The high-stakes game of chicken the Arizona Legislature and Governor are playing over the $3 billion or $4 billion 2010 budget shortfall (depending on who's counting) is certainly bad, but you may not know the half of it.
An organization made up of accountants and other financial experts called the Institute for Truth in Accounting (ITA) has exhaustively studied every state's comprehensive annual financial report (CAFR). In its study, the ITA concluded that many states fail to honestly account for both revenues and spending.
States use cash-basis accounting while the private sector uses accrual accounting. Cash accounting only looks at current inflows and outflows. It fails to account for accrued obligations, such as retirement benefits. States ignore "accounts payable" in their accounting systems, including contract payment obligations. Consequently, state balance sheets grossly understate liabilities.
After studying Arizona, the ITA concludes that while the state claimed $11.2 billion in net assets in 2007, it was actually carrying $16.6 billion in net liabilities. That's an accounting error of $27.8 billion. The discrepancy can largely be attributed to ignoring Arizona's long-term health and pension liabilities.
Now to be fair, the state is doing nothing illegal. But elected officials benefit from efforts to hide the true state of government finances because it allows them to engage in continued, unsustainable spending and avoid tough decisions. At minimum, even if Arizona keeps using cash accounting, the state should be required to keep a second, honest set of books.
Byron Schlomach, Ph.D, is director of economic policy at the Goldwater Institute.
Goldwater Institute: Piercing the Fog: A Call for Greater Transparency in State and Local Government
Institute for Truth in Accounting: Arizona's Asset Picture
Institute for Truth in Accounting: The Truth About Balanced Budgets: A Fifty State Study