorded UAAL for pensions and OPEB to the state’s liabilities reported on the Statement of Net Assets to arrive at “Adjusted total liabilities. Including the remaining $61 billion would increase total liabilities from $147. 2007). 56% of California’s total asset value is composed of capital assets such as roads and bridges.8 billion to $208. In particular. as discussed above. We subtract a state’s net capital assets from its total assets to arrive at “Adjusted total assets” because the focus of this paper is on fiscal sustainability. buildings. Although state governments will be able to provide service with their capital assets. 238 PLUMMER & PATTON funding in recent years. For California. and equipment. These items are included as assets on a government’s Statement of Net Assets because they meet the meet the definition of “assets” in the GASB’s conceptual framework. we modify the Statement of Net Assets to compute AdjTNA for California as an example. 1988.” We make the first modification because. Similar to pension plans. construction in progress. MEASURING AdjTNA FOR CALIFORNIA In this section. only $2. Business assets are .8 billion—about 41%. FASB. these assets generally do not directly produce positive cash flows to a government that can be used to pay a government’s bills or to repay debt. and then apply these same adjustments to all states in the next section.

This measure removes the state’s $102. total liabilities. and total net assets as reported on California’s Statement of Net Assets. Therefore. This suggests that these properties have negative future net cash flows and thus negative values. In contrast. Adding the pension and OPEB obligations increases the state’s liabilities from $147. AdjTNA provides a measure of the resources that the government can use for its activities. Column 6 shows that California’s adjusted total assets are $80. which are not assets in the traditional revenue-generating sense and cannot be used to help finance a state’s activities. In column 7.2 billion provides a more complete measure of the state’s liabilities. most of a government’s capital assets will require additional resources to Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) maintain the assets in a usable condition.6 billion. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 239 expected to generate positive future cash flows. and inventories overstates the assets that are available to help finance a state’s activities. if anything. receivables.963 million. The next two columns present the UAAL amounts for pension and OPEB that are not included in column 2’s total liabilities. The last column of Exhibit 3 shows that California’s AdjTNA is a negative $170. Exhibit 3 details our calculations for the state of California.6 billion.2 billion—an increase of almost 70%.2 billion of capital assets. A negative value suggests that California’s revenues have not been sufficient to finance the state’s costs of goods. capital .392 million and $60. most often by producing goods and services which are then sold to customers and converted to cash. net capital assets are subtracted from total assets to compute adjusted total assets.9 Businesses can also sell their assets and directly convert them to cash. The next two columns present adjusted total assets and adjusted total liabilities. government assets are generally used to provide services. Our last step is to subtract adjusted total liabilities from adjusted total assets to arrive at AdjTNA. Mautz (1981 and 1988) argues that. Including these assets on the Statement of Net Assets along with cash. respectively) are added to the state’s recorded liabilities. the unrecorded pension and OPEB obligations ($42. after considering the government’s known liabilities and obligations.8 billion to $251. and will most likely never be converted into a financial resource that can be used to pay off a liability or purchase another asset. This $251. The first three columns present total assets.

Also see Exhibit 1. However. 240 PLUMMER & PATTON EXHIBIT 3 State of California. See discussion in Section 2 of the paper. governments have the power to tax.583 251.e. California’s AdjTNA measure therefore provides information about the state’s ability to sustain its current fiscal structure. ..587) Notes: 1 Columns (1) and (2) represent amounts for governmental activities and business-type activities combined (i. and are obtained from the Statement of Net Assets for FYE 2008. minus $102. This taxing ability is not reported as an asset in a government’s financial statements. if the AdjTNA deficit value is greater than the amount by which government officials are willing to increase tax revenues (because of political consequences). Assets Liabilities Total Net Assets rded recorded (excludes (includes Assets UAAL) UAAL) net off. Unlike businesses. although it is a likely source of funding for California’s deficit value. assets.784 147.815 34. and that the payment of these costs has been deferred to future periods. given its current financial resources.201 million of net capital assets reported on the Statement of Net Assets. 2 These amounts represent the UAAL for pension and OPEB that are not included in the Statement of Net Assets liabilities for FYE 2008. 3 Adjusted Total Assets is equal to Total Assets from column (1).969 42. however. then the state will have to pursue other options—primarily reducing future government services or reducing costs by increasing efficiencies. or greater than taxpayers’ ability to pay. the primary government). Computation of Adjusted Total Net Assets (AdjTNA) for FYE 2008 (Dollar Amounts in Millions) Statement of Net Assets1 Off-sheet Computation of Adjusted Total Net liabilities2 Assets Adjusted Adjusted Total Total Total Pension OPEB Total Total Adjusted Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) Assets Liabilities Net (unreco (un. must be considered within the context of governments. and services.balance (6)-(7) capital sheet assets)3 liabilities) (2)+(4)+(5) (1) (2) (3) (4) (5) (6) (7) (8) 182.963 80.392 60.170 (170. This measure.

1 billion and $7. For 20 states. depending on the state. even before considering the off-balance sheet pension and OPEB liabilities. Florida and Alaska rank second and third. and Connecticut (-$2. In addition. information from the state’s CAFR was sufficient to determine the UAAL amounts for the state’s pension and OPEB plans.1 billion and $57. There is wide variation across the states.1 billion for pension benefits and $2. We collect financial information from the state CAFRs for FYE 2008. as well as for determining how the liabilities should be apportioned between the Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) state and its local governments.10 The first three columns of Table 1 report total assets. These deficit values suggest that the fiscal sustainability of these states is relatively weak. however.8 billion. total liabilities. This required referring to between one to seven different pension and OPEB plan statements. the state CAFR’s were not sufficient for determining the UAAL amounts. For the other 30 states.7 billion).6 billion.9 billion). we obtained the UAAL amounts from financial statements and reports issued by the applicable pension and OPEB plans. New Jersey (-$12. Appendix A provides a detailed discussion of how we arrive at these numbers. the pension and/or OPEB statements did not provide sufficient information for determining the division of liabilities between the state and its local governments.8 billion). respectively. For these states.7 billion for OPEB benefits. respectively. California has the largest unrecorded pension liability ($42. for nine of the 30 states. Four states have a negative total net asset value: Illinois (-$19. The next two columns of Table 1 provide the UAAL amounts for each state’s pension and OPEB plans that are not included in total liabilities in column 2. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 241 MEASURING AdjTNA FOR ALL 50 STATES We next compute AdjTNA for all 50 states.7 billion.6 billion). with Texas having by far the largest total net asset value ($142. so we contacted state personnel who helped determine the appropriate division. and total net assets as reported on each state’s Statement of Net Assets.11 Table 1 shows that the median unrecorded (actuarial) liability is $4. and the median total net asset value is $14.2 billion). with total net asset values of $59. Massachusetts (-$4.4 billion) and the largest unrecorded OPEB . as well as the pension and OPEB plan CAFR’s for FYE 2008. The median value of assets and liabilities reported on the government-wide statements are $28.

