This article was published by The McAlvany Intelligence Advisor on Monday, February 4, 2019:
Otto von Bismarck is famous for turning Germany from a gaggle of competing provinces into a nation by binding them together using social insurance promises. But he is best known for telling how he did it – behind the scenes: “Laws are like sausages; it is better not to see them being made.”
So it is with many of America’s largest cities when it comes to reporting on their finances. Those sausages are warmed up by the fires used to cook their books.
For the last three years, Truth in Accounting, a non-profit that peers into the dark corners of cities’ kitchens, has exposed the chicanery in its annual report, The Financial State of the Cities. It uses GAAP (generally accepted accounting principles) to analyze what they officially report, and then it goes deeper to find out what’s really going on.
What they learned is ugly: just 12 cities have enough money to pay their bills out of the 75 cities they analyzed. There’s an interactive graph (see Sources below) to show the details, if one dares to know, behind TIA’s conclusions.
TIA also grades each city from A to F depending upon that “taxpayer burden.” There are no “A”s. There are only 12 “B”s. The rest are rated C to F.
TIA staffers really had to dig behind the public numbers in order to determine just how bad some of the financial conditions are. From the report:
At the end of the FY 2017, 63 cities did not have enough money to pay all of their bills. This means that to balance the budget, elected officials have not included the true costs of the government in their budget calculations and have pushed costs onto future taxpayers.
Two cities, Newark and Jersey City, were so far out of compliance with Generally Accepted Accounting Principles (GAAP) in the reporting of their financial conditions that TIA was forced to add two other cities in their place to complete their study.
Cities in general do not have enough money to pay their bills. Based on our analysis, the total unfunded debt among the 75 most populous cities amounts to nearly $330 billion. Most of this debt comes from unfunded retiree benefit promises, such as pension and retiree healthcare debt.
This year, pension debt accounts for $189.1 billion, and other post-employment benefits—mainly retiree healthcare liabilities—totaled $139.2 billion….
TIA learned that many of the cities hide the reality from the public in order to make their financials look better:
One of the ways the cities help make their budgets look balanced is by shortchanging public pension funds….
Some elected officials have used portions of the money that is owed to pension funds to keep taxes low and pay for politically popular programs…. Instead of funding promised benefits now, they have been charged to future taxpayers.
Shifting the payment of employee benefits to future taxpayers allows the budget to appear balanced while municipal debt is increasing.
TIA refers to those 12 cities with enough money to pay their bills as “Sunshine Cities,” which, surprisingly, include two in California: Irvine and Fresno. On a per taxpayer basis, Irvine has $4,400 surplus per taxpayer while Fresno has a $2,500 surplus.
Not surprisingly, however, among the “Sinkhole Cities” where the taxpayer burden is overwhelming is California’s San Francisco where that burden is $22,600.
TIA includes commentary on three of the worst “Sinkhole Cities”: San Francisco, Chicago, and, bringing up the rear: New York City.
San Francisco remains one of the Bottom 5 Sinkhole Cities with a Taxpayer Burden of $22,600. However, this burden decreased by $4,900 compared to the previous year as unfunded pension debt declined by $592 million thanks to income earned on pension plan assets.
Chicago’s finances seemingly improved, but the city continues to have the second worst financial condition among the 75 most populous U.S. cities. A recent law that requires Chicago to increase its contributions to municipal pension plans led actuaries to raise the percentage rate used to determine the current value of promised benefits, which reduced the unfunded pension debt calculation by $7.8 billion.
Note: This “cooking the books” is a non-accounting term for fraudulent manipulation of paper numbers behind pension plan assumptions that work to reduce the city’s liabilities on their balance sheet.
New York City ranks dead last:
New York City again ranks last for fiscal health because of its massive and growing debts. The city’s finances continue to deteriorate as the amount of unfunded retiree healthcare promises balloons. NYC has set aside only $4.7 billion to fund the $100.6 billion of promised retiree health care benefits.
There are budgetary shenanigans even in Wyoming, which TIA rates as an “A” for the prudent handling of its finances. On the surface it shows a taxpayer “surplus” of $19,600, but in a footnote TIA writes: “The state is still hiding $564.3 million of its retiree healthcare debt. A new accounting standard will be implemented in the 2018 fiscal year which will require states to report this debt on the balance sheet.”
Caution is advised for those wanting to use TIA’s interactive map below to learn how their city fares under TIA’s accounting microscope. Caution is also advised when considering Cory Booker’s announcement of his run for the presidency in 2020 on Friday. He is the former mayor of Newark, New Jersey. If he wins, he’ll certainly feel right at home with how the federal government runs its own books.
Truth in Accounting: “The Financial State of the Cities”