Budget Gimmicks Update, October 2013

State officials have a deep bag of tricks to “solve” budget gaps. In reality, these gimmicks result in state budget that appear at first glance to be balanced, but looking past the smoke and mirrors reveals that they are very unbalanced. This consistent habit of kicking the can down the road has put states in their current fiscal catastrophes. Below are some of the gimmicks on which lawmakers rely and examples of how states have used them.

State Updates:

• Arizona: The state is applying settlement funds from a mortgage lawsuit support the general fund. The money was intended to help homeowners avoid foreclosure. Phoenix Business Journal , September 24, 2013.

State Budget Solutions’ Research on Budget Gimmicks:

• Tobacco Settlement Fund Gimmicks Alive and Well, April 2013
• Unbalanced: Why State Balanced Budget Requirements Are Not Enough, April 2013
• The Most Egregious Budget Gimmicks of 2012, November 2012

Common State Budget Gimmicks:

Underfunding pension contributions
An underfunded state pension plan has more liabilities than assets. By continually underfunding pensions, pension accounts become less stable, and there is less assurance that the state can effectively cover distribution amounts when pension benefits become due.

Moving money from dedicated funds: “fund shifts”
“Fund shifts” occur when lawmakers sweep money from one internal state fund and use it in another fund, often in an attempt to demonstrate a more balanced budget.

Delaying payments until the upcoming fiscal year
Delayed payments effectively shift the burden of debt from one fiscal year until the next, to postpone payment of the debt (and potential political backlash). In the past, states delayed issuing state employee paychecks by one day, which shifted payroll costs to the next year, or postponed sales tax payments.

Borrowing money to balance the budget
States borrow money for the same reasons that individuals borrow money. Typically, when a state borrows money, it is through the issuance of bonds that are backed by the full faith and credit of the state issuer. In exchange for the loan, the state agrees to pay an annual interest rate. It is possible for the state to pay off the bond before it matures (and the interest becomes due), pursuant to a each bond agreement, but typically, a state must pay at least five years of interest on a bond before the option to pay face value owed is viable. Bond sales are closely tied to bond ratings.

Inflating revenue assumptions or savings projections
When developing the budget for the upcoming fiscal year, state lawmakers must make assumptions about revenue and expenditures. To demonstrate a balanced budget and justify increasing expenditures, lawmakers will inflate revenue assumptions by projecting overly optimistic revenue growth and rate of return on pension fund assets, and by assuming a lower rate of inflation than is realistic. The parallel accounting trick to accelerating and inflating revenue is inflating savings projections. State lawmakers will assume savings in contract negotiations, on infrastructure costs and repairs, and by predicting no student growth to effectively decrease the amount of expenditures. These savings are unrealistic and rarely mirror projections. Lawmakers may also advertise a reallocation of funds from one agency to another as a “spending cut” to the former agency, leading to projections of greater savings than actually result.

One-time sale of assets or other non-recurring funds
A one-time sale of state-owned assets helps to close budget gaps, but the expenditures including the sale do not decrease in following fiscal years despite the absence of the sale of the asset, effectively creating larger future deficits. Other types of non-recurring funding may include money from legal victories or settlements or the refinancing of state bonds.

Inadequately funding other state programs
State lawmakers will underfund programs such as education and Medicaid, justified by failing to include realistic projections for costs (such as increased student enrollment) or revenues (from Medicaid-related provider taxes or fees).

Improper use of mortgage settlement funds
As part of the National Mortgage Settlement in February 2012, the states split $2.5 billion intended to provide a measure of restitution on behalf of homeowners who lost equity in the market collapse or lost their homes in the “robo-signing” foreclosure scandal. Six states – Missouri, California, South Carolina, Georgia, Alabama and New Jersey – ignored the agreed-upon uses for the money entirely by directing nothing for housing-related activities. Fourteen others, including Idaho and Illinois, are using less than half of their funds for the intended purposes.

Improper use of tobacco settlement funds
46 states entered into the Tobacco Settlement Master Agreement in 1998 with some of the nation’s largest tobacco companies after the states sued to recover tax dollars spent dealing with tobacco related health costs. The tobacco companies agreed to pay the states nearly $200 billion over a 20-year period. Since then, states have issued billions in tobacco settlement backed debt. They frequently shift yearly payments between funds, along with forward and backward in the fiscal calendar, to meet their annual budgetary needs.

State-by-State Analysis:

Arizona

• The state is applying settlement funds from a mortgage lawsuit support the general fund. The money was intended to help homeowners avoid foreclosure. Phoenix Business Journal , September 24, 2013.

