The Most Egregious Budget Gimmicks of 2012
State officials have a deep bag of tricks to “solve” budget gaps but they often keep budgets far from being balanced. This consistent habit of kicking the can down the road has put states in their current fiscal catastrophe. Below are some of the gimmicks on which lawmakers rely, and examples of how states have used them.
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.
The following states significantly underfunded the annual required contributions by the following amounts over the past ten years.
|Illinois||$5.4 billion plus an additional $17.2 billion borrowed in pension obligation bonds.|
|New Jersey||$9.8 billion|
- In July 2012, the largest U.S. public pension system, California Public Employees Retirement System (CalPERS) reported a 1 percent return on investments, even after the assumed rate of return was cut earlier in 2012 to 7.75 percent, a reduction that was obviously too timid.
- Similarly, the $150.6 billion California Teachers pension fund (CalSTRS) earned only 1.8 percent.
- In October 2012, CalPERS filed court actions against San Bernadino and Compton, two cities in California, after they stopped making legally required contribution payments to the big pension fund, a default not made in the Stockton and Vallejo bankrupt cities.
- According to 2012 numbers, Hawaii paid 102% of the recommended contribution to its pension plan but just 24% of what the state should have paid to fund retiree health benefits.
- Over the last ten years, the pension funds earned average investment returns of only 4.5% to 6%, although the assumed rate of return for the pension funds varies between 7% and 8.5%.
- The assumed rate of return on investments over the past decade was 7.75%, but the actual rate of return was only 4.74%.
- The investment return assumption for the state’s public pension plans were changed from 8.5 percent (one of the highest in the country) to 8 percent, beginning July 1, 2012. After five years, the investment return assumption will return to 8.5 percent.
- The assumed rate of return was 8.25% but the actual rate of return was only 5.2%.
- New York uses a pension funding gimmick, a law that lets the state and localities “amortize” its pension obligations over an additional 10 years, with a payback at interest much lower than the pension fund’s 7.5% targeted rate of return. But it is not possible to link the savings from this to any particular project.
- Over the last ten years the assumed rate of return was 8% for the Investment Pool but the actual rate of return was only 6.34%.
- As of June 2011, the unfunded pension for state employees and teachers totaled $1.2 billion, the unfunded retiree benefits to state teachers and employees total $1.8 billion, putting the state behind by $3 billion.
MOVING MONEY FROM DEDICATED FUNDS TO “BALANCE” THE BUDGET: 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.
- Voters approved a transfer of more than $437 million over three years from a state trust fund to the state General Fund.
- In 1998, California votes approved Proposition 10, imposing a tax on cigarettes to raise funds for “First 5,” dedicated towards early childhood health and education programs. In 2011, Governor Jerry Brown signed a law authorizing the state to take half of each First 5 commission’s fund balance to address the $26 billion budget deficit, prompting a lawsuit filed by First 5. In March 2012, a Fresno County Judge ruled that the state’s move to divert the funds was illegal without voter approval, and rejected the move. State officials announced they would not appeal the ruling.
- In 1992, the State of California found itself in a serious deficit position. To meet its obligations to fund education at specified levels under Proposition 98, the state enacted legislation that shifted partial financial responsibility for funding education to local government (cities, counties and special districts). The state did this by instructing county auditors to shift the allocation of local property tax revenues from local government to “educational revenue augmentation funds” (ERAFs), directing that specified amounts of city, county and other local agency property taxes be deposited into these funds to support schools. In fiscal 2012-13, the annual impact of the ERAF shift is a shortstopping of some $6.8 billion from cities, counties, special districts and the citizens those entities serve. Since their inception, the ERAF shifts have deprived local governments of nearly $110 billion. Counties have borne some 73 percent of this shift; cities have shouldered 16 percent.
- Controller John Chiang finished July with $18 billion in outstanding loans after borrowing money from the state’s 500+ special funds and used it to cover day-to-day expenses, with an I.O.U. when more tax revenue is generated. California used 81% of the funds available for short-term borrowing, up from 48.4% in July 2011.
- 9/11 Fund raided to bridge state’s budget deficit.
- Governor Neil Abercombie’s administration will shift nearly $10 million in federal funds to the state’s public hospitals, meaning that private hospitals in Hawaii will lose all federal funding that is used to help offset the costs of caring for Medicaid patients who are uninsured.
- The Lone Star state redirected millions of dollars in fees that it collects for specific purposes and use the money to help balance the budget instead, which House Speaker Joe Straus acknowledged in July and said should stop.
