Burgled by the Prior Generation

A game of musical chairs is not much fun for the player left without a place to sit. It is even less fun when, instead of seats, you’re playing with governments’ budget promises.

Ever since the New Deal and its enactment of an unfunded Social Security program, each generation of working Americans has been burgled by the prior generation – and each generation has, more or less systematically, set out to swipe more from its successors than was taken by the generation before. Sooner or later, the game of musical wallets must stop. The current era’s declining birth rates and aging population make it likely that the day will come sooner than later.

Against this backdrop, the State Budget Crisis Task Force has arrived on the scene much like caricatures of British bobbies, armed only with only their whistles, yelling “Stop or I’ll toot!”

The task force was headed by Paul Volcker, a former chairman of the Federal Reserve Board, and Richard Ravitch, a former New York lieutenant governor. Volcker, Ravitch and their fellow committee members faced the unenviable task of analyzing the state budgeting process and speaking frankly about the widespread problems they observed.

They have my sympathy and, for the most part, my support. Some of what they recommended in their final report, released earlier this week, makes great practical sense. Other parts make sense in theory but are not practical. Still others seem completely divorced from financial reality. But on the whole, the changes they recommend are a lot better than the tottering tower of unacknowledged debt we have built thus far.

One of the most sensible of these proposed changes is forcing states and localities to budget over multiyear periods. This would cut down on short-term quick fixes. Instead, however, we would see medium- or long-term fixes aiming at a static goalpost farther down the line. Whatever accounting cutoff is selected, whether it is three years, or five, or 10, financial architects will move the fiscal reckoning just to the other side of that border.

Still, taking a longer view will lead to better policy, regardless of the budgeters’ intentions. A budget that is balanced over 10 years is likely to be more realistic than one that is only balanced for six months or a year. Of course, you must keep rolling over the budgeting periods; a new 10-year budget has to be passed every year. Otherwise, like any 10-year-long financial projection, such a budget would be mostly an exercise in creative writing. But longer time horizons would be a step in the direction of fiscal honesty.

Less realistically, Volcker and Ravitch do not think proceeds from debt issuance or asset sales should immediately count as revenue. Everyone who borrows cash or sells an asset to raise cash intends to spend the money. Creating a rule that requires such money to be held for multiyear periods just won’t happen. The task force is of course correct in noting that borrowed money is not “revenue” because it must be paid back eventually. Asset sales, however, are revenue, if offset in a theoretical sense by the need to buy or lease similar facilities in the future.

But do we really want or need our local governments to own and maintain big investments in fixed assets, such as office buildings and schools? Are government facilities typically maintained so impeccably and cost-effectively that we don’t want to consider alternatives? I think in many cases government would be better served by leasing the space it needs, where it needs it, and retaining the flexibility to relocate, expand or downsize as future developments require. Asset sales may not only be financially smart, they are probably inevitable when local and state governments get around to settling their debts.

Meanwhile, all debt should be recognized not just as short-term sources of spendable cash, but as long-term liabilities whose payment stream should be quantified and measured against projected resources. Governments currently count on their taxing power to bail them out in the future. There are limits to taxing power (as Detroit has learned), and when you commit the same dollar of tax revenue to be spent two or three or five times, you have created an unsustainable system.

The unsustainable nature of such systems, however, has been shuffled under the rug in many instances by “budget gimmicks” that hide the deep-seated nature of the problems facing states and municipalities. Ravitch expressed concerns about “fiscal sleight-of-hand” which, though not illegal, has kept voters and other government bodies from recognizing which localities are in trouble, and how bad the trouble is.

The task force’s final report, which is available online, emphasized that those in Washington looking to make cuts to programs on a national level need to be aware that such cuts inevitably end up passed down the line to states and, often, from states to municipalities. The final report marked the end of the task force’s work, as it has no power to do anything beyond making suggestions. Volcker, however, has created an institute called the Volcker Alliance which he said would “put some flesh on the bones” of the task force’s recommendations.

In the end, state budget problem won’t be solved for good until voters and taxpayers take a less selfish attitude. If we want government facilities and services, we need to be prepared to pay for them ourselves. The practice of burying the costs in complex, obfuscating budgets until they surface many years down the road, leaving other taxpayers to pay and other politicians to figure out ways to make them do so, is what leads to situations like Detroit’s.

We have to make a pact with ourselves to stop stealing from our kids and grandkids. Bobbies armed only with whistles can’t do much except yell “Stop!”

About Larry M. Elkin 551 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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