by Sheila A. Weinberg

All governmental entities derive their just powers from the consent of the governed.   Governments therefore have a special responsibility to report on their actions and the results of those actions.  These reports must provide useful information that enables the citizens and their elected representatives to make informed decisions.  To be useful, financial information must be understandable, reliable and relevant.  To be relevant this information must be available on a timely basis.  Because an informed electorate is the basis for a sound democracy, providing such information is an essential part of accountability in government. 

As a result of corporate accountability failures, citizens are demanding greater transparency and integrity in financial disclosure.   These accountability failures serve to re-enforce the importance of proper accounting and reporting practices.  It is critically important that such failures not be allowed to occur in the public sector.  To avert the financial difficulties experienced by failed corporations, like Enron and WorldCom, states' constitutions require balanced budgets.   The Government Accounting Standard Board (GASB) believes an intent of balanced budget laws is that the current generation of citizens should not be able to shift the burden of paying for current-year services to future-year taxpayers.  GASB further believes that this concept, known as "inter-period equity," is a significant part of accountability and is fundamental to public administration.  Inter-period equity is a significant part of accountability because it reduces incumbents' ability to promise voters future benefits without having an impact on the current budget calculations. 

Because the provisions of the most states' budget laws are not clear, the budgetary intent of balance is often avoided.   Strong evidence of this can be found in states' annual financial report.  While each state's budget is major policy setting document, the state's Comprehensive Annual Financial Reports (CAFR) is the report card on that policy.   This report gives more accurate pictures of states' finances.   

For example in my home state of Illinois, in March 2005 the legislature passed and the governor signed a "balanced" budget for Fiscal Year (FY) 2006.  The FY 2006 audited CAFR, which was issued twenty one months later, reported that the Illinois' primary government functions ran a deficit of more than $800 million.  Illinois CAFRs for the prior four fiscal years (FY2002-FY2005) also showed annual deficits of $4.2 billion, $4.1 billion, $2.5 billion, and $2.1 billion respectively.  For more than twenty years Illinois' budgets have been "balanced," yet according to the Illinois CAFR, the state government is in a financial hole of more than $44.5 billion. 

This is not unique to the State of Illinois.  Most states are required to "balance" their budgets, but run "structural" deficits.  How can states run "balanced" budgets, but run "structural" deficits at the same time?   Well, it all depends on how you count.  The budgets are calculated using a very complicated and intricate method, I call "political math."  These rules are defined by elected officials, who calculate budgets essentially on a cash basis, which allows liabilities and the real condition of states' finances to be hidden.  On the other hand, the audited financial reports are calculated according to generally accepted accounting principles (GAAP).  GAAP is established by the independent GASB, which has no political stake in the outcome of the financial reports.  GASB dictates that the states' government-wide financial statements be calculated on the accrual basis.  Accrual accounting provides a more comprehensive indication of the total financial activity of government and the long term effects of current policy.  Accrual accounting records revenues when earned and records liabilities when expenses are incurred, regardless of the timing of related cash flow.  Accrual accounting helps governments meet two important objectives of financial reporting: determining whether current-year citizens paid for the services they received in the current year, or if the costs of services were shifted to future-year citizens; and calculating whether a government's financial position has improved or deteriorated as a result of the year's operations.  

It is essential that such information be available during the each state's decision making processes. Each state's budget process is the principal annual vehicles through which the legislature and the governor allocate the states' current and future resources.  The budget process is each state's most important decision making processes.  Therefore, the budget should be presented in a way that facilitates policy analysis and promotes public accountability. 

To expose the state governments to a greater degree of public scrutiny and accountability, the citizens and their elected representatives must be informed of the current and long term financial consequences of the spending and revenue decisions included in the budget.  Therefore the citizens and their elected officials should be given an estimation of the surplus/deficit that would be reported on the accrual basis financial statements, if a proposed budget was implemented.  This estimation should be calculated by the state official responsible for producing the state's CAFR.  The estimate should be done using the accrual accounting concepts outlined by the independent GASB.   To be a part of the important budget process citizens and their elected officials must been given this relevant information.

The Institute for Truth in Accounting is currently researching the difference between states' budget calculations and the results reported on the CAFRs.  Do you know the methods that your state's elected officials use to avoid the intent of the balanced budget requirement?   What could be done to get legislators to consider the amounts reported on your state's CAFR, when drawing up the next year's budget?   Your insights would be most helpful in our research.