Source: Truth in Accounting
Latest Data: 2022
Release Timing: Annual
Amounts: Ranking 1-50
Contact: Sheila Weinberg, (847) 835-5200, sweinberg@truthinaccounting.org

This index is inspired by the work of Edward Kane, a professor of finance at Boston College. Kane wrote books warning about the developing crisis in the bank deposit insurance system in the late 1980s, before and during the savings and loan crisis. Kane coined the term "zombie bank," referring to banks and thrifts that were effectively insolvent but allowed to remain open via untruthful accounting and regulatory forbearance. 

Kane called these banks "zombies" as they were really dead but allowed to walk among the living, while false accounting delayed loss recognition and regulatory intervention. Socialization of losses through the government safety net for banking firms gave zombies incentives to take large risks -- particularly if insiders gathered any upside but taxpayers would take the downside. Zombies had incentives, in Kane's words, to "gamble for resurrection." These incentives amplified the cost of the savings and loan crisis for taxpayers.

Similar incentives could be at work in state and local governments today, particularly those with sorely underfunded pension plans. Citizens and taxpayers may be threatened by risky investments in those plans, similar to how they paid a price for risky assets in thrifts. 

Our Zombie Index tries to identify states that may be especially prone to this kind of behavior. The Zombie Index is based on six equal-weighted elements that relate to what Kane viewed as the factors in Zombie-ness. 

1. The first is Truth in Accounting's "Taxpayer Burden," which measures the overall state government financial condition. Large “Taxpayer Burdens” point to deeply insolvent state governments.
2. The second is the change in the Taxpayer Burden in the decade since 2009, to identify states with significant deterioration in their financial condition. 
3. The third is the state’s timeliness (or lack thereof) in filing its Comprehensive Annual Financial Report. 
4. The fourth is the difference between actual retirement benefit liabilities and those reported on state balance sheets in 2014, the year before GASB finally required them to be reported as debt. This metric, while it comes from 2014, still helps capture an important component of zombieness. Regulatory accounting principles for thrifts inflated capital positions relative to reality back in the S&L crisis. 
5. The fifth is based on Truth in Accounting’s appraisal of the extent to which a state government is still underreporting its net pension and OPEB liabilities, and leaving them off the balance sheet.
6. The sixth is Truth in Accounting’s measure of the extent to which state governments report confusing and misleading new accounts called “Deferred Outflows of Resources” and “Deferred Inflows of Resources” in their balance sheets. Deferred Outflows, in particular, artificially help boost reported net positions by smoothing in changes in assumptions and investment losses in government pension funds. 

We rank the states on each of the metrics we developed for each of these factors. Then we compute an average for those six rankings, and rank the states on their averages. When states tie on their average ranking, we use the change in their "Taxpayer Burden" since 2009 to break the tie.

States with higher Zombie Index rankings deserve scrutiny on the risks in their investments for public pension plans. The Zombie Index Ranking is from 1-50, with one indicating the smallest Zombie, and 50 indicating the largest Zombie.