Column 6 of Table 1 presents adjusted total assets. . capital assets represent a little over half of a state’s total asset value as reported on the Statement of Net Assets. This overstatement can be significant because.7 billion. Table 1 shows that 40 states have a negative value for AdjTNA. Table 2 provides descriptive statistics for the information presented in Table 1. Whereas the median value for total liabilities was $7. as well as the discount rates used by the pension and OPEB plans. On average. including unrecorded pension and OPEB liabilities more than doubles the measure of a state’s liabilities.5 billion. As discussed above. New Jersey. less than half the median value for reported total assets ($28. New York. Three of those states have unrecorded OPEB amounts that exceed $50 billion (California. and suggest that states may have more constraints on future spending than suggested by a less detailed analysis of their financial statements. The mean and median values are -$18. respectively. including capital assets in a government’s total asset value overstates the resources that are available to fund the state’s activities. on average. Three other states have unrecorded pension liabilities that exceed $20 billion (Illinois.0 billion).8 billion (column 2). Column 7 of Table 1 presents “Adjusted Total Liabilities. they will have to be paid. or decrease costs by increasing efficiencies. which is Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) equal to a state’s total assets minus its net capital assets.” which is equal to a state’s total liabilities plus the unrecorded pension and OPEB amounts.12 The median value for adjusted total assets is $11.1 billion). While only 4 states had a negative TNA value reported on the Statement of Net Assets. and Massachusetts).13 The last column of Table 1 presents the values for AdjTNA.2 billion and -$6. 242 PLUMMER & PATTON liability ($61. while seven other states have unrecorded OPEB liabilities that exceed $20 billion. These deficit values represent costs that have been deferred to future periods. the median value for adjusted total liabilities is $17. This will likely require state governments to increase taxes or other revenues. decrease future services.6 billion. and New Jersey). Although these amounts will not have to be paid immediately.

693 14.712 547 76 7.435 20.131 18.786 11.290 4.600 1.734 5.244 10.370 24.553 28.106 (14.973 (5.868 503 27.982 (20.383 (1.393 10.179 69.963 80.922) Montana 8.742 1.133 20.356) New Mexico 25.170 (170.750) Missouri 37.037 14.(2)+(4)+ (6)-(7) Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) ded) ded) des net (5) capital assets) States (1) (2) (3) (4) (5) (6) (7) (8) Alabama 27.664) Louisiana 34.747 (29.735 56.942 24.676 1.986 13.401 5.938 12.949) .312 57.557 5.343 2.271) North Dakota 10.316 5.881 14.426 5.661 713 13.476 46.344 (3.722 12.433 5.642 17.045) Kentucky 28.551 34.297 569 12.263 31.017 (19.908) Georgia 39.831 (7.800 2.589 15.229 15.265 (6.253 13.511 14.378 1.279 121.675 52.256 697 11.352 81.120 17.610) New Jersey 36.570 6.237 9.929 427 13.176 (4.260 2.239 Illinois 36.091 9.023 2.215 (26.235 (7.092 4.440 (29.736 17.451 2.727 (10.395 2.573 (2.854 755 0 4.886) 35.718 17.488) Minnesota 24.966 9.485 15.615 2.299 (54.420) Arkansas 19.820 7.978 44.977 2.990 787 120 5.815 34.156 6.533) Massa- chusetts 39.614 19.965 527 7.194 14.730 (103.377 18.311 15.921 18.601 39.299 43.984 16. (exclu.956 13.918) 53.784 8.459 591 4.784 147.368 (114.944) Michigan 31.547 7.257 (23.799) 2.841 5. Net (UAAL (UAAL Total Liabili.188 10.981 17.710 12 5.257 1.732 16.247 Arizona 32.322) Delaware 9.395) Hawaii 16.768 2.486 22.443 19.501 2.563 47.350 2.191 11.745 21.282 1.794) Iowa 17.352 2.188 29.318) New Hampshire 4.946 16.045 6.296 (62. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 243 TABLE 1 Computation of Adjusted Total Net Assets (AdjTNA) for all 50 states FYE 2008 (amounts in millions) Adjus.660 7.238) Mississippi 19.353 8.908 1.011 2.508 (3.266 11.744 12.621) North Carolina 50.078) Oklahoma 19.957 (12.156 18.476 Nevada 12.113 4.081 New York 130.220 3. Net ties Assets not not Assets ties Assets recor.256 7. recor.916 42.256 11.403 57.596 1.674 21.059 15.869) California 182.719) 29.218 53.806 8.188 37.234 3.264 5.060 6.646 14.345 2.340 23.429) Alaska 64.377 6.368 14.939 1.746 10.609 7.561 3.969 42.417) Maine 6.977 63.291 6.944 (81.896 4.743 8.019 2.773) Idaho 11.673 2.045 43.828 404 7.012 131.449 (27.556 9.991 5.583 251.818 Ohio 70.784 57.469 7.556 1.276 300 4.525 8.903 5.958 6.392 60.203) 13.323 124.816 3.543 (4.238 48.032) Connecticut 22.475 16.413 8.874 8.872 18.832 1.065 9.026 7.566 4.020 14.692 (3.130 17.027 19.044 9.499 3.202 2.380 (23.438 9.190 12.628 2.937 47.273 59.321 (3.629 (8.540 (5.211 11.546 6.364) Maryland 36.372 15.215 23.613 3.805 29.571 11.565) 21.913 (1.170 (193) Kansas 16.451) Indiana 24.892 35.587) Colorado 30.621 (19.130 (1.484 57.433 (2.977 8.219 Nebraska 12.790 7.299) Florida 116.Adjusted Adjusted Total Total Total Pension OPEB ted Total Total Assets Liabili.282 10.290 82.472 46.570 9.659 13.333 20.

