Item A: Budget Service Realignment

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N ative Americans have many sayings, and one of the wisestexpenses look smaller. Similarly, some states have urged retailers is this: When youÕre riding a dead horse, the best strategythat normally submit their June sales tax receipts in July (next fiscal is to dismount. Traditional budgeting, which focuses on year) to do so in June, thus propping up the current year's rev- costs rather than results, is the dead horse of the public sector. enues. ItÕs all legal and properly accounted for, but it does not When we budget for costs, we get more of them. What we donÕt get reflect the governmentÕs true financial condition. is the innovation and accountability for results we need if we are to win the competition for public support. Even when the general fund is legally prohib- Borrowing. ited from being in debt, governments find ways to borrow. New Winning back the public support we have lost over the past 40 York City mastered this dubious art in the 1970s, when it piled up years is the greatest challenge we face in government today. Yet so much debt that it landed in receivership. Both the city and state when faced with deficits, many governments resort to politically of New York are still trying to figure out when and how to pay off expedient budget and accounting practices that only deepen pub- all the bonds issued back when New York truly was, in former lic cynicism. The public finance literature refers to such practices Mayor John LindsayÕs famous phrase, ÒFun City.Ó as Òfiscal illusions,Ó since they distort the ability of stakeholders to evaluate the true costs and benefits of gov- During the current fiscal crisis, several ernment programs. Seven such illusions are states have proven that the Òwhat me worryÓ particularly harmful to the financial credi- politics of borrowing works for both political bility of state and local governments: parties. Instead of making the difficult deci- sions necessary to secure their long-term fis- When cal health, these states borrowed their way to Robbing Peter to pay Paul. that general fund gets in trouble, some lead- ÒbalancedÓ budgets either through outright ers start eyeing Òoff budgetÓ funds as deficit financing or less transparent means resources to be mined. One state govern-such as pension obligation bonds. These maneuvers failed to convince the credit rat- ment helped balance its budget by transfer- ing agencies, which in some cases lowered ring the cost of running a waterway system their ratings to junk-bond status. from the general fund (Òon budgetÓ) to the toll road authority (Òoff budgetÓ). Another state transferred management of a conven- When times are Selling off assets. tion center and parking garage to the state tight, it is popular to sell surplus buildings, pension fund to lower its cash contribution land, or other assets, and then use the pro- from the general fund. Technically, this ceeds to plug a hole in the operating budget allowed the state to show a savings of $175 by treating the real estate money as though it million. Robbing Peter to pay Paul can plug a were ÒnormalÓ revenue. For example, hole to make the budget look better this year, instead of resolving a significant structural but the same hole will reappear next year, budget problem, the leaders of one city gov- when Peter and Paul will both be worse off. ernment decided to sell the water and sewer works to the off-balance sheet entity that operated it. A year later, the city sold $51.2 million in tax and sewage liensÑmoney due to the Using accounting gimmicks to disguise Þscal prob- city that it not yet been able to collectÑfor $32.2 million. The city As the Enron debacle showed, accounting presents leaders lems. has continued to rely on one-shot revenue sources to balance the with many dangerous choices. Quick-fix accounting gimmicks annual budget, putting off the crisis for one more year. include pretending (or even requiring) that money you expect to receive early next year will actually come in late this year. The opposite side of the coin is to pretend (or even require) thatA budget is really just a forecast, a Making something up. expenses planned for this year will be made, technically, next year.statement of expected revenues and expenses. If done correctly it can be a serviceable estimate. But in the end, every budget is For example, some states have informed school districts expecting based on assumptions, and you can make it look better or worse a school-aid payment in the current fiscal year that they will not simply by changing those assumptions. receive it until the next fiscal year, thus making the current year's October 2004 Government Finance Review11 |