In three-fourths of the states, the treasurer or chief
financial officer (CFO) is elected by citizens
in statewide elections. In some states, such as
New York and Texas, the comptroller is elected
and performs many of the functions of the CFO.
About two-thirds of local governments have an
official with the title “financial officer,” “financial
director,” or a similar title implying broad duties.
Financial wizardry is not a CFO’s primary calling;
but when governors or mayors find their budgets
unbalanced, they turn to the CFO for possible
stratagems. For the past few years, politicians in
far too many cities and states—not to speak of
Washington, DC—have tended to rely on nine
dangerous stratagems:
1. Delay maintenance and replacement of assets—
and rely on hope. On August 1, 2007, the
I-35W bridge across the Mississippi River in
Minneapolis collapsed suddenly, killing 13
people. Seven months later, a federal commission
said that just to maintain and upgrade
surface transportation in the United States world
cost $225 billion a year for the next 50 years.
Ensuring safe and dependable roads, bridges
and transportation systems, as well as water systems,
sewage treatment plants, dams and even
schools also requirers long-term planning. Unfortunately,
most politicians prefer quick fixes.
2. Sell assets. In economic hard times, it is
popular to sell land, buildings, or surplus assets.
AP Photo/Pioneer Press, Minneapolis Star Tribune, Brandi Jade Thomas, www.TwinCities.com
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9781111632366, Managing the Public Sector, Grover Starling – © Cengage Learning.
530 Part Three RESOURCES MANAGEMENT
California’s real estate is one of its greatest
assets and selling off state property, according
to the governor’s office, would raise over $1
billion. Specifically, Governor Schwarzenegger
proposed the sale of seven state-owned
properties to help get his budget in balance
including: San Quentin State Prison, the Cow
Palace, Del March Fairgrounds, Orange County
Fairgrounds, Ventura County Fairgrounds, and
the Los Angeles Coliseum. Schwarzenegger’s
proposal was rather straightforward compared
to that of Governor Eliot Spitzer in New York,
who wanted to securitize, or sell off, part of
future state lottery proceeds.
3. Lease rather than buy equipment. Say the U.S.
Air Force needs 100 Boeing 767 aircrafts to use
as aerial refueling tankers. Buying them outright
would cost about $20 billion and add appreciably
to this year’s deficit. Therefore, for political
reasons, Congress and the president might
prefer to lease them over a 12-year period. The
budget would take far less of a hit each year,
even though total cost would be higher than if
the Air Force had bought the planes.
4. Rob Peter to pay Paul. Most budgets are made
up of multiple accounts. The account that gets
the most attention is called the general fund.
When that general fund gets in trouble, politicians
start considering off budget funds as
resources to be tapped. New York helped
balance its budget in 1992 by transferring the
cost of running the Erie Canal from the general
fund (“on budget”) to the Thruway Authority
(“ off budget”). Similarly, in 2003, Massachusetts
transferred management of a convention
center and a parking garage (both “on budget”)
to the state pension fund (“off budget”) to show
a savings of $175 million.
5. Nickel and dime employees. The response
to budget problems is often symbolic. David
Osborne and Peter Hutchinson write: “Leaders
order coffee pots unplugged, travel budgets
slashed, and consultants banned. To save
energy, they force workers to endure hotter
offices in summer and colder offices in winter.
Some even outlaw potted plants. In Missouri last
year, the governor ordered that every other light
bulb in government buildings be unscrewed.”
6. Make across-the-board cuts rather than targeted
cuts. In 2008, Governor Schwarzenegger
proposed cutting California’s budget across
the board by 10 percent, meaning that every
state agency from police to health to the arts
would receive a 10 percent reduction in its
annual budget. Less drastically, that same
year, Iowa Governor Chet Culver announced
a 1.5 percent across-the-board cut and said
education and Medicare “won’t escape
unscathed.” The popularity of broad-brush,
across-the-board cost-cutting is easy to understand:
It is a way to avoid making difficult,
uncomfortable political choices.
