Accounting for Subsidies

During graduate school, I worked at the state capitol for the office that spends the lottery money. There was a sign on the wall that read: Lottery. A tax on those not good at math. I’ve had seven quarters of calculus and I don’t play the lottery. Causation or correlation?

In Illinois, they are risking that even the math-challenged will stop believing in the lottery as a hope for a better future. That’s because they are now “paying” winnings with an IOU. From the Chicago Tribune:

After years of struggling financially, Susan Rick thought things were looking up when her boyfriend won $250,000 from the Illinois Lottery last month. She could stop working seven days a week, maybe fix up the house and take a trip to Minnesota to visit her daughter.

But because Illinois lawmakers have not passed a budget, she and her boyfriend, Danny Chasteen, got an IOU from the lottery instead.

"For the first time, we were finally gonna get a break," said Rick, who lives in Oglesby. "And now the Illinois Lottery has kind of messed everything up."

Illinois is a mess. A fiscal disaster. You think I overstate? Try this: Earlier this year the University of Illinois Institute of Government and Public Affairs released a report called Apocalypse Now? The Consequences of Pay-Later Budgeting in Illinois. Here’s the summary:

For years Illinois has been spending much more than could be supported by sustainable sources of revenue and covering the deficit by issuing IOUs. New projections from the Fiscal Futures model put the magnitude of the underlying deficit at $9 billion for FY 2016—and growing thereafter. The accumulated value of all the IOUs issued to pay for past deficits now totals $159 billion. These IOUs represent claims on the state that when paid off will crowd-out spending on other priorities.

This is remarkable – a $9 billion shortfall represents 25% of state-raised revenue – but not as remarkable as the fact that, not only can the state continue to borrow money, they are doing it at ridiculously low rates. A 20-year US Treasury note issued yesterday had a yield of 2.62% meaning, if you loan the federal government money, they will pay you a rate less than their target for inflation for the next two decades. That’s a sucker punch, but the premium you get for the very real possibility that the state will default on their debt in the same twenty year time period is just a couple of percent.

This is, of course, the byproduct of a manipulated market, one in which the Federal Reserve, the US Treasury and Congress deny that occasional diet and exercise (in economic terms: recession) is necessary to have a strong and healthy economy. Still, it’s hard not to look at this with a certain level of bewilderment.

How do we get to something real? How do we return to a condition where market feedback helps us make better decisions?

One small step comes this week from the Governmental Accounting Standards Board (GASB). In Statement #77 (accountants are not known for their flair), GASB now requires cities to disclose, as part of their financial reporting, the amount of money lost to tax subsidies. The website Good Jobs First describes it this way:

Never in its history has GASB issued standards specifically addressing the estimated $70 billion per year states and cities spend each year in the name of jobs. Although much of this spending is recorded (albeit in many different places), tax breaks for economic development are by far the costliest subsidies and also the least well disclosed. So GASB’s development of standards to cover reporting of business tax breaks is truly a landmark event.

Knowing how these deals work, I suspect that many government officials, including many who work in the realm of economic development, will be surprised by the disclosures. Many are aware of the transactions and the accompanying silly conversations that equate jobs and growth with subsidy, but then the details fade out of memory. I’ve never seen a city go back and ask whether or not a deal actually made sense financially once it was completed. It’s all left up to the windshield test (looks like it’s working).

I’m going to reiterate that this is a very small step. GASB standards still have cities count their infrastructure liabilities as assets – the more you agree to maintain, the richer you are according to GASB – and cities, in general, have accounting practices that are truly cringe worthy given the scope and complexity of what they do. Still, this is a positive development.