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Report: One-third of states have passable fiscal transparency, the rest need improvement

Written on Nov 28, 2018

More than one third of state governments are doing a good job with fiscal transparency, a new report released by the nonpartisan, nonprofit Truth in Accounting (TIA) indicates. The report, which evaluated the transparency of state government finances, found the remaining two-thirds in need of improvements.

To encourage the publication of transparent and accurate government financial information, TIA created a “Financial Transparency Score” for financial reporting. It evaluates several factors ranging from whether a state used an independent auditor to examine its annual financial report to how accessible reports are online.

No state earned a perfect score of 100. However, 19 states scored well on a curved grade, receiving As with scores between 80 and 85. Utah earned an 85, the highest score. Twenty-one states received Bs; three states received Cs; six received Ds. Connecticut received the lowest failing grade of 44, less than half of Utah’s grade.

The top ten states with the most fiscal transparency, according to TIA, are Utah, Washington, West Virginia, Virginia, South Dakota, Idaho, North Dakota, Alaska, Georgia and Indiana.

The ten states with the least fiscal transparency are Missouri, Louisiana, Nebraska, Rhode Island, Vermont, Massachusetts, Montana, Arkansas, New Mexico and Connecticut.

“While there is a great deal of focus on state governments’ budgets, the results of those budgets are found in a government’s comprehensive annual financial report (CAFR),” TIA notes. The CAFR is produced annually and is audited by a certified public accountant.

To receive a score of 100, TIA suggests that governments follow a best practices guideline, which includes certain criteria for their CAFR. TIA states that CAFR must be easily accessible online, with useful links from the table of contents and bookmarks.

TIA’s analysis found that all 50 states produced CAFRs that are in a searchable PDF format; 46 states received a clean opinion.

Louisiana, Missouri and Nebraska received qualified opinions, meaning the auditors found the financial statements were fairly presented, except for a few specified issues. New Mexico received a disclaimer of opinion, meaning “it in essence flunked its audit.”

State governments should report all retirement liabilities on their balance sheets, including a net pension liability measured on the same date as the CAFR that is “not distorted by misleading and confusing deferred items,” TIA says.

TIA found that states did not report their current pension liability amounts. All but three states used June 30, 2016, figures in their fiscal 2017 annual reports. The other three states used amounts from different valuation dates. Colorado, for example, calculated its pension liability using data dated Dec. 31, 2016, for the state’s fiscal year ending June 30, 2017.

No state accurately reported its net position, TIA reports. Instead, they “used confusing accounts called deferred outflows and inflows.”

“Surprisingly, only 15 states used outside certified public accounting (CPA) firms to audit the state CAFR,” the report notes. “The other states used auditors who work for the state, which brings into question their ability to provide an independent opinion.”