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Truth in Accounting's conditions on federal aid to state and local governments

May 14, 2020

As terribly horrible are the health and economic outcomes of COVID-19, this crisis provides Congress with a unique opportunity to not just help states and local governments’ short-term financial needs, but to provide some much-needed guidance. Any aid package should require state and local governments to develop fiscal stability plans that would address financial imbalances before the crisis arrived, and take steps to ensure governments are financially prepared for future crises.

At a minimum, Congress should dictate that governments cannot fund their pension systems more than they would have if the crisis didn't happen. Federal aid that comes from taxpayers throughout the country should not “bail out” the pension system of states who have chosen in the past to keep taxes low and overspend but not properly funding their pensions systems. Money is “fungible,” so even if Congress mandates that no federal aid should be used to fund the pensions, the aid will reduce the money needed to fund other parts of the government,  which might make non-federal aid money available to provide additional funding to previously woefully underfunded pension systems. To avoid this sleight of hand, Congress should limit the amount governments can contribute to their pension plans to historical contributions or amounts set in law that existed before the crisis hit.

Required elements of fiscal stability plans

  • Proper funding of pension systems as determined by the systems’ actuaries
  • Proper funding of retiree health care systems as determined by the systems’ actuaries
  • Establishment rainy day funds equaling six months of general revenue
  • Calculation of budget using full accrual calculations and techniques
  • Limitation of increases in government spending until pension and retiree health care systems are fully funded and rainy day funds adequately funded

 

 
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