305 $ 210.061 9. 244 PLUMMER & PATTON TABLE 1 (Continued) Adjusted Adjusted Adjusted Total Total Total Pension OPEB Total Total Total Assets Liabili.002 Total net assets 18.531 (6.603 11. recor.650 11.120 1.958) South Dakota 5.386 772 1.717 (13.626 13.316 4.130 9.672) # negative 4 2 40 TABLE 2 Descriptive Statistics for all 50 states. Net ties Assets not not (exclu. Max Min Total assets $37.860 4.003 Vermont 2.726 15. Net (UAAL (UAAL Assets Liabili.187 18.581 37.120 Adjusted total net assets (18.34 8.638) Wyoming 17.104 11.198 (2.711 (18.763 18.562 55 63 2.672) 34.824 13.081 $41.723 23.963 0 Adjusted total assets (ex- cludes net capital assets) 18.00 .745 8.812 3.247 (170.025 2.210 2.308 (18.965 27.918) OPEB 10.187 2.135 6.632 17.957 14.083 60.927 (9. FYE 2008 (Dollar Amounts in Millions) Mean Median St.288 8.590 14.723 4.190 1.392 (10.722 3.224 41.231 9.444 177 17.14 4.144 142.531 46.098) Wisconsin 31.501) West Virginia 16.864 8.261 18.280 125.494 11.160 21.170 1.801 $2.552 4.806 26.619 (585) Pennsylva- nia 54.267 35.781 7.308 17.961 1.des net (2)+(4)+ (6)-(7) ded) ded) capital (5) assets) States (1) (2) (3) (4) (5) (6) (7) (8) Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) Oregon 30.00 0.204) (6.827 15.521 (9.572 3.002 4.650 15.433 1. Dev.51 8.307 Tennessee 31.116 9.632 22.204) median 28.061 251.255 18.587) Discount rates: Pension plans 7.564 1.620 952 4.433 128.748) Virginia 32.785 (18.423 243 1.50 7.284 59.160 733 19.135 14.806 14.877 28.335 9.815 1.637 8. ties Assets recor.00 OPEB plans 5.225 (20.104 36.765) Utah 21.767 147.156 17.208 26.666 5.824 (19.774) Rhode Island 4.427 1.836 3.395 19.547 7.778 (7.624 8.072 12.97 8.937 52.401 7.395 $28.830 16.261 7.101 3.613 1.081 7.141) South Carolina 31.958 (1.622 25.525 1.210 Adjusted total liabilities 36.312 1.787 253 1.801 12.294 8.169 4.752) Washington 70.344 46.886) Unrecorded UAAL: Pension 6.860 10.611 420 9.173 mean 37.806 6.801 67.859 19.50 1.50 3.876 125.035 19.424 17.253 Texas 210.972 49.008 14.613 Total liabilities 19.071 33.290 20.977 142.130 2.861 1.527 1.124 42.

500) # negative 40 New York (10.088) Montana 2.967) Oklahoma (2. This suggests that the costs deferred to future periods are significant in relation to a state’s current annual tax revenues.990 South Carolina (11.569) Indiana (672) North Carolina (7.813) Alaska 129.936) Wisconsin (3.813) Ohio (4. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 245 To provide perspective on the deficit balance’s size relative to the size of a state’s constituency.076) Minnesota (1.14 Alaska is clearly the strongest state.717) Median (5.762) Nebraska 3.649) . These deficits represent the Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) costs that have been deferred to future households.190) South Dakota 3.990 per household.000 per household.366) New Tennessee 498 New Jersey (30. As population shifts occur across states.623 California (11.847) Hampshire (6.229) Alabama (11.010) Virginia (4.373) Missouri (2. On average.000.311) Arkansas (1. Table 3 presents states ranked (in reverse order) on AdjTNA measured on a per-household basis.951 West Virginia (12. This analysis can be provided by the authors upon request.839 Rhode Island (15.954 Illinois (19.264) Maryland (11.314 Delaware (16. 35 states have a deficit value that exceeds $1. However.167) Colorado (1.033) Mean (3.974) Iowa (154) Washington (6. TABLE 3 States Ranked by Adjusted Total Net Assets (AdjTNA) per Household (Amounts In Dollars) Connecticut (36. the AdjTNA values in Table 1 are about 140% of a state’s total annual tax revenues.696) Idaho 3.379) Louisiana (11.237) Utah 1. and 15 states have a deficit value that exceeds $10. assuming a state’s number of households remains constant. with a value of $129.320 Massachusetts (22.701) Kansas (6.494) Wyoming 38. We also compare a state’s AdjTNA measure with its state tax revenues for FYE 2008.000) Maine (9.460) Texas (298) Mississippi (6.812 Kentucky (16.543) Vermont (6.191) New Mexico 1.939) Florida (500) Georgia (7.849) Oregon (381) Nevada (7. The state has a significant AdjTNA amount spread across a relatively small number of households.381) Michigan (5.747) Pennsylvania (3.655) Arizona (2.022 Hawaii (25.948) North Dakota 9. the per-household burden will also change.

Given that state pension benefits are protected by constitutional and legal provisions and are likely to be paid (Brown & Wilcox. market values will usually be less than actuarial values. and the UAAL will cause the plan’s funding status to appear better than it is. which require U.17 When we use the NMR liability . Governmental accounting rules require that pension liabilities be discounted using the expected long-term Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) rate of return on plan assets. NMR provide estimates of the unfunded pension liability as of June 2009 for each state using a zero-coupon Treasury yield to discount pension liabilities and using current market value of pension plan assets. 246 PLUMMER & PATTON SENSITIVITY ANALYSIS Critics argue that the UAAL measure significantly understates a government’s unfunded pension obligations and attribute this understatement to two reasons (Novy-Marx and Rauh. To examine how sensitive our measure is to these criticisms. and the UAAL will cause the plan’s funding status to appear worse than it is. Actuarial value is based on an average of the past three to five years of market values.16 In periods of extended market gains. market values will usually be greater than actuarial values. and most state pension plans use a rate of about 8% (Public Fund Survey. Conventional finance theory. critics argue that the appropriate discount rate should approximate a risk-free rate. 2011). 2009). however. which is the level of certainty that a state will make these payments. in periods of extended market decline—as experienced more recently. 2009. However.15 The second reason put forth for the understatement of pension obligations is that governmental accounting rules require that a plan’s assets be measured using their actuarial value rather than market value. Critics argue that actuarial values are irrelevant for measuring a plan’s funding status. 2011). suggests that pension liabilities should be discounted at a rate that reflects their risk. Biggs. 2011b). we repeat our analysis using data from Novy-Marx and Rauh (2011a) [hereafter NMR] to estimate the unfunded pension and OPEB liabilities for each state. 2011a. The first reason is that pension liabilities are discounted using a rate that is too high. 2008. This would be consistent with corporate accounting rules.S. corporations to use a plan’s current market value to report the unfunded pension liability (ASC 715). and that current market value should be used to measure a plan’s ability to pay benefits (Wozniak & Austin.