7. Fudge the numbers. A budget is really just a
forecast, a necessary statement of expected
revenues and expenses. But every budget is
based on assumptions, and CFOs can make it
look better or worse simply by changing those
assumptions. If they expect 1000 new students
to enroll in their schools but assume (for budget
purposes) only 900, they have reduced the
basis for their estimate of new expenses by 10
percent. Ronald Reagan’s approach in 1982
was a classic example of making the budget
“work” by fudging the numbers. To justify large
tax cuts, his budget director, David Stockman,
forecast 5 percent growth for 1982. Theoretically,
this would help create a $28 billion
surplus by 1986. As it turned out, the gross
national product fell by 2 percent that year—
and the largest deficits since World War II soon
followed. The Obama White House presented
its own rosy scenario with the fiscal year 2010
budget. It expected economic growth in 2009
to decline by only 1.2 percent, whereas the nonpartisan
Congressional Budget Office assumed
a 3 percent decline. Quite a difference.
8. Borrow. Even when the general fund is legally
prohibited from being in debt, governments
find ways to borrow. The chief way states
and local governments borrow is by issuing
bonds. California has proven that the politics
of borrowing works for both Republicans and
Democrats. In 2003, the legislature finally
passed a $99 billion budget with $10.7
billion of borrowing—which was probably
unconstitutional. After voter removed (recall)
Democratic Governor Gray Davis from office,
the new Republican governor, Schwarzenegger,
immediately endorsed borrowing $15
billion more as part of his “budget balancing”
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9781111632366, Managing the Public Sector, Grover Starling – © Cengage Learning.
Chapter 11 PUBLIC FINANCIAL MANAGEMENT 531
plan. Meanwhile, on the East Coast, New
Jersey faced a $3.5 billion shortfall and had
accumulated a $32 billion debt. Governor
John Corzine therefore proposed increasing
fees on toll roads and issuing up to $38
billion in bonds against future toll revenues.
Although issuing bonds is the chief way for
a state to borrow, Schwarzenegger would
later try another way, namely, invoking a law
that lets the state demand loans of 8 percent
of property tax revenue from cities, counties,
and special districts. Under this law, the
state must repay the municipalities with
interest within three years. So, he requested
$2 billion, displeasing local officials up and
down the state and in effect, kicking the can
down the road three years.
9. Use accounting gimmicks. Accounting offers
many temptations to politicians who might have
made a read-my-lips pledge of “no new taxes.”
Since we cannot consider all the gimmicks,
we note here just four: manipulating the timing
of expenditures and receipts, requesting
funds after budget approval, making false
assumptions, and making dubious promises.
Our first example involves pretending or even
requiring that money you expect to receive next
year will actually come in this year or pretending
that expenses planned for this year will be
made, technically, next year. For example, states
tell school districts that are expecting a school-aid
payment in May (this fiscal year) that they will get
it in July (next fiscal year), thus making this year’s
expenses look smaller. At the same time, they tell
retailers who normally submit their June sales tax
receipts in July (next fiscal year) to do so in June,
thus making this year’s revenue look larger. In
Massachusetts, Governor Deval Patrick proposed
counting about $900 million in proceeds from
license fees of new casinos that the legislature
had not even authorized.
Prudent presidents and governors recognize
that natural disasters happen and allow for them
in their budgets. Others simply assume none will
occur, lower their spending request to the legislature
accordingly, and then blithely ask the legislature
for supplemental funding two months later,
when the flooding or whatever occurs. This works
well for wars, too.
Another accounting gimmick used to make deficit
projection look smaller involves the alternative
minimum tax (AMT) enacted in 1969 to prevent
the wealthy from using tax shelters to avoid paying
any income tax. Although it was intended to
hit the wealthy taxpayer, it was not indexed for
inflation. That fact has meant that it could affect
millions of middle-class taxpayers. If they pay it,
the government would get billions of dollars more
in tax revenues, which is what past budgets have
falsely assumed. But it would also probably mean
a taxpayer revolt. So each year the White House
and Congress agree to patch the alternative tax for
inflation and the extra revenues never materialize.
Finally, we come to a relatively new gimmick:
PAYGO (pay-as-you-go) . Here’s how it works: The
president promises that “Congress can only spend
a dollar if it saves a dollar elsewhere.” Thus,
PAYGO, provides politicians with convenient
talking points and taxpayers with a false sense
of security on budget reform. From 1991 through
2002, PAYGO existed as a statute and was
brought back in 2007. But it never worked
because Congress severely limited the amount of
the budget to which it applied and, in those cases
when it did apply, conveniently voted waivers.
Case Questions
1. Identify the weaknesses in each strategy. (Hint:
How do you think the bond rating agencies
reacted to California’s 2003 budget?)
2. Which strategies are the most dangerous?
Least? Why?
3. Provide a recent example of each strategy.
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