Guest Post: Bad Accounting = Bad Decisions

Written by Sheila Weinberg, Truth in Accounting

Bad government budgeting and accounting practices make it impossible for you to knowledgeably participate in government. It is impossible for you to effectively advocate for tax and spending policies in your cities and states, because your governments are providing you with misleading financial information.  

Today I am going to outline a simple step you can take now that will have a big impact on government transparency and accountability. 

The bad accounting governments use for their general and other budgeted funds allow elected officials to claim “balanced” budgets, while going further into debt.

To make this easier to understand, we can compare what the governments are doing with a couple’s personal finances.

Let’s say you and your spouse agree to live within your means and not overspend during the holidays. You decide you can afford for each of you to spend $500. You are careful and make sure you don’t go over your budget.

In January you look over your bank account and are happy your spouse only spent $400. You’re amazed because he had given so many great gifts to you and others. Later in January you open up your credit card statement to find your spouse had charged $1,100 in December. When you bring up the issue,  your spouse responds proudly that he, or she, had used less than $500 from your joint bank account. Your spouse says  don’t worry about the credit card balance; it will be paid  over the next year or so.

Like your spouse, many government officials only care about the balance in their general fund and not about the money owed. If a government decides not to pay its bills, the amount of unpaid bills doesn’t adversely affect its general fund balance. This is the root of governments’ pension problems.

Bad budgeting and accounting practices have made it impossible for taxpayers to determine if their government’s budget is balanced. Officials can “balance” the budget using accounting gimmicks, such as claiming borrowed money as revenue, not paying their bills on time, and promising pension and retiree health care liabilities, but not funding them. 

Forty-nine of the 50 states have balanced budget requirements, as do the 75 most populated cities.

One of the reasons governments have balanced budget requirements is so elected officials have to live with the government’s means. The most important reason is so citizens can hold their elected officials accountable for their spending. Former U.S. Treasury official, Frank Cavanaugh said it best, “Politicians should not have the pleasure of spending (getting votes) without the pain of taxing (losing votes).”

Unfortunately, governmental financial reports support the political math used to pretend the budget is balanced when it was not. Nobody is breaking the rules. The rules themselves are the source of deception. The board that sets state and local government accounting standards has been an enabler of this deception.

Some of you may know about the Financial Accounting Standards Board that sets accounting standards for corporations. But government officials decided they didn’t want to live by the same rules as corporations. So they created their own board, the Governmental Accounting Standards Board (GASB). The GASB sets the standards for state and local government accounting and is currently reviewing general fund accounting.

 General fund statements (and other budgeted funds) are prepared using a convoluted accounting method called “modified accrual accounting.” This is similar to “checkbook” accounting in which you only worry about what goes in and out of your checkbook.

When reporting if the general fund ran a surplus or deficit, the general fund income statement includes only the incurred expenses that will be paid in the next year, not expenses the elected officials chose to defer paying long into the future. Governments routinely do not write checks to fund their pension plans properly. They in essence “charge” the some of the pension portion of their employees’ compensation, to the government’s pension “credit card.” Therefore, these expenses do not negatively affect their general fund balance. Currently GASB requires governments not to report their pension and retiree health care liabilities on their general fund balance sheets.

Governments should be required to use FACT-based accounting to account for their general fund. FACT stands for full accrual calculations and techniques, which is similar to the way large corporations are required to do their books. This would give citizens and their advocates general fund statements that would indicate whether their government’s budget was truly balanced. 

With your help, we can stop this confusing and misleading accounting practice. GASB usually only hears from government accountants and finance people or others who have a vested interest in maintaining the status quo. They need to hear from you.

What Can You Do?

Help us to bring GOOD ACCOUNTING to the general fund

Email the director of GASB to have the general fund accounted for properly using full accrual accounting. Encourage GASB to not approve the current exposure drafts, which call for a continuation of the current bad accounting practices.

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