Brown and Wilcox. and Illinois have deficit values that exceed $40. state legislatures are enacting significant revisions to their pension plans (Snell. If states are liable for these amounts. AdjTNA is negative for 48 states.000. The mean and median values are -$52. or school district default. although New York’s deficit now ranks second and New Jersey’s ranks fourth. county. Texas and Florida have the largest increase in their deficits.238. and increase Florida’s deficit value from -$3. 2009).8 billion to -$150.5 billion. or there could be legal actions which resulted in states paying at least a portion of the liabilities.000 per household.2 billion and -$20. and states’ fiscal sustainability is even more uncertain. and 22 states have a deficit value that exceeds $20. Accordingly. Morrison and Foerster LLP. Thirty-seven states have a deficit value that exceeds $10. All four states have deficits exceeding $200 billion.000 per household. All states have legal protections for their pensions that limit the state’s ability to modify the vested benefits that have already accrued to existing workers and retirees (Moore. The NMR adjustments increase Texas’ deficit value from -$2. 2000. The four states with the largest deficits are the same as in Table 1.6 billion from state-sponsored pension and OPEB plans that we determine are not a primary legal obligation of the state (see Appendix A). a state may step in to fund the liabilities rather than see a city. The authors can provide this analysis upon request. compared with the deficit values in Table 1.18 In an attempt to reduce liabilities. it is not entirely clear whether the state would ultimately be responsible for these unfunded liabilities if a local government could not pay them. which is about 3 times larger than the average deficit values in Table 1. and California’s deficit remains the Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) largest at -$395. Connecticut. As a practical measure. ADDITIONAL ISSUES AFFECTING ESTIMATES OF STATES’ LIABILITIES When computing AdjTNA.7 billion. many pension changes only affect employees hired after the legislation’s effective date and . USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 247 measures rather than the UAAL amounts in Table 1.835 and $16. the mean and median deficit AdjTNA values are $16. Only Alaska and Wyoming have positive values. On a per household basis. However. we remove $167.4 billion. then AdjTNA deficit values are actually larger (more negative) than shown in Table 1. respectively.2 billion. New Jersey. 2007. 2011). in dollar terms.9 billion to -$95.

if pension reforms modify benefits to existing workers and retirees for work already performed. . Although these changes have been met with legal challenges. We provide estimates of the magnitude of these deferred costs for each state. the courts dismissed the lawsuits. they must eventually be paid.200 per household. giving rise to increased concerns regarding whether the level of governments’ goods and services are sustainable. Several other states are pursuing Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) similar reforms (Tyer. We use states’ accrual-basis financial statements. Although retirees in both states challenged these changes as unconstitutional. both Minnesota and Colorado reduced the cost-of-living adjustment that pensioners in their respective states automatically received. If states can successfully reduce their pension or OPEB liabilities. Sensitivity analysis using adjustments to UAAL pension and OPEB liabilities reported by the states suggests that 48 states have deferred a median cost of $20. States have more leeway to modify OPEB benefits because they do not generally have the same level of protection as pension benefits (U.7 billion per state or $5. However. 2011).S. Government Accountability Office. these challenges are less likely to be successful. then a state’s level of goods and services is not sustainable. their UAAL amounts would be reduced. and thus decreased their UAAL amounts. then the UAAL amounts will decrease. Our primary results suggest that 40 states have deferred payment for past costs to future periods. These deficit values are also significant when compared with states’ current annual tax revenues. 2008). with the median deferred cost being $6. and expectations regarding their fiscal sustainability could be improved.7 billion per state or $16. If these deferred costs are greater than what future taxpayers are willing or able to pay.230 per household. Although some of these past costs will necessarily provide benefits in future periods.19 CONCLUSIONS AND POLICY IMPLICATIONS State spending and long-term liabilities continue to grow and outpace revenues. 248 PLUMMER & PATTON do not affect the UAAL amounts shown in Appendix A. For example. with adjustments. State legislatures are also modifying their OPEB plans. to measure the extent to which states have deferred payment of past costs to future periods.

assuming states have additional debt capacity. and provide a template for computing and applying them. Our AdjTNA therefore provides information about Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) a state’s ability to sustain its current fiscal structure. given its current financial resources. 40 states have a negative AdjTNA.20 Our study suggests that certain adjustments to a state’s financial statements are required to provide a more complete assessment of a government’s fiscal sustainability and economic condition. especially with respect to the project’s third phase which focuses on a government’s fiscal sustainability. a significant portion of these prior costs is due to pension and OPEB obligations. Our AdjTNA results provide a significantly different picture of states’ fiscal sustainability. GASB is still developing a definition of “fiscal sustainability. . to rely on a government’s future revenue sources. However.” but project documents state that this term commonly includes the government’s ability to continue services and existing programs. which supports informed long-term decision making. which is intended to represent the resources available to the government to provide services. to meet financial commitments now and in the future. States currently report TNA on their Statement of Net Assets. However. which has different economic consequences than issuing debt to finance construction of assets that may yield future benefits. then governments will likely have to decrease future government services. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 249 Our AdjTNA measure has several important policy implications. While only four states have negative TNA values for FYE 2008. States may also choose to issue new debt to fund these prior costs. One way of funding these deficit values is through state tax revenues. Our evidence suggests that pension and OPEB obligations represent almost half of a state’s total liabilities (Table 1). and to maintain reasonable debt levels (GASB. to maintain the stability and predictability of future tax burdens. and when capital assets are removed from a state’s available resources. Our AdjTNA measure provides an estimate of a state’s available resources when unfunded pension and OPEB liabilities are included as liabilities. Our study can also help inform discussions on the GASB’s “Economic Condition Reporting” project. discuss their rationale. This means that a state would be issuing debt to finance the expenses of its retired employees. after the government has paid its liabilities. We outline these adjustments. if a state’s ability to increase tax revenues is constrained because of political or economic reasons. 2014).

such as a state’s size. Expanding the analysis to multiple years would also allow researchers to identify how states respond to revenue needs (e. Last. Future studies could also expand their analysis to include multiple year’s data. 250 PLUMMER & PATTON These types of adjustments are worth considering as the GASB discusses economic condition reporting. Our paper also suggests several opportunities for future research.g.. income level. our results not only provide policymakers with preliminary evidence on how the two new accounting standards for pensions will affect states’ financial statements. The GASB is currently considering whether similar changes should be made to the OPEB Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) standards so that governments would begin to report a significant long-term liability related to their OPEB obligations. It would also be useful for future research to examine how these factors are associated with a state’s current and future tax revenues. However. Our analysis provides economically meaningful estimates of states’ costs deferred to future time periods. and unemployment rate. decrease services). Our paper makes several contributions to our understanding of the fiscal sustainability of state governments. but also how similar standards for OPEB would affect states’ financial statements. thereby providing an analysis of both cross-sectional and time-series variation. These estimates can help policymakers and scholars better understand the fiscal sustainability concerns currently facing state governments. The GASB plans to propose the revised OPEB accounting standards in spring 2014. increase taxes. It would be useful for future studies to identify economic and demographic factors that are associated with AdjTNA. issue bonds. Identifying such factors could provide insight into those economic and demographic influences that are related to a state’s current and future deficits or surpluses. This could help provide a measure of what future state taxpayers are able to pay. perhaps the most important contribution is to show how accountants and accrual basis accounting for state governments can inform economic and tax policy debates. which in turn could lead to more informed decisions with respect to states’ spending and tax policies. population growth.21 .

