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State debt crisis highlights need for more transparency

by John Stephenson / /

A recent article in the New York Times aboutthe mounting levels of state government debt and accompanying fears of alooming financial crisis highlights the need for more transparency in statebudgets. Several states have made headlines recently with their budgetproblems. Arizona has stopped paying for organ transplants for patients onMedicaid. Illinois is still paying lastyear’s bills. And some states are releasing prisoners early becausethere is not enough money to house them. While these cuts may seem draconian,financial analysts believe that next year could be a lot worse because theamount of state debt is so large – perhaps in the trillions of dollars – thateven an economic recovery will not balance the books. The exact scope of theproblem is unknown because much of the debt has beenoff the books and hidden from public view for years.

The lack oftransparency about the budget and what exactly states’ owe has contributed tothe problem. To help whether the recession and unwilling to reform taxes,reduce spending, or modify public worker pensions, the states have reliedaccounting tricks, budgetary gimmicks, and sleights of hand to balance theirbooks each fiscal year. The New York Times describeshow it happened:

“Few workerswith neglected 401(k) retirement accounts would risk taking out secondmortgages to invest in stocks, gambling that the investment gains would beenough to build bigger nest eggs and repay the loans.”

 

“But that isjust what Illinois, which has been failing to make the required annual paymentsto its pension funds for years, is doing. It borrowed $10 billion in 2003 andused the money to invest in its pension funds. The recession sent theirinvestment returns below their target, but the state must repay the bonds, withinterest. The solution? Illinois sold an additional $3.5 billion worth ofpension bonds this year and is planning to borrow $3.7 billion more for itspension funds.”

To date, states continue to borrow becauseinvestors continue to purchase their bonds. But demand has declined recently.There may come a time when the states cannot find anyone to purchase theirbonds. If states cannot borrow, then they cannot operate.

To better understand the nature of theproblem we face and find ways to fix it, we need more transparency in state andlocal government budgets. Governments should make all financial information,including their budgets, revenue collections, expenditures, contracts, pensionobligations, investments, and the like available and accessible to the public.Through transparency, taxpayers can demand more accountability from theirelected representatives in government, which leads to better decision-making. Althoughwe are facing a looming crisis, we have the means to prevent it.