F.A.C.T.-Based Budgeting Provides Honest State Numbers

F.A.C.T.-Based Budgeting Provides Honest State Numbers
January 19, 2012

To bring truth and greater transparency to state budget processes, the the Institute for Truth in Accounting has developed a budgeting system called “Full Accrual Calculations and Techniques,” or F.A.C.T., which would require governors and legislatures to recognize expenses when incurred regardless of when they’re paid.

F.A.C.T.-Based Budgeting

F.A.C.T.-based budgeting is necessary because government has increasingly grown its role from funding and building infrastructure and operating the rather limited machinery of the state’s internal operations to being concerned with the health, welfare, and lifestyles of citizens and government employees. This expanded role involves committing new programs for citizens and employees not just for the current period but also for years to come.

F.A.C.T.-based budgeting would allow governments’ accounting and budgeting systems to evolve to provide a comprehensive indication of total activity and the long-term effects of current policies. It would record revenue in the budget year the activity revenue was generated. Expenses would be included in the budget year when the resources were consumed and the liability was incurred, regardless of when associated cash is actually received or paid.

By recording accounts payable and receivable, and thus the change in the value of assets and liabilities, F.A.C.T.-based accounting would keep a running tally of what a government owns and owes in economic terms. If a government promises pension benefits in the current year and must pay retirement claims in future years, the liability and expense is recorded when the event occurs. When the cash is actually paid, the liability is removed.

More Transparency

To increase transparency before a budget would come up for a vote, its financial effects would be summarized in easy-to-read, pro forma balance sheets, income statements, and cash flow statements. After the budget year, these statements could easily be compared to the state’s audited financial statements.

The calculation of the retirement liabilities on the pro forma balance sheet and the related costs included in the income statement would be based on the unfunded retirement liabilities determined by the states’ actuaries.

Particularly important for intergenerational equity, F.A.C.T.-based budgeting will limit elected officials’ ability to expand programs and services by deferring the payment of current costs.

The IFTA believes that if F.A.C.T.-based budgeting had been used by state governments over the past 50 years, they would not be in the situations of high financial risk they are in today.

Overseas Examples

Australia, New Zealand, and Canada have successfully adopted systems similar to F.A.C.T. These countries have experienced benefits in linking their budgeting and accounting systems.

The IFTA would like to educate legislators and other state officials on the Truth in Accounting Act, which would require the implementation of F.A.C.T-based budgeting. Model legislation can be found at the end of the Financial State of the States report.

The IFTA staff is available to hold legislators’ workshops on budgeting processes and best practices for state government budgeting. The staff has testified at budget hearings throughout the country and can be scheduled in legislators’ states.

The American people have made it clear that putting our nation’s finances in order is a top priority. Effectively addressing this will require an accurate picture of our public finances and electing policymakers who are willing to make hard decisions.

To avoid what Europe now is facing, Congress, the White House, and the state and local governments must act soon, before their budget sinkhole collapses.

Sheila Weinberg (sweinberg@truthinaccounting.org) is founder and CEO of the Institute for Truth in Accounting.