What to Look for in State Budgets

William Glasgall, Director of State and Local Programs at The Volcker Alliance , discusses what’s important to keep in mind when looking at state budgets. He describes the benefit of using GAAP budgeting and points to the perils states face when adopting short-term fiscal maneuvers. He also looks at how Puerto Rico has become a the ultimate example of what happens to a government after making years of bad budgeting decisions.

GLASGALL: I think the first thing to keep in mind is the truthiness of the budget. All the states have to have balanced budgets. 49 states have it by law, one, Vermont, is the lone holdout, does it by custom. So when the governor says, "I balanced the budget for four years in a row." The governors just say, "Well, I obeyed the speed limit. That's fine." You need to look at how the budget is balanced, how it's put together.

Really, only New York City-- That's the only major government that uses GAAP for budgeting. Everybody uses it for their financial reporting, their kafirs. GAAP budgeting is a bit more honest way of expressing revenues and expenditures. You don't count borrowed funds as cash, that was one of New York's big sins before it almost went bankrupt. It's really a way of expressing balance in a more honest sense.

You can look at Illinois or New Jersey versus Texas, for example. Or versus New York City. In the piece I did for the bond buyer, we looked at New York City because it's the only big government that uses GAAP for its budgets. If you look at the state of Illinois general obligations versus New York City general obligations, there's about a seven time difference in the spread over triple A taxis and municipal debt. Illinois doesn't even have a budget as of April anyhow for the current fiscal year, it's debating next year's. There's a penalty when a government goes to market with the budget that uses a lot of evasive tactics doesn't pay its' bills, can't make up its' mind about what to do about pensions or healthcare. The market does recognize this is an issue.

That's the ultimate end of bad budgeting. Puerto Rico is not a state, nor can it file currently for Chapter 9 bankruptcy as a municipality can. Its municipalities and his agencies also aren't allowed to do this by law. Puerto Rico has borrowed under Democratic and Republican governors, I might add, to fund deficits. What happens is one day-- It's kind of what happened to Bernie Madoff, one day there wasn't anybody left to give him any money.

That's the position they're in now. They've passed a law, a debt moratorium while they're waiting for Congress to act and allow it some kind of reconstruction of its' debt. That's really the ultimate. Nobody says that Illinois or New Jersey is at that point. Nobody said that California was at that point, but once upon a time, California was using IOUs to pay some of its bills.