While the federal government may get much of the attention, especially lately with the infrastructure bill and key spending decisions, it’s often at the state and local levels where budgetary decisions have the most direct impact on people’s lives. It’s also at this level where, by law, almost all governments must balance their budgets.
Sadly, because the current accounting standards guiding financial reporting by state and local governments require governments to keep two sets of books, it is difficult to determine if their budgets were balanced and their true financial conditions. It’s well past the time to fix these standards, and the good news is that right now we have a rare opportunity to do so.
The accounting standards used by the vast majority of state and local governments are set by the Governmental Accounting Standards Board (GASB). This private-sector organization is considering for the first time in decades whether to make fundamental changes to the standards for reporting budgeted funds, including public hearings in March and April.
Unfortunately, GASB is proposing to maintain the status quo or might even make things worse. But there is a rising chorus of dissenting voices demanding change to the failed policies and standards that obfuscate the true financial condition of state and local governments from coast to coast.
As things stand now, the financial reports for budgeted or “governmental” funds are, frankly, detached from reality. They in essence use “cash basis accounting,” which shows expenses when money is paid, not when expenses are incurred. It’s as if you evaluated your own finances by looking only at your checking account balance, while ignoring all of the credit card bills you’ve racked up. That’s an easy way to convince yourself that your personal budget is “balanced,” but only until the moment when the debt collectors knock on your door.
This kind of reporting supports elected officials who make short sighted financial decisions to get reelected, but doesn’t help anyone else. It doesn’t help the media and other watchdog groups play their vital role in our democracy. And it doesn’t help voters when they hold our leaders to account at the ballot box. All it does is hide the truth — and that has dire real-world consequences. Consider the ticking time bomb of public employee pension and retiree healthcare obligations. None of that shows up in the current financial reports of the budgeted funds.
This is not a partisan issue. These standards have led to real-world consequences in both red-states and blue-states. In Illinois, for example, the state has supposedly balanced its budget every year, yet has a bill backlog that now stands at $4 billion. Illinois' enormous backlog has stopped vendors from working with the state because they know they won’t get paid for months or even years. This has led to an Illinois police department almost running out of bullets and state employees having to pay upfront for their health care services.
In another example from Texas in early 2019, state officials touted a $13 billion surplus in their general fund but did not consider $58 billion in pension debt. Nevertheless, based on this “surplus,” within weeks, the state’s final budget included increases in teacher salaries and property tax relief, leading to further deterioration of the state’s overall financial position. Furthermore by ignoring $58 billion in pension debt, the state is ignoring promises it made to its employees who are relying on that money for their retirement.
GASB can solve these confusing problems by adopting “full accrual” accounting standards for budgeted funds, which show expenses as they are incurred, including the promised and earned benefits. These are the same standards that the IRS requires most businesses to use in their financial reporting.
To be clear, this isn’t an argument for fiscal responsibility, nor is it a finger wag at states and municipalities that have let their long-term debt obligations spin out of control. There are plenty of others voicing those opinions already — and often on the pages of this very publication. There may or may not be good reasons a state or local government decides to defer pension contributions, borrow money, cut taxes, increase spending or shift money around from fund to fund.
If we adopt common-sense accounting standards, politicians will simply need to provide the facts about these budget decisions and make their case to voters. Isn’t that how democracy is supposed to work?
GASB could deliver a watershed moment for transparency and accountability in American government, but only if it puts the needs of citizens over those of the accounting industry, credit rating agencies, politicians and others with an interest in the status quo.
The admittedly complex and technical nature of these issues has allowed GASB and special interests to operate without public scrutiny and avoid reform for so long. At a time when our state and local governments are grappling with the pandemic’s economic fallout — and deciding how to allocate billions in funding from the American Rescue Plan Act — it’s especially important that we lift the curtain on the GASB process and demand a full and clear view of our governments’ financial conditions.
Sheila A. Weinberg is the founder & CEO of Truth in Accounting, a government finance watchdog. Grover Norquist is the founder & president of Americans for Tax Reform, an organization that opposes all tax increases.