Tax Reform

State Budget Solutions

State Budget Gimmicks of 2015

Every year budgets are debated and voted upon somewhere across our nation. The timing of state budgets generally occurs during the summer months, since almost all states have a fiscal year that begins on July 1st. This is the single most important job for a state government to accomplish each year: prioritizing public priorities by allocating precious tax dollars amongst competing claims by lawmakers, special interests and citizens. To complicate the issue, almost every state has some provision requiring the passage of a balanced budget, meaning the state cannot spend more than it collects in revenue. This restriction, and the generally complicated nature of budgeting for a state, has tempted some lawmakers into using gimmicks to fill accounting holes and mollify certain constituencies.

So what exactly is a “gimmick?” According to the dictionary, the word “gimmick” has a couple of meanings. The most striking definition is “a hidden mechanical device by which a magician works a trick or a gambler controls a game of chance.” So, are state budgets no more than a bag of tricks – or is it that lawmakers are the gamblers, controlling the game that we call state government? I would argue that both analogies fall short in the end – but they do have more than a grain of truth.

State Budget Solutions has been keeping an eye on budgets for many years, and when states face a recession or some other event that causes state spending to spike or revenues to drop, that is typically when governors and legislators use gimmicks to ‘fix’ or ‘balance’ the state budget. Unfortunately, these temporary fixes only hide the true cost of government, setting up states for true fiscal calamity down the road.

As we take a look back on 2015, some states have attempted to fix gimmicks they employed in the past, while others have continued to ‘kick the can down the road’ and only compound problems for future lawmakers and citizens alike. Here are a few of the most “popular” gimmicks that we’ve come across in 2015.

Underfunding Pension Contributions

During the late 1990s, public pensions encountered worrisome shortfalls – the result of market declines, funding holidays, and benefit increases. Today, these shortfalls have led to a nationwide $4.7 trillion unfunded liability according to State Budget Solutions’ research. By chronically underfunding pensions, retirement accounts become less stable, and there is less assurance that the state can effectively cover distribution amounts when pension benefits become due.

  • New Jersey has been underfunding its pensions since 1996 – and from 2001 to 2004 payments were avoided entirely while increasing benefits for employees. In 2011, legislation passed that would increase the state’s annual payments to its pension fund in exchange for higher employee contributions. Fully funding pensions in 2015 would have cost $3.9 billion, but Governor Christie reduced payments to a mere $700 million, in order to “balance” the budget. The unions sued, arguing that legislation from years prior created a contractual obligation by the state to pay its required contributions. The suit ended up in the New Jersey Supreme Court, leading to a decision that the state does not have to put more money into the public pension system.1
  • 74% of California’s total debt is retirement liability debt, amounting to $111 billion which remains undisclosed on the state’s official report thanks to the government’s use of outdated accounting practices.2
  • Nevada has been in desperate need of pension reform for years, but lawmakers have continued to punt the issue from one session to the next because of inaccurate calculations and political considerations heading into state election seasons. Nevada’s unfunded liability for eventual payouts to its employees under the existing defined benefit plan is estimated to be $12 to $40 billion.3
  • Texas’ unfunded liability is reported to be constantly doubling from one year to the next. According to a report from State Budget Solutions, Texas’s real unfunded liability, calculated with a fair market valuation, was a staggering $244.1 billion.4

Moving money from dedicated funds, aka “fund shifts”

“Fund shifts” occur when lawmakers sweep money from one internal state fund and use it in another fund, often in an attempt to demonstrate a more balanced budget. Lawmakers are not picky about what kinds of funds they raid. Most recently it has been from federally-funded programs, in an effort to shift funds without lowering the total amount spent on programs.

  • Over the last decade, Georgia has shifted its federal Temporary Assistance for Needy Families (TANF) funds to non-profits, and counted that money as state spending. If this practice were ended, the state could see a $100 million budget hole. Last year, while Georgia was supposed to spend its own $173 million on the program, only $74 million was from the state budget, and $99 million was shifted from TANF dollars.5
  • Alaska lawmakers voted to draw money from the state’s reserves to cover multibillion-dollar deficits brought on by low oil prices. By moving money from the state’s savings account and constitutional budget reserve, it allows the state budget to look balanced.6
  • North Carolina ended a multi-decade $200 million per year transfer of gas-tax dollars from the Highway Fund to the state’s General Fund. During the mid-2000s, the Highway and Highway Trust Fund were raided to “balance” the General Fund.7

Delaying payments until the upcoming fiscal year

Delayed payments effectively shift the burden of debt from one fiscal year until the next, to postpone payment of the debt (and potential political backlash). In the past, states delayed issuing state employee paychecks by one day, which shifted payroll costs to the next year, or postponed sales tax payments.

