Budget Transparency Problems Are Identified in 50-State Survey

Published September 1, 2008

The Institute for Truth in Accounting, based in Northbrook, Illinois, is a nonpartisan, nonprofit organization founded by financial and public policy experts to develop more effective accounting standards and deliver accurate government financial information to policymakers, opinion leaders, and citizens.

The institute is studying each state’s balanced budget requirement because this requirement is meant to remove incumbents’ ability to promise voters future benefits without affecting the state’s current budget calculations. The institute is looking for examples of the methods used to circumvent the intent of balanced budget requirements. Examples may be forwarded to the institute’s researchers at [email protected].

Transparency is critical in each state’s budget process, because that process is the principal vehicle through which state legislators and governors allocate resources collected from businesses and individuals.

With that in mind, the nonpartisan, nonprofit Institute for Truth in Accounting is surveying state governments’ deficits and balanced budget requirements. As a part of this research, funded by the Searle Freedom Trust, the institute is studying all states’ budget processes and the results reported on their financial statements.

The institute’s survey of the 50 states will determine which states, if any, are showing leadership in transparency and accountability to their citizens.

In our work on the study so far, common problems already have been identified.

Reporting Problems

After a state’s fiscal year ends, the state comptroller or treasurer issues the Comprehensive Annual Financial Report (CAFR), a type of report card on the accuracy of the previous year’s estimates of revenues and expenses. The institute’s research notes two key problems with the current budgeting and accounting systems.

First, the same accounting rules are not being used for budget calculations as for financial reporting. Second, CAFRs are not being issued in time for legislators or governors to review the results meaningfully before planning the next year’s budget.

Regarding the first problem, when states calculate their budgeted revenues and expenses, they are using “modified” “cash basis” accounting. Only current cash inflows and outflows are included in cash basis accounting. Therefore, budget calculations do not include liabilities incurred in the fiscal year that will be paid in future years.

The institute’s experience in Illinois shows “modified” seems to mean elected officials can change the amounts in almost any manner they want so they can claim a “balanced” budget. Another troubling trend the institute identified in Illinois is the lack of accounting for hundreds of millions of dollars of pension and other retirement benefit funding that were due but not paid in the previous fiscal year.

Budgets vs. Reports

The lack of consistency between budget calculations and financial reporting results means the budget numbers have no bearing or relevance to the CAFR numbers. For legislators, this seems to work out well: All they have to focus on is expected cash flow in the coming fiscal year, and they can ignore amounts that will be paid in future years.

Unfortunately for taxpayers, this creates a growing problem of having to pay for guaranteed liabilities that loom larger every day they are not adequately addressed. Public accountability is nearly impossible because there is no way for citizens or legislators to compare what was budgeted to what was actually spent.

California, Illinois Among Worst

Two states, California and Illinois, illustrate the scale of the problem.

California’s budget calculations included no estimate of revenues. Only estimated expenses are noted. Reviewing the FY07 CAFR, we found a net deficit (operating loss) of $1.083 billion.

True transparency and accountability begin with a budget process that gives taxpayers a clear and concise report of where their money is proposed to be spent. California hasn’t even begun to move toward such an approach.

The Illinois budget includes both anticipated revenues and expenditures, but each audit of that budget shows an ever-expanding hole between what was budgeted and what actually transpired during that fiscal year. In FY07, Illinois’ CAFR reported an accumulated net deficit of more than $20 billion. Nevertheless, the legislature and governor are not close to bringing about meaningful change in the current procedures.

This year’s budget process in Illinois shows signs of being as cantankerous as last year’s, when frustrated legislators were kept in the state capital until mid-August. When Gov. Rod Blagojevich (D) claimed in August 2007 the legislature was not working for a truly balanced budget, the state comptroller weighed in by pointing out the past four budgets the governor had signed were not balanced.

Illinois consistently ranks among the worst in providing its citizens a transparent budget process that actually tries to match the budgeted needs with reality. Until elected officials keep spending in line with realistic revenue projections, the state’s budget hole will only get deeper.

Promise in Vermont

The institute has found some promising results in Vermont, which is showing how to budget with both transparency and accountability.

Vermont is carrying a positive net operating balance, and its budget tracks its CAFR comparatively well. Informed with such information, Vermont taxpayers, legislators, and media have a truer depiction of the state’s financial condition and therefore can participate more meaningfully in planning for the next fiscal year and beyond.

Sheila Weinberg ([email protected]) is founder and CEO of the Institute for Truth in Accounting, a nonpartisan public interest group based in Northbrook, Illinois that encourages private and public entities to produce financial reports that are comprehensive, comprehensible, and transparent.

For more information …

The Institute for Truth in Accounting expects to publish its 50-state survey of state government deficits and balanced budget requirements shortly. Until then, more information on the institute’s activities is at http://www.truthinaccounting.org and http://www.truthin2008.org.