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.


pumping-irony said...

Y, I've lived in NJ all of my 58 years and I never heard a governor say the words "we don't have the money".... at least, not consecutively in the same sentence, anyway. It may be that the state's financial situation has never been more precarious (it probably hasn't) or the state's voters finally got fed up with the likes of spineless weasels like Jon Corzine (hopefully) or just a stroke of luck, but Christie is the right man at the right time.

MarkD said...

It has started here. My town taxes are going up 14% due to the county sharing less sales tax revenue with the towns because of their pension issues.

At some point, nobody can pay. Due to some mandatory furloughs, I made less money this year than last, and I still have a job. What do people on fixed incomes do?

This is typical for NY, however I don't see it being sustainable. Let's see if the younger Cuomo can fix it.

bobdog said...

The precarious financial condition of California, Illinois, New Jersey, New York and other tippy states primarily goes back to unfunded pension liabilites for public employees, including teachers.

It's always easier for legislators to cave into the voracious demands of public unions than it is to confront them for what they are: extortion and threats of bad publicity. Politicians live in fear - fear of inadequate campaign funds, fear of the next election, fear of exposure for dirty dealing. The "public servant" face they put out for public consumption is for the most part a pathetic charade. Their prime imperative is to get re-elected. A principled stand against the public unions is a dangerous position, one that represents present danger to their careers. It is always easier to kick the can down the road and deal with the cost of their spinelessness at some time in the fuzzy future. This is the nature of the beast.

Like the housing bubble, this approach works only until the bubble bursts and the economy fizzles out. Then the chickens come home to roost.

The "fuzzy future" has arrived, and it's time to pay the piper.

Tacitus Voltaire said...

Some states have tried to pretend their pension obligations do not exist. New York is shortchanging its pension funds, and Gov. Chris Christie of New Jersey, who claims to be so financially responsible, is the latest in a line of governors who have simply refused to pay the billions the state owes to its employee pensions. (Instead, it has often spent that money on tax cuts.) Public employee unions will need to give ground on pensions and other benefits, but it will be hard to start productive discussions if Mr. Christie and other governors refuse to acknowledge their obligations and bargain in good faith.

apparantly, the touted "fiscal responsibility" of erstwhile conservative heroes like christie depend on them quietly victimizing public employees...

bobdog said...

The precarious financial condition of California, Illinois, New Jersey, New York and other tippy states primarily goes back to unfunded pension liabilites for public employees, including teachers.

It's always easier for legislators to cave into the voracious demands of public unions than it is to confront them for what they are: extortion and threats of bad publicity

you do know, don't you, bobdog, that this site is run by a public school teacher and many other public school teachers comment here. perhaps you have a secret plan to keep their pensions intact?

Tacitus Voltaire said...

the problem with conservatism by demonization is that sooner or later the people you are demonizing turn out to be republican voters

LarryD said...

"You're another", TV?

Granted, there are plenty of red states in the same hole, just generally not so deep. Nothing in Betty's description mentioned party affiliation.

Rick Caird said...

TV just made a comment that is so far off topic, it may not even have remained in the Milky Way.

I would love to see how he attempts to tie his inane comment on "demonizing voters" with accounting gimmicks in the states.

Pat Patterson said...

Tv is experiencing his own Red Scare.

Tacitus Voltaire said...

so... pat and rick have given up on debate and are amusing us with their imitations of teenagers?

Pat Patterson said...

Yep, and considering who were talking about it was wise to lower the level of vocabulary and use only simple sentences.

Rick Caird said...

TV, it is impassible to debate your continuing non sequiturs and off topic stream of consciousness posts. You clearly do not understand the unholy alliance between public employee unions and the mostly Democratic elected officials they fund. It is this alliance that has caused the huge unfunded pension liability and the growing, but already immense, disparity between public employee pay and private employee pay.

I suggest you read "Plunder" by Greenhut, but the evidence of this conspiracy is all around you.

Pat Patterson said...

bobdog is merely pointing out the state version of robbing an electronics store and then giving that brand new HD tv to a retiree and then the retiree yells mine when the owners come by to reclaim their property.