California

• California taxpayers may be paying even more for a budget gimmick gone wrong. In order to make up for a budget shortfall, the state contracted to sell 11 buildings to a private group, and then have the group lease back the buildings for continued government use. But Governor Jerry Brown canceled the deal when he came into office, citing the cost to taxpayers. A judge has now allowed a lawsuit by the private group against the state to go forward. Press-Enterprise, July 28, 2013.
• The new budget will put a wrench in budget transparency by including a provision that will allow local agencies to make their own rules when it comes to the California Public Records Act. Rather than mandate that these agencies respond within ten days, the agencies themselves will now control that process. NBC 7 San Diego, June 16, 2013.
• The budget shell game continues in Sacramento, where Gov. Jerry Brown and state legislators have heralded their plans to keep more conservative revenue estimates in this year’s budget—only to shift other funding predictions. Those include estimating greater receipts from property taxes ($300 million); lower estimates on implementing the Affordable Care Act ($80 million); and reducing the amount that will be repaid to schools by $650 million. Los Angeles Times, June 11, 2013.
• California’s “balanced” budget ignores the long-term debt obligations of the state for retirees and for money borrowed for the unemployment insurance fund. Sacramento Bee, June 12, 2013.
• California has a newfound “surplus” thanks to outrageous budget gimmicks that simply ignore state debt. Rather than making the necessary payments into the state pension fund, California, as well as many other states, skip this step and claim to have a balanced budget. Manhattan Institute: Public Sector Inc., May 30, 2013.
• California’s current budget is attempting to close a major gap in public school funding created by a decade-plus-long practice of delaying funds into the next fiscal year. Charter schools have been disproportionately affected by this scheme, as they have been forced to take out bridge loans, and in turn, incurring larger interest payments. Gov. Jerry Brown’s 2013-2014 budget proposes repaying $1.8 billion in deferrals-but from 2009-2011, the state added $6.3 billion in delayed payments. The program began with a $1.1 billion deferrals in 2001-2002. Los Angeles Times, April 16, 2013.
• California adopted an accounting shift in the state budget allowing a portion of final income tax payments paid to be accrued all the way back to the prior fiscal year. Because the volatile capital gains-related revenues are the subject of the accrual changes, the late adjustments could total billions of dollars, making it nearly impossible to track how much money the state is making and or expects to make. Capitol Weekly, November 20, 2012.

Connecticut

• Connecticut Voices for Children’s Fiscal Policy Center, a left-leaning group, also found the state’s budget to be filled with gimmicks that will only worsen the budget problems.CT News Junkie, August 2, 2013.
• This year’s budget contains an incredible amount of budget gimmicks. The ultimate reason for doing so is to allow for more state spending that has little consequence in improving the lives of state residents.Journal Inquirier, June 8, 2013.
• In order to raise the state’s spending cap, Gov. Dannel Malloy could have gotten the required three-fifths majority vote in the legislature to do so. Instead, the budget circumvents the cap by moving the funding out of the budget that will be reimbursed by the federal government for Medicaid. Wall Street Journal, June 3, 2013.
• With a fiscal sleight of hand, Gov. Daniel P. Malloy proposes to tax Connecticut’s 29 acute-care hospitals about $400 million over the next two years, providing about one-fifth of the revenues he needs to close the roughly $2 billion shortfall projected over that period.The Day, March 10, 2013.
• Malloy’s “Budget Deficit Roadmap” borrows $10 million to pay this year’s installment in the $100 million, ten-year Stem Cell Initiative, and will put the $10 million it saves by borrowing into the General Fund to cover the deficit. Wait, What? (blog), December 10, 2012.

Illinois

• The state has stopped paying its bills on time, and even non-profit groups are feeling the pain. The Illinois Comptroller established committee that aims to help non-profits that have to deal with delayed payments. Journal Star, August 11, 2013.
• The General Assembly will hide all federal funding from the General Budget, including spending related to Medicaid expansion, based on that argument that since it is federally funded, it is not a true expenditure. But that leaves significant spending out of the budget conversation and skews budget decisions related to other areas of healthcare. Illinois Policy Institute, May 31, 2013.

Louisiana

• The administration of Gov. Bobby Jindal presented a $24.7 billion spending plan to legislators on February 22, 2013. Commissioner of Administration Kristy Nichols said the budget relies on more than $400 million in non-recurring funding, which she said would prevent a 19 percent drop in funding for the state’s public colleges and universities. The one-time money sources include refinancing the state’s tobacco bonds, pharmaceutical company settlements, federal dollars, and unspecified property sales. The use of the money is certain to trigger opposition from a faction of Republican house members who want to limit the use of one-time, or non-recurring, money in the state budget for the 2013 FY. The Advocate, February 25, 2013.

Maryland

• Governor’s budget proposal squeezed extra spending out of state revenue in part by shifting funding from special accounts-such as a tax collected on housing transactions and earmarked for environmental work-to the state’s general fund. Again, he proposed funding some of those projects with borrowed bond money, to be repaid over the next 15 years. The FY2013 budget year beginning in July will mark the first time under O’Malley that the state must dip into the general fund revenue to pay for debt service on increased borrowing. Washington Post, January 16, 2013.

