|
 Bad accounting has helped Illinois politicians avoid balancing
the budget for 20 years, despite a constitutional requirement to pass a balanced
budget each year. Government accounting standards that fail to offer
transparency and accuracy in financial reporting have also contributed to the
state’s $260 billion pension crisis, the primary reason Illinois has the lowest
credit rating any state has ever received.
The Governmental Accounting Standards Board has proposed changes it calls
“improvements” to the accounting standards for governments. However, watchdog
groups such as Truth in Accounting have criticized the proposed changes and
urged the adoption of more stringent standards that would require governments to
balance their budgets the way most businesses are required to do. Illinois has
grown accustomed to using lax accounting methods to hide its budget deficits,
racking up debt year after year. The state’s taxpayers would benefit from
tougher standards that impose fiscal discipline.
The standards board sets the accounting standards for state and local
governments. While many private sector companies are required by law to use
accrual-based accounting, which recognizes income when it is received and bills
when they become due, the board uses modified accrual accounting. Intended as a
hybrid between accrual and cash-based accounting, the modified system
effectively operates as cash-based accounting, in which revenues are counted
when they are received but expenses are not counted until they are paid. This
creates a distorted view of budgets and enables governments to overpromise –
making financial commitments they have no way of keeping.
Imagine homeowners “balancing” their monthly budget by refusing to pay their
$100 electric bill, instead counting it toward next month’s expenses just
because the bill went unpaid. That is the type of irresponsible financial
management cash-based accounting allows. These reckless budget practices have
helped push Illinois into a fiscal abyss while also contributing to numerous
other problems plaguing the state.
Current board standards enable governments to use confusing accounting methods
to shield significant problems from the eyes of taxpayers rather than promoting
transparency in the use of public funds. Truth in Accounting, an independent
financial watchdog, said these methods allow governments to “ignore long-term
liabilities, such as the pension and health care promises they made to their
government workers.”
Truth in Accounting is leading an effort to push the standards board to adopt
stronger standards and urging the public to write to the board during the open
comment period, which runs until the end of February. It wants the board to
adopt what it calls FACT-based accounting – Full Accrual Calculations and
Techniques. Using this method “would mean that the financial statements used for
budgeting must show expenses as they are incurred, especially when a government
makes a promise to pay in the future.”
Truth in Accounting CEO Sheila Weinberg recently highlighted an example of how
deceptive financial practices mislead the public and hide the true fiscal state
of public entities. Weinberg pointed to a Chicago Sun-Times 2019 headline about
the Chicago Public Schools that said, “CPS finishes year with budget surplus,”
when CPS had a loss in excess of $750 million and net liabilities over $14
billion. The “surplus” was only in the general fund and was calculated using
cash-based accounting.
The board standards lack the stringency necessary to keep public sector budgets
operating in a responsible manner. Citing board standards, the Financial Times
concluded, “Politicians are encouraged to lowball both the value of public
assets and the cost of promises made to public-sector workers. It’s a recipe for
poor governance, if not outright corruption.”
Illinois’ unfortunate triple crown of lax accounting practices, poor governance
and corruption drag down its economic growth, contributing to residents leaving
the state. Unsurprisingly, recent research from the University of
Illinois-Chicago found the state to be the second-most corrupt in the nation.
Worse, that corruption comes with a hefty price tag. Research from the
nonpartisan Illinois Policy Institute found the state loses $556 million each
year due to corruption’s stifling effect on economic growth.
[
to
top of second column] |
In the 20 years since the state’s last truly
balanced budget, its deficits have increased, taxes have increased,
and population has declined. In fact, the most recent data show
Illinois is hemorrhaging residents, suffering the largest population
decline of any state during the past decade. The state is also in
danger of becoming the first to have its bonds hit junk status. The
state’s precarious finances left it unprepared for economic turmoil
like the coronavirus pandemic.
While no one could have foreseen the economic
calamity caused by COVID-19, few states were less prepared to handle
a downturn than Illinois. Illinois has only enough money in reserve
to fund the government for about 15 minutes, a sobering reminder of
just how poorly politicians have been managing the state’s finances.
The poor fiscal state of Illinois was also on display when it
borrowed funds through an emergency program created by the Federal
Reserve called the Municipal Liquidity Facility. The program was
designed to allow state and local governments access to credit to
manage revenue delays and losses, with $500 billion in funding
available to all 50 states, large cities and counties, and certain
other municipal entities until Dec. 31, 2020. Yet only two
government bodies ended up using this emergency funding resource:
the Metropolitan Transportation Authority of New York and the state
of Illinois. Illinois borrowed $1.2 billion in June then requested
an additional $2 billion in December after voters in November
rejected Gov. J.B. Pritzker’s progressive income tax.
Illinois sought to use this program because the state is in such
poor fiscal condition that the Municipal Liquidity Facility program
offered borrowing opportunities at better rates than the state could
find in the traditional bond market. Crain’s Chicago Business
explained: “Investors have long punished Illinois for its fiscal
woes, boosting the penalty the state pays to borrow from the bond
market. Illinois 10-year general obligation bonds yield about 2.77
percentage points more than benchmark debt, the highest of the 20
states tracked by Bloomberg.”
The purpose for the liquidity borrowing, according to Pritzker, is
to help the state manage its enormous bill backlog, another
long-running problem enabled by cash-based accounting. The bill
backlog is essentially a “carried deficit” from year to year. Since
Illinois counts an expenditure only when it is paid, the state can
carry that expense into future fiscal years without counting it
toward the current fiscal year’s balance. Under accrual accounting,
bills would be counted in the fiscal year in which they were
incurred, regardless of when they were paid. Essentially, Illinois
uses this trick as a crude form of borrowing that ends up pushing
costs into the future with interest. This borrowing and debt
manipulation is part of a bad budget process that hides real
deficits from taxpayers and allows the state to claim balanced
budgets even though they are not. Illinois’ current bill backlog is
around $5 billion even after payments have been made as a result of
this latest short-term borrowing.
Illinois continues to use all available gimmicks and federal
handouts to keep its fiscal boat afloat. The governor has said he is
“thrilled” control of the U.S. Senate has changed hands, increasing
the prospect of a federal bailout of state governments.
Illinois taxpayers should question why governments in charge of
allocating their money are held to such weak accounting standards by
the Governmental Accounting Standards Board. Taxpayers should
further question why their elected officials continue to use these
methods to hide the state’s true financial condition. Until Illinois
changes its poor practices and adopts better accounting standards,
Illinoisans can expect to keep seeing smoke-and-mirror accounting
tricks by politicians.
Illinois is perhaps the most glaring example of why governments need
to be held to higher standards than the ones the board uses.
Illinois must reverse these troubling trends by adopting serious
reforms that directly address the problems facing the state. That is
the only way to place Illinois on a sustainable path forward.
Click here to respond to the editor about this article |
