New Jersey has amassed a huge, and possibly dangerous, level of debt, according to a new report that reviews the financial health of state governments across the country.
Each Garden State taxpayer owes tens of thousands of dollars and the state is a tax “sinkhole,” according to the nonprofit organization Truth in Accounting (TIA), because state lawmakers of both parties have overspent and used accounting “gimmicks” for decades. The organization defines “sinkholes” as states that lack the necessary funds to pay their bills.
The S&P report also gives New Jersey a low grade on debt practices.
“On our scale of ‘1.0’ to ‘4.0’, where ‘1.0’ is the strongest score and ‘4.0’ the weakest, we have assigned a composite score of ‘3.7’ to New Jersey’s debt and liability profile,” according to S&P.
Moody’s, in its July 14 report, gave New Jersey an A3 rating on its general obligation (GO) bonds, a low rating. But it praised recent efforts by Murphy to solve the problems of long-term debt.
Fitch Ratings, in its April 13 report, gives New Jersey an A- grade. It said its rating reflects New Jersey’s “adequate financial resilience.” But it also said that its condition isn’t as good as that of most states, and stirs up some troublesome ghosts.
We call it the “Zombie Index” based on the work of Edward Kane, a prolific and respected finance professor at Boston College. Back in 1985 and 1989, Ed wrote two books warning about taxpayer exposure to losses from bank deposit insurance schemes, before we knew what hit us in the savings and loan crisis. Ed coined the term “zombie bank” to identify effectively-insolvent banks that were allowed to remain open by regulators and others. Deceptive accounting principles greased the wheels for regulatory forbearance, making “zombies” appear to be solvent.
Zombies had incentives, in Ed’s terms, to “gamble for resurrection.” Insiders could capture the upside of riskier investments, while prospective losses could be socialized through the government’s sponsorship (and ultimately, bailout) of deposit insurance systems. These incentives ended up magnifying taxpayer losses during the 1980s deposit insurance crisis. Those losses ran in the hundreds of billions of dollars and helped set the stage for the massive financial crisis of 2008-2009.
Iowa (the blue line) maintained positive net revenue in 15 of the 16 years. Illinois, on the other hand, did so in only three of those 16 years.
The frequency of truly-balanced-budgets, as indicated by “Net Revenue,” provides significant explanatory power (in econometrics-speak) for two important measures of state government performance – Truth in Accounting’s “Taxpayer Burden” measure of overall financial condition and rankings of the states on the latest Gallup results for a survey of trust in state government.
In our latest (2021) Financial State of the States report on state government finances, Iowa ranked 9th, while Illinois ranked 48th. And in the latest Gallup poll on trust in state government, Iowa ranked 8th, while Illinois ranked 50th (dead last).
The Fed has embarked on a massive expansionary quest in recent years. In 2020, total Reserve Bank assets rose from $4.2 trillion to $7.4 trillion amidst the pandemic and related government lockdown and fiscal “stimulus” policies. That was roughly three times the extraordinary growth in the consolidated balance sheet for the Reserve Banks in the 2008-2009 financial crisis. And in the latest weekly “H.4.1” release, total assets were up to $7.8 trillion – rising about a hundred billions dollars a month so far this year.
Today, short and long-term interest rates on government bonds rest near historic lows, important in part because the Fed massively expanded its purchases of government bonds. But low interest rates can’t be taken for granted, particularly if we get significantly higher inflationary expectations — which appear to have begun to sprout in recent weeks.
If we get significantly higher interest rates for that reason, the Reserve Bank balance sheet impact from losses on securities assets would arrive if the losses become “realized” – a realistic prospect if the Federal Reserve reverses course and starts selling off securities as a means of conducting monetary policy amidst higher inflationary expectations.
NPPC, I recommend you think through what will actually inform and protect your members. The TIA folks are not distorting the message, except to the extent that state and local governments are undervaluing their pension and OPEB promises.
Complaining about TIA will not make the pensions better-funded. Complaining about TIA will not prevent the worst-funded pensions from running out of assets, which will not be supportable as pay-as-you-go, as the asset death spiral before that will show that the cash flows were unaffordable for the local tax base.
