Fiscal Watchdog Releases 2026 State of the States Report

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Texas’s financial position improved in the latest annual assessment from Truth in Accounting (TIA), but the state still fell short of having enough available assets to cover its obligations. The 2026 Financial State of the States report places Texas 27th nationally with a “C” financial grade and a $400 Taxpayer Burden. That burden is down from $1,100 in last year’s report, although Texas’s ranking and grade remained unchanged.

The improvement deserves recognition, but the report also identifies substantial unfunded retirement obligations, benefit expansions that added to pension liabilities, and weaknesses in the oversight of federal funds. Together, those findings reinforce the need to evaluate fiscal responsibility by more than a balanced budget or a strong revenue forecast.

What the Report Measures

TIA evaluates state finances using audited financial statements and retirement system reports, comparing the assets available to pay bills with financial obligations that include unfunded pensions and retiree healthcare benefits. It then divides the resulting shortfall or surplus by its estimated number of taxpayers to produce a Taxpayer Burden or Taxpayer Surplus. A Taxpayer Burden is an accounting measure of obligations left uncovered under TIA’s methodology. It is not an actual tax bill or a prediction that lawmakers will impose a tax of that amount.

The distinction between the report’s publication year and the financial period it examines also matters. The 2026 edition primarily evaluates fiscal year 2025, although four states had not released their fiscal year 2025 financial reports by TIA’s September 1, 2026, research cutoff, so the organization used fiscal year 2024 information for those states. In either case, the analysis offers a broader perspective than the budget lawmakers adopt, since a state can meet its budget requirements while still carrying substantial obligations that will require resources in future years.

National Finances Improve, but Shortfalls Remain

Across all 50 states, TIA reported approximately $2.23 trillion in assets available to pay bills against $2.85 trillion in obligations, leaving an aggregate shortfall of approximately $624 billion. Unfunded retirement benefits remained a major source of financial pressure. The report identified $775 billion in unfunded pension liabilities and another $490 billion in unfunded other post-employment benefits, primarily retiree healthcare.

Twenty-six states qualified as “Sunshine States,” meaning they had sufficient available assets to cover their obligations under TIA’s methodology, while the remaining 24 were classified as “Sinkhole States.” North Dakota led the rankings with a $72,300 Taxpayer Surplus, followed by Alaska at $64,200 and Wyoming at $30,300, with Utah and Tennessee rounding out the top five. At the other end, New Jersey ranked last with a $45,800 Taxpayer Burden, joined in the bottom five by Connecticut, Illinois, Massachusetts, and California.

Investment performance remains an important influence on these results. Strong returns can improve pension funding measures, while market losses can reverse that progress. An improved annual assessment therefore requires examining both the numbers and the factors behind them.

Texas’s Three-Year Comparison

Texas’s latest results show a meaningful improvement in its per-taxpayer position, even as its national ranking remained unchanged.

Report year	National ranking	Taxpayer Burden	Financial grade
2024	24th	$900	C
2025	27th	$1,100	C
2026	27th	$400	C

This year’s $400 Taxpayer Burden represents a reduction of approximately 64 percent from the $1,100 reported last year, though Texas remained just short of Sunshine State status. Under TIA’s grading system, a Taxpayer Burden between $0 and $4,999 receives a “C,” so the improvement narrowed the state’s shortfall considerably without changing its grade. As Texas Policy Research (TPR) discussed in its 2024 coverage and 2025 coverage, long-term retirement obligations have remained a recurring concern throughout this period.

Texas Still Has a $3.9 Billion Gap

TIA calculated that Texas had approximately $174.4 billion in assets available to pay $178.3 billion in obligations, leaving a $3.9 billion shortfall. That calculation does not mean Texas had only $174.4 billion in total assets. The report identified approximately $578.3 billion in total assets, then excluded capital assets and assets restricted for specific purposes. Buildings, roads, and restricted funds can provide significant public value, but they are not freely available to satisfy other obligations, which explains how a state can report substantial assets while still recording a shortfall in this assessment.

