Budget Gimmicks Used by States

Most states are acting in budget denial.  According to the Encyclopedia of Mental Disorders, “denial” is “the refusal to acknowledge the existence or severity of unpleasant external relations.”  Many states are ignoring the requirement to have a balance budget and thereby denying the reality that deep and permanent reductions are needed in the size and scope of government.

Governors and legislators are tempted to use gimmicks to kick the can to the future to help “balance” state budgets.  They succumb to the siren song of smoke and mirrors accounting.  The use of these gimmicks in most states, however, has simply ensured a much larger budget deficit problem in the next budget writing session. The problem of excessive spending by the states is hidden when states use these gimmicks.  At some point the Day of Reckoning will occur.  The longer lawmakers avoid the problem, the tougher it will be for them to solve it.

State Budget Solutions urges all states to use our Reality Based Budgeting to “reset” state spending now.  Substantial cuts are needed in most states to reduce state spending to a level that the state’s private sector economy can support for the long term.

Thankfully, not all states have resorted to budget gimmicks.  Florida’s lawmakers are spending $1 billion less this year than they did last year, and $4 billion less than 2006.  Other states that have not taken the easy way out include Arkansas, Georgia, Indiana, Michigan, New Hampshire and Utah.  Even better is Nevada’s move from an input system to an outcome, performance-based budgeting system known as reality-based budgeting.  Other states are considering making the same shift.  Reality Based Budgeting means not using budget gimmicks.

Because many states do continue to rely on the gimmicks, SBS tracks what financial games the states are playing.  The gimmicks are many and varied.  The following are some of the gimmicks that states have recently used.

Not making the required contributions to pension plans — and making false assumptions

New Jersey has failed to make the actuarially recommended payments since 1998. Last year they underfunded pensions by $3.1 billion.  Next door, New York lawmakers have deferred $884 million from pensions in the past two years.  In Virginia, lawmakers borrowed some $600 million or more from the Virginia Retirement System to balance the biennial budget and also postponed $135 million in payments to retirement system.  The state of Washington assumes a higher rate of return of 7.9% on pension investments than the 7.5% recommended by the state actuary recommended and the state also uses an 8 year smoothing process to write off gains or losses in pension investments.  It also assumes that state employees will work longer and delay retirement, which is an unfounded assumption at best, and most likely incorrect.

Sweeping money from dedicated funds and using it to “balance” the budget

Many of the states rely heavily on one-time fund shifts from a dedicated fund to help balance the general fund budget.  In California, Gov. Brown proposed in January that the state plug $5.4 billion of deficit by borrowing from other internal state funds, shifting property tax revenues from redevelopment agencies to counties and taking money from voter-approved funds for services for mentally ill and for young children.

Lawmakers are not picky about what kinds of funds they raid, and it seems as if anything was fair game this year.  In Colorado diverted tobacco funds to balance the state budget in May 2011.  They swept $150 million from a state road-building fund in Florida, and $100 million for road and bridges was used to balance the Oklahoma budget. Georgia lawmakers gave final approval to sell off a large part of a state environmental loan fund that helps pay for water and sewer projects to help eliminate state budget shortfall.   In Hawaii, legislators transferred $200 million from Hurricane Relief fund.  Idaho swept $48.8 million from Economic Recovery Reserve fund and $1.4 billion from other dedicated funds.  Funds from an economic development “mega fund” were transferred in Louisiana.

Maryland has made a habit of transferring cash from fund to fund, with over $2.3 billion transferred between funds from 2007-10. Texas relied on $4.9 billion unspent in dedicated accounts to balance the current budget.  New York State officials have repeatedly borrowed from a fund known as a short-term investment pool to cover ordinary state spending.

Delaying payments until the following fiscal year

States do not just move money from fund to fund in a given year, they also move the money from year to year.  Shifting a payment one day can move it from one fiscal year to another, which is an accounting game many states use to “balance” the budget.

