FACT-Based Budgeting: Medicine for What Ails Government Finances

FACT-Based Budgeting: Medicine for What Ails Government Finances
February 14, 2014

Some surprises, such as Valentine’s Day candy, are nice. Others, like government spending crises and bankruptcies, are hard to swallow. Instead of trying to treat the heartburn after the pain becomes intense, a careful look at causes and prevention might help.

Governments, which are expected to balance their budgets, can avoid these painful financial surprises. It all depends on the meaning of “balanced budgets.” Budgets primarily focus on yearly income and spending, but politicians like to provide more “goodies” without raising taxes. So they hide from public view some expenses that should be paid each year, much like credit card balances when the borrower makes only the minimum monthly payments.

Struggles to match spending to revenue are not new. In the early 1800s, several states declared bankruptcy after large “internal improvements” projects such as road and canal building exceeded funding. To prevent this problem, governments adopted “fund accounting,” setting up separate checking accounts for special projects so they could not tap general revenues. Since then, however, government missions have become more extensive and complicated, with human-services costs becoming hard to predict, often increasing when economic conditions worsen and government revenues decrease.

‘Political Math’

To avoid unpopular tax increases, spending cuts, or both, government officials have created a new game we call political math, to deal with these spending challenges. This game includes moves such as:

  • Creating revenue by moving money into an overdrawn fund from a solvent fund.
  • Treating loan proceeds, meant for a specific project, as “funds available” to pay bills for other services.
  • Delaying payment for this year’s bills until next year.
  • Shifting a significant portion of current employee compensation costs onto future taxpayers. Pension and other retirement benefits, like salaries, are a form of compensation cost. A government may choose to “charge” these earned benefits on a “credit card” for pension and other retirement plans. This choice does not change the fact the retirement benefits portion of the compensation cost should be included in the balanced budget calculation.

Too Few Assets

Analysis by the Institute for Truth in Accounting shows 43 of the 50 states have debt that cannot be covered by available assets. More than a few cities have the same problem, and some have declared bankruptcy. Thus governments that have been required to balance their budgets have instead accumulated debt, running up ‘credit card’ balances for future taxpayers to cover.

In February of this year, for instance, the Chicago City Council voted to approve another $1.9 billion of borrowing just two days after Mayor Rahm Emanuel proposed the measure. The 43-4 vote came after virtually no discussion and with little detail from the mayor about what the money would fund.

Pressures from rising “minimum payments” on such debts are creating painful tradeoffs among priorities such as education funding and pension payments.  

As a result of these manipulations, citizens don’t have the information they need to participate knowledgeably in their government. Elected officials also lack a truthful, timely, transparent picture of the situation. Clearly “balanced budget” requirements aren’t working if government debt is increasing.

A FACT-Based Budget

To prevent painful financial surprises, elected officials should adopt Full Accrual and Calculation Techniques in their budget processes. FACT-based budgeting requires each year’s budget to be calculated and reported in a way that allows everyone to see the impact on the government’s current and future financial position. Debt cannot be hidden in financial footnotes and appendices. Debt has to be truthfully and transparently shown, on a timely basis, before budgets are passed.

Under such a system, each year citizens could clearly see whether the budget causes debt to increase or be paid up. No longer could government create “credit card” debt for today’s services to accumulate for future taxpayers to pay.

Government distribution of goodies can be a false sign of affection, especially if it leads to debt and spending heartburn. Effective prevention requires knowledge of the true cause. Truthful, timely, transparent government reporting would enable all involved—citizens, elected officials, and government employees—to assess proposed solutions to today’s financial challenges. FACT-based budgeting would also prevent debt from increasing and being hidden from taxpayers.

Elected officials should improve both reporting and budgeting, and not kick the can down the road for future citizens to handle.

Donna Rook (drook@statedatalab.org) is president of StateDataLab.org, a project of the Institute for Truth in Accounting.

Internet Info

One-Page Summary of FACT-Based Budgeting, Institute for Truth in Accounting: http://www.truthinaccounting.org/uploads/files/TAA%20one%20sheet.pdf