California ranked 42nd out of the 50 states on its fiscal health in Truth in Accounting’s latest Financial State of the States report. California’s state government has accumulated more than $250 billion in unfunded bonds, employee pension, retiree health care, and other liabilities. This huge hole is more than $100 billion deeper than it was back in 2009 – despite the fact that we’ve had a significant economic recovery since then, including a massive recovery in financial markets (and the investments supporting California government employee pension plans).
Yet just a week ago, California Governor Gavin Newsom announced that the state would have a “historic budget surplus” next year.
How can A + B = C?
The answer (of sorts) arrives in government accounting standards, and in particular, standards for “governmental funds” used in the budgeting process.
There are words, and there are deeds, the old saying goes. Budgets are prospective planning documents, while Truth in Accounting’s annual financial analyses are based on accrual-accounting-based government-wide financial statements – the results.
Unfortunately, we are being charitable with California, given that it was the only state so slow (it still hasn’t released its June 2020 financial statements yet) that we had to use 2019 results.
But budget data, like those recently cited by Newsom, aren’t necessarily better because they are more timely. In fact, the opposite can be true – they are more timely because they are cash-accounting-based numbers, which ignore the accumulation of long-term debt in retirement benefit plans to reach a “surplus” conclusion.
Let’s take a brief but creative look at an October 27, 2021 report from the California Legislative Analyst’s Office, titled “The 2021-2022 Budget: Overview of the Spending Plan.”
The word “surplus” appears 17 times.
The word “debt” appears twice.
The word “deficit” doesn’t appear once.
The word “liability” doesn’t appear once.
The word "spend" appears 75 times, either by itself or in other words.
The first time the word “surplus” appears in a sentence, it is in this one:
“A surplus occurs when, over the three-year budget window, the state collects more in General Fund revenues than it requires to meet its existing obligations.”
This helps illustrate the deceptive nature of governmental fund accounting standards and budgeting communications. “Existing obligations” are defined to not include obligations due in the window, when massive and real obligations still exist, under a longer time horizon.