Minnesota

• Gov. Mark Dayton was forced to reduce his advertised “spending cuts” by $58 million when state lawmakers determined that those funds were merely reallocated to other state agencies or programs. Actual spending reductions amount to only $167 million. Associated Press, January 28, 2013.

New Hampshire

• The state budget passed by the House employs several budget gimmicks. Over 300 dedicated funds have been targeted for funds shifts into the general fund. Tobacco settlement funds, due on April 17, have been put into the next biennium budget, rather than being put towards the rainy-day fund for FY2013. The latter is proper because of the expected payment of the fund and the relative uncertainty of payment.The House Ways and Means Committee, with approval from both parties, estimated a two percent increase in revenue from the Medicaid Enhancement Tax (MET) over the next two bienniums. These funds are currently used, in order, for provider payments, then uncompensated care, and the surplus is left for the general fund. But the budget bill changes that. The House Finance Committee projected a 17 percent increase in the first biennium and an eight percent increase in the following biennium for MET revenue, while also rearranging the order of payment priorities so that the general fund payments come before paying hospitals for uncompensated care. Finally, Republicans contest that revenue estimates are too high. Seacoast Online, April 23, 2013.

New York

• New York’s budget reverses a 1996 law that prevented the state from taking money from the State Insurance Fund, claiming that the $1.75 billion is from the fund’s reserves. Most of the money, $1.25 billion, will go to the general fund while the remaining $500 million will be transferred to a “transformative capital” program. One insurance advisory firm says that the Fund actually has a $6.9 billion shortfall. Wall Street Journal, April 5, 2013.
• New York’s state budget deal includes a minimum wage hike, $350 rebates for middle class families and pension gimmicks. GovernorCuomo said his plan to offer local government the choice to finance future pension payments would be a part of the budget, with Comptroller Thomas DiNapoli’s support. DiNapoli had expressed reservations about the plan, which allows cities and other governments to pay lower pension payments in the short-term in exchange for making higher payments more than a decade from now.Post-Standard, March 21, 2013.
• The federal government accuses New York of overbilling Medicaid for the costs for institutional care for state residents with disabilities. The resulting change in reimbursement will leave New York with a $500 million hole in its budget. New York Times, February 20, 2013.
• Governor Cuomo’s budget helps the state’s fiscal condition, but relies on new borrowing and risky revenue sources, according to Comptroller DiNapoli. Cuomo introduced a $136 billion budget that limits spending growth to 1.9 percent and closes a $1.3 billion budget gap. DiNapoli cautioned that the budget would increase the state’s debt burden, rely on temporary revenues and count on federal aid that is not secured, although he applauded the fiscal restraint. Poughkeepsie Journal, February 13, 2013.
• Comptroller criticizes Governor’s plan to cut pension costs because of its potential impact on the funding levels of the state pension system. Governor Cuomo proposed allowing municipal governments to defer a portion of their pension costs by choosing a fixed contribution rate below the current rate. The plan comes on top of another pension deferment plan approved in 2010 (backed by the Comptroller) that allows municipalities to borrow from the pension fund to pay their pension costs. New York Times, January 28, 2013.
• New York relies on non-recurring revenue to pay for rising pension costs and the most-generous Medicaid benefits in the nation according to a December 2012 study by former Federal Reserve Chairman Paul Volcker and former Lieutenant Governor Richard Ravitch. Bloomberg News, December 18, 2012.

Texas

• Texas tries transparency, for a change, and the reform process exposed some major problems, including $4 billion in underfunding Medicaid and a practice of “backfilling” funds years after a budget has been approved. Texas Public Policy Foundation , August 19, 2013.
• Legislators in Texas now expect to be back for a third special session after failing to pass an amendment on transportation spending. Republicans vowed not to raise taxes, but also want to be able to divert $800 million for transportation, so they want to put the question to voters instead. The legislature has used budget gimmicks in the past to raid the transportation budget in favor of different spending. Associated Press, June 29, 2013.
• Legislature passed House Bill 7, which ends the practice of shifting Dedicated Funds into the General Budget and will instead return unused fees to the taxpayers. Texas Public Policy Foundation, May 21, 2013.
• The Texas legislature takes roughly $5 billion in the budget, raised for specific programs, and diverts the money into accounts that help balance spending in the general budget. A new proposal would add transparency to the process and limit how much money can be diverted. Texas Tribune, March 18, 2013.
• Lawmakers have about $95 million to spend in the upcoming budget, after paying for the gimmicks used last legislative season. In FY2011, lawmakers left giant a giant Medicaid IOU, borrowed some tax dollars from 2014-15, and relied heavily on billions in fines and fees that have been accumulating for years in so-called “dedicated accounts.” The cost of those accounting maneuvers is approximately $7 billion. Austin American-Statesman, January 15, 2013.

West Virginia

• State will raid Medicaid for $17.7 million to balance books for fiscal year ending June 30, 2013. Charleston Daily Mail, June 28, 2013.