We spent some time recently talking about the financial literacy — or lack thereof — of American investors.

They’re not the only ones who need a crash course in finance. State politicians from coast to coast are dumb as sticks when it comes to money management.

That’s the implication, anyway, in a new report titled “The Financial State of the States.” Published by the Institute for Truth in Accounting, the report casts an accountant’s trained eye on the financial statements of each state in the nation, and lord, the results aren’t pretty. Forty-nine of our 50 states have balanced-budget amendments, and in spite of that, 46 states have dug themselves some pretty nasty financial holes.

The culprit, according to the report, are “outdated accounting policies” that allow states to shift the cost of current policies (like employees’ retirement benefits) to future state budgets.

“States are not properly accounting for these promised benefits over the long-term,” the report states. “They only focus on what is payable in the current year, so setting money aside to pay for future benefits is not required in the states’ budget planning. This pushes current costs onto to future.”

The ITA prefers a method called “Full Accrual Calculations and Techniques” (or FACT — get it?) that “would require governors and legislatures to recognize expenses when incurred regardless of when they are paid.” When viewed through the FACT lense, state financials get pretty ugly. Consider:

  • Only six states have what the ITA calls a “taxpayer surplus” — that is, they have adequate surpluses available to pay their obligations. The rest operate under “taxpayer burdens” — the amount each taxpayer would have to pay back to the state in order for the state to break even.
  • Maryland is the 11th worst state in the country, with a taxpayer burden of $17,300.
  • The problem will only get worse. “States are not held to the same accounting standards as most businesses and publicly traded companies,” the report states. “Therefore, states do not have the proper tools to balance their budgets. In fact, every year most states go even deeper into debt.”

The logic is simple: When you incur an expense, you report it. I’m not sure when we lost sight of that basic truth, but kicking the can down the road like this is hurting us dearly.

It could hurt even more when 2013 comes around.

That’s when we’ll arrive at the so-called “fiscal cliff” — the deadline for reducing the nation’s budget deficit through a combination of tax increases and mandatory spending cuts. For states like Maryland, whose budget depends heavily on federal allocations, those federal spending cuts could be disastrous.

You see where this is going, don’t you? Next year’s financial picture could get pretty ugly for many states, Maryland included. They’ll be looking for every scrap of revenue they can find — and for any help they can get to clean up this mess.

Are you up to the task, CPAs?

Your expertise and business acumen are needed more now than ever. The stakes are certainly higher than they’ve been in recent memory.

I mean, really — who’s better qualified than a CPA to help our elected officials straighten out this mess?

Of course, that’s assuming politicians are capable of listening to reason.

The job begins at CPA Day
Mark your calendars for Jan. 16 and make plans to join us in Annapolis for the 2013 edition of CPA Day. The more CPAs who are there, the stronger our collective voice becomes — and the more knowledge we can pass along to our elected officials. Don’t miss the most important event of the MACPA’s year! Get details and register here.

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