A couple weeks ago, The Washington Post reported on a plan developed by downstate Illinois lawmakers to attempt to separate Chicago from the State of Illinois. Developments like “New Illinois” and related efforts to promote bankruptcy possibilities for Illinois cities raise important accounting questions.
Back in the early 1980s, governments carved out their own accounting standard setter, GASB, instead of the accounting framework for the private sector laid out by FASB. They argued that governments deserved their own rules, given how different governments were from private businesses.
For example, a “White Paper” on GASB’s website states:
“Because governments often have the power to tax—a right in perpetuity to impose charges on persons or property—they have the ability to continue operating in perpetuity. In contrast, business enterprises are at risk of going out of business because their ability to generate revenues depends upon market-determined demand for their goods and services.”
The power to tax has limits. Migration trends and initiatives like “New Illinois” underscore how market forces can discipline governments, too.
State and local governments are not alone. The frequency of the word “unsustainable” has been rising dramatically in the annual Financial Report of the US Government in the last two decades.
More fundamentally, every year, on July 4, we celebrate a relevant example how governments can go out of business.