The States' Stupid Budget Tricks

This year may set a record for gimmicks they used to balance their books.

A few weeks ago, as we were half-snoozing through Jon Stewart's The Daily Show, we were jolted awake. "News correspondent" Jason Jones was reporting that "Arizona has come up with a novel solution to close its $3.4 billion budget gap."

We kind of expected this to be the opening line of a quick joke. But instead, we found ourselves touring Arizona's Capitol and watching Jones interview Arizona state Senator Linda Lopez. She was explaining why Arizona intends to sell the state's Capitol building for $735 million and then lease it back for $60 million a year. Here's an exchange we found unnerving:

Jones: Okay, so you've got 735 million dollars for this year. What happens next year when you don't have that and you've got to pay rent.

Lopez: See, that's always the problem, but, y'know....

Jones: That's a big problem.

Lopez: We've got to get through this year. And ... there are already cuts in the budget.

Jones: Okay, but next year you've got to pay rent.

Lopez: Right.

Jones: Isn't that adding to your deficit?

Lopez: Yes, but it will have helped us bridge the gap for this year.

Jones: Okay. I gotta say again. Next year, what are you gonna do?

Lopez: Oh my goodness. You're killing me here. You're absolutely killing me.

Arizona is hardly alone in looking at "creative" ways to close its budget gap. This year may go down in the record books for the number of gimmicks used to balance state budgets--and the degree to which those gimmicks may come back to haunt the entities involved. We're not particularly aware of any new tricks out there. These are tried-and-true ways for governments to avoid confronting reality--at least for a while. They include deferring payments, accelerating revenues, changing accounting rules and, as in Arizona, borrowing from the future to pay for today.

California, as is often the case, takes the cake. In its efforts to resolve its nearly $60 billion budget imbalance over this year and last year, the state borrowed from local government property taxes and special fund accounts, added to payroll withholding, accelerated personal income tax and corporate tax estimated payments, and will be kicking the June payroll to July. That last one is particularly sneaky. Employees see virtually no difference. Their paychecks arrive a day late, maybe, and that's hardly cause for outrage. But for the state it moves those payments forward a full fiscal year.

"You can argue, 'What's the big deal?'" says Mac Taylor, California's legislative analyst. "But our concern is that it's an expense we incurred this year, and we really should count it this year. We're getting out of sync on the reporting of what we're spending."

Want more? In Illinois, legislators decided that the only way to balance the state's 2009 budget was by not paying some $3.8 billion worth of bills until the next fiscal year. Not only does this mean quite a strain on vendors, it can cost the state more money in the future. When entities pay their bills late, vendors often add a premium--as much as 5 percent--to compensate for not getting paid promptly.

Then there are the ever-popular interfund transfers in which money citizens pay for one purpose is diverted to another. In Wisconsin, for instance, a 75-cent monthly fee was supposed to go for 911 service improvements, but the state diverted $100 million over two years to local governments for other uses, in hopes of reducing the pressure to hike property taxes.

David Smith, the chief administrator in Maricopa County, Arizona, has become a curator of devices like these. The practices that bother him the most are ones that cost substantial money out of taxpayers' pockets over a long period of years. For example, some entities refinance loans in such a way that the total repayments go up by as much as 50 percent over the life of the loan. But the refinancing saves money in the current year.

The Governmental Accounting Standards Board has done a lot in recent years to flush out the details of budget gimmicks and to show when governments may be running a deficit even if the budget appears to

be balanced. Imbalance shows up in the "accrual-based government wide financial statements," which give a clear view of any borrowing that might have occurred to support government spending. In addition, Statement 34, which went into effect early in this decade, requires that governments report "extraordinary and special items" (such as the sale of land or the sale of a building). "They're shown separately," says Dean Mead, research manager at GASB. "so if someone wants, they can remove the item to see what the bottom line would have been without that unusual transaction."

Go tell that to The Daily Show.

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