Estimated Time to Read: 7 minutes
The annual “Financial State of the States” reports, produced by Truth in Accounting (TIA), provide a comprehensive financial analysis of the fiscal health of all 50 states. The latest report, released on Thursday, shows that while Texas’ fiscal health is improving, significant challenges remain. State debt, unfunded pension liabilities, and current financial management practices continue to place a burden on taxpayers, highlighting the need for further reforms.
2024 National Fiscal Trends
The 2024 report paints a concerning picture of state finances across the country, revealing that the collective debt of all 50 states stood at $2.9 trillion, while total assets amounted to $2.1 trillion—leaving a $800 billion shortfall. This shortfall primarily stems from unfunded retirement obligations, which include both pension debt ($840 billion) and Other Post Employment Benefits (OPEB) debt ($493 billion). These OPEB liabilities cover healthcare benefits for retired public employees, a growing concern for states that have failed to properly fund these commitments.
Many states, despite legal requirements to balance their budgets, have resorted to accounting gimmicks to make their finances appear healthier than they are. Tactics such as deferring pension contributions, delaying bill payments, or borrowing against future revenues allow states to claim balanced budgets while hiding their true financial condition. This method shifts the burden to future taxpayers, leading to a cycle of deferred financial responsibility. The volatility of pension fund investments also plays a significant role. For example, Colorado experienced a steep increase in pension liabilities due to adverse market conditions, highlighting how dependent states’ finances are on external factors like stock market performance.
The broader national trend shows a divide between states that are financially stable and those that are struggling. Many states have taken advantage of favorable market conditions or COVID-19 relief funds in recent years to mask underlying fiscal issues. However, as federal relief wanes and inflation continues to rise, states may soon be forced to confront their unsustainable financial practices.
Sunshine vs. Sinkhole States
The Financial State of the States report categorizes states into “Sunshine” and “Sinkhole” states based on their ability to pay their bills. Sunshine states, such as North Dakota, Alaska, and Wyoming, have more than enough assets to cover their liabilities, resulting in substantial taxpayer surpluses. These states are known for sound fiscal management and often benefit from natural resource revenues. North Dakota, for instance, ranks first in the 2024 report, with a Taxpayer Surplus of $55,600 per taxpayer. These states demonstrate how disciplined financial practices and diversified revenue streams can lead to long-term stability.
On the other end of the spectrum, Sinkhole states are those that cannot pay their bills, with significant taxpayer burdens. States like New Jersey and Illinois continue to struggle with massive unfunded pension obligations and other debts. In 2024, New Jersey held the dubious distinction of having the highest Taxpayer Burden at $42,500 per taxpayer, while Illinois was close behind with a burden of $37,000. These states have accumulated such large debts that future taxpayers will inevitably face increased taxes or reduced public services to cover these shortfalls. The fiscal mismanagement in these states serves as a cautionary tale, demonstrating the long-term consequences of deferring liabilities and failing to address structural deficits
Texas’ Financial Standing in 2024
While Texas is far from the extreme debt of sinkhole states like New Jersey or Illinois, it still faces notable financial challenges. In the 2024 report, Texas ranked 24th overall, reflecting a Taxpayer Burden of $900. This means that to fully cover its current obligations, each taxpayer in Texas would need to contribute $900. Though this burden is far smaller than those in many other states, it signals underlying fiscal issues, particularly with unfunded pension and healthcare liabilities.
Texas has traditionally enjoyed a strong economy, driven by industries such as energy, technology, and real estate. The state’s lack of a personal income tax and relatively low business taxes have attracted both businesses and residents, spurring economic growth. However, despite these economic strengths, the state has not fully addressed its long-term liabilities, particularly those related to retirement benefits. The pension obligations for Texas public employees, including teachers and state workers, remain underfunded, contributing to the state’s ongoing Taxpayer Burden.
Texas’ “C” grade in the 2024 report reflects that while the state comes close to balancing its budget each year, it has not fully addressed the deferred costs associated with pensions and healthcare benefits. This puts future generations of Texans at risk, as they may face higher taxes or reduced services to cover these obligations if the state fails to take meaningful action.
Texas in 2023: A Comparison
For comparison, the 2023 report shows that Texas ranked 30th overall, with the same $900 Taxpayer Burden it carried into 2024. This consistency in the Taxpayer Burden suggests that while Texas has maintained its current financial status, it has not made substantial progress in reducing its long-term liabilities. The state’s economic performance has remained strong, driven by growth in industries such as oil and gas, healthcare, and technology. However, these strengths have not been enough to substantially lower the state’s pension and OPEB liabilities.
In 2023, Texas faced the same issue of underfunded pension benefits that continues into 2024. Public employees have been promised retirement benefits that the state has not fully funded, creating a long-term financial obligation that will eventually need to be paid. While Texas is better off than states like Illinois or New Jersey, its inability to significantly reduce these liabilities leaves it vulnerable in the future.
The Challenge of Pension and OPEB Liabilities
One of the most pressing financial issues for Texas, as highlighted in both the 2023 and 2024 reports, is the state’s pension and OPEB liabilities. Texas, like many states, has promised its public employees certain retirement benefits, including pensions and healthcare. However, the state has not consistently set aside enough money to pay for these promises, creating a growing financial obligation.
Pension benefits are considered deferred compensation, meaning employees earn them during their working years, but the payments are made after retirement. When states underfund these benefits, they push the financial responsibility to future generations. In Texas, this means that unless significant reforms are made, taxpayers in the future may be faced with higher taxes to cover these costs. The 2024 report emphasizes the need for Texas to adopt full accrual accounting—referred to as FACT-based accounting by Truth in Accounting. This method would more accurately reflect the true cost of government obligations by accounting for all liabilities when they are incurred, rather than deferring them to future budgets.
Texas in the National Context
In the broader national context, Texas is far from the most troubled state, but it also falls short of the best-performing ones. States like North Dakota and Wyoming, which rank among the top in the 2024 report, have effectively managed their finances and built up significant taxpayer surpluses. These states benefit from robust natural resource industries, which provide a steady stream of revenue that can be used to pay down liabilities and invest in long-term financial stability.
By contrast, Texas, while economically strong, continues to hover in the middle of the pack when it comes to financial health. The state’s $900 Taxpayer Burden is small compared to states like California, which had a burden of $17,400 in 2024, but it still indicates unresolved financial issues. The state’s ongoing pension and OPEB obligations will need to be addressed if it is to rise in the rankings and secure a more stable financial future
Path Forward for Texas
While Texas has maintained a steady financial course from 2023 to 2024, its long-term financial health is threatened by underfunded pensions and healthcare obligations for public employees. The state’s ability to improve its ranking and fiscal outlook depends on its willingness to adopt more transparent accounting practices, such as FACT-based accounting, and fully address its growing liabilities. Without meaningful reforms, future generations of Texans may be burdened with higher taxes or reduced public services as the state struggles to meet its financial obligations.
Texas Policy Research relies on the support of generous donors across Texas.
If you found this information helpful, please consider supporting our efforts! Thank you!
