By Sheila A. Weinberg, founder & CEO, Institute for Truth in Accounting
Later this summer the Institute for Truth in Accounting will be issuing our survey of state governments’ deficits and balanced budget requirements. As a part of this research, funded by the Searle Freedom Trust, the Institute is studying each of the 50 state’s budget process and the results reported on their financial statements.
We believe that transparency is in each state’s budget process is critical because this process is the principal vehicle through which the state legislature and governor annually allocate resources generated through identified and regulated revenue streams. The budget document and process should be the cornerstone of government accountability. The research that we have done so far indicates two key problems with the current budgeting and accounting systems. First, the same accounting rules are not being used for budget calculations and financial reporting. Second, the audited Comprehensive Annual Financial Reports (CAFRs) are not being issued in time for legislatures or governors to meaningfully review the results before planning the next year’s budget. Our survey of the 50 states will determine what state budget processes, if any, are showing leadership in transparency and accountability to their citizens.
To the first problem, when states calculate their budgeted revenues and expenses, elected officials and their staff 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. Our experience in Illinois shows that ‘modified’ seems to means that the elected officials can modify the budgeted amounts in almost any manner that they want, so they can claim a “balanced” budget. Another troubling trend the Institute researchers have noticed in Illinois is the lack of accounting for hundreds of millions of dollars of pension and other retirement benefit funding that were incurred but not funded in previous fiscal years.
The CAFRs are prepared in accordance with Generally Accepted Accounting Principles (GAAP). GAAP accounting gives a more complete picture of each state’s financial condition, including a clearer view of the state’s liabilities. The lack of consistency between the budget calculations and financial reporting results in an “apples and oranges” scenario, where the budget numbers have no bearing or relevance to the CAFR numbers. Public accountability is nearly impossible because there is no way for the public to compare the amounts included in the “balanced” budget to what was actually spent. For legislators, “cash basis” budgeting seems to work out very well: they only need to focus on expected cash flow in the coming fiscal year, without having to include amounts promised in future years. Unfortunately for the taxpayers, it creates a growing problem of having to pay for guaranteed liabilities that only loom larger every day they are not adequately addressed.
Three states show the scale of the problem: California, Illinois and Vermont.
In California, the legislature and governor do not even include an estimate for anticipated revenues in the budget—it’s a “$0” entry. Only expected expenditures are included. The FY07 CAFR showed a net deficit of $1.083 billion and recent words of reform from the Sunshine State makes us worry. True transparency and accountability begins with a budget process that gives the taxpayers a clear and concise report of where their money is proposed to be spent. California hasn’t even begun.
In Illinois, where the budget does include both anticipated revenues and expenditures, the growing difference between the budgeted amounts and the CAFR amounts is staggering. In FY07, Illinois’ CAFR reported an accumulated net deficit of more than $20 billion. Yet in spite of this evidence, the legislature and governor are not close to bringing about meaningful change to the current procedures. This year’s budget process is showing signs of being as cantankerous as last years, where frustrated legislators were sequestered in Springfield until mid-August. When the governor claimed that the legislature was not working for a truly balanced budget, the state comptroller weighed in by advising that the last four budgets the governor had signed were not balanced. Illinois consistently ranks among the worst and most dire when it comes to budgeting and funding.
The Institute has found some promising results in Vermont, which is showing the way to budget 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 even the media have a more true depiction of the state’s financial condition, and therefore can participate more meaningfully in the planning for the next fiscal year, and beyond.
We will issue our 50-state survey of state government deficits and balanced budget requirements in late summer. Until then you can find more information on their websites at: www.truthinaccounting.org and www.truthin2008.org
Find the original blog post here: http://aga.typepad.com/aga/2008/07/a-study-of-the.html