Creative Budgeting

Michael Granof, an accounting professor at the University of Texas writing in the New York Times, discusses the budgetary tricks that state government are going through in order to balance their books. It involves techniques where bonds are issued in order to finance the purchase of one part of government to another. The purchase is then entered into the books as revenue, which balances the books, without actually increasing revenue. All involve some way of ensuring that current obligations are passed onto the next generation:

Gov. Arnold Schwarzenegger of California wants to reduce his state’s deficit by borrowing money from the future. His plan is to issue $15 billion in bonds that are backed by future lottery revenues. More than a third of that money would be used to ease California’s current-year deficit.

Borrowing from the future to pay for the present is, unfortunately, becoming routine. In 2006, Indiana leased a toll road to a foreign consortium from Australia and Spain. The state received $3.8 billion upfront by surrendering the next 75 years of toll revenues. Other states have sold tobacco bonds that provide one-time infusions of cash — in return for forgoing 25 years of payments from cigarette companies that were supposed to pay for health care related to tobacco-caused illnesses.

Another trick is to move up the due dates on merchant-collected sales taxes from early next year to late in the current year. These taxes then are counted as revenues for the current year.

Other states have moved employee paydays from the last day of the month to the first day of the next month. This enables them to eliminate an entire month of employee pay from the year’s budget, because for one year there are only 11 paydays instead of 12. In subsequent years, the budget includes 11 paydays from salaries earned in the current year and one payday for money earned the previous year.

States also transfer money from a “rainy day” reserve account to the general fund and then count the amount transferred as revenue. This is the equivalent of solving personal fiscal problems by moving money from a savings account to a checking account and calling it “income.”

Pensions are the ideal budget item for imaginative accounting. When pension expenditures are decreased, the consequences of the cuts may not show up for decades. States can simply fail to pay the amount that is actuarially sound into pension funds. The retirement checks that state employees eventually receive under a defined-benefit plan are determined by the promises incorporated into the plan, not by the timing of a state’s contributions. In effect, the state pays now or it pays later.

All this while investments in the future are cut for current economic gain. Sucks to be young.