4. 2. 27 (the current pension standard). 2009). Our results also provide evidence on how states’ financial statements would be affected by Moody’s proposed adjustments for evaluating state credit risk. Because state budgets are not governed by GAAP. The reason that they report a net pension asset is because they have funded more on an annual basis than their actuarially determined annual required contribution. An exception would be roads and bridges for which tolls are assessed. Recent statistics indicate that six states have over $400 million in annual state and local toll road receipts (not including bridges). using a lower discount rate for liabilities. some state and local governments report a net pension asset in their financial statements although they have a large unfunded actuarial accrued liability. Pennsylvania. and Illinois each have between $400-$500 million (Perez and Lockwood. In 2011. many would argue that it is appropriate for governments to finance capital assets by issuing long-term debt.e. The GASB’s concern is that financial statement users understand the implications of a government’s fiscal decisions for future periods. The annual required contribution is determined by adding the normal cost (or actuarial present value of benefits allocated to the current year) to an amortized portion of the unfunded actuarial accrued liability. Florida and New Jersey each have between $800-$900 million in toll road receipts. Moody’s (2012) is now considering four adjustments to state and local pension information. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 251 NOTES 1. allocating multiple-employer cost-sharing plan liabilities to specific government employers based on proportionate shares). and Texas. states have flexibility in how they measure revenues and expenditures for . New York. The GASB notes that whether interperiod equity is (or is not) achieved is a policy decision of the government.. 5. For example. 3. Moody’s began directly including pension liabilities in its state credit analysis. Three of these are similar to ones made in this paper (i. Under GASB Statement No. 2006). using market values instead of smoothed asset values. Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) and that users can therefore appropriately assess the degree to which interperiod equity has been achieved (GASB.

144). so the information was collected from the 2009 CAFR. 2011a) is that we apportion the liabilities between the state and local governments according to which government is legally responsible for funding the pension or OPEB plan. 2008). Novy-Marx and Rauh. If state governments wish to have an unqualified opinion Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) on their financial statements. 2010. for example. Using fair values will make the net pension liability reported in a government’s financial statements more volatile. When pension plans and governments implement GASB Statement No. 6. An important distinction between our study and other studies that have examined unfunded pension and OPEB obligations (Pew Center. The Statement of Net Assets also presents a separate column for assets and liabilities of a state’s component units. In the private sector. 7. New York (March). they will follow GASB pronouncements including issuing government-wide financial statements. 11. All states have a June 30 year end except for Alabama and Michigan (September). Instead. pension plan assets will generally be reported at fair value at the end of the pension plan’s reporting period. 67 and No. but for which the state has responsibility for financial reporting. long-lived assets are written off to the extent that the asset’s net book value exceeds the sum of the undiscounted cash flows expected to result from the asset’s use and disposition (FASB Statement No. 252 PLUMMER & PATTON budgetary purposes. 2011). 8. In some cases. and Texas (August). 68 (GASB 2012a and 2012b). has a history of adjusting the accounting method used for recognizing revenue in order to help balance the state’s current-year budget (Sisney. 10. California. but they do so voluntarily for numerous reasons (Baber and Gore. The last line of Appendix A’s table shows . they will no longer be able to use a multi-year average of market values for plan assets. No states are actually required to follow GASB pronouncements. Component units are separate legal entities from the state. the pension and OPEB valuations for FYE 2008 were reported in the 2009 CAFR. we exclude them from our analysis. 9. Because they are not part of a state’s primary government activities.

For 34 states. 15. Liabilities more than double for 27 states. or the rate of return on high quality fixed income securities (ASC 715-30). and 3% (Wyoming). 2005). Consistent with the Internal Revenue Service’s methodology. capital assets represent 23% (North Dakota). the mean and median increase in liabilities is 114% and 109%.8% in 2009 (Ehrhardt and Morgan. A survey of 100 U. These rates are intended to capture the risk of the pension liabilities.01 trillion for unfunded state and local government pension and OPEB liabilities for this same time period.S. Alabama has the largest percentage increase in liabilities (568%. respectively. public companies with the largest defined benefit pension plan assets shows the median discount rate was 6. and requires liabilities be discounted using market rates currently applicable for setting benefit obligations. and for Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) an additional 13 states. we estimate the number of households for each state using the number of 2008 federal individual income tax returns filed in each state (Internal Revenue Service. This compares with the Pew Center’s (2010) estimate of $1. capital assets represent more than half of total asset value as measured on the Statement of Net Assets.07 trillion. FASB oversees reporting for corporate pension plans. 2011).3 billion to $29 billion). State and local bankruptcies are rare. Peltz. with only 49 municipal bankruptcies from 1980 to 2011 (Nolan. 2010). 10% (Alaska). 2011). Evidence suggests that corporate pensions are less likely to be paid than government pensions since companies can declare bankruptcy and default on pension liabilities (Loomis. Although not required. while liabilities for 16 states increase from 30% to 95%. $4. some government pension plans provide two unfunded liability amounts in their financial statements—one based on actuarial value of assets and one based on market value—stating that the funding status based on market value provides a “better measure” of a plan’s ability to pay benefits . 13. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 253 that we estimate the total unfunded pension and OPEB liability for state-sponsored plans to be $1. capital assets represent more than 35% of total asset value. and Florida has the smallest increase (less than 1%). 2004. 14. Across all states. For the remaining three states. 12.4% in 2008 and 5. 16.

254 PLUMMER & PATTON (Calif. 45. 29). The UAAL amounts for OPEB liabilities are not as affected by the two criticisms leveled at pension liabilities (Clark. Marsh. and service capacity information to assist users in assessing a government’s economic condition” (GASB. the accounting rules state the discount rate should be the yield on assets used to Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) pay benefits—which is generally 4% to 5% for state governments (Statement No. GASB 2004). Minnesota Office of the State Auditor. and Montondon (2013) examine OPEB liabilities of public universities. states will likely have to pursue policy changes such as those proposed by LaPlante (2011). STRS (p. Yusuf and Musumeci (2012) propose four approaches for how local governments have responded to GASB 45. It is difficult to identify these plans and quantify their liabilities. Hunt. 2009 and 2011b. 21. 18. Hora. 20. and for these plans. GASB defines economic condition as “a composite of a government’s financial position and its ability and willingness to meet its financial obligations and service commitments on an ongoing basis. Also see the 2009 CAFR for the Colorado PERA (pp. Most OPEB plans are unfunded. 19. 16). Thus. PERS 2009 CAFR. They illustrate these approaches using a sample of 15 counties and 9 cities. p. 37-39) and the 2010 CAFR for the Calif. LaPlante identifies seven predominant habits in state policy making that contribute to unsustainable budgets and fiscal instability and provides suggestions for correcting them. but evidence suggests that liabilities are significant (Novy-Marx and Rauh. Fischer. fiscal capacity. There are also thousands of local governments that do not participate in state-sponsored pension or OPEB plans. including the cost containment and benefit modifications being considered by the universities to help address revenue shortfalls. . 2014). To attain fiscal sustainability in the long-run. we only adjust OPEB amounts for the 12 states that use a rate greater than 5% to discount OPEB liabilities. 2006 and 2009). but participate in a combined plan with other municipalities or fund their own plans on a stand-alone basis.” and economic condition reporting as the “communication of financial position. 17. The approaches involve different combinations of changing OPEB funding and/or benefits. 2009).

