Albany needs honest accounting

Regina M. Calcaterra, former director of State and City Legislative Affairs in the New York City comptroller's office, is managing partner of a securities litigation firm and has served on the litigation teams of WorldCom, Merrill Lynch, and other corporate fraud cases.

Gov. Andrew M. Cuomo has made a key observation about New York State budgeting: It's where "Enron meets Albany." While the governor has been calling for deep spending cuts to ease the burden on taxpayers, that will be for naught unless budgeting reforms are also enacted.

It's time our state treats its finances like publicly traded corporations, by using Generally Accepted Accounting Principles (GAAP). Among other provisions, under GAAP, a budget must show that this year's bills are paid with this year's revenues. In the marketplace, prudent shareholders analyze their companies' quarterly reports and GAAP-certified year-end financial statements, then decide whether they want to continue investing in the company or sell.

New York's taxpayers are its shareholders, except we don't get quarterly statements and the annual state budget isn't GAAP-certified - or even accurately reported. State lawmakers have acted like Enron's directors, who disregarded the company's long-term fiscal health for short-term profits (in Albany's case, easier re-election).

Our budgets have skyrocketed well past the rate of inflation, because expenditures are not based on real revenues, forcing Albany to raise taxes to keep up with costs. And what have almost 2 million of our state's shareholders done in the past 10 years alone? Sold their shares and fled the state.

For decades, those who serve us in Albany have used "cash budgeting" - applying one-shot infusions such as tobacco settlements and stimulus funds, or worse, future funding streams like anticipated federal Medicaid revenue slated for receipt three years hence - to pay for annually recurring expenditures. GAAP accounting would have prevented that type of kick-the-can-down-the-road financial charade.

Last year a number of state legislators actually supported instituting GAAP standards as part of the budget process, and then-Lt. Gov. Richard Ravitch proposed GAAP in conjunction with a complete budget overhaul. But Albany took a pass.

According to a 2008 study by the U.S. Governmental Accounting Standards Board, between 67 percent and 72 percent of governments, mostly local, use these standards to guide their financial controls. In fact, during the 1976 fiscal crisis, the City of New York was forced by the state to institute GAAP rather than cash budgeting.

So why do state lawmakers keep avoiding it?

Here's one possibility: According to a 2007 study out of Penn State, chief executives and chief financial officers of corporations that were caught intentionally masking budget problems were fired five to six times more often by directors and shareholders than at companies where there was no such problem. When you look at Albany's high incumbent re-election rates, maybe you can see why so many Albany politicians are fighting GAAP. It will become a budgetary truth serum - and Albany doesn't want its shareholders to see the real numbers.

Publicly traded companies that obscured their true financial pictures and fraudulently circumvented GAAP contributed to the economic tsunami of 2008. The risky mortgage-backed securities that weren't disclosed on corporate balance sheets were long-term liabilities that led to their decimation.

On the flip side, honest companies that used GAAP - General Electric, IBM and Microsoft are good examples - helped maintain enough confidence in the market to stave off complete collapse.

In Albany, legislators' practice of borrowing from tomorrow to pay for an unsustainable budget today is no different from that of boardroom executives who ignored their companies' true financial status to boost short-term stock prices.

Cuomo is right: New York budgeting is where Enron meets Albany. Let WorldCom, Merrill Lynch and Lehman Brothers be cautionary tales. It is far past time to light an accounting candle, so that we will never have to curse the darkness.