by Bob Williams

Many governors and state legislators are using accounting gimmicks and federal stimulus funds to temporarily balance their budgets. When federal funds run out in a year or two, these states will face a spending cliff, necessitating a significant downsizing of their state budgets.

Legislators allow bureaucrats to report a budget shortfall as the difference between what the state wants to spend (not the current budget) and the revenue forecast. A real shortfall is the difference between the current level of spending and the revenue forecast. Thus, most shortfalls are highly inflated. Legislators need an urgent wake-up call before it's too late. Most state budgets are unsustainable, and legislators need to stop the budget bait and switch (budget gimmicks). I speak as a former U.S. Government Accountability Office (GAO) auditor, a former certified public accountant, and a former five-term state representative who served on the budget committee for 10 years.

The day of fiscal reckoning is now. The economy of most states cannot support the high level of spending that has occurred over the last decade. State revenues will not return to the 2007 level for several years. Most legislators are unaware of the severity of the structural budget problem, and legislative leadership has indulged in budget gimmicks that will exacerbate the long-term fiscal problem. A close examination of state budgets reveals that nearly all states have enacted budgets that are unsustainable.

Rather than reducing spending to reflect the declining state revenues and fundamentally reforming the size and scope of state government, legislators are artificially propping up a higher level of spending than can be supported by their state's economy.

The problem is excessive state spending-not a lack of revenue. It is true that states have faced declining revenue in the past two years, but this is not even close to the steep revenue increases since 1993. According to the U.S Census Bureau, state revenue data since 1993 shows a total taxation increase of 120.8 percent. That's 2.5 times inflation, 1.5 times Gross Domestic Product, almost six times household growth, more than 1.2 times median household income, and 10 times growth in average household income. And during this record revenue growth, states for the most part did not build up rainy day funds, and underfunded pensions and other liabilities. Taxpayers can't determine the actual financial status of their state because of the manner in which liabilities are hidden from the public.

Washington State exemplifies the bad choices legislators are making. Last year, Gov. Chris Gregoire convinced legislators that they were facing a $9 billion shortfall (out of a $30 billion, two-year general fund budget). Legislators talked a lot about cuts, but when they were finished they had reduced the general fund by $1 billion, and increased other funds (i.e. federal funds and other accounts) ballooning total state spending by $1.3 billion. This year the governor said the state had another $2.8 billion budget shortfall. After again talking about the tough cuts that were being made, the Senate proposed a budget that raises total spending by $1.8 billion and the House by $1.5 billion. Clearly these rates of increases are unsustainable.

Over two years, the public was told the state had an $11.8 billion budget shortfall; budgets were cut to the bone and taxes had to be raised. In reality, state spending will be increased by more than $2.8 billion! Officials are counting reduced spending increases as "cuts."

Washington state seems to have finetuned the games and gimmicks that are being used to "balance" state budgets, resulting in the bills being passed on to future generations. Given all the deferred costs, unfunded pensions and retiree health care benefits, and increased debt service, the money will not be there to continue this high level of spending. Something will have to give.

These are gimmicks that were used over the past year in Washington:
• Used more than $3.5 billion in federal stimulus funding which enabled legislators to avoid downsizing government,
but will increase the budget gap when federal government funding expires.
• Overstated the budget shortfall as mentioned above.
• Transferred $269 million from various dedicated accounts to help balance the budget. This included taking $84 million out of the capital funds. In 2009, legislators transferred nearly $800 million from capital accounts.
• Used 100 percent of the budget stabilization fund (the restricted reserve account). This amounts to $45 million
in 2009 and $229 million this year.
• Taxed hospitals in order to "leverage"(get more) federal money. This raised $33 million by taxing hospitals, resulting in a higher federal match. Then the legislature returned the $33 million to the hospitals by increasing the hospital reimbursement rates.
• "Shell games" artificially increased the voter-approved state spending limit. The Senate used an accounting gimmick
to raise the spending limit by $110 million.
a. Budget directed the State Treasurer to transfer $100.77 million from the Education Savings Account to the Education Legacy Trust Account for fiscal year 2010.
b. Budget then directed the State Treasurer to transfer $110 million from the Education Legacy Trust Account to the state general fund for fiscal year 2010.
c. Budget further directed the State Treasurer to transfer $110,000 from the general fund to the Education Trust Account for fiscal year 2011. SSB 6444, Section 802, Lines 17-24, Page 230.
d. A separate bill allowed the state spending limit to be increased for the transfer of funds to the general fund and prevented it from being decreased for the transfer out of the funds. SB 6875 Section 7(4), Lines 11-13, page 9.
e. Net result: The Senate artificially raised the spending limit by $110,000,000.
• Played games with cash flow. State law currently requires the governor to order across-the-board cuts whenever there is a forecast of a deficit in a fund. The budget temporarily suspended the law and allows state agencies to run a deficit as long as it is eliminated by June 30.
• "Gamed the pension system." In addition to under funding pensions, legislators assumed an 8 percent return on pension investments. Instead, the state lost 25 percent of the pension investment in the stock market last year. They
will write off this loss over five years, but they still assume an 8 percent return. In addition, in order to lower the amount they would put in pensions, they assume state employees will work longer and die earlier than the mortality tables- that "saved" $45 million.
• Assumed a lower rate of inflation than reasonable. The legislature assumed state employee health care would rise only 3 percent over the two-year budget period. As a result, the state employees health care fund has a $100 million deficit, and the governor and legislators are
unwilling to reopen the state employee contract. Taxpayers are left holding the bill.

Legislators need to look at the costs that are being pushed forward and ask themselves, "Where are we going to get the money?" This is a plea for states to stop the budget gimmicks and downsize government. Indiana Gov. Mitch Daniels was correct: it is the time for "The Big Reset," in state government.

 

Filed Under : Budget Gimmicks, Solutions, Spending Cuts