Dan Walters

By Dan Walters
dwalters@sacbee.com
January 17, 2016 4:58 AM

  • Accounting method can affect budget’s bottom line
  • State has constantly shifted income-outgo systems
  • Including retiree costs would make big difference

Fair warning: This column is about state accounting practices, which means you are in danger of being stupefied.

Most family budgets are calculated on a “cash basis.” They count income as it is received and outgo as bills are paid.

Corporations, however, generally use “accrual” accounting, in which both revenues and expenses are recorded when they are earned or incurred, providing a fuller picture of their true financial situations for regulators and stockholders.

In theory, governments should use accrual in response to the Governmental Accounting Standards Board’s recommendations, but GASB’s rules are complex and compliance is largely voluntary.

They are, therefore, relatively free to use whichever system suits them, meaning their budgets may hide realities that are not politically digestible.

A few years ago, an extensive examination of state and local accounting, published in the UCLA Law Review, said the systems have “created incentives for accounting gimmicks that have directly contributed to the dramatic decline of public sector finances.”

California has a decades-long history of switching not only its entire budget but particular revenues and expenses back and forth between cash and accrual – and hybrids – in response to current fiscal and political conditions.

California has a decades-long history of switching not only its entire budget but particular revenues and expenses back and forth between cash and accrual – and hybrids – in response to current fiscal and political conditions.

To read expanded column, click here.