- Vermont is one of three states that spent more than 80% of TANF/MOE money on transportation. In comparison, nationally, spending on transportation accounted for just 16% of TANF/MOE spending.
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.
- Department of Health Care Services spokesperson reported that clinics across the state are reporting significant delays in payments from the Department of Health Care Services
- In January 2012, CalPERS agreed to allow California to delay making a $527 million payment until April to cover state worker benefits.
- California delayed $2.1 billion in payments to school districts.
- Delayed the issuance of bonds for transportation projects, allowing the $24 million slated for finance costs to help prop-up the non-transportation programs in the General Fund.
- In June 2012, Illinois delayed payments for one month to the Illinois Department of Human Services, specifically, the groups that work with the developmentally disabled. Ninety-five percent of income for DHS comes from the state. The payments are supposed to cover the costs of food, utilities, and transportation.
- Illinois regularly delays payments due to vendors and other organizations; the state has a backlog of approximately $9 billion dollars (June 2012).
- Minnesota abolished-later restored by Congress-bonus pay for the Minnesota National Guard troops deployed for one year in Kuwait and Iraq, which was then delayed to Oct. 1, 2012.
- Withheld (or delays) a portion of state aid payments to school districts until the subsequent fiscal year. In FY 2012, the amount of this delayed payment was increased by $453 million, resulting in a one-time reduction in state funding for FY 2012 causing the growth in school funding from FY 2012 to FY 2013 to be artificially inflated. After adjusting for the effects of this funding delay, the magnitude of Minnesota’s funding growth from FY 2012 to FY 2013 would be approximately one-fifth of the level described in figures 3 and 4 and Minnesota’s rank among the states in terms of spending growth would fall significantly.
- Minnesota’s numbers represent formula funding for a dozen or so different programs including special education, compensatory aid (to help schools with high concentration of low- income children), Limited English Proficiency aid, operating capital, etc.
- Faced with a budget shortfall, the Texas Legislature when crafting this year’s budget left $4.7 billion out of the Medicaid budget, a couple million out of the education budget, and deferred spending, all due in 2012.
- Delayed a $2.3 billion payment owed to public schools in 2012-2013 by one day so that the bill is not due until fiscal year 2014.
- The 2012 Supplemental Budget (HB2127) House Democrat budget proposal included a provision to delay a $330 million payment to K-12 schools by one day, from June 30, 2013 to July 1, 2013, thus pushing this spending into the next two-year budget period. The primary problem critics noted in the bipartisan Senate budget proposal was the decision to skip a $133 million payment to the state pension fund.
BORROWING FUNDS 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.
- In February 2012, California lawmakers passed a bill allowing the state to borrow $865 million from internal accounts to help avert a cash shortfall that might leave the state without enough money to pay its bills.
- California has used voter-approved bond issues and debt restructuring to generate budget cash. In fiscal year 2003, in addition to $4.5 billion from securitizing tobacco revenue, it restructured debt to generate $1 billion for the budget. One deficit bond sale accounted for $10.7 billion in revenue in fiscal year 2004 and $2 billion in fiscal year 2005; another generated $3.3 billion in fiscal year 2009. These and other borrowings have led to a “wall of debt” to fund current expenditures that following the passage of the state’s 2012-2013 budget is estimated at $28 billion.
- Governor borrowing $30 million to cover the cost of the next fiscal year’s Town Aid Road program.
- Hawaii completed the largest bond sale in state history in December 2011, a $1.3 billion sale of general obligation bonds. $800 million of the new debt will go towards capital projects– counting the new bond debt, the state has $4 billion in outstanding debt.
- In January 2012, Illinois sold $800 million in bonds to fund capital projects, one week after Moody’s Investor Service slapped Illinois with the lowest credit rating of any state in the nation.
- In October 2012, the Art Institute of Chicago sold about $100 million of taxable and tax-exempt bonds to shore up unfunded pension obligations.
- The O’Malley Administration said in September 2012 that it will seek to float $750M more in bond debt, although State Comptroller Peter Franchot objected to it, saying it could potentially trigger a property tax hike.
- In June 28, 2012, lawmakers raised the transportation borrowing limit to allow $250 million to go towards closing the budget deficit.
- In October 2012, Governor Chafee announced the sale of $81.4 million in general obligation bonds, although priced at the lowest cost-of-capital in Rhode Island history.
- Vermont Treasurer announced a $25 million sale of general obligation bonds to finance school construction, pollution control, and other projects.
