Dangerous Stratagems

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

All rights reserved. No distribution allowed without express authorization

9781111632366, Managing the Public Sector, Grover Starling – © Cengage Learning.


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.


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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