Budget Gimmicks Explained: Five Ways States Hide Deficits

By: - June 23, 2011 12:00 am

Last week, California Governor Jerry Brown vetoed a budget that he said was filled with gimmicks — or as he put it, “legally questionable maneuvers, costly borrowing and unrealistic savings.” Editorial boards have praised Brown for exercising responsible fiscal judgment. Meanwhile, Brian Joseph of the Orange County Register has written that Brown’s own budget plan uses gimmicks, too.

All this begs the question: What qualifies as a budget gimmick? There’s no textbook answer to that question. But there are certain techniques that states sometimes use to make the budget look balanced when it arguably isn’t. If there’s one thing all of these tricks have in common, it’s that they push this year’s budget problem off into the future.

Here are five common budget gimmicks states use:

Gimmick #1: Putting off payments

States, like people, have bills to pay. They usually try to pay those bills on time. But when times get tough, they sometimes delay payments, figuring they can make up what they owe later.

Illinois is the most famous example of a state that has made regular practice out of delaying payments to universities, doctors, social service providers and others by months.

Another example comes from Minnesota. There, Democratic Governor Mark Dayton and a Republican-controlled legislature are locked in a budget brawl that may end in a state government shutdown. The two sides don’t agree on much but one thing they do agree on is that the state should continue to delay payments to schools.

These funding shifts have been taking place on and off in Minnesota for three decades. Even though the state’s fiscal year finishes at the end of June, schools only receive 70 percent of their funding by then. This trick started because lawmakers found it easier to balance the budget by withholding 30 percent of the school payment. “The schools carry the money on their books,” says Charlie Kyte, executive director of the Minnesota Association of School Administrators, “but they don’t have it in their checking accounts.”

This is a trick that only works once. Each subsequent year, the state has to pay the 30 percent from the previous year plus the 70 percent from the current year. In addition, the delayed funding imposes borrowing costs on some schools. Breaking this cycle is difficult because it would mean coming up with more than 100 percent of the schools’ funding in one year. That’s why Dayton and the legislature both support continuing the shift.

Pension funds are another area where states sometimes skip a payment — there’s always the chance that a bull market will pay high enough investment returns to make up the difference. That doesn’t always happen, of course.

Since 1998, New Jersey has never once made the actuarially recommended payment into its public employee pension system. As a result, the state is more than billion short of what it would need to pay its financial obligations to retirees. Under a pension overhaul the legislature is close to approving, the state would increase its contributions, but it would still be years before it made its full required payments.

Gimmick #2: Accelerating revenue

The flip side of delaying a payment is booking future revenue ahead of schedule.

That’s what Texas is doing. To close a mammoth budget gap over the next two years, conservatives in the legislature refused to raise taxes. Instead, they devised a plan to collect some taxes sooner.

Under the state’s expected budget deal, Texas’ large retailers will pay some of their sales tax collections early. That will add million to the budget for the next biennium. But it also means the money won’t be there for the biennium after that.

Washington State tried a variation of this tactic back in 1971 and it haunted the budget process for years. To balance the two-year budget that ended in June of that year, the state grabbed revenue from July. In effect, it was using 25 months’ worth of revenue to pay 24 months’ worth of bills.

Getting spending and revenue back into alignment required writing a budget that would pay 24 months’ worth of bills with 23 months’ worth of revenue — something Washington State wasn’t able to do until 1987. This year, the “25 th month” gimmick came up again as an idea for balancing the budget, but Governor Christine Gregoire and others rejected it as shortsighted.

Gimmick #3: Using temporary money for recurring expenses

States often rely on rainy day funds to get through tough fiscal times. In Hawaii, it’s raining so hard that the state is tapping its Hurricane Fund.

The Hurricane Relief Fund was never intended to be used as a budget cushion. It was created after Hurricane Iniki caused serious damage to the state in 1992. Property insurers were scared away from the islands. So the fund was started for the purpose of jumpstarting the insurance market if disaster struck again. Hawaii stopped adding new money years ago, but the fund still holds million. “The money has basically just been sitting there for nine years,” says Lloyd Lim, the acting executive director of the fund.