- To save the state $238 million and balance the General Fund every month, the state will hold local tax revenue in the GF until the end of every month, instead of instantly transferring it to the Local Sales and Use Tax Account. An additional $60 million will be available in negotiated general obligation refunding bonds (depending on the interest rates).
INFLATING REVENUE ASSUMPTIONS
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.
- California spent $89.2 billion last fiscal year, despite collecting only $87.8 billion. The state ended the FY with a $9.6 billion cash deficit, $1 billion less than the Governor estimated in May.
- As of February 2012, state receipts were $2.6 billion lower than forecast in Dec. 31st, while expenditures were an equal amount higher, according to the state Controller.
- Comptroller reports budget deficit just under $144 million in FY2012, reporting that state spending was up almost $937 million from 2011 (5.2%), while revenue increased 4.8%, falling $227 million short of the original budget target.
- Arranged to collect FY 2013 revenue in FY 2012 (more than $700 million in taxes). Thus taking money out of the FY 2013 budget.
INFLATING SAVINGS PROJECTIONS
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.
- The solvency current state budget is, in part, predicated on the passage of Governor Jerry Brown’s $8.5 billion tax initiative on the November ballot. If that proposition fails, the California budget crisis will become exponentially worse.
ONE-TIME SALE OF ASSETS
A one time sale of large 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.
- Governor Brown proposed plugging the $5.4 billion deficit by selling 11 state office buildings, although he later decided not to go forward with the sale. Not doing so would add $1.4 billion to the deficit.
- $600 million line of credit expires in August 2012, used as a budget “fallback” for the state.
INADEQUATELY FUNDING OTHER STATE PROGRAMS
State lawmakers will underfund programs such as education and Medicaid, justified by failing to include realistic cost predictions (such as increased student enrollment).
- In California, Gov. Brown proposed in January that the state plug $5.4 billion of deficit by borrowing from other internal state funds, shifting property tax revenues from redevelopment agencies to counties and taking money from voter-approved funds for services for mentally ill and for young children.
- Governor announced plan in May 2012 to divert long-term debt payments to cover the deficit, igniting controversy because the Governor recently highlighted speeding up bond payments as indicative of his fiscal responsibility.
- Hawaii’s Rainy Day Fund balance dropped from $60 million to $6 million in 2011 after a majority of lawmakers and Gov. Neil Abercrombie raided the fund to cover a shortfall and balance the state budget.
- After years of underfunding state Medicaid spending and failing to reduce costs significantly, Illinois accumulated unpaid Medicaid bills from providers that are estimated to total $1.9 billion as of the end of the current fiscal year. The bills will be paid out of funds raised in ensuing fiscal years.
- New York raided funds legally dedicated to other programs-welfare, environmental protection and wireless network improvements.
- Budget assumed no growth in the number of school children in Texas, even though it is one of the fastest-growing states in the nation. Estimated $2 billion kicked to next fiscal year.
- Budget intentionally underfunded Medicaid by nearly $5 billion.
- The Vermont legislature passed a sweeping health care reform bill in 2011, Act 48. The magnitude of such a state health care fund would be over $3 billion annually. This is greater than the state’s General Fund, the Education Fund and Transportation Funds combined, and represents almost 20% of the state economy.
MORTGAGE SETTLEMENT FUNDS
As part of the National Mortgage Settlement in February 2012, the states split $2.5 billion intended to 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.
- In Arizona, consumer advocacy groups sued the state legislature over its plan to divert half of the state’s $97.7 million in settlement money to the general fund. The groups lost the first round, but has appealed.
- Governor Jerry Brown took every penny of the state’s $410.5 million in mortgage settlement money for the general fund budget
- Georgia’s legislature used the $99 million received from mortgage servicers for two existing economic development programs. Most of those who were the victims of mortgage fraud were in Atlanta, yet half the money will go towards rural programs.
- Florida’s $33.4 million share of foreclosure settlement money is in escrow until a dispute between the attorney general and the legislature is settled over who has authority to allocate the money.
- Illinois is using less than half of its mortgage settlement funds for the intended purposes.
- Lawmakers plan to use the state’s $39.5 million from the mortgage settlement to cover cuts in the state’s higher education budget.
- Gov. Chris Christie intends to pour the whole $72 million that the state received in mortgage settlement funds straight into the state’s general fund.
- The Empire State has dedicated between 70 percent and 89 percent for housing purposes, meaning 11 to 30 percent of the funds are being diverted.