At a time when state and local governments have to make tough choices due to COVID-related budget shortfalls and the federal government is contemplating more aid in another stimulus package, citizens deserve to know the extent of their governments’ financial troubles now more than ever.
State and local government finances have taken a hit this year. As of June 2020, the 50 states were projected to lose a combined $397 billion in revenue. We will not know the actual financial hardship this pandemic has caused for a couple of months when governments begin to release their annual financial reports for fiscal year 2020.
Americans deserve truthful and timely government financial information, but, unfortunately, with the way government budgets are prepared they are not receiving accurate information.
Forty-nine of the 50 states (except Vermont) have balanced budget requirements. To you and me a budget is balanced when our expenses do not exceed the money we earn. But the rules for government accounting allow governments to obfuscate their budgets and claim “surpluses” when they are millions, if not billions of dollars in debt.
Many states are able to tout surpluses, even during the pandemic, because they shortchange their retirement liabilities and other bills. In reality, the 50 states had a combined debt of $1.5 trillion before the pandemic began. This is like someone touting a few hundred dollars in a savings account while ignoring thousands of dollars of credit card debt.
Governments can falsely claim balanced budgets because accounting standards set by the Governmental Accounting Standards Board (GASB) allow them to keep two sets of books. The books that governments use to budget, which are called the General Fund statements, use a confusing accounting system known as modified accrual accounting. This is a thinly disguised name for cash basis accounting.
Cash basis accounting allows governments to ignore long-term liabilities, such as the pension and health care promises they made to their government workers, teachers, and firefighters. This method is so deceptive that the IRS does not allow corporations making more than $26 million per year to use it. We everyday Americans don’t use it either when preparing our household budgets. So why should governments be any different?
This type of accounting has dire real-world consequences. Nonprofits that provide services for the most vulnerable are not getting paid. In New York, for example, 700 nonprofit organizations signed onto a letter to Governor Cuomo about how the decision to delay payments to nonprofits puts them at serious risk for financial failure.
We have the chance to change government accounting for the better, perhaps even before they pass the next stimulus bill. The GASB is currently accepting comment letters on general fund accounting. You can write to GASB to tell them you don’t think governments should be any different from corporations or individual citizens when it comes to managing their finances.