Budget Deception: Weird Accounting Diminishes Accountability

This week, after reaching agreement with Governor Brown, the California Legislature will pass the state budget for the 2016-17 fiscal year. In so doing, it will meet its Constitutional deadline of June 15th.

A few weeks ago, this column attempted to provide some clarity to ordinary citizen taxpayers on basic state budget issues. This included an explanation of the difference between “general fund” expenditures and “special fund” expenditures. The column also reviewed California’s higher than average level of taxation and its legendary wasteful practices.

Those budget issues are confusing enough but there is something else going on that confounds even those of us who have at least some familiarity with government finance. Specifically, California has manipulated accounting rules that are, at best, confusing and, at worse, intended to conceal the true condition of state finances.

For most folks, figuring out the family finances isn’t all that difficult. Most people have a relatively stable and predictable amount of income they can spend and, on the flip side, they have a pretty good grasp of their expenses. Of course, even the best laid plans can be thrown off with the layoff of a breadwinner or, on the positive side, an unexpected bonus or inheritance.

But with government, predicting revenue can be tricky. Given this unpredictability, one would think that the state would want to base its accounting decisions on best practices. But that isn’t the case at all. Without going into all the wonkish details, the Department of Finance uses various “accrual” techniques to attribute revenue, not to the year in which it was received, but rather to a previous or future fiscal year depending on what political ends the administration seeks to achieve. Venerable Sacramento Bee columnist Dan Walters calls this “hide the pea” accounting and even the Legislature’s own Legislative Analyst has criticized the practice.

For all the funky accounting on the revenue side, it is much worse on the spending side. Here, under proper “accrual” rules, California should be counting the massive amount of debt we’re racking up differently. But with manipulative accounting, the state can actually spend more money than it receives in a given year and still report a budget surplus. This debt, as it relates to public employee pension obligations, is nothing more than spending tomorrow’s money today. But if it is spending money today, it should be counted as such.

David Crane, Lecturer in Public Policy at Stanford University, believes that California has been employing deceptive accounting practices to confuse the Legislature.

David Crane is a Lecturer in Public Policy at Stanford University and President of Govern For California who has written extensively on California’s deceptive accounting practices. He points out that proper accounting could have stopped the largest non-voter-approved debt issuance in California history. That 1999 debt was not a bond. Rather, it was retroactive pension increase for state employees. Had that cost been “booked” the way businesses account for future liabilities, the legislature may very well have thought twice about undertaking such a huge financial burden.

The good news is that the days of deceptive government accounting may be numbered. The Governmental Accounting Standards Board (GASB) has, for the last several years, been forcing government entities to finally begin reporting pension obligations and “Other Post-Employment Benefits” (OPEBs) in a way that is both more honest and transparent. Also, the California Legislature now has as a member Senator John Moorlach, a no-nonsense accountant who predicted the Orange County bankruptcy several years ago. He, like Crane, is shining a light on California’s budgetary shenanigans. With a looming downturn in the economy, this enhanced transparency will be critical.

About the Author: Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.