WASHINGTON - After years of painful service cuts and devastating bankruptcies, culminating in the financial collapse of Detroit, state and local governments are being urged to stop using budget gimmicks that obscure the true extent of their money problems.
On Tuesday, the State Budget Crisis Task Force released its final report, calling for an end to the long-standing practice of using accounting methods that make budgets appear balanced even when fiscal problems are worsening.
The task force was led by a former chairman of the Federal Reserve Board, Paul Volcker, and a former New York lieutenant governor, Richard Ravitch, who have warned that states and cities have deep structural problems that will not go away just because the country is recovering from the recession that started in 2008.
New accounting rules that take effect nationwide this year are meant to help cut through some of the confusion over who is ultimately responsible for state and local pensions, an area of concern to the task force. The Society of Actuaries also is scheduled to issue recommendations on public pensions. But Volcker said much more needed to be done to “create an environment where the states feel pressured to follow” the rules.
“There have been efforts to have government accounting standardized for years,” he said. “As near as I can see, it’s been ineffective.”
One problem has been an overabundance of detail and complexity in budgeting and accounting practices.
“The hope is that we can have a simpler framework that deals with some of these obvious machinations,” Volcker said.
Another problem is a lack of consistent oversight. A 1975 law called the Tower Amendment limits federal regulation of the financial activities of states and cities. The Securities and Exchange Commission enforces rules on corporate accounting but has limited power to do the same with state and local governments.
“The Tower Amendment should be revisited so that the SEC can require issuers to comply with sensible disclosure requirements, as well as with robust accounting standards,” the task force said in its report.
Attempts to repeal the Tower Amendment have foundered over concerns about states’ rights.
The SEC can take action against state and local officials when it finds evidence of fraud. But Ravitch said he was more concerned about the pervasive fiscal sleight-of-hand that, while not illegal, obscured financial reality. Political leaders, with the help of their bankers and advisers, he said, routinely cobble together schemes to make budgets that are millions of dollars short appear balanced.
As an example, he cited Chicago’s sale of 75 years’ worth of municipal parking revenue for $1.2 billion in 2009. The sale made it easy for Mayor Richard Daley to balance the city’s budget that year but passed the financial burden to future budgets until 2084.
Another example, Ravitch said, was a 2005 deal in which Detroit borrowed $1.4 billion and used the cash to shore up its pension funds. Much of the money was quickly lost on real estate investments that soured.
Since then, the city has defaulted on the debt, the pension system has a bigger shortfall than ever, and the legality of the initial borrowing is in doubt. Detroit’s emergency manager, Kevyn Orr, recently testified that the SEC could not investigate because its four-year “look back period” had ended.
The report also called for clarifying what could be counted as “revenue” in government budgets. The proceeds of bond sales, or cash raised by selling public assets, should no longer be counted.
In addition, the task force called for multiyear financial plans that would force states and cities to look beyond one year. States should be required to provide better oversight of cities and other local governments, the report said.
And it emphasized that fiscal hawks in Washington needed to start thinking about the troubles they impose on states and cities when they cut programs to balance the federal budget.It recommended creating a bureau - possibly within the Congressional Budget Office - to collect and analyze state and local financial data to help coordinate budget efforts at all government levels. Without such coordination, they said, federal policy makers will continue to push their problems to the states, which will push them to the local municipalities.
Local governments already have been struggling to deal with the resulting shortfalls by deferring their maintenance of roads, bridges and other public works, or cutting public education spending.
The task force can only recommend changes, and hope that its report will increase public pressure to adopt them.
“What we are after is more openness and reporting consistency,” Ravitch said. “Politicians want to maintain the maximum amounts of opacity.”
Front Section, Pages 2 on 01/15/2014