By: Mark Glennon*
For those of you bored by accounting, bear with me, this will be in plain English. It may sound like green eye shade stuff, but it’s key to how Illinois, Chicago and many of its municipalities became financial basket cases. And the problem may get worse.
A group called GASB, the Governmental Accounting Standards Board, sets the standards for how governments report their finances. It’s considering some changes to what’s fundamentally wrong in that reporting.
Unfortunately, the proposed changes won’t help and may well hurt.
The problem is that state and local governments are allowed by GASB to budget on what’s called a cash basis. That means budgets are really nothing more than a plan for where cash will come in and go out. It may sound insane, but budgets therefore count borrowed money, assets sold and raids on special purpose funds as income.
They ignore growing debts, and growing debts are what are killing Illinois. Those growing debts include unfunded pension liabilities.
Cash accounting has allowed Democrats and Republicans alike to claim “balanced budgets” year in and year out for the state, Chicago and most other municipalities. Sure, there is reporting every year about a billion or two dollars patched over with short term gimmicks, but that’s quibbling compared to the bigger, persistent problem of built-in structural imbalances that cash budgets ignore.
The result, for example, is that Illinois has actually lost over $15 billion dollars on average for the last ten years even as politicians and most of the press claimed “balanced budgets” in each of those years. It’s a similar story for Chicago and most of our towns and cities.
It’s not unique to Illinois. Cash budget accounting is common for governments around the country, though Illinois politicians have abused it far more than most.
This is a key reason why Illinois voters have been asleep at the switch while their governments sank into crisis. Few know about the issue, as well as most reporters and politicians.
If you are still confused, see the simple, short video linked here from Truth in Accounting, a Northbrook-based nonprofit.
Now, GASB will be holding hearings on the proposed changes to its standards that supposedly would address the problem. The trouble is, those changes don’t really help and would obscure the problem.
GASB has also taken written comments. I submitted mine, which are reproduced below.
The solution is called accrual accounting, which adds in growing debts and excludes income that isn’t really income. GASB is claiming their changes would be a move toward some form of partial accrual accounting, but critics say that’s bluster, covering up the same old problem.
Truth in Accounting has been pounding on the table about this issue longer than we have. They are leading the charge to push GASB to get this right.
Let’s hope the true reformers prevail.
*Mark Glennon is founder of Wirepoints
Expect no retraction or apology. This what they do.
The state’s existing buyout program for its own pensions is the precedent for Chicago, which should be a warning: Look out for similar exaggerated claims and shoddy analysis.
Excellent letter, Mark, that you sent to the GASB. It is a cozy bunch of former government employees who took advantage, and will continue to take advantage, of the cash basis charade. You letter points the finger at them, as it should be pointed.
I also think that using cash accounting hurts forward analysis. For example, if I had tax revenue of $1M at a tax rate of 10%, cash accounting says I will have tax revenue of 1.5MM at a tax rate of 15%. There is no thought that people might change behavior or substitute to avoid the tax. Hence, if I am budgeting and raise capital gains or income taxes in my budget, I predict much higher government tax revenues than will be reported if in fact the tax is enacted. Dynamic scoring of future budgets is better.
Lots of technical and expert responses here. This is the kind of Wirepoints article that can really set government on its heels for their practices, precisely because it gets to how the mechanism works. If only there were a court to listen, this is solid stuff. To think that government can simply create an accounting “standard” out of the blue to make their practices legit. Replacing standard accounting with this kind of BS is like defying basic physics. I guess if you call a lie a “standard”, then get some fancy acronym organization to cultivate it, then everyone will believe… Read more »
The other significant stakeholders in this problem are the guvmn’t payday-loan bond rating agencies – S&P, Fitch, and Moody’s.
Nothing they like better than GASB dancing accounting angels on the heads of pins. GASB provides the bond rating agencies with the camouflage required to avoid having to empty government-bond investor’s interest-income feeding trough by actually labeling Illinois bonds as they junk they actually are.
This is devastating to local real estate values, when schools use the loophole to borrow in excess of the statutory debt limit (13.8% of EAV). Example: Woodstock CUSD200 borrowed $13 million on a CAB in 2006, putting the district right up to the maximum debt limit as a ratio of debt-to-local-property-value. Less than 20 years later the deferred interest ($50 million) and principal are coming due. Meanwhile, that accruing interest obligation was allowed to be “hidden” and further debt burdens could be piled on taxpayers because the statutory max limit of 13.8% did not have to include the interest accruing… Read more »
Seems that GASB should be patterned after, if not completely replaced by, FASB (Financial Accounting Standards Board). FASB is applicable to private sector firms with defined-pension plans, as I understand it.
For those interested in seeing the comment letters, see here:
https://www.gasb.org/jsp/GASB/CommentLetter_C/GASBCommentLetterPage&cid=1176157116776&project_id=3-25
The Wirepoints letter hasn’t been posted yet (neither has my second letter, in response to a last-minute “fact sheet” put out by GASB) – Friday 2/26 was the deadline, and a flurry of letters came in near the end.
Sounds like GASB shoud maybe hire some CPA’s? Add in the incompetent and dishonest actuaries, what could possibly go wrong?
The fund accounting method used by government entities is ridiculous. It can only have been instituted to promote deception in government finances. I thought it was crazy 30 years ago when I studied accounting, and made a firm decision then to stay in the private sector. The whole system needs to go, not just rule changes at GASB.
What states, if any, do the best job basing budgets on a accural accounting basis? What is the model state to look towards, Wisconsin?
I don’t know the exact changes they are proposing, but I can’t help but think that they are designed to achieve some secret purpose. On a national level, are the proposed changes perhaps designed to sneakily bolster the justification for state bailouts by the federal government?
I’m better informed than the typical Illinois voter and I don’t recall GASB as being one of my many concerns with the state. I therefore doubt whether GASB performs it’s job ethically/properly or not will have any impact on elections. Conservative voters already know the state is committing fiscal suicide. Liberal voters don’t pay attention to budgets. The middle ground voters aren’t paying attention or they would already be conservative. The middle ground voter will vote for the person saying what they want to hear. Most won’t bother to investigate whether it’s truthful. That’s how Dems control Illinois. That’s why… Read more »
I agree with your voter descriptions, but disagree on the importance of honesty in reporting. In an accrual system, it is difficult to legally manipulate the results, which is why publicly listed companies must follow these GAAP. With all of the manipulation of modern government, it is absolutely stunning that they are allowed to use a cash basis. For anything to change, this is where it starts. This is why media figures like Greg Hinz and Rich Miller report that the state’s annual budgets are “balanced” and that all is ok. Millions of people–including the politicians–read these columns, and so… Read more »
JB is going to have the firms he is invested in switch from FASB to GASB; then raise a SPAC to spin them out. (this is satire)
Even though I didn’t vote for him, I thought, “hey, at least he’s a business man, so maybe he’ll take a fiscally conservative and reasonable approach to things…” Boy was I wrong. This guy has taken every problem in Illinois and just stepped on the gas while driving the state into a brick wall. I realized that he’s no business man. He’s a guy born with billions, who watched his parents do what they do, and then hired those same people to manage his assets. Strip the money and the handlers away and I doubt you’d have a guy who… Read more »