(2011. Damon Asbury. 83(3): 565-591. February 17). Aristotle Hutras (Director) and Annemarie Erkman (Research Attorney).” Public Policy Briefs. Discounting State and Local Pension Liabilities. W. State of Michigan Department of Management and Budget.” Public Budgeting & Finance. Hank Johnson. Biggs. The authors are responsible for all errors and omissions. Minnesota Teachers Retirement Association. Brown.R. . We have benefitted from comments and discussions with Ray Pfeiffer. Ohio School Boards Association. “An Options Pricing Method for Calculating the Market Price of Public Sector Pension Liabilities. Oklahoma State Regents for Higher Education. A.W. MA: Federal Reserve Bank of Boston. Boston. “State Government Budgets and the Recovery Act. J. Sheri Mauck (Associate Vice Chancellor for Budget and Finance) and Ben Hardcastle (Director of Communications). Gene Meyer (Kansas Reporter). REFERENCES Baber. D. “Consequences of GAAP Disclosure Regulation: Evidences from Municipal Debt Issues.R. Bradbury. We have also benefited from discussions with the following individuals and appreciate their help in clarifying their state’s pension and OPEB plans: Teresa Kesey (Chief Financial Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) Officer) and Jim Puckett (Division Director). K. Wylie. Ohio Retirement Study Council. & Gore. 99(2): 538-542. Executive Director/Administrator of South Dakota Retirement System.” The Accounting Review. (2009). Cindy Peters (Manager) and Randy Bitner (Accountant). (2008). Mary Stanford. Assistant Executive Director. 31(3): 94-118. Administration. Bob Vigeland.G.K. and Laura Bischoff (Dayton Daily News). (2010. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 255 ACKNOWLEDGMENTS We thank two anonymous reviewers and the editor (Don Deis) for their comments and suggestions. American Economic Review: Papers and Proceedings. Retirement Services. A. State of Alaska Division of Retirement & Benefits. Federal Reserve Bank of Boston. & Wilcox. Fall). Robert A. and Bill Wempe. Fort Worth ISD. John Wicklund. Director of Legislative Services. Chief Financial Officer.

R. Accounting & Financial Management. “The 2002 Downturn in State Revenues: A Comparative Review and Analysis. Haughwout. R...” National Tax Journal. “Warning by States as Tax Revenues Fail to Rebound. Hunt. C. Funding and Future Obligations. M. & Montondon.” The New York Times. (2013. R.. S. 256 PLUMMER & PATTON Chapman. & Maher K. March). T.” National Tax Journal. “Will Public Sector Retiree Health Benefit Plans Survive? Economic and Policy Implications of Unfunded Liabilities. L. (2011. October 20). Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) Cooper.A. 57(1): 111-132.com..com. (2010). [Online]. 144: Accounting for the Impairment or Disposal of Long-Lived Assets. (2011).. Norwalk. Patton.S. & Giertz. [Online]. Public Administration Review. B.” Journal of Public Budgeting. March).H.” American Economic Review: Papers and Proceedings. Upper Saddle River. Dye.” The Wall Street Journal.. (2004. “State Revenue Cyclicality. Statement of Financial Accounting Standards No. July 7). March). (2008. Tax Structure and State-Local Fiscal Stress. Ehrhardt. 23(1): 91-112.F. Freeman. December-Supplement). Allison..milliman. [Online]. Available at http://www. Milliman 2010 Pension Funding Study. 57(1): 147-158.wsj. Marsh.. J.. (2004.. Available at http://www.D. Fischer. A. & Morgan P. Clark. G. 68(Special Issue): 115—131.I. J. (2001).nytimes.F.online. Governmental and Nonprofit Accounting: Theory and Practice (9th ed. “Institutions. . “Higher Taxes Yield to Budget Cuts in States.R. revised). CT: Author. “Public University OPEB Burden: Recognition.J.L. State and Local Fiscal Sustainability: The Challenges. (2009).. NJ: Pearson Prentice Hall. J. & Rosen R.com.K. Giertz. L. G. 57(1): 133-145. G. & Smith.C.L. Financial Accounting Standards Board (FASB). 99(2): 533-537. Edgerton. J. Available at www. (2004. T. Shoulders.W. M.. Jr. (2011.F.” National Tax Journal. Eaton. Hora. Spring).

34: Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments. GASB (1999). GASB (2004). [Online]. Fall). June). GASB Project Pages: Economic Condition Reporting.html. D. . USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 257 Governmental Accounting Standards Board (GASB). Hou.irs. GASB (1994). (2014). CT: Author.org/ Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) cs/ContentServer?c=GASBContent_C&pagename=GASB%2FGAS BContent_C%2FUsersArticlePage&cid=1176156731381.id=217542. County Income Data. Statement No. 4: Elements of Financial Statements. Available at http://www. GASB (2012a). Norwalk. Y. CT: Author. GASB (2012b). “A Framework for Understanding State Balanced Budget Requirement Systems: Reexamining Distinctive Features and an Operational Definition. 45: Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions.gasb. 26(3): 22-45.L. Available at http://www. GASB (2007). 68: Accounting and Financial Reporting for Pensions—An Amendment of GASB Statement No. Norwalk. Norwalk. Statement No.00. 25: Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans. Norwalk. Statement No. [Online].” Public Budgeting and Finance. CT: Author. CT: Author. (2006. GASB (1994). 67: Financial Reporting for Pension Plans—An Amendment of GASB Statement No. 27: Accounting for Pensions by State and Local Governmental Employers. Norwalk. Available at http://gasb. CT: Author. Internal Revenue Service (2011). CT: Author. 27. & Smith. Statement No. CT: Author. Statement No.. 25. Concepts Statement No. Tax Year 2008. The User’s Perspective: Interperiod Equity and What it Means to You.gov/taxstats/article/ 0.org/cs/ContentServer?c=GASBContent_C&pa gename=GASB%2FGASBContent_C%2FProjectPage&cid=117615 6646154. [Online]. Norwalk. GASB (2009. Norwalk. Statement No.

