Nebraskanomics: A GAAP in Nebraska Budgeting Practices
William Glasgall and former New York Lt. Gov. Richard Ravitch of the Volcker Alliance join Jim to discuss why a major influx of federal money might be mismanaged under current local government financial practices. A transcript of the discussion can be found below.
Mentioned on this episode:
The infrastructure bill shows why Congress must stop enabling bad behavior by cities and states
The Volcker Alliance
September 23: Special Briefing on the Infrastructure Investment Act
Platte Institute Report: Accounting for Property Taxes
Jim Vokal: Today we’ll discuss why strong finances are an important attribute for a strong economy. My guests today, William Glasgall and Richard Ravitch, represent the Volcker Alliance, a nonprofit founded by the late Federal Reserve Board Chairman Paul Volcker. You might remember Paul Volcker brought high inflation to a halt.
Today, Mr. Glasgall and Mr. Ravitch carry on Volcker’s legacy by helping states and local governments keep their own finances in check. Mr. Ravitch is the former Lieutenant Governor of the state of New York and brings a wealth of historical knowledge. Gentlemen, welcome to Nebraskanomics.
Jim Vokal: Nebraska is historically known for having pretty strong finances here at the state level. We’re prohibited from accruing much debt. But groups like the Volcker Alliance keep us on our toes and produce a report card that gives us pointers on how we can improve. Can you both tell us a little bit about your Truth and Integrity in State Budgeting program and how Nebraska’s fared?
William Glasgall: I’d be very happy to, Jim. The Volcker Alliance, since 2015, has been grading all 50 states on how they put their budgets together. We don’t compare numbers against numbers, we’re looking at, for the most part, the techniques and the practices, and recommending better practices in many cases. The idea here is that states and cities in general use what’s called cash accounting, rather than the accrual accounting which corporations use. Cash accounting allows you to count any revenue as revenue, borrowed money, money that came from other funds, money from the rainy-day fund, so it covers a multitude of sins. We grade states in five areas. Nebraska has come off generally very well.
It’s a conservative state with a lower-case “C” and as a result, it doesn’t have any general obligation debt, it doesn’t obligate itself to provide health care for retired state workers. There’s no value judgment there, it’s just the state doesn’t. Many states have built up billions and billions of dollars of debt for unfunded liabilities for health care, as well as pensions. Nebraska not only pays its pension contribution for public workers but has a law that says if you miss a contribution, or shortchange a contribution one year, you got to make it up. Illinois, Kansas, Kentucky, New jersey should be so lucky.
So, you know, you do a very good job. There are areas where you could improve. You’re right now in the process of rebuilding your rainy-day fund—that’s very important. The rainy-day fund can also be a temptation. During the last years of the economic boom in this country before COVID, Nebraska was balancing its budget with savings in the rainy-day fund. Usually, you want to use those savings for bad times like we’re currently going through, or like we had in 2008-2009, thereabouts. Also, Nebraska doesn’t have any laws on the books for how the money is spent. You’re very good on saving it, but kind of loosey-goosey on how it’s spent. Other states like Texas control that very, very tightly, as it should be.
And one other thing which gets to the heart of what Dick (Ravitch) talks about all the time—about states and cities hiding their liabilities and not really truly balancing their budgets—Nebraska, like most states, 45 or so of the states, doesn’t have a good accounting of all the deferred maintenance costs that you’ve piled up for infrastructure, roads, bridges, schools, state university, the state house. In many cases these involve billions and billions of dollars. California: $65 billion that they disclose. Idaho is the latest state to bite the bullet and start disclosing that they will do that later this year. Alaska does it, Tennessee does it. This is not a red or blue issue, but it’s one glaring liability that’s not on your balance sheet. It should be, and it’s not in the budget, and it should be.
So, congratulations for the most part, but you could still do better.
Jim Vokal: So I think we’re all in agreement guys that Nebraska generally gets pretty good grades for our state finances, but often overlooked is the pension or other debt from local governments. I saw that when I served on the Omaha city council here for eight years. You both recently co-authored a piece in Fortune where you state that the states and localities are going to be, certainly, put to the test with the expected federal infrastructure plan. Can you maybe expand upon that and why you say that?
William Glasgall: The problem is that the money in ARPA (the Biden administration’s COVID relief program) has to be committed, obligated, by the end of 2024 and spent by the end of 2026. So that federal money is going to run out. So many states and cities are using this federal money not just to plug holes in the in the budget, but also to expand programs. You see this in New York, New York City, New Jersey. That raises the specter of a fiscal cliff. So we have a possible fiscal cliff coming when the federal money runs out, and these programs are living on, “What do you cut?” Do you cut schools? Do you cut public health? Do you cut policing? I don’t know. But there’s a day of reckoning now.
With the infrastructure bill, it’s the same thing. States and cities have done a pretty good job financing infrastructure development through the municipal market. Rates are pretty cheap. They sell about $500 billion dollars a year in bonds to finance. It’s usually backed by tolls or fees or tax revenue. Along comes this big slug of federal aid—it’s great they get the ball rolling—but what’s going to happen afterwards is there’s going to be a second infrastructure fiscal cliff that everybody becomes addicted to. It’s really worth considering, in the great scheme of things, even if it turns out to be an eight- or ten-year program, it’s got a finite life. So we have to think longer term. Congress doesn’t think longer term. Congress thinks about the next election. Dick, you want to continue that?