California  $2.1 billion in delayed payments to school districts. Illinois delayed at least $1 billion in unpaid bills from to next year.  Minnesota seems especially fond of delaying payments to K-12, having done it three decades.  In 2011, Minnesota delayed an additional  $770 million.  Texas delayed $2.3 billion in payments to schools until the next fiscal year.  Washington delayed K-12 payments until from June until July, pushing them into the next fiscal year. In 2010, Idaho postponed Medicaid payments until July 1, the first day of the next fiscal year, to save $27.6 million.

Borrowing funds to balance budget

States often borrow money to pay their bills and “balance” their budgets. In June of 2011, Illinois lawmakers borrowed $1.17 million from money state citizens designated for charitable use on their tax returns and the states said it hoped to repay the money within a few months.  Gov. Pat Quinn has proposed that the state borrow $10 billion to pay its bills.

Accelerating revenue collections 

Ohio accelerated pre-existing phase outs of several taxes to pick up over $1 billion.  This year’s Texas state budget includes $3.5 billion in “non-deferred payments,” and accelerated tax collections, which meant retailers paid $231 million early, and those funds will not be there in the following biennium.

Inflating revenue assumptions

California’s Gov. Brown assumed $1.4 billion in revenue from selling state buildings and then kept going, assuming $4 billion in a rosy economic forecast above the projected $6.6 billion forecasted increase. That has not been realized.  In 2010, New Hampshire also assumed $60 million in revenue from selling or leasing assets, but those assets were unspecified.  If you do not know which assets you are selling, it’s hard to know how much the state will make on the sale.

Lawmakers in New York assumptions on collecting $140 million in cigarette taxes on Indian reservations was looked particularly inflated when, three months into the new fiscal year, the state had not collected anything.  States take it even farther and assume revenue from a non-existent source, such as when Pennsylvania assumed $470 million in revenue from tolling Interstate 80 after the federal government rejected tolling the year prior.

Inflating projections of savings

Some states balance their budgets on what lawmakers hope they can save, despite the fact that those figures are far from certain and likely inflated.  Both Connecticut and New York assumed billions in union concessions before they had secured agreement from the unions, who can and have rejected such agreements.   Other savings projections are also often be inflated.

Moving items off-budget

The North Dakota state budget increased general fund spending by 20 percent over the next two years due to an accounting maneuver. The biennial budget that lawmakers approved included several big-ticket spending items, such as $370 million in road repairs and another $342 million to reduce local property taxes, and those projects were paid for through a special account financed by excess oil-tax revenues – rather than the general fund – allowing Governor Jack Dalrymple and the Legislature to mask their effect on overall spending until after lawmakers had approved a two-year general fund budget on April 28. “Those programs were financed by a fund for surplus oil taxes that has often been used as a piggy bank for favored projects,” the AP reports. “The Legislature abolished the fund, which is called the Permanent Oil Tax Trust Fund, and ordered that the money be transferred to the general fund.” The result is that the $3.3 billion budget that Dalrymple originally proposed in December became a $4.1 billion budget by the time it was approved by lawmakers.

Using of certificates of indebtedness

Kansas issued a $600 million certificate of indebtedness, without which the state general fund would have been out of money on July 5, just five days into the new fiscal year, and wouldn’t have a positive balance again until June 21, 2012.

Selling tobacco bonds

Minnesota budget calls for raising $640 million by selling “tobacco bonds” that would be repaid with interest from money the state expects to receive from a legal settlement with several tobacco companies

Failing to fully fund programs

Texas seems especially good at the gimmick of insufficiently funding programs, having intentionally left the state Medicaid program underfunded by about $5 billion over the next two years and failing to factor enrollment growth into the education budget despite the fact that enrollment projections show more than 160,000 additional students in Texas public schools over the next two years.

Taxing hospitals in order to “leverage” federal money

In 2011, the following states enacted legislation to establish or expand provided taxes and fees: Indiana; Maryland; North Carolina; Oklahoma; and Tennessee