N.E. “Government-wide Financial Statements and Credit Risk.washingtonpost. Oliff. 25(1): 165-198. Minnesota Office of the State Auditor (2006). Accounting & Financial Management. T. “A Summary of What We Know—and don’t—about State Fiscal Crises. (2011. (1981).M. R.J. 168: 60-66. & Johnson.cnn.us/reports/ gid/2009/opeb/OPEB_liabilities_report. “The Sinking of Bethlehem Steel.. McGuire. “Seven Habits of Unsustainable Budget Building: A State Policy Perspective. “Reporting on the Financial Condition of the Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) States: 2002-2010.org/cms/index. Kioko.cbpp.com.pdf. P. & Steuerle. (2004.cfm?fa= view&id=711.. W. LaPlante. April 5). (2003. [Online].” Journal of Public Budgeting. (2011). S. Accounting & Financial Management.” The Washington Post.state. (1988).K. August 4). Available at www. States Continue to Feel Recession’s Impact. and Opportunities. 258 PLUMMER & PATTON Johnson. Mautz. (2012).. Special Study: Other Postemployment Benefit Liabilities of Minnesota School Districts. Khimm.N. 152(2): 53-60. McNichol.. Mautz. Kioko.” Journal of Public Budgeting.J. Center on Budget and Policy Priorities.htm. 2(2): 123-128.” State Tax Notes: 357-361. “Financial Reporting: Should Government Emulate Business?” Journal of Accountancy. E. (2012. N. S. Loomis.” Public Budgeting and Finance. R. J. (1989.” Journal of Accountancy.mn. [Online]. R.. August). 32(1): 80-104. 23 (2): 215-267. “Not-for-Profit Financial Reporting: Another View. C. [Online]. October 20). Special Study: Other Postemployment Benefit Liability of Local Governments in . Available at http://money.L.auditor. (2013). Available at www. [Online]. Minnesota Office of the State Auditor (2009). “The State Budget Crisis Isn’t Over Yet.K.K.com/ magazines/fortune/fortune_archive/2004/04/05/366339/inde x.” CNNMoney. S. “Monuments. C. Mautz. Available at http://www. Mistakes.” Accounting Horizons. C. & Hildreth. Spring).

DC: Author. National Association of State Budget Officers (2009). July 2). “The Crisis in Local Government Pensions in the United States. National Association of State Budget Officers (2010). DC: Author.gov/NR/rdonlyres/275A2 978-5DDE-4138-A7F5-AF02D17D7F97/0/State-bystatememo10 ..com. Novy-Marx.bc..” In R.S. (2011a). Litan and R. National Association of State Budget Officers (2011). & Soto.ky. Munnell. Moody’s Investors Service (2012. Novy-Marx.” The Wall Street Journal. Available at http://finance. & Greenebaum Doll & McDonald.edu/briefs/why_have_defined_benefit_plans_ survived_in_the_public_sector. 23(4): 191-210. Index by States: Extent of Protection of Pension Interests. K.auditor. Is Your Pension Protected? A Compilation of Constitutional Pension Protections for Public Educators. (2009).pdf. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 259 Minnesota. J. Moore. PLLC (2007).H. “Public Pension Promises: How Big are They and What are They Worth?” Journal of Finance. (2011b). The Fiscal Survey of the States: June 2010. Washington. (2000). Boston College (No. DC: Author. 66(4): 1211-1249. “Alabama County Files for Bankruptcy. . Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) Washington. Herring (Eds. Morrison & Foerster. C. November 9). [Online].wsj. Washington. M.). State and Local Government Reported Pension Data. “The Liabilities and Risks of State-Sponsored Pension Plans. LLP. R. [Online]. & Rauh. 2). The Fiscal Survey of the States Spring 2011. Nolan. [Online]. K. DC: American Association of Retired Persons.pdf.” Journal of Economic Perspectives. J.us/ reports/gid/2006/opeb/opeb_06_fullreport. The Fiscal Survey of the States: June 2009. Available at at http://online. New York: Author.mn. Available at http://crr. (2007). & Rauh. (2011. Available at www.html. A. Request for Comments: Adjustments to U. J. Haverstick. Novy-Marx. & Rauh. Washington. “Why Have Defined Benefit Plans Survived in the Public Sector?” Center for Retirement Research. [Online].state. R. R.

F. Perez. & Lockwood. S. “GASB 34’s Governmental Financial Reporting Model: Evidence on its Information Relevance.” National Tax Journal.M. [Online].” Tax Notes: 343. Washington.. 82(1): 205-240. (2010). “Balanced Budget Rules and Fiscal Policy: Evidence from the States. “Changing Red to Black: Deficit Closing Alchemy.S. Poterba. October 23). Hoo. April 23). Plummer. Pew Center on the States (2010. Fiscal 2002.publicfundsurvey. Petersen. The Trillion Dollar Gap: Underfunded State Retirement Systems and the Roads to Reform. J.pewcenteronthestates. “State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics. J. B. (1994). & Reuben. Available at www. 48(3): 329-336. (2001). J.org/publicfundsurvey/ index. Available at www..” National Tax Journal. Poterba. S.” National Tax Journal. DC: Brookings Institution. & Patton. P. Rose. 56(3): 567-577.. Poterba. Federal Highway Administration. Y. K. 102(4): 799-821. . September). (2005.” Los Angeles Times.htm.M. Available at http://articles. & Yilmaz.org. Rueben. [Online]. Current Toll Road Activity in the Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) U. and Tax-Exempt Bond Yields.S.latimes. 50(37): 537-562. “Fiscal Capacity of States. 63: 807-838.” The Accounting Review.. (2003. Hutchison. Public Fund Survey (2011). Peltz. “Fiscal News.” Journal of Urban Economics. K.” Journal of Political Economy.com/2005/apr/23/business/fi-ual23. J. Washington.M. Office of Transportation Policy Studies. “Federal Insurer to take over United Airlines Pension Plans.: A Survey and Analysis. 260 PLUMMER & PATTON Growing Old: Paying for Retirement and Institutional Money Management after the Financial Crisis. S. Public Fund Survey Results. State Budget Rules. (2007). [Online]. J. E. (1995). Department of Transportation. (2006. (2006). February). “Institutions and Fiscal Sustainability.E.S. T. DC: Report Prepared for U.

