Nicole Bullock
9 Jun 2015
Paul Volcker, former chairman of the Federal Reserve, has warned that US states rely on faulty practices to balance their budgets, masking the true nature of their finances and leading to poor policy making.
While states have returned to better health after the depths of the financial crisis and recession of the last decade, many remain under "heavy pressure," with overall tax revenues, adjusted for inflation, barely recovered from their pre-recession peaks.
Paul Volcker, former chairman of the Federal Reserve.
"The continued fiscal stress is tempting states to continue, and even intensify, budgeting and accounting practices that obscure their true financial position, shift current costs on to future generations, and push off the need to make hard choices on spending priorities and revenue practices," Mr Volcker said in a report released on Monday by the Volcker Alliance, a government reform group he founded in 2013.
Mounting fiscal stress in Illinois, Detroit's bankruptcy and the financial troubles coming to a head in Puerto Rico demonstrate the importance of developing better financial policies, the report said.
"There are problems hidden by a lack of truth and integrity" in state budgeting, Mr Volcker said.
He questioned how better reporting might have changed the situations in Greece or Puerto Rico.
At issue is that all but one state - Vermont - are required to balance their budgets annually but no common definition of a balanced budget exits.
That left room for short-term "sleight of hand" - to create the appearance that spending did not exceed revenue, the report said.
Techniques include shifting the timing of receipts and expenditures across years, borrowing long-term to pay for current bills, using non-recurring revenues to cover recurring costs and delaying funding of pension and healthcare retirement benefits.
Budget gimmicks set states on a path of continually searching for ways to plug successive budget gaps.
"The never-ending sense of crisis leads to stop-and-go funding of vital programmes and stifles the need for serious discussions about policy," the report said.
In particular, the Alliance critiqued the budget practices of three states. Triple-A-rated Virginia, though not perfect, has the best methods, New Jersey is a serious offender and California falls somewhere in the middle, having improved significantly in recent years.
To balance its budget, New Jersey has relied on borrowing and manoeuvres, including shifting money intended for other programmes to its general fund.
With the report, the alliance aims to lay the groundwork for future research extending to the 50 states and to build a common approach toward responsible budget practices.
The hope is that by shining a light on these practices, it will make it harder for states to engage in these "shenanigans" and "fess up to the problem," Mr Volcker said.
The municipal bond market where states and local governments raise money does not fully reflect shoddy state budgeting, Mr Volcker said.
"There is a hidden agreement between issuer and buyer - neither has had an interest in exposing it," he said. "If we expose all of this stuff the hope is that spreads will appropriately widen."
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