Paying bills late, selling buildings and swiping money from special accounts are some of the gimmicks states are using to bypass balanced budget requirements, according to a new report on the tricks being used to paper over deep deficits.
From California to New Hampshire, state governments are using smoke and mirrors instead of cash to meet the constitutional or statutory mandates that they finish their fiscal years with balanced budgets, according to research from State Budget Solutions, a non-partisan group that monitors state spending.
The total accumulated state debt is about $5.1 trillion, or about $16,178 for every American, according to SBS.
“It’s really a terrible situation that keeps compounding year after year,” said Joe Luppino-Esposito, editor and counsel at SBS. “There absolutely will be a day of reckoning. The biggest joke of it all is that almost every state says it has a balanced budget. A lot of them claim that they have a surplus every year.”
The most costly gimmick is underfunding annual payments for government pensions. States now face about $3.9 trillion in unfunded pension liabilities, according to SBS.
California is by far the biggest offender, with more than $583 billion in underfunded pensions. Four states continued to significantly underfund required pension payments in 2013: California, Illinois, New Jersey and New York, SBS research shows.
Pension underfunding occurs when states either use unrealistic projections of future earnings from investments or simply do not make their required contributions to pay for future benefits.
The SBS calculations use market-based projections to calculate future pension fund earnings, rather than the much more optimistic figures used by most states.
Requirements for a balanced budget vary. The National Conference of State Legislatures says 49 states have some balanced budget requirement, though in several states the mandate is weak or unclear. Vermont is the exception.
With the definition of a balanced budget so murky, state governments have long used tricks to make it appear on paper they are not going deeper in debt.
Among the most common gimmicks identified by SBS in 2013:
— Raiding settlement funds. Money from a $200 billion settlement with tobacco companies has been flowing to states since 1998 to compensate for tobacco-related medical costs.
A separate settlement with mortgage lenders in 2012 added $2.5 billion to another special account to compensate homeowners who lost equity in the market collapse four years earlier. SBS identified 23 states that are raiding those accounts to improperly balance their general funds.
— Delaying payments until the next fiscal year. This accounting trick holds final payments of state aid, usually to local schools or tax rebates, until after the end of the fiscal year.
That takes it off the books and allows the savings to be claimed to balance current-year budgets. The obligation does not go away. New Jersey and Illinois are using this trick.
California Gov. Jerry Brown is proposing a $6 billion payment to schools next fiscal year to bring the belated payments up to date.
— Selling state assets such as prisons or other buildings. This brings a one-time influx of cash as states mortgage needed assets to bondholders or private investors.
-- Rosy revenue projections. New Jersey, California and West Virginia are balancing their budgets in part by making overly optimistic projections about revenue growth or cost savings.
California and New Jersey are the states that use the most gimmicks to balance their budgets, according to SBS.
Both states have underfunded pensions, delayed payments, inflated revenue or cost-savings projections, and sold state assets to claim balanced budgets.