[Online].S.” Public Budgeting & Finance: 27(2): 1-21.lao. DC: Author.ca. “Changing and/or Funding OPEB Promises: A Typology of Local Government Responses to GASB 45 and the Realization of OPEB Liabilities. Public Budgeting and Finance. (Wie) & Musumeci. Available at www. Public Pensions at a Crossroad: Which way forward? BNY Mellon Asset Management. E. Pensions and Retirement Plan Enactments in 2011 State Legislatures. 24(3): 369-396. Wilson. Summer). & Austin.R. National Conference of State Legislatures. States. (2011. (2011. 21(3): 47-62. & Kattelus. October 7). Sacramento. Available at http://us. (2012. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 261 Sheffrin. Washington. Wang. (2012).wsj. Accounting & Financial Management.C. (2011). “Measuring Financial Condition: A Study of U. (2007. Y. (2001. R.. . R. V. Available at http://online.obkcg. & Tu.ncsl. D. [Online]. U. S.S. P. CA: California’s Legislative Analyst’s Office. [Online].D. September 30). 18(2): 205-226. Implications of GASB’s New Reporting Model for Municipal Bond Analysts and Managers. Available at www.asp?a=595.M.K. State and Local Government Pension Plans: Current Structure and Funded Status. January 6).bnymellonam. Available at www.E. Wozniak.” Journal of Public Budgeting. [Online]. T.S.com/core/library/ documents/knowledge/pensions/PublicPensions. The 2011-2012 Budget: The Administration’s Revenue Accrual Approach. Spring). Yusuf. “California Takes Aim at Budget Gap. Vara. (GAO-08-983T). Tyer.” Journal of Economic Perspectives.gov/ analysis/2011/revenues/revenue_accrual_013111.com. S. J. The Constitutionality of Illinois Public Pension Reform: Legal Insights for Pension Boards. Sisney. (2008).com/article. U.aspx. (2004.pdf. Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) Snell. Government Accountability Office (2008). L.org/?tabid= 22763.” The Wall Street Journal. [Online]. X. “State Budget Deficit Dynamics and the California Debacle.S. J.S. A. Dennis. Fall).

found in the state CAFR’s “Notes to the Financial Statements. If this was not apparent from the plan’s description. We determine the UAAL amount which is included in a state’s liabilities by examining the information on a state’s long-term obligations. the pension and OPEB valuations for FYE 2008 were reported in the 2009 CAFR. These amounts are obtained from a state’s Comprehensive Annual Financial Report (CAFR) for FYE 2008. Therefore. we apportioned the UAAL amount based on the relative funding responsibility. All CAFR’s were obtained from publicly-accessible websites. All CAFR’s were read to see if the funding responsibility was apparent from the plan’s description. 262 PLUMMER & PATTON APPENDIX A Description of UAAL Data Collection and Apportionment between State and Local Governments The amounts in Appendix A represent unfunded actuarial accrued liabilities (UAAL) for state-sponsored pension and OPEB plans. we are only interested in a state’s unrecorded UAAL amount (i. For these plans. the division between state and local governments was based on our discussions with plan directors. we contacted the director of the pension or OPEB plan. and all contacts with plan directors were made by the authors. . These contacts were made via email and/or phone. the UAAL amount which is not already included as a liability in the state’s Statement of Net Assets). the Table 1 UAAL amounts are equal to the Appendix A UAAL amounts. The amounts in the first two columns of Appendix A represent the total UAAL amounts which are the state’s responsibility.. so the information was collected from the 2009 CAFR. However. minus the UAAL amount which is already recorded as a liability. If both the state and local governments had a responsibility to fund the plan.e. In some cases. We apportioned the UAAL amounts to the government which is legally responsible for funding the pension or OPEB plan. for purposes of Table 1 (columns 4 and 5). as well as the CAFR’s for the individual Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) pension and OPEB plans.” Note: All data was collected by the authors.

019 2.599 24.787 94.790 9.715 16.981 28.485 North Dakota 547 76 622 0 0 622 Ohio 12. USING FINANCIAL STATEMENTS TO PROVIDE EVIDENCE ON THE FISCAL SUSTAINABILITY 263 APPENDIX A Unfunded Actuarial Accrued Liability (UAAL) Amounts for FYE 2008 (in Millions) State State State Local Local State & State Pension OPEB Total Pension OPEB Local Total Alabama 9.858 0 0 45.294 0 13.752 1.762 Florida (1.091 0 0 2.946 7.443 19.989 Louisiana 11.276 675 18.841 99.112 0 0 26.171 Colorado 6.282 1.091 Nebraska 755 0 755 0 0 755 Nevada 7.468 8.733 25.003 0 8.858 North Carolina 504 27.232 Kansas 6.721 52.291 1.428) 56.828 0 0 24.877 0 0 41.460 Maryland 10.914 90.667 17.369 0 12.713 3.880 Montana 1.562 New York (10.072 0 0 9.215 25.084 15.965 570 8.877 Delaware 121 5.384 31.866 Arkansas 2.592 2.570 9.592 6.030 2.285 3 11.019 41.312 13.859 26.989 0 0 23.402 0 0 10.331 Indiana 9.866 0 0 6.741 2.430 5.659 14.112 0 0 37.489 New Jersey 34.535 Missouri 2.874 8.615 2.642 5.493 14.828 Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) Alaska 3.459 632 2.328 11.351 66.536 10.485 0 0 28.348 0 8.232 0 0 3.455 63.687 5.504 252 5.218 419 0 0 419 Georgia 6.188 New Mexico 4.028 37.957 Idaho 790 148 938 0 0 938 Illinois 54.562 0 0 7.408 0 0 4.669 26.112 Hawaii 3.226 0 0 25.596 Kentucky 12.159 85.342 Connecticut 15.663 1.117 20.260 107.874 0 0 25.402 Iowa 2.228 3.828 404 3.847 0 0 13.229 15.874 Maine 3.472 22.888 Mississippi 7.762 0 0 5.801 20.286 45.660 23.656 4.519 9.242 23.390 10.408 California 44.434 55.432 Minnesota 2.226 Massachusetts 22.072 New Hampshire 1.460 0 0 5.543 0 8.042 24.799) 2.940 463 10.276 317 6.661 729 7.847 Arizona 6.852 5.789 12.112 Michigan 2.297 569 6.510 .732 1.535 0 0 8.769 130.

444 189 1.707 1.207 70.031 Vermont 462 1.745 .763 18.212 902.959 Wyoming 1.070 9.914 7.959 0 0 1.834 4.912 0 13.944 1.538 10.069.962 519 32.858 Utah 3.504 18.221 0 637 61.386 788 5.360 268 484 11.424 578 0 4.578 0 11.781 47.611 420 4.360 West Virginia 4.130 2.399 3.260 697 9.492 Pennsylvania 8.418 0 0 14.078 South Dakota 55 67 122 130 0 252 Tennessee 1.870 Oregon 3. 264 PLUMMER & PATTON APPENDIX A (Continued) State State State Local Local State & State Pension OPEB Total Pension OPEB Local Total Oklahoma 9.124 97.685 14.470 10.733 3.514 7.414 1.008 21.025 2.426 sum 376.615 2.314 Downloaded by UNIVERSITY OF NEW ENGLAND (AUS) At 05:04 15 December 2017 (PT) Rhode Island 4.439 61.076 Virginia 10.076 0 0 2.042 1.112 Wisconsin 253 1.803 0 0 11.736 5.395 median 4.624 10.984 0 376 11.634 0 0 1.174 South Carolina 12.002 Texas 13.408 21.782 8.174 0 0 5.418 Washington 3.160 753 3.071 26.031 0 0 4.958 3.912 525.634 mean 7.078 0 0 21.