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Institute for Truth In Accounting: New Jersey A "Sinkhole" State

August 09, 2011 J

Today, the Institute for Truth in Accounting (IFTA) released a report entitled “The Financial State of the States.”

This eye-opening report discloses the fact that, despite all but one U.S. state having a balanced budget requirement, most states find themselves in debt.

The “Financial State of the State” report ranks each state in terms of its true debt burden per taxpayer with the five worst offending states being designated as “Sinkhole States.” Among them, New Jersey which has the ignominy of being the second worst state in the nation behind only Connecticut with a true per taxpayer debt burden of $34,600.

Said another way, in order to meet the true cost of state government, New Jersey taxpayers would have to cough up another $34,600 each!

How is this happening? Why are states not providing taxpayers with a true accounting of their budgets?

The causes, according to the report, are primarily twofold. First, states are utilizing outdated “fund” or “cash basis” accounting methods rather than an “accrual” based approach. From the report:

As documented in our last study, and referenced above, states continue to use historical cashbased fund accounting. For those functions that do not relate to a specific project with an associated fund, states have established a “General Fund” which typicall has become the primary focus of state budgets. The budgets of specific projects and the general fund are primarily created using “checkbook accounting.” The calculations used to verify a “balanced budget” include only the checks that will be written and the funds that may be deposited in the state’s General Fund during the budget year.

IFTA calls for “accrual” based accounting techniques to be implemented to provide an open and honest assement of state budgets.

On the other hand, accrual accounting recognizes expenses when incurred, regardless of when paid, and revenues when earned, regardless of when received. The use of accrual accounting principles in the budget process would acknowledge the political and economic realities of the Twenty-first Century.

Secondly, many states fail to accurately disclose the true costs of their pension liabilities.

The largest annual cost incurred by states is emplyees’ compensation. Included in employees’ compensation packages are benefits, such as health care, life insurance and retirement benefits, including pension and other post employment benefits (OPEB). These benefits are earned each day an employee works and the cost of these benefits accumulates every day as well. As these benefits are promised and have been earned, a liability is created that will be paid sometime in the future. Prudent management demands that the value of this liability be estimated, and assets provided, to make sure the payments can be made when they come due.

Because of the historical use of cash basis accounting, with its focus on checks written today, some citizens and many politicians ignore retirement benefits that will be paid in the future. Some ask, “Those payments won’t have to be made for another 30 years, why worry about them now?”

Unfortunately, New Jersey is guilty as charged in this respect with Legislatures and governors, both past and present, having failing to make required payments and kicking rhe can down the road on this ticking time bomb.

The net result is New Jersey’s balanced budget requirement has failed to keep our state’s fiscal house in order and prevent the runaway debt we are witnessing today.

CLICK HERE to download and read the full report from the Institute for Truth in Accounting.

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