How U.S. states cook their books

cooking the books

cooking the books
Here’s a trick used by bankers, states trying to add debt without getting voter approval and companies like Enron or Worldcom — and we know how that worked out (they both went bankrupt and their executives charged with fraud). This from the New York State Comptroller (hat tip to our of our viewers):

First, consider some figures from the office of State Comptroller Thomas DiNapoli and Moody’s Investors Service:

  • State debt has nearly tripled since 1990, ballooning from $14.4 billion to $57 billion in 2009.
  • New York ranks second in tax-supported debt, after California and far ahead of third- highest New Jersey.
  • New York ranks fifth in net tax-supported debt per capita. At $2,921 per person, our per capita debt is far higher even than California, an economic basket case, with net tax-supported debt per capita of $1,805.
  • Debt in New York is supposed to be approved by New Yorkers in a referendum, but voter-approved debt has decreased from 40 percent of the state’s debt portfolio in 1985 to just 7 percent today, or $45 billion of the total $48.5 billion. Rather than face voters, the state deviously — and routinely — resorts to “back-door borrowing” through the state’s public authorities. In addition, the public authorities, themselves, carry more than $80 billion of debt that is not supported by state revenues.
  • Source: Buffalo news

    What is Back-door Borrowing?

    This is debt issued by public authorities (public benefit corporations) without voter approval. The State has authorized numerous public authorities to issue debt which the State is contractually obligated to pay for the interest and principal. This debt is not approved by the voters but tax dollars are used to repay the debt. This debt was created in the 1960’s after voters rejected many debt issuances. This type of borrowing makes up approximately 93 percent of outstanding State-Funded debt and increased $12.8 billion or 40 percent between 2000 and 2006.

    Teams of lawyers from the banks, such as Bank of America and others keep long term financing off the books using side letter agreements that allow the states and municipalities to enter into leases with annual renewals to avoid going to voters, which would be required for any long term (over one year) financing.

    Comparing debt in US to debt in Canada

    Government has a limited lifetime. 4 or 5 year terms and it might be over with the future Government having to eat the debts of the previous. Is that fair?

    Canada should go to the Bank of Canada and consolidate all their debts at zero interest, or at least the amount pegged to inflation. Rather than float bonds they should borrow straight off the Central Bank. If that governing party or coalition can’t pay back the debt accumulated in their term, or the deficit, it should be written off as bad loans by the Bank of Canada, and released to the public in the form of a statement. Such bad debt would be inflationery and for the public to judge them on at the ballot box. All levels of government should never have a deficit, but if they do the same rules would apply. The total National Debt should be paid back to the BoC but without interest except maybe for inflation.

    Corporations make the boast they are taxpayers and good citizens but when it comes to the crunch they also threaten capital flight from their country of origin. They can’t have it both ways.

    Calls for ending backdoor borrowing herald decades

    Bye-bye, back-door borrowing
    The Daily Gazette January 15, 1993 By Denis P. Paquette

    New Yorkers who thought that by voting down the $800 million jobs bond act in November they were keeping the state from borrowing money to create jobs were only partly right. The state itself may not be able to borrow money for that purpose, but any number of quasi-governmental authorities could do so — without voter approval. State lawmakers have borrowed frequently in this fashion over the years, circumventing the constitution, saddling taxpayers with billions in long-term debt and damaging the state’s credit rating in the process. Fortunately, the sham may be about to end. Gov. Mario Cuomo has, with the blessings of Comptroller Edward Regan, proposed a number of reforms aimed at reducing back-door borrowing. Foremost among them would be a restriction limiting public authorities’ borrowing to their own capital projects. This would keep the state from doing something like selling Attica state prison to the Urban Development Corp. the next time it needs $200 million — something it actually did several years ago. Or borrowing $800 million from some other agency to create jobs now that voters have rejected a referendum on such borrowing. The proposal would also require that any public agency’s plan to borrow first be reviewed and approved by the comptroller. This would not only inject a degree of fiscal restraint into the process, but ensure public input. (In the past, the Legislature has approved some agency borrowings in the middle of the night, with no prior public notice.) The plan also calls for amending the constitution so that the state could put more than one bond issue before voters at a time. This would presumably encourage several smaller bond issues, as opposed to the enormous, all-or-nothing packages that voters have been inclined to reject in recent years. The plan also would require that new bonds be backed by dedicated revenues (Currently, they depend en appropriations from the Legislature, which bond rating agencies feel are less predictable.) This provision should improve the state’s credit rating, helping to reduce its borrowing cos.. The need for a constitutional amendment would delay implemention of these reforms by at least a few years, which is all the more reason for the Legislature to get moving. But even in the interim, Cuomo’s proposal would be an improvement over the status quo: It would consolidate all agency borrowing in the state under a single new roof, also under the comptroller’s watchful eye. This package would greatly reduce the legerde-main that has enabled state lawmakers to thumb their noses at taxpayers for years. As such, it will hard for the the Legislature to accept. But it’s an important step toward restoring the state to fiscal responsibility and deserves passage.

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