State governments across the country are reeling from the effects of the current economic downturn. New York, facing a $26.2 billion deficit over the next three years, is particularly hard hit. Like most other states, it is looking to balance its budget mainly by cutting spending.
But if history is a guide, governors and legislators across the country will seek to avoid the difficult choices that are required. Instead, they will likely pass the costs of the services that we enjoy today on to our children and grandchildren, through creatively deceptive budgeting.
This is a time-honored practice. In 1991, the State of New York sold Attica prison to none other than itself. The buyer was a state agency that financed the $200 million purchase price by issuing bonds. The agency then leased the prison back to the state, with the lease payments being equal to the debt service on the bonds.
In substance, of course, the transaction was nothing more than a borrowing arrangement — the equivalent of borrowing $200 million from the buyers of the bonds. Nevertheless, the state booked the entire sale price as revenue for the year. The previous year, the state sold the Cross Westchester Expressway to the New York Thruway Authority — in other words, to itself.
New York is not the only state fond of this sort of budgetary dissembling. 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. And by paying later, the eventual cost to the state will be significantly increased, because no investment income will be earned on the funds that should have been contributed now.
In the most advanced form of pension-budget fakery, states can adopt faith-based pension schemes. They borrow money by issuing bonds to make both the current payments owed to their pensions and to compensate for any previous shortfalls. Then they just pray that the returns on the investments that will be purchased by the pension fund will exceed the interest to be paid on the bonds.
It is easy to understand why public officials are tempted by these strategies. Ask citizens whether they would prefer that their state’s budget be balanced with “accounting adjustments” as opposed to a combination of tax increases and service cuts, and they might well opt for the budget tricks.
But put the question differently and ask voters about the morality of passing along our bills to future generations, and the answer would surely be quite different.
Reposted from The New York Times
August 8, 2008