Investment gains improved state finances, but 24 states still could not cover all bills

Strong market returns helped lift state finances in 2025, mainly by boosting public pension assets, but Truth in Accounting says 24 states still ended the year unable to pay all of their bills. The group warns lawmakers not to treat temporary investment gains as long-term fiscal stability, especially as pension debt and retiree healthcare costs remain large.

Why it matters: - Strong investment markets improved many states’ balance sheets in 2025, but the gains may not last. - Truth in Accounting says states risk using temporary market help to justify new promises instead of funding obligations already on the books. - Taxpayers could face the cost if markets weaken and pension gaps widen again.

What happened: - Truth in Accounting released its seventeenth annual Financial State of the States report on October 15, 2026. - The report ranked all 50 states on financial health. - Twenty-four states still did not have enough money to pay all their bills at the end of fiscal year 2025. - New Jersey ranked last for the second year in a row with a Taxpayer Burden of $45,800. - North Dakota ranked first again with a Taxpayer Surplus of $72,300. - The top five and bottom five states were unchanged from the prior year.

The details: - The 50 states had $2.85 trillion in bills and $2.23 trillion in assets available to pay them. - The bills included $775 billion in unfunded pension liabilities. - The bills also included $490 billion in other post-employment benefits, mostly retiree healthcare costs. - Strong stock market performance increased pension asset values and lowered unfunded pension obligations in most states. - Fourteen states saw less than a 5% improvement in unfunded pension obligations. - Those states were Alabama, Hawaii, Illinois, Kentucky, Maryland, Missouri, Montana, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oregon, and Texas. - Illinois earned nearly 10% investment returns, but its major pension plans saw little to no improvement because contributions stayed below recommended levels. - Illinois has 47 cents in pension assets for every dollar of benefits promised. - Every state except Vermont has a balanced budget requirement. - Truth in Accounting calculates each state’s debt or surplus on a per-taxpayer basis as a Taxpayer Burden or Taxpayer Surplus. - As of September 1, 2026, four states had not released their fiscal year 2025 financial reports. - Truth in Accounting used 2024 data for those four states.

Between the lines: - The report argues that balanced budget rules do not prevent states from pushing long-term costs onto future taxpayers. - The group says public pensions remain vulnerable because state and local plans do not have the federal funding and reporting protections that apply to private-sector plans under ERISA. - The persistence of the same best- and worst-ranked states suggests the underlying fiscal gap is structural, not just a one-year market story. - The delayed financial reports point to a transparency problem that can blur real-time budget decisions.

What's next: - Truth in Accounting says states should use strong market periods to fully fund pension promises and build reserves. - The group also wants lawmakers to avoid benefit increases or contribution cuts based on short-term investment gains. - The report calls for government pension standards similar to private-sector ERISA protections. - Future market downturns could quickly erase the improvement seen in 2025 if states do not strengthen funding now.

The bottom line: - State finances looked better in 2025, but pension debt still leaves many governments exposed.