And don’t look to the federal government to save your hash. So far bailout amounts have been puny compared to the size of the promises.
Spending plans that “fully fund” pension obligations by making statutorily required contributions — amounts required by legislators, by law — do not necessarily fully fund pensions. In fact, Illinois has a sad history of passing laws with funding that falls far short of actuarial requirements — the amounts necessary to keep pension (and related retirement health care) debt from rising over time.
For an example, take a peek at the Illinois Teachers’ Retirement System (TRS). Their annual report for 2020 is available here. The table on pdf page 2 shows that the system has accumulated more than $50 billion in invested assets, but this massive amount actually falls far short of the nearly $140 billion in present value obligation for future pension payments, leading to a nearly $90 billion unfunded liability.
The practice of distributing unfunded promises to pay money in the future has been a key of the tool chest that politicians have employed in misleading the citizenry that Illinois has lived up to constitutional balanced budget requirements, when in truth it has done anything but.
Watch a recording of Truth in Accounting’s virtual event with special guest Steve Malanga, senior editor at City Journal. In this episode, we discussed the financial troubles of America’s largest cities and the effects of Biden’s infrastructure plan.
Author(s): Bill Bergman, Sheila Weinberg, Steve Malanga
Several months ago, the Governmental Accounting Standards Board (GASB) issued two new Exposure Drafts for proposals that would lead to a new government accounting concept statement and related standard. GASB invited comment on those proposals, a process in which Truth in Accounting participated directly and also encouraged others to participate.
… The following information is on the State of Illinois, the city of Chicago and the Chicago Public School (“CPS”) system … The severe financial decline in those three entities have not been at all adequately communicated to the various users of the information. The accounting standards and reporting have not required it. Those governmental units are financially unsustainable and their services to their citizens have not been sustained. The financial accounting standards have been fundamentally flawed for decades and border on gross negligence.
… The GASB must have a higher level of accounting standards. There are no independent third parties overseeing their government accountings standards like there is with FASB and nongovernmental entities. The financial and service sustainability of State and local entities are in question. The services they provide are of the utmost importance to the public and their citizenry. … Requiring fund balance accounting using total financial resources focus measurement and accrual basis of accounting is the tool necessary for the political system and the public to successfully address these issues.
Illinois and Connecticut state governments don’t pay taxes to the federal government. In Illinois’ latest financial report, a report prepared by the department led by Mendoza (note that the latest report available is for fiscal 2019, for a fiscal year that ended more than 600 days ago), Illinois reported roughly $25 billion in grant “revenue,” most of it from the federal government. This doesn’t add up to Illinois contributing more in federal taxes than it receives from the federal government.
So how does their math work?
To claim that Illinois and Connecticut act as donor states, Mendoza and Lembo are “counting” on the money sent by their state’s taxpayers to the federal government, a very large amount.
But when they call for federal “relief,” they aren’t calling for federal money for state taxpayers. They are calling for federal “relief” to be sent to state governments.
Every taxpayer and beneficiary of government services and benefits should care about good government accounting. Accountants and other financial professionals should take special note because GASB is attempting to change one of the basic tenets of accounting. This is a rare opportunity to convince GASB to reverse course and move toward true accrual accounting in budgeted funds statements.
The proposals, most importantly, do not relate to government-wide financial statements such as the Statement of Net Position (a balance sheet) and Statement of Activities (an income statement), both of which have significantly firmed up their accrual accounting foundations in the last decade. GASB’s proposals relate instead to governmental funds statements, such as those for general funds, which are widely used for budgeting purposes.
The Chicago-based Truth in Accounting (TIA), a financial watchdog, is fighting the efforts of the Government Accounting Standards Board (GASB) to enshrine a system of accounting into place the group says allows governments to paint a misleading picture of taxpayer debt.
GASB’s “Project 3-20: Recognition of Financial Statement Elements,” has seen its share of blowback from concerned parties. The concept would allow governments to continue their standard of cash-based accounting, which allows bureaucrats to prepare financial reports that show expenses only when the money is paid, not when the debt is incurred. TIA argues that this allows governments to show a rosier picture of taxpayer debt than what’s reality, helping government officials to kick the can down the road.