UCLA Law Review

Fixing Public Sector Finances:
The Accounting and Reporting Lever

James Naughton & Holger Spamann

ABSTRACT

The finances of many states, cities, and other localities are in dire straits. In this Article, we argue that partial responsibility for this situation lies with the outdated and ineffective financial reporting regime for public entities. Ineffective reporting has obscured and continues to obscure the extent of municipal financial problems, thus delaying or even preventing corrective actions. Worse, ineffective reporting has created incentives for accounting gimmicks that have directly contributed to the dramatic decline of public sector finances. Fixing the reporting regime is thus a necessary first step toward fiscal recovery. We provide concrete examples of advisable changes in accounting rules and advocate for institutional changes, particularly Securities and Exchange Commission involvement, that we hope will lead to better public accounting rules generally.

It is no secret that Truth in Accounting wants to see changes in how the government accounts for our tax dollars. 

We call for using Full Accrual Calculations Technique or FACT-based to be used in government budgets. Currently, the antiquated modified accrual accounting technique is being used, and it obfuscates the truth about the fiscal health of our government at all levels. In addition, this technique has led to budgetary mismanagement and a uniformed electorate.

Therefore, we have begun a campaign to directly contact elected officials at the city and state levels. 

We started with the mayors and council members of the five sinkhole cities in our Financial State of the Cities report and the governor & legislators of New Jersey since they ranked last in our Financial State of the States report. The five cities are New York City, Chicago, Honolulu, Philadelphia, and Portland. Unfortunately, as of this writing on 1/12/23, only two council members have responded. One from Chicago said they have no official position on accounting standards, and the one from Philadelphia asked me to forward the information to the city's Chief Financial Officer. Unfortunately, the city website does not list his email. I'm tracking it down! 

We must ask ourselves if the lack of response is complacency, complicity, or conspiracy. 

You can read the correspondence they received here.  And if you would like to join this project and reach out to your elected officials with this information, we welcome the help. Contact Judi at jwillard@truthinaccounting.org so we support you and can track responses. 

On November 14, 2022, Illinois Governor JB Pritzker issued a press release touting the findings of the state's annual Illinois Economic and Fiscal Policy Report (the Economic Report). In the release, he claimed:

• Illinois is in its best fiscal shape in decades

• The state's projected long-term budgetary deficits will be nearly eliminated

• Extra money will be put into the pension systems, and $200 million will be added to the rainy-day fund

David is joined this week by Sheila Weinberg, founder and CEO of Truth in Accounting, a watchdog group fighting the good fight around governmental accountability. The mission of this organization seems harmless enough: to compel governments to produce financial reports that are accurate (stop the presses!), but apparently, this is more controversial than it sounds. David and Sheila walk through the simply unfathomable abuses of basic accounting that local, state, and federal governments get away with, and ultimately, how this undermines the optimal growth of a free and productive economy in monumental ways. Listen to the full podcast here. 

Sometimes we are asked why we at Truth in Accounting care so much about total government debt. People suggest government debt is like our mortgages. We only need to worry about making the next month’s payment. If we can pay our bills today, why worry about tomorrow?

Well, that is certainly a nice thought. The only problem is, typically, our mortgage is backed by an asset - our house. If we lose our jobs and know we will not have income for the next year, we will have the option to sell our homes to eliminate the debt. The debt is only a debt so long as we are financially responsible for the underlying asset from where the debt originates. Once we sell the house, the debt disappears, and we move forward in whatever manner makes sense. READ MORE

This is written in support of S. 4295, the Financial Data Transparency Act of 2022. It is bi-partisan legislation. Senator Warner (D-VA) and Senator Crapo (R-ID) are sponsoring a bill that would require the Municipal Securities Rulemaking Board (MSRB) to "establish data standards'' and to "scale" reporting requirements for "smaller regulated entities." These entities would include state and local governments. This legislation supports the use of technological advances toward developing standardized financial information that already exists for publicly traded companies. Truth in Accounting wholeheartedly supports this legislation. READ MORE

A new analysis of the audited financial reports found Jefferson County has a Taxpayer BurdenTM of $500, earning it a “C” grade from Truth in Accounting. READ MORE

Be Heard!

Proposed changes to certain risk disclosures are open for public comment to the Government Accounting Standards Board until September 30.

Written comments are the primary means by which the Board solicits feedback. Truth in Accounting has prepared a letter to GASB on this issue. We encourage you to read our letter, copy it, use it as a template, and send it yourself.

Quote from GASB:

"State and local governments face a variety of risks that could negatively affect the level of service they can provide or their ability to meet obligations as they come due. Although governments are required to disclose information about their exposure to some of those risks, essential information about certain other risks that are prevalent among state and local governments is not routinely disclosed because it is not explicitly required."

GASB is the board responsible for setting accounting standards and practices. Changes in accountability and transparency start with them. 

Part Three of Four

The previous two blog posts explained that searching governmental financial reporting statements is difficult. We also discussed that after the stock market crash of 1929, the government made financial reporting for publicly traded companies more transparent. It has been an almost 100-year improvement process in public company reporting starting with the rules promulgated through the SEC in 1933 until today. Now the entire information a company reports is searchable through a programming language called Inline XBRL. We know XBRL is a language to report financial data, but how does it work, and how would it help governmental reporting? READ MORE

Employers review our job history, education, references, and credit check to ensure we are someone they can trust. So why should we rely only on credit ratings to asses the financial health of our government? After all, credit ratings are only one tool for taxpayers to evaluate the government's trustworthiness. READ MORE