State Budget Crises Call Out for Better Disclosure

Wednesday, December 16, 2015

While Illinois and Pennsylvania are still struggling to enact 2016 budgets almost halfway into the fiscal year, other states from coast to coast have adopted improvements in their budgeting processes that may help avoid future crises such as these. These states show how governments presenting critical data more transparently, can promote more rational consideration of the decisions that legislators and governors face every day spending taxpayers’ dollars.

The Volcker Alliance, which scrutinized three states’ fiscal practices earlier this year in a report, “Truth and Integrity in State Budgeting,” this month published a working paper by longtime state budget-watchers Katherine Barrett and Richard Greene, “Beyond the Basics: Best Practices in State Budget Transparency,” laying out 10 disclosure principles for states to follow.

Unveiled along with a companion study on the Illinois budget by the University of Illinois Institute of Government and Public Affairs, both studies show how much of the annual drama enshrouding statehouses toward the beginning of every fiscal year or biennium could be minimized by explaining more clearly to policy makers, citizens and investors the true state of revenues and obligations governments face, now and for years into the future. The Alliance’s 10 principles include:

  • Clearly present one-time revenues and their impact on future budgets. If states must use one-time revenue sources to cover recurring expenditures (which is generally a no-no), they should at least show what they are up to. Nebraska, for example, discloses how money gets transferred from special funds into the general fund, the major source of states’ spending.
  • Provide multiyear projections for growth of recurring revenues and expenditures. Long-term estimates can reveal spending that has been deferred into the future, revenue sources that may cease to exist in coming years, and other temporary measures that cause long-term structural imbalances. Of the 50 states, only Alaska, New York, and Washington publish comprehensive forecasts of revenues and expenditures, according to the Center on Budget and Policy Priorities.
  • Disclose and explain the impact of delayed spending. This is especially critical for states that are underfunding or borrowing to pay for promised public employee pension and health care obligations. New York, which pays part of the state’s actuarially recommended pension contributions with interest-bearing notes, discloses what this practice will cost taxpayers out to 2029.
  • Disclose deferred infrastructure maintenance. Deferred maintenance–what needs to be spent to keep a state’s physical assets in good order—is as much an obligation as pension underfunding or debt. Yet few states document this as part of the budget process. California is an exception. Its latest five-year infrastructure plan, part of the governor’s proposed 2016 budget, estimates $66 billion in deferred maintenance in the state.
  • Provide tax-expenditure information. At least 46 states produce reports on tax expenditures, such as exclusions, exemptions, deductions, and credits to individuals and businesses, according to the Institute on Taxation and Economic Policy. But they vary in their level of detail and are often not a visible part of the budget process. Beginning on Dec. 15, the Governmental Accounting Standards Board has required states to include such information in comprehensive annual financial reports. Similar statistics should be included in budgets. Louisiana, for one, already summarizes the cost of tax expenditures in its budget (it showed a $6.7 billion loss in fiscal 2011 and projects a $7.4 billion loss in fiscal 2015).
  • Include current, historical, and trend information for debt. States might be more prudent about their indebtedness if they were compelled to include in budgets such information as ratios comparing outstanding debt to revenues, capacity to take on new debt and details on the type and maturity of outstanding borrowings. In Georgia, one of only eight states with AAA bond ratings from Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings, the governor’s budget presents a 10-year chart comparing annual debt service to the state’s constitutional cap on the expense.
  • Disclose the impact of state fiscal actions on local governments. The financial interplay between states and local governments is critical information that is not often disclosed. Minnesota, however, produces an annual “price of government” report as a supplement to the budget that examines the cost of services statewide, including those delivered by the state, cities, counties, and school districts.
  • Compare actual education funding to goals set by legislatures, voters, or courts. While state funding formulas for K-12 education vary widely, budgets usually don’t show whether spending is matching or falling short of targets set by legislatures, voters, or court decisions. The California Legislative Analyst’s Office did, however, in a February 2014 report show how from 2008–09 to 2011–12, the state deferred payments to schools and community colleges that were mandated by statute. Most of the deferrals have been repaid, according to the LAO.
  • Improve disclosure of volatility in tax revenues. Disclosing how past revenues have gyrated will help governors and legislators design and use rainy day funds and other reserves to help governments cope with future volatility. In Utah, the Legislative Fiscal Analyst’s Office and Governor’s Office of Management and Budget must disclose revenue volatility in reports that are important to the budgetary process.
  • Include targets for achieving financial goals. Budgets should disclose where the government stands in relation to financial goals, such as retaining funds in a reserve or reducing unfunded pension liabilities by a targeted amount. Minnesota and California, for example, have adopted rainy day fund rules to ensure emergency cash reserves are replenished after drawdowns and adjusted for the volatility of tax revenues.

Opaque budgeting processes have helped bring about the fiscal crises facing Illinois, Pennsylvania, and, of course, Puerto Rico, where much of the commonwealth’s $72 billion in debt was taken on to prop up current spending. Yet in the long run, budgeting in the dark benefits no one, especially when decisions are made to push expenditures for today’s—or yesterday’s—obligations for education, infrastructure, and public worker retirement needs onto the backs of future taxpayers.

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