Reform Government Accounting Standards
Many state and local governments have requirements to balance their budget every year, but because of how they prepare financial reports, budgets that appear balanced are anything but. All too often, governments' official financial statements don’t reflect reality because they follow “cash-based” accounting principles. What does that mean?
With cash-based accounting, financial reports show expenses only when money is paid, not when debt or future expenses are incurred. By only reporting cash spending and not accumulated debt, the financial reports paint a much rosier – but far from accurate – picture of government finances.
This delusional and nontransparent approach to government accounting has had dire real-world consequences for cities, states, and their citizens. When it comes time to pay the previously hidden debt, elected officials face a sudden need to hike taxes or slash services—or both. People suffer.
Here is what the International Monetary Fund has to say about this technique.
Pure cash accounting has a number of weaknesses from the point of view of government financial transparency, integrity, and accountability. Under cash accounting, transactions are recognized only when the associated cash is received or paid, and economic events are not reported if there is no immediate exchange of cash. Governments have been tempted to exploit this weakness by deferring cash disbursements or bringing forward cash receipts as a means of artificially inflating their financial balance. Moreover, governments that follow cash accounting tend to not maintain comprehensive and up-to-date records of the value of their assets and liabilities. This enables them to transfer assets (such as land or mineral rights) or incur liabilities (such as pensions or public-private partnership contracts) to third-parties without disclosing their financial implications for the government and taxpayer.3.
The vast majority of state and local governments follow accounting standards set by the Governmental Accounting Standards Board (GASB). GASB wants to continue cash-basis financial reporting for governmental funds statements. We believe, along with many others, that this type of accounting supports bad government budgeting practices like counting borrowing money as revenue, underfunding or skipping pension funding requirements, and putting off paying bills until the next fiscal year in order to “balance budgets.” For example, California has used the technique of paying government employees one day after the end of the fiscal year, going from July 31st to August 1.
Now is the time to advocate to institute FACT-based accounting standards.
We have drafted state-level model legislation to ensure transparency, accountability, and accurate financial reporting by requiring local governmental entities to adopt full accrual accounting in their financial statements and budgets while eliminating cash-basis accounting in all financial reporting. This legislation can be a stand-alone bill or added to any appropriation bill as a way to ensure transparency and accountability with state tax revenue. However, any city OR state can embrace these principles, regardless of legal mandate. It is a framework for leaders who understand that harnessing the right data is not just about financial decisions; it's about shaping a better future that impacts us all.
Join the Fight
You can help support us in our fight for transparent and truthful government financial information by sending the following letter to your elected officials.
I hope you are doing well. Thank you for your service. I know it can't always be an easy job.
As a constituent, I am concerned with the government's finances and wanted you to be aware of a few little-known accounting facts I have learned from the non-partisan group Truth in Accounting.
First, the government uses different accounting standards than the business community and has two and sometimes three different sets of books.
Second, the budget is completed using cash-basis accounting, which is flawed because it makes money fungible and can list borrowed money as revenue while skipping pension payments and bills to ensure it appears balanced.
Truth in Accounting produces annual reports based on the financial analysis of all 50 states, the federal government, and the 75 most populated cities. These reports are not meant to point fingers at any political party or policy. The reports reflect the numbers that would be in the budget if government accounting standards were the same as required by the business community. In technical terms, full accrual accounting, not the cash-basis currently being used.
Along with Truth in Accounting, I believe elected officials have been given a raw deal by the groups that set the accounting standards. Truth in Accounting has been lobbying them for years to change the standards.
Suppose elected officials and citizens understood the difference in accounting standards. We all could insist on using full accrual accounting in the budgets and, therefore, more effectively be informed about tax increases, program cuts, or both.
Truth in Accounting makes no policy prescriptions past better accounting practices, so elected officials can serve their constituents from a place of complete honesty. Understanding these accounting concepts can help build a bridge between political parties. The fiscal facts can help guide you in your decision-making and the desired outcome of why you wanted to serve in the first place.
We know that you are in a tough spot as an elected official. So, Truth in Accounting is here to help right the ship. Please let me know if you would like to be connected with them to learn more. They often give presentations to citizen advisory boards and city councils and testify before state legislators and Congress.
Please take time to review Truth in Accounting's report to understand this issue more completely. A bankrupt government serves no one.
Thank you for your time and your service.
Truth in Accounting will calculate your state or local government's true financial condition. The true financial condition is calculated using our proprietary methodology to analyze your government's financial report. We will develop a comprehensive, concise view of your government's finances, including all assets, as well as the hidden pension and retirement health obligations.
We can also perform the following services:
State Financial Report (CAFR) data mining
State pension plan analysis
Municipal or county debt burden per taxpayer
Please contact us at firstname.lastname@example.org to discuss your custom project.