According to TIA, Texas reported revenues significantly exceeding expenses in fiscal year 2025. However, much of that surplus went to capital assets and restricted purposes, which largely offset its effect on the state’s financial condition. For taxpayers, the practical question is whether the resources available to meet existing commitments are keeping pace with those commitments.

Retirement Obligations Remain a Major Challenge

Texas’s obligations included approximately $52.2 billion in unfunded pension benefits and $49.4 billion in unfunded retiree healthcare benefits, a combined $101.6 billion in unfunded retirement commitments. TIA also reported that legislation increasing benefits for certain employees and educators added $4.9 billion to pension obligations. Those increases help explain why strong investment returns did not produce a significant decline in the state’s unfunded pension liability.

Retirement benefits are commitments with costs extending well beyond the budget in which lawmakers authorize them, and expanding them without adequately providing for their long-term cost places additional pressure on future budgets. The policy challenge is to honor obligations already earned while preventing new unfunded commitments. Strong investment years can help, but lawmakers should not depend on favorable markets to substitute for sustainable benefit structures and consistent funding.

Federal Funding and Oversight

The report also highlights Texas’s reliance on federal funding. Texas received approximately $105.3 billion in federal grants in fiscal year 2025, representing 40 percent of its revenue. Those dollars come with program requirements and oversight responsibilities, and they expose state finances to decisions made in Washington.

TIA’s discussion of Texas’s Single Audit identified repeated problems involving program monitoring, recordkeeping, reporting, and technology systems. Those weaknesses made compliance harder to verify and increased the risk that fraud could occur without detection. To be clear, control weaknesses do not establish that every affected program experienced fraud, but they do demonstrate the need for agencies to correct recurring problems and for lawmakers to verify that those corrections work. Fiscal accountability requires examining how money is managed after it is appropriated, including money received from the federal government.

State Spending Continues to Outpace Growth

TIA’s assessment measures obligations already on the books, but how quickly the state is adding to its spending base matters as well. The 2026–27 General Appropriations Act totals approximately $337.4 billion in All Funds and $237 billion in State Funds, the largest budget in Texas history. According to TPR's analysis of state budgets since 1996, State Funds have grown 42.8 percent since the 2022–23 biennium and All Funds have grown 27.4 percent, while combined population growth and inflation over the same period were only about 20 percent. Because this year’s report covers fiscal year 2025, the effects of the current budget will begin appearing in future editions.

That growth came during a period of exceptional revenue. Lawmakers began the 2025 session with a $24 billion surplus and a full Rainy Day Fund, yet they chose to expand appropriations rather than hold spending to population and inflation, and only about $6 billion of the budget’s property tax relief is new. Strong revenue years are when the state is best positioned to pay down unfunded obligations and return money to taxpayers. When those years instead raise the baseline of recurring spending, the additional commitments remain long after the surplus is gone.

Implications for Texas Lawmakers

The 2026 report gives Texas lawmakers evidence of progress alongside a clear warning against complacency. Texas’s smaller shortfall is encouraging, but a “C” grade and more than $100 billion in unfunded retirement benefits leave considerable room for improvement. TIA recommends incorporating full accrual accounting into budgeting, which it calls FACT-based accounting. That approach would recognize the cost of commitments when they are incurred, giving policymakers and taxpayers a clearer view of the financial consequences of current decisions.

For Texas, that means making long-term costs visible before expanding benefits or creating additional recurring obligations. It also means correcting audit weaknesses, examining dependence on federal funding, and holding spending growth to no more than population growth plus inflation, especially during periods of strong revenue. A favorable revenue forecast does not erase promises already made. Texas can strengthen its financial position by reducing unfunded obligations and limiting new commitments that would shift today’s costs onto tomorrow’s taxpayers.

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