Prairie State Wire

States need to do more work on setting aside funds for a rainy day and stop using political math, experts said in a Truth in Accounting webinar on the economic impact of COVID-19 on state revenues.

"The nature of the shock that we've experienced in the last few months is certainly different than anything in living memory and we can't really compare it to previous recessions and depressions due to the very nature of it," Eileen Norcross, senior research fellow at the Mercatus Center at George Mason University said during the virtual event. "But, that doesn't mean that we haven't been here before in the sense that every so often we can expect a financial shock, a recession it's to be expected."

Norcross said the question is, what should states do when they're faced with those situations and whether or not they have firm fiscal foundations. She said the 2008 recession really showed that many states were not saving up for a rainy day.

"Currently, depending on how you want to estimate the shortfall, unfunded pension liabilities in the states are anywhere from $2 trillion to $5.9 trillion, in unfunded liabilities," Norcross said. "With OPEB benefits, while progress has been made, there is still a lot of work to be done with over a dozen states having nothing saved for those benefits. And lastly, on rainy day funds, there has been some progress. Some states have put some money aside, even enough to get through this current crisis."

Norcross said much more needs to be done on that front.

"But I would just urge that we have to continue to bolster fiscal foundations — crises can be expected," Norcross said. "We don't always have good years, we have to prepare for the bad years."

Norcross said that while the nature of the current crisis is unprecedented because its nature is unique, crises are regular and each state needs to be better prepared to deal with those crises.

Norcross said no one knows how things are going to play out pertaining to unfunded liabilities.

"I don't know if it's mathematically possible for states like Illinois and New Jersey to pay what is owed," Norcross said.

Sheila Weinberg, founder of Truth in Accounting, said that some governors, like Illinois's Gov. J.B. Pritzker and California's Gov. Gavin Newsom, are saying their states were in a fine financial state before this happened. Both states were saying their states ran surpluses.

 "All the states have a balanced budget requirement so you'd think the states would be doing fine, but, what we've found and Eileen highlighted it a little bit was that it all depends on how you count."

Weinberg said government officials have used what she calls "political math," which includes using accounting gimmicks to balance their budgets.

"We find the states are $1.5 trillion in debt even though they balance their budgets. So how can that happen?" Weinberg asked in the webinar. "Well, they use accounting gimmicks. They record loan proceeds as revenues. They move money around into the budgeted funds from the non-budgeted funds and somehow that becomes revenue. Then they just don't include all their costs, they only include what checks they plan to write."

Weinberg said that Congress still hasn't passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, yet states like Illinois are already counting on funding from that bill to help the state.

Bill Bergman, director of research at Truth in Accounting, said there is no way to know how much states are going to lose from the pandemic.

"We had a quote/unquote projection, but it's not a prediction it's really not even a projection it's more like a scenario. The assumptions you have to make to come up with a number that's defensible are subject to a great deal of uncertainty," Bergman said. "People can differ about whether or not they think a federal bailout is appropriate. Let's just put that aside for now. Some people believe it isn't. But having said that any future aid to the states should not be linked to any projection of future economic conditions."

Bergman said economists and those looking at this could be looking at actual revenue shortfalls from pre-pandemic numbers instead of using projections that have been tossed about.