Michael Granof, a professor at the University of Texas at Austin, lists some of the clever ways state governments avoid “the difficult choices that are required” to balance their budgets:
- Sell state-owned buildings and lease them back (the sale revenue is booked now; the lease costs are spread out over future years)
- Sell bonds backed by anticipated future lottery revenue
- Sell future toll collection rights on state toll road
- Sell bonds backed by future tobacco settlement revenue
- Change the dates of major transactions by one day (e.g., mail aids to local governments on the first day of next year instead of the last day of this year)
- Defer funding pension obligations.
Wisconsin has done some of these including tobacco securitization and shifting payments across fiscal years.
None of these strategies is illegal. Many are not even real accounting “tricks.” They’re mostly different forms of borrowing from the future and may be sensible financial management in some cases. Granof is outraged by these approaches on moral grounds because they allow governments to avoid hard choices by passing costs on to future generations.
The question for a policy economist is: what incentives are leading governments to make these choices? Granof hits on the answer in his last sentence.
It is easy to understand why public officials are tempted by these strategies. Ask citizens whether they would prefer that their state’s budget be balanced with “accounting adjustments” as opposed to a combination of tax increases and service cuts, and they might well opt for the budget tricks.
In other words, public officials are using creative borrowing to expand the amount of money they can spend now without having to raise the amount of taxes they collect now. This is precisely what we expect governments to do! Unlike families or businesses, which try to maximize revenues and limit expenditures, governments “try to minimize revenues and maximize expenditures”, because that’s what we ask them to do. (The quote is from Bob Lang, director of the Wisconsin Legislative Fiscal Bureau.)
This tendency of governments to borrow certainly creates problems, but outrage doesn’t seem to be effective. It would be more effective to limit the power of governments to borrow in the first place. Wisconsin, for instance, cannot run a budgetary deficit from year to year, but it can run an accounting deficit. Changing that would eliminate the pay-one-day-into-next-year trick. Similarly, Wisconsin is limited in what it can bond for but not in its use of the sell-and-lease-back-a-building trick.
Legislatures can change what kinds of borrowing are possible. So can citizens through constitutional amendments.
