State Budget Crisis Task Force Calls for National Attention to Reforms in State Budgeting and Financial Reporting

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Jan 14, 2014, 11:00 ET

WASHINGTON, Jan. 14, 2014 /PRNewswire/ -- Co-Chairs former Lt. Governor of New York Richard Ravitch and Paul A. Volcker, former Chairman of the Board of Governors of the US Federal Reserve System, released the Final Report of the State Budget Crisis Task Force today after nearly three years of study, analysis and debate.

The Task Force outlined a troubling picture of the unsustainable and now perilous fiscal position of many states and their local governments across the country. As symbolized by this event being held in the Rayburn Office Building and surrounded by the Halls of Congress, the implications are national. Understanding and action by the federal government as well as the states will be required to support needed reforms.

"What is at stake," said Co-Chair Ravitch, "is the strength of our educational institutions, of our infrastructure, our health care and judicial system, and the safety and security of our homes and streets – all of which in our federal system are heavily dependent upon the management and financial integrity of our states and their political subdivisions."

Co-Chair Volcker added that, "We need only look to Detroit where debt was leveraged time and time again with no ability to pay, to see that reforms in financial reporting and oversight by states and localities are prudent and necessary. The ultimate victims of unsustainable, patchwork budgeting and overextended finances are the citizens dependent upon essential public services."

The Task Force, an independent, non-partisan group of experienced participants in government, has not itself set out positions with respect to particular public policies and programs. What it does insist upon is that political and policy discussions and decisions must be made on the basis of honest, reliable budget estimates and easily accessible, comprehensive, and transparent financial data.

To that end, the Task Force recommends several specific approaches for financial planning and reporting:

Modified Accrual Budgeting by States and Localities. The practice of cash-based budgeting facilitates gimmicks and "one shot" measures that obscure actual financial conditions. Where appropriate, using consistent, accrual-based budgeting would facilitate comparison and avoid budgets based on inaccurate representations of future obligations or revenues.

Multiyear Financial Plans. States should include meaningful, forward-looking financial plans as part of their annual budget submission and adoption process. A comprehensive annual budget presented by the governor and reviewed and approved by the legislature should serve as a key element of the forward-looking multiyear financial plan. These plans should encompass both operating and capital expenditures and should set out the basic assumptions regarding revenue and expenditures, showing clearly when future costs of promises, such as debt service and leasing balloon payments, are due. The capital plan should also indicate the source of financing to be used for projects.

Reserve Funds. Reserve funds, often called rainy day funds, should be required and should be adequate to meet any reasonably anticipated eventuality. It is heartening to see that many states have begun, in small steps, to replenish these funds.

Borrowed Funds Never Treated as Revenue. Proposed and adopted operating budgets should not be dependent on borrowed funds disguised as revenue. At times, governments must borrow to meet intrayear cash flow problems, because tax revenues are not necessarily received on the same schedule as expenditures, or to address sudden revenue shortfalls within the year. While it is recognized that, due to sudden revenue shortfalls, cash balances at times may need to be bolstered with the proceeds of short term borrowing, that borrowing should never be treated as an element of revenue and provision should be made for its repayment.

Where appropriate, Individual States Should Consider Strengthened Oversight of Local Financial Reporting and Communication. Periodic reporting by local governments and timely review of financial data by state governments is essential to anticipating and dealing with the threats to public services. States should have statutory processes for imposing corrective actions on localities where financial positions indicate a high risk of their ability to meet their obligations to the public.

Budget Standards. Budgeting standards should include definition of the nature of revenues, limitations on the use of nonrecurring items, multiyear planning, fair presentation of pension and other benefit liabilities, and the size and pace of funding of reserve funds.

Easily Understandable Financial Reports. Standard-setting bodies should work with associations of states to develop rules for the creation of concise, timely and readable financial reports. The typically convoluted, sprawling nature of state financial statements make them of limited use for public understanding. Both budgetary and asset-based information for all special funds should be easily accessible and be used in disclosure statements for borrowing.

Building on these proposals, the newly-founded Volcker Alliance, consistent with its mission to improve government performance, will press for implementing action by states and cities. Co-Chair Volcker notes that, "The Task Force Report has highlighted serious problems that demand attention. Open, honest budgeting and financial reporting are essential elements for responsible and effective decision-making, and for maintaining trust in every level of government. The Alliance, as its name suggests, will be working with other interested parties, certainly including knowledgeable representatives of state and local governments."

