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Honest budgeting practices? Loans are not revenues
By Grassroot Institute @ 4:15 PM :: 606 Views :: Hawaii State Government

Grassroot Institute defends honest budgeting practices

The Governmental Accounting Standards Boards is considering letting states count loans as "revenues" to balance their budgets

News Released from Grassroot Institute 

HONOLULU, Feb. 14, 2021 >> The national Governmental Accounting Standards Board is proposing a new accounting standard[1] and a new accounting concept[2] that the Grassroot Institute of Hawaii says would normalize and make more difficult to reform flawed government accounting practices that lack accuracy and transparency. 

Established in 1984, the GASB is the independent, private-sector organization based in Norwalk, Conn., that establishes accounting and financial reporting standards for U.S. state and local governments that follow Generally Accepted Accounting Principles. The standards are recognized as authoritative by state and local governments, state Boards of Accountancy and the American Institute of CPAs.

In a Feb. 10, 2021, letter to David R. Bean, GASB director of research and technical activities, Institute Executive Vice President Joe Kent urged that Bean and his colleagues dismiss the proposals, "so government officials will have to deal honestly with public interest groups such as ours that seek sound budgeting practices and accountability."

As explained by Kent, the proposed new accounting standard and accounting concept would require general and other state budgeted funds to have a “short-term” focus,[3] such as recognizing long-term transactions only “when payments are due.” That would allow lawmakers to continue sweeping long-term liabilities off the books.

"For example," said Kent, "Hawaii’s latest general fund budget proposal listed $750 million of borrowing as proceeds under 'other revenues' being used to balance the budget.[4] We would expect the state Comprehensive Annual Financial Report to highlight this fact, but instead the CAFR’s governmental funds statements support the false claim that the budget has been balanced." 

This type of accounting, said Kent, obscures the fact that the money is not really “revenue,” but rather a liability. On the governmental funds statements, the loan is considered another “source” of funds, but a corresponding liability is not presented on the government funds balance sheet.

Kent said additional problems include:

>> "The proposed short-term focus standard seems to have an exception for long-term debt borrowed for short-term purposes, and provides an example for tax-anticipation notes.[5] But it’s not clear if that standard would apply to only tax-anticipation notes, or if the standard would apply to other types of borrowing, such as in the Hawaii example already mentioned.

>> "It is unclear how to account for bond swaps, such as when our state in fiscal 2020 took out $250 million cash from the rental housing fund to place in the general fund, and replaced it with general obligation bond IOUs that needed to be paid back.[6] Presumably, the short-term focus would allow this liability to be swept under the rug, thereby allowing lawmakers to paint a rosy picture for the public."

>> States would be allowed to calculate the net position on their Comprehensive Annual Financial Reports by subtracting total liabilities from total assets, rather than from unrestricted assets. This misleading accounting measure, Kent said, "inflates a government’s financial picture by assuming that all of a government’s capital assets can be used to balance its bills. But that would be akin to balancing your budget by including the value of your house. Instead, a more realistic approach would be to use only unrestricted assets in the calculation of the net position, which would give the public a more accurate picture of a state’s financial situation."

>> Pension and health benefits liabilities would no longer need to be reported on the governmental funds balance sheet. "But this hides the fact that those liabilities exist," said Kent, "and, in the case of Hawaii, $7 billion of pension benefits and $6.7 billion of retiree health care benefits[7] are to be paid from those funds."

Kent said the institute's concerns about Hawaii’s true financial condition were reinforced by Truth in Accounting’s latest 50-state analysis, which ranked Hawaii’s fiscal health as 47th worst in the nation.[8] Its research showed showed that Hawaii’s financial situation was dire even before the coronavirus crisis, thanks to longstanding budgeting practices that depend on less-than-trustworthy general and governmental fund “balances.” These “balances” have been boosted by short-term tactics at long-run general expense.

In fiscal 2019, Kent said, Hawaii’s reported general fund balance was $1.6 billion,[9] while its other governmental fund balances amounted to $1.9 billion.[10] These large “balances” contrasted sharply with Truth in Accounting’s estimates of the state government's deteriorating financial position, which in fiscal 2019 showed a balance of -$16.1 billion (negative $16.1 billion), calculated as the money available to pay the state’s bills.[11]

In closing, Kent urged Bean and his GASB colleagues to reconsider the proposed new statements "to allow for more public oversight and understanding of a state’s true financial situation."

To read Kent's letter, click >>> LETTER TO GASB <<<.

__________________

[1] "Proposed Statement of the Governmental Accounting Standards Board Financial Reporting Model Improvements,” Governmental Accounting Standards Board, June 17, 2020.

[2] “Proposed Statement of the Governmental Accounting Standards Board on concepts related to Recognition of Elements of Financial Statements,” Governmental Accounting Standards Board, June 17, 2020.

[3] “Proposed Statement of the Governmental Accounting Standards Board Financial Reporting Model Improvements,” Governmental Accounting Standards Board, June 17, 2020, p. v. “Proposed Statement of the Governmental Accounting Standards Board on concepts related to Recognition of Elements of Financial Statements,” Governmental Accounting Standards Board, June 17, 2020, p. v.

[4] “Testimony by Craig K. Hirai, Director, Hawaii Department of Budget and Finance,” Hawaii Senate Committee on Ways and Means, Jan. 4, 2021, p. 20 and Attachment 1.

[5] “Proposed Statement of the Governmental Accounting Standards Board Financial Reporting Model Improvements,” Governmental Accounting Standards Board, June 17, 2020, pp. 11 and 59. See also, “Tax Anticipation Note,” Investopedia, Apr. 8, 2019, which states, “A Tax Anticipation Note is a short-term debt security issued by a municipal government to finance an immediate project that will be repaid with future tax collections.”

[6] “State of Hawaii,” State Department of Budget and Finance, Oct. 21, 2020, p. B-15, f.n. 4, which states, “Reflects various revenue impact bills passed by the 2020 Legislature, including general fund to general obligation fund bond swaps.” See also, Act 4 of 2020.

[7] “State of Hawaii Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2020,” Hawaii Department of Accounting and General Services, Dec. 30, 2020, p. 29.

[8] “Hawaii in Dire Fiscal Health Prior to Pandemic,” Truth in Accounting, September 2020.

[9] “State of Hawaii Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2020,” Hawaii Office of the State Auditor, Dec. 19, 2019, p. 14.

[10] Ibid.

[11] “Money available (needed) to pay bills,” Data-Z.org, accessed Jan. 27, 2021.

# # #

The Grassroot Institute of Hawaii is an independent 501(c)(3) nonprofit research and educational institution devoted to promoting individual liberty, economic freedom and accountable government. Its goal is to improve the quality of life in Hawaii through a lower cost of living, expanded opportunities and greater prosperity for all.

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