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Wednesday, March 11, 2009

Illinois' Balanced Budget Farce

The State of Illinois has a Constitutional mandate that each year's budget has to be balanced. Given that, why would the state of Illinois ever need to issue bonds? After all, bonds are means of taking on debt. The state would never need to issue any debt if it were balancing its budget every year right? Well, as it turns out, the state balances its budget through a complicated pseudo cash flow method. As such, the state considers the bonds as new cash flow ( as such bond money is treated like revenue) while only accounting for whatever that year's payment is. This is one of many tricks in the Illinois budget that makes a total mockery of the mandate to make the budget balanced yearly.

Another example is the state's negotiations with the unions. In order to create current yearly budget balances, the state often negotiates salary increases with massive deferred payments. This way the budget is balanced currently and shortfalls come later on down the road. This way the state's politicians can curry favor with the unions without having to make other budget decisions. The unions get their salary increases. These increases don't show up on the budget for years. Meanwhile, politicians can continue to spend at their same pace.

Another example of accounting tricks is the so called Section 25 exception. This portion of the State Finance Act allows the state to put off paying the bills on certain expenditures. Since the state's budget is balanced as long as cash flows are balanced, the state can run up the purchases on certain items and simply put off paying them until later. Once again, the true costs of spending is hidden and payment is put off until later.

Beyond this, the state makes even more audacious budget decisions. Since 1970, the Illinois Constitution guaranteed pension benefits to its state employees. Yet, routinely, the state misses contributing to the state's pension fund in order to balance the budget. In the meantime, the state has passed several laws to enhance pension benefits. So, while the state can meet its yearly budget balance, it also creates a long term shortfall that will one day have to be met and all at once.

All of these long term practices have created one giant mess in the budget of Illinois. It goes a long way toward explaining why the state is on the brink of total collapse. For years, the state has borrowed money through bonds in order to pay short term debts. All the while, it maintained the air of a balanced budget. It put off long term debts, and often didn't fund long term liabilities. The long term effect has put this state on the brink of fiscal collapse.

For more information, go to the Institute for Truth in Accounting.

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