Poor Government Accounting Standards Enable Soaring Municipal Debt

Poor Government Accounting Standards Enable Soaring Municipal Debt
October 29, 2013

Bill Bergman

Bill Bergman is the director of research for Truth in Accounting. (read full bio)

Do you think your household budget is balanced if you spend more than you earn by using credit card debt?  If you do, then you think like the City of Chicago’s government leaders.

Each year the City of Chicago releases its annual budget. City leaders regularly claim they operate under a balanced budget requirement, and they cite state law. But if state law has long required the City of Chicago to maintain a balanced budget, why has the city’s debt risen dramatically?

A clue lies in the city’s government leaders choosing to include borrowed money to "balance" the city’s budget. But what’s happening behind the scenes is even more important. Chicago and other financially troubled municipalities have accumulated massive debts outside of the official financial statements, enabled by government accounting standards that have long left retirement benefit promises out of the equation.

This was the gist of the message delivered in October in a seminar held at CivicLab in Chicago’s West Loop. The seminar was led by Sheila Weinberg, CEO and founder of the Institute for Truth in Accounting, a nonprofit organization dedicated to promoting truthful, transparent, and timely government financial reporting.

Weinberg opened the discussion with related observations on federal government accounting, in light of the national debt ceiling debate. She asked seminar participants if they believe the government owes senior citizens the Social Security and Medicare benefits they have been promised, and whether military veterans are owed the benefits they have been promised. 

Real Debt Many Times Higher

All participants answered in the affirmative, which leads to a basic conclusion that the "official" government debt subject to a transportable "ceiling" massively understates the real debt our federal government has taken on. The $17 trillion official national debt may sound like a lot of money, and it is, but it pales in comparison when considering that adding unreported debt leads the total to run at least $74 trillion in the red.

State and local governments have similar problems, including the City of Chicago. A recent study of 518 Cook County taxing districts cowritten by Weinberg and John Nothdurft of The Heartland Institute found a combined “financial burden” of almost $34 billion, once official government reports are adjusted for off-balance sheet debts – even after considering the assets those governments have to pay their bills.

Masked by ‘Political Math’

How did Chicago residents end up in this situation, despite having leaders who regularly "balance their budgets?" Weinberg calls the main reason “political math.”

“It all depends on how you count,” she says. She described how unfunded deferred compensation can provide short-run successes in a loyal government workforce, without current costs required to be paid by taxpayers. Growing debt fills the gap, even with “balanced budgets,” as liabilities rise outside the accounting statements provided to citizens.

Weinberg painted a picture of contrast between the raucous public debate over related issues in Wisconsin in recent years and the relative calm (on the surface) in Illinois – even though unfunded liabilities in Wisconsin are “basically a rounding error” when comparing them to Illinois. (Tens of thousands of government workers in Wisconsin took over the state’s Capitol building in 2011 to try to block Republican Gov. Scott Walker and legislators from ending collective bargaining for pension and health insurance benefits and the forced collection of union dues. The protests failed, and the reforms were enacted.)

Weinberg said Wisconsin state management has done a much better job of funding growth in real retirement liabilities with current real resources, leading to a real current impact for taxpayers. Wisconsin has cut taxes since 2011. Illinois, by contrast, has used accounting tricks and dishonest budgeting and reporting to allow the unfunded liabilities to grow even as taxes have soared.

Weinberg warned the day of reckoning is near. The sooner we get truthful accounting from government, the better the solution will be, she said. Weinberg’s conclusion is in keeping with the mission of the CivicLab, a unique facility and nonprofit organization dedicated to civic education and engagement. Weinberg urged citizens to educate themselves and demand “FACT-Based Budgeting” (Full Accrual Calculations and Techniques) and truth from government and the news media.

Bill Bergman

Bill Bergman is the director of research for Truth in Accounting. (read full bio)