  • The Rhode Island House, without any debate, voted to suspend the payment of annual pension increases for current retirees. The terms are settled to include a $500 bonus this year – and another $500 next year – in the pensions paid to retirees.8

Borrowing money to balance the budget

States borrow money for the same reasons that individuals borrow money. Typically, when a state borrows money, it is through the issuance of bonds that are backed by the full faith and credit of the state issuer. In exchange for the loan, the state agrees to pay an annual interest rate. It is possible for the state to pay off the bond before it matures (and the interest becomes due), pursuant to each bond agreement, but typically, a state must pay at least five years of interest on a bond before the option to pay face value owed is viable. Bond sales are closely tied to bond ratings.

  • Connecticut sold $840 million in bonds, its largest of 2015, to fund improvements to the New Haven Rail Line, the I-84 expressway, and the Pearl Harbor Memorial Bridge.
  • Kansas issued $1 billion in bonds for KPERS to close a budget hole in its public employees’ retirement fund.9

Inflating revenue assumptions or savings projections

When developing state budgets, lawmakers must make assumptions about revenue and expenditures. To demonstrate a balanced budget and justify increasing expenditures, lawmakers will inflate revenue assumptions by projecting overly optimistic revenue growth and rates of return on pension fund assets, and by assuming a lower rate of inflation than is realistic. The accounting trick parallel to inflating revenue is the inflation of savings projections. State lawmakers will assume savings in contract negotiations, on infrastructure costs and repairs, and by predicting no student growth to effectively decrease the amount of expenditures. These savings are unrealistic and rarely mirror true projections. Lawmakers may also advertise a reallocation of funds from one agency to another as a “spending cut” to the former agency, leading to illusory projections of greater savings.

  • In Louisiana, the government projected an average oil price of $61.7 per barrel, while in fact oil prices are currently about $47 per barrel. For every $1 drop in oil prices below the $61.7 average, Louisiana loses $12 million in taxes.
  • TOPS, Louisiana’s college scholarship program, is expected to cost $19 million more than budgeted.
  • Alaska’s budget is based on a forecast of oil averaging $67.49 per barrel. However, according to state figures, oil price has averaged $51.08 since July 1.10
  • Colorado, New Mexico, Oklahoma, Texas, and Wyoming all have state budgets based on oil prices projected higher than current levels.11
  • In Connecticut, while retirements among prison guards were anticipated to increase, Governor Malloy’s proposed budget for 2014-2015 ignored that surge. The state is now facing a forecasted $191 million deficit, as a consequence of Malloy’s gimmick.12

One time sales of assets or other non-recurring funds

A one-time sale of state-owned assets helps to close budget gaps, but the expenditures including the sale do not decrease in following fiscal years despite the absence of the sale of the asset, effectively creating larger future deficits. Other types of non-recurring funding may include money from legal victories or settlements or the refinancing of state bonds.

  • Louisiana Gov. Bobby Jindal’s administration proposed to sell the state’s remaining share of a massive tobacco settlement, in order to plug budget holes.13
  • Jindal’s administration has balanced the budget only in name, by moving money from reserve accounts, selling state property, tapping legal settlements, and approving a tax amnesty program. The outlook for fiscal year 2016’s budget is already about $1.6 billion in the red, due to the use of $1.2 billion in one-time money, combined with the drop in oil prices.14

Inadequately funding other state programs

State lawmakers will underfund programs such as education and Medicaid, justified by failing to include realistic projections for costs (such as increased student enrollment) or revenues (from Medicaid-related provider taxes or fees).

  • According to a lawsuit by former Gov. Ronnie Musgrove on behalf of 21 districts, Mississippi has not fully funded an education formula every year. The formula, put into law in 1997, has been ignored by Mississippi’s legislators, as stated in the lawsuit.15
  • Faced with an ongoing state budget impasse, Illinois has delayed $800 million in funds to the City of Chicago, Chicago Public Schools, and the Chicago Transit Authority. School officials have warned that this funding delay may necessitate massive layoffs.16
  • As Pennsylvania’s budget stalemate drags well past the beginning of the fiscal year, several counties are no longer able to support programs to assist the homeless and provide emergency housing and shelter due to the months-long loss of state aid.17 
  • Texas lawmakers approved cuts earlier this year that would slash by roughly 20% payments therapists receive from Medicaid, justified by the state’s claims that it is “significantly” overpaying therapists compared to other states.
  • Washington completes its four-year balanced budget requirement, largely by suspending the unfunded class size reduction initiative (I-1351).18

Improper use of mortgage settlement funds

As part of the National Mortgage Settlement in February 2012, the states split $2.5 billion intended to provide a measure of restitution on behalf of homeowners who lost equity in the market collapse or lost their homes in the “robo-signing” foreclosure scandal. Six states – Missouri, California, South Carolina, Georgia, Alabama and New Jersey – ignored the agreed-upon uses for the money entirely, by directing nothing for housing-related activities. Fourteen others, including Idaho and Illinois, are using less than half of their funds for the intended purposes.