This year, though, the Democratic-controlled legislature shifted million from the fund to balance the budget. They also authorized Democratic Governor Neil Abercrombie to use the rest if he chooses. Whether Hawaii really needs a fund specifically for hurricane insurance is a matter of debate. What’s clear is that this is just a one-time fix for Hawaii’s budget. Meanwhile, the things the budget pays for — such as schools, prisons and health care — will keep costing the state year after year.

States have found numerous ways to secure one-time infusions of cash. They’ve raided dedicated accounts like the Hurricane Fund, offered tax amnesties to delinquent taxpayers and sold state property, among others. These steps temporarily relieve the need to cut services or increase taxes. But because the money is temporary and the expenses continue, they don’t let states avoid those choices forever.

Gimmick #4: Counting on savings that aren’t likely to materialize

There’s no doubt that many government programs can be run more efficiently. But sometimes, states count on savings based on assumptions that are clearly unrealistic from the start, setting up their budgets to fall out of balance.

California has been one of the biggest offenders here. California’s budget for 2010 counted on state agencies cutting their information technology expenses by million. As it turned out, the state only managed to save million on IT. The last two years, California has saved about million combined by cracking down on fraud in a program for in-home care for seniors and the disabled. But this year’s budget depends on finding million in savings from anti-fraud measures, a figure that the state’s Legislative Analyst’s Office noted was unlikely.

Then there’s prisons. Every year, California lawmakers tell the Department of Corrections and Rehabilitation how much to spend. Every year, the agency exceeds that budget. One of the big reasons why is that lawmakers have made “unallocated” reductions to the corrections budget. They don’t specify how to cut the budget — by closing a prison, perhaps. They simply tell the agency to spend less. In theory, that gives the agency some flexibility. In practice, the agency finds the goals set for it impossible to achieve. Much of its costs are for employees who can’t be cut: Prisons must be guarded 24 hours a day. “Realistically, to get a significant amount of savings in corrections, you have to adopt some policy changes,” says Anthony Simbol, director of criminal justice in the Legislative Analyst’s Office.

Of course, what savings are realistic often is only clear in retrospect. This year, Connecticut’s two-year budget was balanced with the help of concessions from public employee unions. The legislature’s nonpartisan Office of Fiscal Analysis said it couldn’t verify some large pieces of the deal, including million in savings expected from information technology and another million expected to come from suggestions from state employees. Mark Ojakian, who helped negotiate the deal for Democratic Governor Dan Malloy, counters that the numbers were the result of firm ideas and careful analysis of how much they would save.

Gimmick #5: Counting on revenue that isn’t likely to materialize

Just as spending assumptions can be unrealistic, so can assumptions about how much revenue is going to come in to state coffers.

A classic case comes from New York. Last year, lawmakers there approved a budget that included million from collecting cigarette taxes on Indian reservations. There was just one problem: The state has tried to collect those taxes for years and had never seen a dollar from it. Tribes fought the move both in court and with civil disobedience — in 1992, members of the Seneca tribe threw burning tires on the New York State Thruway in protest.

This year, New York lawmakers were undeterred. They approved a budget that yet again counted on million from the tribal collections. The state has won recent court rulings that make that goal appear more attainable than in the past; a ruling this week lifted an injunction against collecting the tax. Still, nearly three months into New York’s fiscal year, the state still hasn’t collected anything.

Any state budget relies on forecasts for revenue collections. Where states get into trouble is when they rely on forecasts that are wildly implausible.

Sometimes, the wildcard is Washington. In California, last year’s budget was built around receiving .3 billion in new federal money at a time when there was little appetite in Washington for new aid to states. Then-Governor Arnold Schwarzenegger signed the budget in October. By November, it was back out of balance.

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Josh Goodman

Josh Goodman helps lead research on fiscal management and place-based economic development programs as part of Pew’s state fiscal health project. Goodman has served as a primary author for Pew studies that examine how states should evaluate tax incentives and maintain budget discipline when implementing those incentives.