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Walking the talk? Budgets vs. results

November 8, 2017

Late last week, the Volcker Alliance released a new report grading all 50 states on their budgeting practices.  The report, titled “Truth and Integrity in State Budgeting: What is the Reality?”, examined and graded the states in five different categories of budgeting practices – “budget forecasting,” “budget maneuvers,” “reserve funds,” “legacy costs,” and “transparency.”

Reviewing their results in light of Truth in Accounting’s “Taxpayer Burden” measure of state finances leads to some interesting and useful insights, and more questions. Caution makes sense in this area, in important part because budget math and the accounting results reflected in our Taxpayer Burden have key differences.  For one thing, budgeting provides prospective perspective (on an “income statement” basis), while our Taxpayer Burden represents the cumulative impact of longstanding fiscal practices (from a “balance sheet” perspective.) Budget accounting can be more malleable (and deceptive) than the GAAP results leading to our Taxpayer Burden, a factor explicitly addressed, on the surface, in the Volcker Alliance grading.

Let’s see how their results line up (or not) with ours.

We took a close look at the distribution of their grades in those five categories (for the years 2015-2017), and compared them to the distribution of rankings of the states on our Taxpayer Burden.  We compared them to our latest Taxpayer Burden (2016), as well as the change in the ranking on Taxpayer Burden from 2009 to 2016.

First, let’s look at how they defined their five main categories:

Budget Forecasting. The criteria used in grading this category didn’t necessarily rate how accurate the forecasts were. It was more about practices deemed better than others, at least by the Volcker Alliance. Good practices included sticking to single, “binding” (ha!) numbers, rather than a range of different estimates, as a source of possible discipline. The criteria also reviewed how reasonable those rationale were, in the view of the Volcker Alliance, and whether multi-year estimates (another good practice) were used.

Budget Maneuvers. Here, the Volcker Alliance assessed whether states stressed cash-based accounting while budgeting, or more valuable accrual concepts.  Truth in Accounting has long advocated full-accrual-based budgeting techniques (what we call “F.A.C.T” based budgeting).  Among other slippery ways of ‘balancing’ budgets, governments can count anticipated borrowing proceeds, expected one-time inflows, and funds transfers as revenues to ‘balance the budget,’ but leave tomorrow for another day. 

Reserve Funds. This category includes assessments of state practices relating to so-called “rainy day” funds. Some states have more volatile revenue streams than others, in part because some states are more sensitive to economic growth and/or special factors (like oil prices) than others, so making a judgement about how ‘adequate’ rainy day funds are can be a difficult task.  Here the Volcker Alliance assessed practices rather than levels, such as the existence and quality of formal policies for funding and/or replenishing government rainy day funds, and whether or not funding policy made an attempt to relate “good” funding to possible revenue volatility.

Legacy Costs. Here the Volcker Alliance examined how well the state funded actuarially determined requirements for “adequate” pension funding, together with the overall liability facing the state.  Technically, the latter isn’t exactly a current “budgeting” issue, but (like our Taxpayer Burden) the current consequence of long-standing fiscal practices. The Volcker Alliance acknowledged that one way to ‘improve’ current pension funding is to sell pension obligation bonds, which are not necessarily a source of fiscal discipline. But the Alliance does not appear to have explicitly penalized states or evaluated them on that practice.

Transparency.  The criteria in this category reflected the Volcker Alliance’s judgement on the quantity and quality of budget information provided openly to the public. Some of the practices examined included whether states provided consolidated budget websites, whether those websites include related information like debt service costs, and whether (a growing concern) states incorporate the deferred infrastructure maintenance costs and tax expenditures in their budgeting.

Budgets are malleable, forward-looking things.  Whether or not states actually “walk the talk” is another matter. A state may claim that it expects revenues to run in line with or ahead of expenses at the outset of a given year, but whether or not it reaches that result depends on both the willingness and ability of the state. At Truth in Accounting, when we survey state finances, we try to see if accrual accounting measures in end-of-year annual reports suggest that states really “walked the talk,” and find that states with higher frequencies of keeping GAAP expenses within revenues also tend to be in much better position that states that do not.

So, how do our assessments compare to those of the Volcker Alliance?

Longer-story short, and a topic or two for future review, we see that the Volcker Alliance grades for “Budget Maneuvers” and “Legacy Costs” significantly relate to our rankings for states on their Taxpayer Burden, and in the expected direction (better grades = better TIA rankings). The relationships between grades on “Budget Forecasting” and “Reserve Funds” appear more tenuous.  The grades for “Transparency” aren’t significantly related to our Taxpayer Burden, but the “Budget Maneuvers,” “Legacy Costs” and “Transparency” grades are all significantly related to the change in Taxpayer Burden since 2009, consistent with more recent results.

The Volcker Alliance assessments of “Budget Maneuvers” also align strongly with the frequency of “truly” balancing the budget, at least in end-of-year accrual accounting results.

Much food for thought in here, and further exploration. 

Speaking of budget maneuvers, why does the Volcker Alliance hold New York City in such high esteem?  Hmm.

 
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