FAQs
Below are a few frequently asked questions (FAQs) about accounting methods and terms. If you have a question that is not addressed here, please email info@truthinaccounting.org.
You can also see our Truth in Accounting pamphlet online here.
- What is "TIA"?"
- What is TIA's relationship to Data-Z and data-z.org?
- How is TIA funded?
- Why are your numbers (TIA State Analysis and The Financial State of the States) different from those I find elsewhere?
- Is it proper to account for bills that aren’t yet due?
- What is “pension smoothing?”
- What is a “rate of return?”
- What is “net revenue?”
- What are “business-type activities?”
- What is a “balanced budget?”
- What is a “balanced budget requirement?”
- Why are balanced budget requirements popular and desirable?
- What does “off-balance sheet” mean?
- What are “liabilities not fully disclosed?”
- What is a "CAFR?"
- What is "OPEB?"
TIA stands for Truth in Accounting™, the organization that operates this website. TIA was founded in 2002 to "compel governments to produce financial reports that are understandable, reliable, transparent and correct." It is a nonpartisan, non-profit organization headquartered in Chicago, Illinois. Visit TIA's hompage.
What is the connection between TIA and Data-Z and data-z.org?
Data-Z is a project of Truth in Accounting (TIA). The site (data-z.org) extends TIA’s core capabilities by surrounding our data and analysis with tools and external data for context. The site is intended to enable users to better understand their state governments’ financial and economic condition. The site contains state financial data and external demographic and economic data, along with tools ranging from graphs to regression, ranking and compound growth analysis. Data-Z is a division of TIA, not a separate entity.
TIA is funded by a combination of grants and individual donors, as well as higher education institutions and some businesses through Data-Z subscriptions. We do not receive any funding from federal, state or local governments.
Why are your numbers (TIA State Analysis and The Financial State of the States) different from those I find elsewhere?
Some sources omit the cost of pension and health insurance promises made by state governments to their employees upon retirement. Others assign all responsibility for state retiree pensions to taxpayers although some funding comes from other sources such as investments. Some independent appraisals of the present value of future retirement liabilities use their own estimated interest rate to discount those liabilities, while Truth in Accounting (TIA) uses state discount rates applied by the state actuaries. Although other independent appraisals add obligations expected to be incurred due to growth in government workforces, TIA does not make adjustments like this. Given that they account for assets available to pay bills as well as the use of other borrowing, TIA’s estimates provide a broader perspective of each state’s financial position, including retirement liabilities.
Is it proper to account for bills that aren’t yet due?
Yes. To keep a running tally of what a government owes in economic terms, bills must be accounted for when incurred. By accounting for bills when incurred, one can determine if the burden of paying for current-year services and benefits has been shifted to future-year taxpayers. Such a determination is a significant part of assessing government accountability.
Smoothing is a process by which actuaries calculate the value of pension funds by averaging the last several years’ market value. The “smoothed value” is used to estimate current required contributions for the pension funds given market value variations. This can create problems when the “smoothed value” is dramatically higher than the current market value because required contributions are lower than needed to ensure enough money is available to pay future pension promises.
In determining the funding status for retirement plans, states make assumptions about the expected rate of return in their investment portfolios. This is the rate of return. Many variables influence the rate of return, including stock market performance and interest rates. Higher assumptions for investment returns lead to higher estimates for the amount a liability is funded, partially because states also use these investment return assumptions to discount the present value of their liabilities. In contrast, discount rates are typically lower in the private sector, which leads to higher obligation estimates. Using a higher rate of return permits states to make smaller contributions to their pension funds.
Net revenue is the difference between a government’s general revenues (i.e., taxes) and net expenses. Net expenses adjust total expenses for non-tax revenue sources such as fees and grants (e.g., business-type activities). A government’s net revenue performance helps signal its commitment to running a truly balanced budget.
What are “business-type activities?”
A government body conducts business-type activities when it charges and accepts a fee for service, such as public university tuition. These revenues are not considered taxes and are counted differently because they are not guaranteed.
From one perspective, a government has a balanced budget when its planned expenditures and obligations do not exceed the amount it receives in revenue. From another perspective, a government has a balanced budget when it actually spends an amount equal to what it receives in revenue.
What is a “balanced budget requirement?”
Forty nine of the fifty state governments have balanced budget requirements either in law or in their constitutions. Only Vermont does not have a balanced budget requirement. Some requirements rely on estimates of expenditures and revenues for the coming year’s budget. Additionally, some requirements require budgeted appropriations to not exceed projected revenues even though appropriations are not actual spending.
Why are balanced budget requirements popular and desirable?
A major intention of balanced budget laws is so state governments avoid shifting the burden of paying for current-year services and benefits to future-year taxpayers. This is important for government accountability because it reduces the state’s ability to incur costs without accounting for them in the budget.
What does “off-balance sheet” mean?
Governments maintain balance sheets that show their assets and liabilities. However, accounting rules allow government bodies to note some long-term liabilities elsewhere in their financial reports, allowing them to omit them from the total money owed to creditors on the Statement of Net Assets.
What are “liabilities not fully disclosed?”
These are usually long-term liabilities such as employee retiree pensions and health insurance. Because of the way government financial statements are organized and the rules regarding government accounting, governments may keep the promises they’ve made to their employees off-balance sheet, hidden within their financial reporting.
CAFR stands for Comprehensive Annual Financial Report, a yearly report issued by each state's treasurer, comptroller, or another specialized government department or agency. Many other government bodies issue CAFRs as well, including some pension and retirement fund plans.
OPEB stands for Other Post-Employment Retirement Benefits, which includes health care benefits offered to government retirees.