The GAAP in state finances

The Wisconsin Policy Research Institute’s George Lightbourn on the correct way to assess state finances (which is not now being done by the Walker administration, nor was it done by the Doyle, McCallum, Thompson, Earl, Dreyfus, Schreiber or Lucey administrations, and so on, and so on, and so on):

Sheila Weinberg from the Institute for Truth in Accounting coined the term, “political math.”  When politicians delay a payment and refer to the delay as a “savings,” they’re using political math.  Or when no money is set aside for a bill they know is coming due, practitioners of political call the IOU a “savings.”  It’s political math that allows state government to meet the balanced budget requirement while state accountants show it to be running a $3 billion deficit (according to the official tally released over the Christmas holiday).

Both Republicans and Democrats have used political math to make budgets balance over the years.  Political math allowed my former boss Scott McCallum to balance the budget using one-time tobacco money and it was political math that green lighted Jim Doyle to “borrow” over $1 billion from the transportation fund.  Thanks to political math, Governors and legislatures of all political stripe have been able to buy more government than they could really afford.

Last summer, conservatives celebrated the budget Walker put together with the help of a friendly legislature because it squeezed nearly all the political math out of the process.  (We say nearly because they still used a couple of old tricks which included $264 million of “debt restructuring” a practice that permits state government to delay its debt payments for a couple of years).  We finally have a budget that comes pretty close to balancing, i.e. spends no more money than is actually available.

Yet, no one, especially fiscal conservatives, should think the job is finished; far from it.  What Walker and company accomplished was a one-off budget, one that can easily be undone – and then some – by the next governor and legislature.  Wisconsin’s budget is as vulnerable as ever. …

Either an uptick of the economy or a change in the political whim could lead Wisconsin right back into the old style of budgeting where our politicians spend way more money than they have.

As long as the official books of the state are kept using cash accounting, political math will forever be part of our heritage and we will continue to spend more money than we actually have.  It is time for the Governor to take a giant step toward creating a legacy of balanced budgets that will inevitably yield a more limited government.

One rather wonkish change would kill political math once and for all.  Wisconsin state government to do what every local government and every Wisconsin business does – use generally accepted accounting principles (GAAP) to balance its books.  If our government made that one budget change, then any commitment to spend, no matter how far into the future, would have to be backed by actual money. …

Revolutionary?  Hardly, since this is the same accounting standard that every local government and business in Wisconsin has learned to live with.

As I’ve written here before, it is crazy that an enterprise that spends $35 billion each year uses cash accounting. A business 0.0001 percent of that size wouldn’t use cash accounting. And using cash accounting instead of GAAP accounting has gotten us to where we are in government finance. During the past decade, one-third of the states ran GAAP deficits in any year, but Wisconsin ran GAAP deficits in every fiscal year.

As usual, we taxpayers have to be protected from our elected officials. Counting dollars correctly is a start. So are strict controls on government spending at every level, enacted in the state Constitution and essentially impossible to surmount.

6 thoughts on “The GAAP in state finances

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