Antiquated accounting hides true pension debt

Pension solution requires Truth In Accounting

MARCH 15, 2013 | by Richard Lorenc | REBOOT ILLINOIS

Reposted from Reboot Illinois.

While waiting out a surprise snowstorm at the airport earlier this week, I caught a glimpse of a cable news show featuring a large headline that read, “585 days since we lost our AAA rating.”

The rating downgrade, of course, belongs to the federal government, and the “we” is every taxpayer in the United States who will now pay increased borrowing costs to fund what Truth in Accounting founder Sheila Weinberg aptly calls “the largest financial organization in the world.”

Things are bad in Washington, D.C.–you’d be hard-pressed to find anyone who argues either the “fiscal-cliff” fix or the recent “sequester” solved anything. But we in Illinois focus on federal issues at our peril. Headlines for years have regularly sounded the alarm that the powers-that-be in Springfield continue to preside over an ever-worsening state financial situation for which they lack even the correct information to truly fix.

Here are just a few major Illinois events to recall:

1,555 days have passed since disgraced former Governor Rod Blagojevich was arrested on corruption charges. In 2003, Blagojevich issued $10 billion in pension obligation bonds to create the illusion the state was funding its pension system, while, in fact, taxpayers were really amassing more debt.

It has been 47 days since Standard & Poor’s downgraded the credit rating of the State of Illinois, making more expensive the state’s ability to finance growing public pension liabilities by borrowing.

Governor Pat Quinn made his annual budget address a mere seven days ago, where he pleaded with legislators to help him “move Illinois forward” by sending him a comprehensive pension reform bill.

And it has been only three days since the Securities and Exchange Commission announced it had settled with the State of Illinois over fraudulent public pension disclosures the state had been issuing to investors for years.

You may have noticed all these major Illinois events have a single issue in common: Illinois’ public pensions.

Mostly unsaid is how bad accounting rules have contributed to the State of Illinois’s perilous financial condition by allowing politicians to underfund, promises they have made to public sector employees and others.

Like every other state in the country, Illinois uses accounting rules from a bygone era. When government’s sole responsibility was to build roads and regulate trade, it was appropriate for government bodies to account for assets and liabilities simply, using separate checkbooks for each program. This “cash-based” accounting tracks only current liabilities  for which a payment is being sent immediately.

The role of government, however, has changed since the 19th century. Today, government has also committed to providing benefits for its retired employees, which take the form of pensions and health insurance. Because these benefits aren’t intended to be paid in the near-term, antiquated accounting rules permit them be hidden off-balance sheet, largely out of view of not only to the public, but also to legislators whose duties include management and oversight of the state’s financial condition.

It took Truth in Accounting a year to develop a methodology based on Generally Accepted Accounting Principles (GAAP) to account properly for deferred compensation promises made by state politicians, including those in Illinois.

The idea was simple: keep an accurate  total of what Illinois owns (assets) and owes (current and future liabilities). The difference between those two produces a figure that indicates how much the state must actually plan to pay. Using the most recent financial report (from fiscal year 2011), that figure amounts to $159 billion of debt.

Looked at another way, that means each taxpayer in Illinois would owe $38,500.

Source: http://www.statedatalab.org/state_data_and_comparisons/detail/illinois

That figure is, of course, a proxy. No one would have to write a check for that amount tomorrow. But proxies are useful because they help us understand information, to put it into context. The fact is $159 billion will have to come from somewhere.

Debt isn’t just an abstract idea. It means something regardless of your political priorities. Using State Data Lab.org–a project of Truth in Accounting I helped to build–you can find that doctors in states with higher debt loads tend to accept fewer new Medicaid patients than those facing smaller debts. You can also learn that states that report their finances later–such as Illinois, which took a whopping 337 days after the end of its fiscal year to report for 2011—also tend to have higher debts.

And so much for Illinois’s balanced budget requirement. We have also found Illinois has been spending more than it receives in taxes since 2007. This has also been true in the past couple years despite the income tax hike in 2011. Even without accounting for mounting pension liabilities, the State of Illinois is still digging taxpayers deeper into debt.

Graph: Despite the tax hike in 2011, Illinois’ spending still exceeds its revenues. This is not the case with our Midwestern neighbors. (Source: http://www.statedatalab.org/c/NAaNkyJE2096c76)

There are many ways being proposed to fix this, but, arguably, the most important is to begin by demanding political decision-makers work from the true numbers. No more accounting for costs only when checks must be written. No more gimmickry to claim balanced budgets. And no more obscuring deferred employee compensation off the state’s balance sheet.

If we do not have truth in accounting soon, it’s likely we will someday read the headline: “State of Illinois Files For Bankruptcy.” That’s a result everyone–taxpayers, public sector employees, and regular Illinois citizens–should want to avoid.

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