With the financial crisis in 2007 and 2008, the subsequent recession, and the resulting loss of jobs, there has been a heightened interest in the financial outlook of state governments. In particular, politicians, voters, capital providers, and regulatory bodies have all focused on whether the deterioration in states’ fiscal wellbeing and burgeoning debt balances will affect their tax policies and their ability to provide entitlement programs. In this paper, we conjecture that politicians will view defaulting on debt, raising taxes, or cutting entitlement programs to be costly political responses to fiscal stress, and as a result, politicians will use mechanisms like accounting discretion to mask deficits. We also conjecture that there are economic outcomes associated with the use of accounting discretion, as outputs from the accounting system serve as inputs into a variety of economic decisions made by governmental entities.