For several years the Institute for Truth in Accounting has documented Illinois’ budgeting process and shown unsound accounting principles had enabled lawmakers to evade constitutional and statutory mandates requiring balanced budgets.
The organization’s new report, “The Truth about Balanced Budgets—A Fifty State Study,” shows the problems identified in the institute’s home state of Illinois are rampant in other states.
Multitude of Fiscal Sins
When the institute began to design the study in early 2008, our purpose was to examine the effect lack of adherence to accounting principles and policies has on states’ budgeting and financial reporting practices. Our findings include:
* Most state annual reports indicate their budgets are not balanced.
* Despite this fact, states perpetuate the myth that their budgets are balanced.
* Governors and legislatures intentionally circumvent balanced budget requirements for political expediency, endangering fiscal sustainability and evading public scrutiny.
* Billions of dollars in retirement costs are incurred each year but not provided for in state budgets.
* Information required to assess the long-term consequences of current policy decisions is not available.
* Surpluses reported on state financial statements do not report true financial results.
* Many state annual reports are not published on time, resulting in legislators entering budget negotiations completely unaware of how the state performed in the previous fiscal year.
Creative Accounting
In early 2008 few people foresaw the financial distress that was to develop during the second half of the year. Since then, news of developing fiscal difficulties in several states shows why their creative accounting makes it difficult to understand a state’s financial condition and predict future financial crises.
These developments lend credence to the finding that a complete overhaul of the budgetary requirements governing the states is critically needed. It is also time to improve the Generally Accepted Accounting Principles used by state and local governments so pension and health care obligations are included as liabilities on the governments’ balance sheets.
Critical Requirements
Because state governments cannot infinitely expand their credit, issue currency, or tax excessively, their ability to spend is finite. To avert future financial difficulties and enhance accountability, states have adopted balanced budget requirements in their constitutions and/or statutory schemes. The Institute’s study found all states except Vermont have such requirements.
These balanced budget requirements have both short- and long-term objectives. In the short term, they generally force governors and legislatures to determine how much tax money must be raised to cover the government’s costs.
In theory, these requirements foster accountability, because politicians should be allowed to spend only the amount taxpayers are willing to pay.
The Governmental Accounting Standards Board (GASB) believes laws requiring balanced budgets prevent citizens from shifting the burden of paying for current services to future taxpayers—our children and grandchildren. GASB deems this concept, known as “inter-period equity,” to be a significant part of accountability and fundamental to public administration.
Political Cost Avoidance
Prevention of inter-period equity spending is indeed a significant part of accountability because it reduces incumbents’ ability to promise voters future benefits without having to face the political cost of enacting ways to pay for those benefits today.
The institute reviewed each state’s Budgetary Comparison Schedule as reported in the Required Supplementary Information included in the financial section of each state’s Comprehensive Annual Financial Report. The review found most states report their budgets are not balanced.
According to the review of the state numbers for the fiscal years 2005-2007:
* Twenty-six states reported budget deficits for each of the three years.
* Another nine states reported budget deficits for one or more of the three years.
* The annual budget bills adopted by Arizona, Arkansas, and California do not include revenues, which means only expenditures are presented on the Budgetary Comparison Schedules. This makes it impossible to determine whether their budgets were balanced.
Circumventing Requirements
Balanced budget requirements are intended to maintain fiscal sustainability and public accountability. Our study found self-serving budget manipulations are used to circumvent those requirements.
Governments circumvent the intent of balanced budget requirements by several means, including:
* Using “word games” that defy the plain intent of constitutions and statutes as well as the very meaning of words, such as classifying loan proceeds as “revenues” and claiming balanced budgets while running “structural deficits.”
* Falsely inflating or favorably shifting revenues into earlier periods.
* Manipulating reporting of expenses by ignoring vendor bills and shifting current expenses into later periods.
The manipulation of pension and other post-employment benefits involved the largest dollar amounts, the study found. State and local government officials realized long ago that paying their employees higher salaries has a very visible impact on their current budgets and financial statements.
The cash basis method used to calculate state budgets allows government officials to use deferred compensation gimmicks to avoid such negative impacts while keeping their workforces happy. Deferred costs of pension and retiree health care benefits do not appear on the budget, so politicians don’t have to cut other programs to provide for these benefits, nor do they have to raise taxes to fund these future promises.
Sheila Weinberg ([email protected]) is founder and CEO of the Institute for Truth in Accounting in Northbrook, Illinois.
For more information …
“The Truth about Balanced Budgets—A Fifty State Study”: http://www.truthinaccounting.org/news/listing_article.asp?section=451§ion2=451&CatID=3&ArticleSource=567
