States Use Budget Gimmicks and Accounting Tricks to Evade Balanced Budget Requirements

Here's the thing about state budgets right now: They're in sorry shape. They can't afford their Medicaid bills, which were on the rise even before the recession blew up the case load, nor their public employee obligations. And that's just if you look on the headline numbers.

As The New York Times notes, the state budget situation is actually worse than it looks. Although nearly all are required to balance their budgets each cycle, they've managed to avoid doing so by relying on budget gimmicks:

While almost all states are required by law to balance their budgets each year, the report said that many have relied on gimmicks and nonrecurring revenues in recent years to mask the continuing imbalance between the revenues they take in and the expenses they face — and that lax accounting systems allow them to do so.

The report focused on California, Illinois, New Jersey, New York, Texas and Virginia, and found that all have relied on some gimmicks in recent years.

California borrowed money several times over the past decade to generate budget cash.New York delayed paying income tax refunds one year to push the costs into the next year and raided several state funds that were supposed to be dedicated to other uses. New Jersey borrowed against the money it received from its share of the tobacco settlement and, along with Virginia, failed to make all of the required payments to its pension funds.

Texas delayed $2 billion worth of payments by a month — pushing the expenses into the next year. Illinois has billions of dollars of unpaid bills and borrowed money to put in its pension funds.

Desperate budget officials often see public pension funds as an almost irresistible pool of money. One common way of "borrowing" pension money is not to make each year's "annual required contribution," the amount actuaries calculate must be set aside to cover future payments. Despite its name, there is usually no enforceable law requiring that it be paid.

As a result, the report found that from 2007 to 2011, state and local governments shortchanged their pension plans by more than $50 billion — an amount that has nothing to do with the market losses of 2008, which caused even more harm.

That's an important point. It's become common practice to wave off concerns about state budgets by noting that their distressed because of the economic crisis. But the economic crisis only exacerbated the deep-rooted fiscal problems that already existed in a lot of states.