Effective budgeting starts with honest bookkeeping

By Byron Schlomach, Ph.D.
Goldwater Institute
 
The high-stakes game of chicken the Arizona Legislature and Governor are playing over the $3 billion or $4 billion 2010 budget shortfall (depending on who’s counting) is certainly bad, but you may not know the half of it.

An organization made up of accountants and other financial experts called the Institute for Truth in Accounting (ITA) has exhaustively studied every state’s comprehensive annual financial report (CAFR). In its study, the ITA concluded that many states fail to honestly account for both revenues and spending.

States use cash-basis accounting while the private sector uses accrual accounting. Cash accounting only looks at current inflows and outflows. It fails to account for accrued obligations, such as retirement benefits. States ignore “accounts payable” in their accounting systems, including contract payment obligations. Consequently, state balance sheets grossly understate liabilities.

After studying Arizona, the ITA concludes that while the state claimed $11.2 billion in net assets in 2007, it was actually carrying $16.6 billion in net liabilities. That’s an accounting error of $27.8 billion. The discrepancy can largely be attributed to ignoring Arizona’s long-term health and pension liabilities.

Now to be fair, the state is doing nothing illegal. But elected officials benefit from efforts to hide the true state of government finances because it allows them to engage in continued, unsustainable spending and avoid tough decisions. At minimum, even if Arizona keeps using cash accounting, the state should be required to keep a second, honest set of books.

 
Byron Schlomach, Ph.D, is director of economic policy at the Goldwater Institute.


Comments

  1. An error is an error and a technique is a technique. If you want to count long-term liabilities, count the assets on the balance sheet as well. But wait, we’re not talking about a balance sheet, but an annual budget. That’s the difference.

  2. All states, except Vermont, have balanced budget requirements. The intent of these requirements is to prevent states from accumulating bills that future taxpayers will have to pay and which could cause financial difficulties. Arizona’s politicians, like those other states, use budgeting and accounting gimmicks to circumvent intent of the balanced budget requirements. An annual budget should include all of the costs currently being incurred by the state. One of the reasons billions of dollars of long term liabilities have and are being created is because our elected officials are not being truthful in their accounting AND in their BUDGETING practices.

  3. Shivers: The $16.6 billion of liabilities is a net amount. These are liabilities in excess of assets.

  4. Shiver is correct that it is inappropriate to call these “errors.”

    If we want to do this correctly, how about we include in assets the value of the 9.2 millions acres of state trust land.

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