State Fiscal Gimmicks: A Budgetary Balancing Act

When state legislators and governors talk about the care with which they keep their states fiscally sound, they frequently refer to the mandate that they pass a balanced budget- -- a requirement in all states except Vermont. Every dollar spent is presumably balanced against a dollar coming in. This sounds pretty good in theory. Who could get into fiscal troubles with a system like that?

Almost everybody, it turns out. When revenues fall, budgets are often balanced with gimmicks that can cost states, localities, and taxpayers more money in the long run. To be sure, the day the budget passes, projected revenues equal anticipated expenses. But the gimmicks only defer the day of reckoning. Within weeks or months, revenues come in low, expenses come in high, and it's time to turn to further fiscal magic to get through the year.

Consider Arizona. That state has decided to sell a passel of state buildings and then lease them back so the state can continue to use them. That could raise around $737 million for general operations in the near term -- but it means that the state will have to cough up rent year after year after year. Cut through the complexities of the deal, and it becomes clear that Arizona is really borrowing that money -- sidestepping the constitutional requirement forbidding deficit spending and with no real plans for paying the annual costs that go out decades into the future.

In a remarkable segment on Jon Stewart's The Daily Show, correspondent Jason Jones interviewed an Arizona state senator, Linda Lopez, who reacted with great discomfort when asked, repeatedly, how the state was going to come up with the rent in future years, after spending the $737 million in 2010. Jones' last question in the interview: "OK. I gotta say again. Next year, what are you gonna do?"

Lopez's answer: "Oh my goodness. You're killing me here. You're absolutely killing me."

This is not the kind of answer designed to give citizens comfort. And Arizona is hardly alone. "Many states have historically used a whole array of gimmicks to hide the fact that their budgets aren't really balanced," says Don Kettl, dean of the school of public policy at the University of Maryland. "Today's fiscal nightmare has put pressure on many to dig even deeper into their bag of tricks. Unfortunately, this kind of chicanery almost inevitably leaves them in worse shape in years to come."


Some states shortchange their public-sector pension plans, even though they'll eventually have to find those payments in order to make good on promises to retirees. In 2003, 2004, and 2005, Oklahoma's payments to its Public Employees Retirement System covered less than 60 percent of the actuarially required contribution. Between 2000 and 2006, New Jersey's contributions to its pensions never exceeded 30 percent of the required amount. Others use money that was borrowed for capital expenses, like buildings, to pay for operating expenses, like payroll.

A number of states play the shift-and-slide game, in which money collected for one purpose winds up being used for another. In Wisconsin, for instance, a 75-cents-a-month fee on cell phones was originally earmarked for improvements in its 911 emergency-response services, but the state diverted $100 million, over fiscal years 2010 and 2011, to local governments in the hope of reducing the pressure to hike property taxes. The Associated Press reported in July 2009 that Oregon, Delaware, and Hawaii have begun nipping at money supposedly dedicated to telecommunications for general government purposes and that New York and Rhode Island have been doing so for years.

Sometimes, states simply delay paying their bills. Minnesota faced a $2.7 billion budget gap that remained at the end of the 2009 legislative session. Gov. Tim Pawlenty has been dead set against new taxes. So, according to Christina Wessel, the budget project deputy director of the Minnesota Council of Nonprofits, he instead simply delayed $1.8 billion in school payments. "Normally, schools get paid 90 percent of their funding in one year," she explains, "then [they] get a 10 percent follow-up payment in the next year. That small delay in payments allows for the state to adjust the actual amount paid to schools to account for changes in enrollment, etcetera. But the governor changed that percentage to 73 percent up front and 27 percent in the next year. This is a huge burden to schools that now need to front more money themselves -- so they may need to turn to reserves or short-term borrowing to cover that gap."

Short-term borrowing can be an expensive proposition. Who pays? The same citizens whom the governor saved from increased taxes.

In New York, Gov. David Patterson in mid-December announced that he intended to hold back some $750 million in payments scheduled to go to schools and local governments. When will the state make good on its promise to fully fund schools and localities? Nobody seems to know the answer, which leaves schools -- particularly those in poorer areas that are not likely to have reserved stocks of cash -- having to reduce program outlays and resort to layoffs.

Illinois legislators, meanwhile, came to the end of their last fiscal year around $4 billion in the red. What to do? Legislators decided to just pay the money sometime in the new fiscal year. This is bad news for vendors, large and small, who generally anticipate that a state is probably going to pay its bills on time. It's also potentially bad news for the state in a variety of ways. Vendors may well add a premium -- which could be more than 5 percent -- to compensate themselves for not getting paid in a timely way. Not only is there no such thing as a free lunch in this case but the state winds up paying for the lunch with interest.


California, not surprisingly, may take the prize for using the most gimmicks in recent years. Consider this partial list: California borrowed at least half a billion (as reported in the February and July budget packages) from various special-fund accounts, recorded $1 billion in revenues by assuming that parts of the State Compensation Insurance Fund could be sold, and redirected at least $1.6 billion in transportation funds. The state also borrowed some $2 billion from its localities, picked up another $2.3 billion by speeding up tax collections, and raised $1 billion by shifting the last payday of the fiscal year into the next year. Few in the state may notice if paychecks are delayed by a single day. But when those 24 hours let the checks slide over into a new fiscal year, it can mean huge artificial savings for the state. They're artificial, of course, because the money still has to be paid -- and these gimmicks produce no new money.

Ultimately, all these actions are taken in order to avoid the hard decisions that can truly put states on firm financial footing: tax increases, service cuts, and genuine gains in efficiency. But the first two tend to put off voters, and the third is elusive at best.

Still, "there's just no alternative to stepping up and facing the mega-issues," Kettl says. "Sooner or later they all stare us in the face. It might seem easier to wait them out, but when they come back in the future they never get any easier to solve -- and they often present all sorts of nasty new twists that make resolving them even more painful."

"It can seem more politically expedient to let future leaders take the heat," Kettl adds. "But that isn't what leadership is all about."