Friday, December 24, 2010

Accounting gimmicks in the states

Steven Malanga looks at some of the tricks that states have been using to pretend that they were balancing their budgets and get around the constitutional provisions requiring that they do so. One trick has been to pay today's debts with borrowed money and just cross their fingers hoping that revenue will kick up some time soon. Meanwhile, they're piling new debts on top of their old debts.
To make an annual contribution for public employees' retirements, Illinois borrowed $10 billion in 2003, depositing the sum in its pension funds. But in the boom years that followed, the state still failed to make adequate contributions. So Illinois had to borrow again in 2009, issuing some $3.5 billion in new debt at a cost of $4.5 billion in future principal and interest payments. This year, it borrowed yet another $4 billion for the same reason.
Another insidious trick is to take money from accounts dedicated to specific purposes and then spend that money in their general budget.
One honey pot is the tax revenue designated by federal law for upgrading 911 emergency-response systems. An August survey by the Federal Communications Commission reported that states redirected $135 million in these taxes last year to spending for other purposes. New York is a serial abuser: Since 1991, the Empire State has collected an estimated $600 million from its 911 tax. But only $84 million has actually gone to local officials for upgrading emergency services.

These fund transfers have become so routine that New York must now do "reverse sweeps." For example, New York created a fund 20 years ago to finance bridge and road construction and maintenance. But it often transfers money out of it and into the state's general accounts—only to replace what's been swept by borrowing more. About a third of the Dedicated Highway and Bridge Trust Fund's disbursements, or nearly $1 billion, now goes toward debt service, a figure projected to rise to 70% by 2014. And so New York is shifting tax dollars back from its hard-pressed general fund to help pay off the transportation account's debt.
How long can this shell game continue? Eventually the buck stops somewhere and the states will have to actually face up to all these tricks that they've made in the past. THen they'll come whining to the federal government to bail them out with something dressed up as stimulus funds, but actually just meant to fill the holes that they've dug for themselves. Unfortunately, the federal government has been playing the same game on a grander scale and won't have the money for them.

When these bubbles burst, the fallout will be worse than the crash of 2008. It's extremely scary to contemplate, but it's what is in our future. States need to elect their own Cassandras who understand this problem and will have the guts to just say no to extra spending. Hence the appeal of people like Mitch Daniels and Chris Christie. It's not their charm that appeals so much; it's their hard-nosed acceptance of reality and the courage to start doing something about it.