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July 30th, 2009

States get gimmicky to balance books



The federal government can run deficits from here to doomsday, but many states can’t; their constitutions mandate balanced budgets. That’s led to a lot of budget tricks that would land businesses in hot IRS water:

Here’s one creative way that state lawmakers helped balance Washington’s troubled budget: They assumed public employees will stay on the job longer – and die sooner than expected once they finally retire.

This bit of actuarial legerdemain lets Washington assume that less money must be budgeted for pensions, and never mind that actuarial reality foresees longer lifespans. But that state is hardly alone:

Kansas refinanced some of its bonds, avoiding both principal and interest payments on some debts and paying only interest on others during the 2010 fiscal year. The temporary savings amount to about $39 million.

Refinancing state-issued bonds is a time-tested way to save money. It’s practical, and actually doesn’t qualify as a gimmick (although interest-only payments do). Another classic is to simply ‘divert’ funds from off-budget accounts dedicated to, say, transportation, malpractice insurance (New Hampshire), and unemployment-insurance payments (New Jersey).

Expect to see more of this as states (particularly California) discover that the era of simply raising taxes is basically over.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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