  • Instead of using the settlement funds to help homeowners, Texas directed the money to be deposited in the state’s general fund.19
  • California is obligated to return $331 million that it took from the mortgage settlement fund, according to a court ruling in Sacramento. The fund, which is designated to help homeowners, was instead used by the governor to fix deficits in the state’s budget.20

Improper use of tobacco settlement funds

Forty-six states entered into the Tobacco Settlement Master Agreement in 1998 with some of the nation’s largest tobacco companies, after the states sued to recover tax dollars spent dealing with tobacco-related health costs. The tobacco companies agreed to pay the states nearly $200 billion over a 20-year period. Since then, states have issued billions in tobacco settlement-backed debt. They frequently shift yearly payments between funds, as well as forward and backward in the fiscal calendar, to meet their annual budgetary needs.

  • In fiscal year 2015, states collected $25.6 billion from the tobacco settlement and taxes, but they spent only 1.9% of it on programs to prevent kids from smoking or to help smokers quit.21

Conclusion

These are just a few of the many gimmicks states use each and every year to fill budget holes, shift money to increase spending, or use the budget to fulfill campaign promises. Some states are worse than others. This year, New Jersey wins the 2015 title of worst abuser of budget gimmicks, with its egregious shirking of pension obligations. The Garden State was hardly alone in its use of creative accounting to project a false image of fiscal health. In statehouses nationwide, lawmakers have relied on various budgetary tricks. Unfortunately for taxpayers – as well as those who rely on government funds – these fiscal sleights of hand only forestall critical reform.

Sources

1.     Alicia Munnell, “Surprising decision in New Jersey pension funding case,” Market Watch, June 17, 2015.

2.     Sheila Weinberg, “California, Texas Share Big Pension, Retirement Liabilities,” Heartlander, September 18, 2015.

3.     Frank Partlow, “Nevada’s pension payments unsustainable,” Reno Gazette-Journal, March 31, 2015.

4.     Jon Cassidy, “Reported debt doubles at two Texas pension funds,” Texas Watchdog, March 20, 2015.

5.     Michelle Eloy, “Ga. Braces For $100M Budget Hole Amid Possible Welfare Changes,” WABE 93.1 FM, September 9, 2015.

6.     Dan Joling, “Alaska lawmakers OK $5 billion budget; layoff notices to be rescinded,” News Miner, June 11, 2015.

7.     John Hood, “Fund Transfer Finally Ends,” Carolina Journal, October 12, 2015.

8.     Katherine Gregg  and Jennifer Bogdan, “R.I. House unanimously, quickly passes ‘pro-jobs’ budget,” Providence Journal, June 17, 2015.

9.     John Montgomery, “Gambling with KPERS,” Hutchinson News, April 6, 2015.

10.   James Brooks, “Oil prices continue to widen state’s fiscal problem,” Juneau Empire, October 14, 2015.

11.   Ibid.

12.   Keith M. Phaneuf, “Malloy’s tax rebate clears big hurdle,” The Connecticut Mirror, April 1, 2015.

13.   Associated Press, “Louisiana should sell tobacco settlement for upfront cash, Gov. Bobby Jindal says,” New OrleansTimes-Picayune, March 17, 2015.

14.   Tyler Bridges, “Louisiana budget bill leaves fiscal problems for future; lawmakers will have to solve $1 billion gap,” Baton Rouge Advocate, May 30, 2015.

15.   Emily Wagster Pettus, “Judge: Mississippi not obligated to fully fund schools,” The Clarion-Ledger, July 15, 2015.

16.   “City Of Chicago, CPS, CTA Budgets Need $800 Million From State,” Progress Illinois, October 26, 2015.

17.   Robert Swift, “State budget woes deepen for counties,” Citizen’s Voice,” October 26, 2015.

18.   Jason Mercier, “Budget reforms are needed to end the threat of state government shut-downs,” Washington Policy Note, September 2015.

19.   Brett Shipp, “Texas mortgage settlement millions misspent, critics say,” WFAA, November 10, 2015.

20.   Gretchen Morgenson, “California Has to Repay $331 Million to Homeowners Fund, Court Rules,” The New York Times, June 15, 2015.

21.   “Broken Promises to Our Children: A State-by-State Look at the 1998 State Tobacco Settlement 16 Years Later,” Tobacco-Free Kids Special Report, December 11, 2014.


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