Victoria's Auditor-General says the state's $1.2 billion surplus is built on dodgy accounting of money that should have gone back to the federal government.
But Treasurer Tim Pallas is claiming a win because the state gets to keep the $1.5 billion for the dumped East West Link project anyway.
"The money was never going to go anywhere other than remain on the books of the state of Victoria," he told reporters on Wednesday.
Acting Auditor-General Peter Frost said the $1.5 billion should have been treated as a liability in the 2014/15 financial report, which means Victoria would have had a deficit of $286 million.
The federal government demanded the money back after the East West Link was axed and accounted for the $1.5 billion in its 2015/16 budget.
Mr Pallas said the department of Treasury and Finance and accounting firm Ernst and Young said Victoria was right to keep the money on its books.
"Whilst we respect the Auditor-General, on this particular issue, we disagree," he said.
Mr Pallas said he had a letter from federal Treasurer Scott Morrison confirming Victoria got to keep the $1.5 billion.
Shadow treasurer Michael O'Brien said the government had cooked the books.
"Under Labor, Victoria is seeing a budget deficit for the first time in over 20 years while debt is increasing and thousands of full-time jobs are being lost," he said.
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