Will Financial Reporting Finally Make Sense?
Paul Volcker and Richard Ravitch’s State Budget Crisis Task Force recommends ways government can make reporting cleaner, clearer and simpler.
Back when I taught a graduate course in public finance, I would ask the budding young government managers on the first night of class why they were there. They would look at me a bit quizzically and tell me they were there because the class was required. Then I would tell them that the reason they were there was because they could not manage any organization, public or private, without understanding its finances.
But I would also tell them that for a host of reasons—including the lack of a single financial bottom line and government’s (incorrectly) perceived imperviousness to market discipline—public-sector finances are much more difficult to understand, which leads to bad management decisions. Sometimes the people making those decisions simply do not understand their consequences, and sometimes the opaqueness of a jurisdiction’s finances allow those consequences to be deliberately obscured.
The need for cleaner, clearer and simpler government financial documents has been apparent for years, but the discussions largely have been among government finance professionals. In some respects, Paul Volcker, former chairman of the Federal Reserve, and Dick Ravitch, former lieutenant governor of New York, have begun to rescue budgeting and financial reporting from these professionals.
In 2011, they created the State Budget Crisis Task Force with the explicit objective of raising the profile of these issues. The final report, issued in January, recommends ending cash-basis budgeting, which allows all sorts of gimmicks and short-term measures that obscure actual financial conditions; having states develop multiyear financial plans; budgeting adequate reserve funds; never treating borrowed funds as revenue; developing rules for concise, timely and readable reports; and more.
It’s fair to ask why government managers would pay attention to the work of the task force, since these issues have been raised before with little or no impact. I think that will change for several reasons. First, Volcker and Ravitch are both very savvy political players who can command the attention of government decision-makers. They convened four national dialogues on the topics in the report—invitation-only events held in prestigious venues such as the Federal Reserve Bank of New York—and said they hope that the “highly regarded participants” would help to disseminate and promote their recommendations.
Ravitch says that at this point in his life there is nothing that “has more gravitas” than getting the recommendations implemented, which he says he is committed to making happen because “I have 13 grandchildren and the fact that they won’t get what I got really gripes me.”
For his part, Volcker has created the Volcker Alliance, specifically aimed at spreading good management practices among governments. Shelley Metzenbaum, president of the alliance, says that its next steps are to create an action agenda around open, honest budgeting and reporting and aligning the dialogue to discuss best practices.
Those are indeed the conversations we need to have at all levels of government, and we need to have them now.