Richard Ravitch: All of a sudden, the federal government is appropriating trillions of dollars to finance infrastructure, which it had never done before except in three respects: it had financed roads, it financed public transportation, capital projects, and it provided in the Obama administration—briefly—it agreed to pick up the interest cost on the bonds sold by states and cities to finance certain kinds of infrastructure that was approved by the federal government. But they’ve abandoned that now with this massive proposal to finance it directly with, in my judgment, unfortunate ambiguity as to who is going to decide what schools to be built, where to build them, or the bridges, or the street repairs. Who is going to establish the priorities? Who is going to pick the projects that would be beneficiaries of this money? What’s the federal government’s role in relation to state and local government?
I can only tell you, I don’t think the federal government has any business being involved in the decisions about how many schools to build, or where to build them, or how to finance parks or streets. That is clearly something within the competence and jurisdiction of state and local governments, and I don’t think states should be indirectly deprived of the power to make those decisions. And the bribes from the federal government are very tempting, given the fiscal squeeze, but that’s the conflict that we see coming, and why we are determined in our little way, Bill (Glasgall) and I, and the University of Pennsylvania whom we cooperate and work jointly, why we’re so eager to get this subject discussed and well understood. So that people in Washington, above all, begin to understand what’s going on with states and cities. And we are both delighted and flattered that you gentlemen have started the reaction to our one article.
Jim Vokal: I appreciate that. Thanks for that perspective. Another reason why we’re excited to have you both on is I get to finally talk about Generally Accepted Accounting Principles (GAAP). We’ve been talking about that a lot at the Platte Institute and how local and state governments are currently falling short. We saw that here in York, Nebraska as an example, and now we’ve got this major spending program, right, like the infrastructure bill, and that could make the problem worse. So from where we sit in Nebraska, GAAP is an area where many officials may not even realize that there’s a problem, so can you maybe explain and walk our listeners through the issue of accounting practices, what it means for elected officials, and maybe a bit why the average taxpayer or resident of Nebraska should care?
William Glasgall: You know, the governor, the mayor, stands up—it’s campaign time—”I balanced the budget every year of my term.” And everybody claps, and says, you know, way to go. There is no definition of a balanced budget in the accounting that states and localities use. Except for New York City, which has to balance the budget according to Generally Accepted Accounting Principles, or a version of it. So, New York uses a version of what Warren Buffett uses to balance his books. People haven’t really questioned Mr. Buffett’s acumen, at book balancing certainly, but you might question the state. Because many states have unfunded pension liabilities, including your neighbors in Kansas. Many states we talked about, infrastructure liabilities, health care liabilities, there are all sorts of numbers. Many states use, you know, budget gimmicks, one-time actions, to balance their budget.
Illinois is famous for sweeping spare cash that’s lying around in state agencies into the general fund. And so, the budget is balanced, but you’ve got hundreds of billions of dollars of liabilities sitting out there, not you know, not quite on a balance sheet. Maybe some on the balance sheet, never in the budget. There is no federal authority over state budgets, they are what they are, and they can be very creative. Dick has lived through this in New York City and New York State and probably knows a hundred times better what the story is.
Richard Ravitch: The truth of the matter is, if the federal government had a statute that said that they would not provide aid to any state or city that didn’t budget in accordance with GAAP, within a five-year period, you would have an enormous fundamental change in the way states and cities budgeted. And our children and grandchildren would be the beneficiaries.
William Glasgall: And you know, the problem is that if you kick the can down the road, which is what we’re talking about, if we use budgeting as we do now and push liabilities off, push our bills off until tomorrow, to the next generation, somebody’s going to have to either pay for it, or services are going to be reduced. We’ll have to settle for that, or in the case of localities, school districts, counties, they may go bankrupt, as Detroit did, as Puerto Rico did. States can’t go bankrupt. There’s some dispute about that but at the current moment states have no ability to file for bankruptcy, they’re sovereigns also. So, you live like Kansas lives, or like Illinois lives, where you kind of lurch from crisis to crisis.
Your borrowing costs are higher so people are paying, you know, Illinois at its peak had $16 billion in unpaid bills that it was paying 1% a month on. Can you imagine running a business and paying 1% a month on your money? This is like paying money to the mob. You think that money just showers down from the sky? No, it comes out of your pocket, in higher taxes, or less service. So, there’s a cost. There’s a cost to doing what we’re doing.
Jim Vokal: People interested in learning more about your organization, the Volcker Alliance, can you direct them to maybe where they can find out more information about any future events or more information about the organization?
William Glasgall: You bet, Jim. Number one, go to volckeralliance.org. There’s plenty of information there. Number two, the Volcker Alliance and the University of Pennsylvania Institute for Urban Research, we do a monthly series kind of like what you’re doing at Nebraskanomics. We focus on the intersection of COVID-19, federal, state, and local governments, and finance. The next episode is 11 a.m. Eastern Time 10 a.m. Central Time on September 23. We’d love to have you and come to Volcker Alliance for the link or we’ll post a link on your website. It’s free. Our keynote guest the 23rd is the mayor of Newark, New Jersey, Mayor Baraka, and some experts on broadband, and water and sewer. Those are two big issues in the ARPA Act.
Thank you to William Glasgall and Richard Ravitch for joining us on this episode of Nebraskanomics.