To determine a state’s financial condition, TIA researchers created a thorough, detailed approach comparing a state’s bills, including those related to retirement systems, to all state assets available to pay these liabilities. The results of that comparison are presented in the following “Financial State of the State” presentations.
TIA believes analyzing a state’s unfunded pension and OPEB liabilities without considering other liabilities and obligations along with assets available to fund liabilities would be incomplete. Evaluating only state retirement liabilities without considering its assets would be similar to judging a person’s finances by only looking at their $10,000 credit card balance without considering they have over $20,000 in the bank to pay off this balance. Assessing a state’s unfunded pension liabilities without considering other debt may be inaccurate because some states have issued pension bonds and other debt to fund plans contributions. In those cases pension plan funding improves, but this improvement is offset by increases in other state debt.
A key feature of TIA’s analysis, enhancing public knowledge of state finances, is a determination of each state’s share of unfunded liabilities related to multi-employer, cost-sharing pension and OPEB plans.
Data for this report was derived from each state's CAFR and related retirement plans' actuarial reports. Specifically, TIA researchers began reviewing the Statement of Net Position and identifying all assets, including capital assets (buildings, roads, bridges, parks, etc. and other assets (cash, investment and money in fund accounts, etc.. Some of these assets are available to pay a state’s bills or liabilities, while the use of others is restricted by law or contract, making them unavailable to pay bills. Restrictions include external constraints imposed by creditors, grantors, contributors or other governments, as well as internal legal or constitutional provisions. TIA removed capital assets from calculation of assets available to pay a state’s bills or liabilities since they cannot be easily converted to cash. “Assets Available to Pay Bills” are then calculated by subtracting capital assets and those restricted by law or contract from total assets.
In calculating each state’s financial condition TIA researchers included assets and liabilities of the Primary Government and its “Discretely Presented Component Units.” These units include entities such as state colleges, universities, financing authorities and toll-ways. As indicated in the Iowa CAFR, “These component units are entities which are legally separate from the State, but are financially accountable to the State, or its relationship with the State is such that exclusion would cause the State's financial statements to be misleading or incomplete."(Iowa Department of Administrative Services - State Accounting Enterprise 2013, 59)
In most states, Primary Government and Discretely Presented Component Units have balances due from and due to each other. To avoid overstating a state’s assets and liabilities, TIA staff removed these receivables and payables.
TIA researchers analyzed “State Bills” including liabilities disclosed in a state’s financial report such as accounts payable and bonded indebtedness; as well as pension and OPEB obligations found in the state CAFR, retirement systems’ CAFRs, and actuarial valuation reports. Only liabilities incurred to date were included. Debts related to the financing of capital assets were removed from the calculation of the state’s bills because these assets were excluded from the “Assets Available to Pay Bills.” Then TIA researchers calculated “Money Needed to Pay Bills” by subtracting the “State Bills” from the “Assets Available to Pay Bills”.
The result of TIA’s analysis is expressed as Taxpayer Burden. This financial burden represents, on a per taxpayer basis and in today’s value, bills a state has chosen to fund as they come due rather than when they were incurred. 39 states have created a financial burden, representing the amount needed to pay the state’s obligations per taxpayer. Only eleven states have a “Taxpayer’s Surplus” representing, on a per taxpayer basis, an excess of funds available to meet a state’s obligations to citizens, employees and creditors.
States accumulate a Taxpayer Burden when current costs are passed onto future taxpayers. The “Money Needed to Pay Bills” is similar to a term used by government accountants called “Unrestricted Assets”. Each state’s Money Needed to Pay Bills value is calculated by subtracting the additional unfunded retirement liabilities from the available assets reported on the balance sheet.
TIA’s analysis of retirement systems found many states administer multi-employer, cost sharing plans that cover employees from entities other than the state and local government related employers. These employers may include outside state agencies, counties, cities, universities, colleges and school districts. In analyzing these plans, special care was taken to calculate a state’s share of each plan’s unfunded liability. A few states’ actuarial reports disclosed each employer’s share of the plan’s unfunded liability, but because current accounting standards do not require such allocation, many states do not provide such transparency for their multi-employer, cost- sharing plans. In many states TIA researchers found it necessary to estimate state liability based upon the state’s share of historical contributions. Some states did not disclose an allocation of plans’ liabilities or state contributions into such plans. In these cases the state’s share of multiemployer, cost-sharing plans’ unfunded liabilities was estimated based on other data available such as the percent of state employees in the plans.
TIA researchers reviewed other studies of state retirement systems and found that some allocate all unfunded liabilities of multi-employer, cost-sharing plans to the states. Those studies did not recognize that other employers, such as municipalities and school districts, have and will continue to contribute to such plans. For example one study indicated the entire unfunded liability related to the Public School Retirement System of Missouri was a state liability. TIA’s review of this plan determined the state contributes less than one percent of the plan’s total contributions. Therefore the plan’s unfunded liability was not included in TIA’s calculation of State Bills.
The methods developed and used to complete this analysis have produced precise estimates of every state’s actual assets and liabilities that are currently available.
Each state’s “Money Needed to Pay Bills” amount reported in Appendix III is an approximation of the Unrestricted Assets each state would have reported on their 2014 Statement of Net Assets if the proposed amendments to pension and OPEB reporting were in place. This approximation does not take into consideration the amendment’s provisions regarding assumptions used to calculate actuarial value of retirement plan assets or actuarial accrued liabilities.