More broadly, the challenge before the states has clear implications for the federal government. There is little evidence today that the Congress and Executive Branch consider the impact of its decisions on the other levels of government in setting policy and spending levels for the federal government. The reality is that all three levels of government serve the same people and have a responsibility to ensure that the unintended consequences of their fiscal actions do not unnecessarily complicate or disrupt or even thwart the effective implementation of state responsibilities.

The Co-Chairs said, the federal government needs to be more cognizant of the effects its actions have on the fiscal condition of the states and localities by:

Requiring Analysis of the Impact on State and Local Finances and Services of Federal Actions and Policies. The Task Force found that no mechanism now exists for determining, assessing, and communicating the fiscal impact of federal actions on state and local governments.

Insisting Upon Adequate Disclosure of Terms, Conditions, and Risks of Municipal Finances. The current jurisdiction of the Security and Exchange Commission with respect to municipal finance issuers is narrowly limited to fraud due to the so-called "Tower Amendment." No other body has the affirmative obligation or authority to require full transparency and disclosure of risk. The Tower Amendment should be revisited or other arrangements be made to assure sensible disclosure requirements as well as robust accounting standards.

The 2012 Report of the State Budget Crisis Task Force (www.statebudgetcrisis.org) drew national attention to the eroding fiscal condition of states. To address the declining fiscal condition of states, over the past several months the Task Force hosted four National Dialogues focusing on the most urgent areas of concern including: Transportation Infrastructure, Pensions, and Medicaid, as well as the broader implications for the federal structure of American governance. Each Dialogue convened experts to discuss options for new organizational arrangements, consultative processes, or legislative mechanisms that can promote a cooperative approach between the federal and state governments in dealing with challenges that require reconsideration and reform.

Task Force Advisory Board Members include: Chairs: Richard Ravitch, Paul A. Volcker
Members: Nicholas F. Brady, Joseph A. Califano, Jr., Phillip L. Clay, David Crane, Peter Goldmark, Richard P. Nathan, Alice M. Rivlin, Marc V. Shaw, George P. Shultz.

Task Force Advisory Board Members offered the following:

Joseph A. Califano, Jr., Secretary of the Department of Health, Education, Founder and Chairman of the National Center on Addiction and Substance Abuse at Columbia University
"In accommodating their financial difficulties the states should be particularly attentive to the needs of the most vulnerable in our society and to reducing the vast income inequality that has grown like Jack's beanstalk over the past two or three decades."

David Crane, Former Special Advisor to Governor Arnold Schwarzenegger, and current lecturer on public policy at Stanford University. Formerly he served on the University of California Board of Regents and the boards of the California State Teachers Retirement System
"This report should be read by everyone who cares about future generations. Its principal recommendation -- that states adopt accrual-based budgeting -- will stop governments from reporting surpluses when they have deficits and elected officials from putting off until tomorrow what they should do today."

Peter Goldmark, Jr., Former Budget Director, New York State
"State and local finance is the neglected child of American public finance. The feds ignore it and too many state and local officials play games with it. The result is that what should be one of our strongest forces for growth and investment is blocking fiscal recovery and slowing the American economy down."

George Shultz, Former U.S. Secretary of State, Secretary of the Treasury, Secretary of Labor, and director of the Office of Management and Budget. He was chairman of President Ronald Reagan's Economic Policy Advisory Board and is now the Thomas W. and Susan B. Ford Distinguished Fellow at the Hoover Institution.
"The facts presented need to be widely absorbed so that needed actions will be taken and, though difficult, will receive broad support."

The crisis in the underfunding of state and local government defined benefit pension systems and recommendations for relieving the crisis will be the subject of a presentation by the Nelson A. Rockefeller Institute of Government in the The National Press Club's Holeman Lounge, 529 14th St. NW, 13th Floor, Washington, D.C., January 16^th from 1-2:30 p.m. To attend, obtain a copy of the embargoed report and arrange interviews with the report's authors in advance of the January 16^thevent, contact Robert Bullock, deputy director of the Rockefeller Institute, at (518) 443-5837 or at [email protected].

The Task Force has published the following documents:

Report of the State Budget Crisis Task Force, July 2012
State Reports of the State Budget Crisis Task Force
- California (September 2012)
- Illinois (October 2012)
- New Jersey (November 2012)
- New York (December 2012)
- Texas (November 2012)
- Virginia (November 2012)
Task Force White Papers
- Improving the State/Federal Partnership of Medicaid (May 2013)
- Managing the Impact of Federal Deficit Reduction (June 2013)
- Unfunded Pension Promises (April 2013)
- Increasing Transportation Funding to Benefit the Economy (April 2013)

The Task Force greatly appreciates the support of the following, which recognize the value of the Task Force's work but should not be considered endorsers of its recommendations: