Price of Paradise: Accounting Fraud Hawaiian Style

Hawaii, like all but one of the states, has a balanced budget requirement. The purpose of such a requirement is to ensure that the full cost of current state services is paid by current taxpayers, that costs are not pushed onto future generations.

Unlike the federal government, states claim an understanding of the immorality of leaving our tab to be paid by our kids and even our grand-kids. We watch our state’s governor and legislature struggle to balance revenues and expenses during every annual budget cycle. We are so happy when, at the last moment, they find a way! Of course, we are even happier if that way doesn’t mean even higher taxes on increasingly tapped out taxpayers.

So, great! We love our keiki, don’t we? Our Democrat dominated legislature acts responsibly so we are not stealing our kids’ future. Right?

Wrong. If we are not to burden our children in Hawaii, I hope all you fellow taxpayers are ready to pony up a cool $33,000 each. How can this be? After all, we balance our budgets! The sad fact is that we violate the spirit of budget balancing through use of accounting procedures that would land business executives in jail.

Governments in general account on a cash basis. Hawaii receives X dollars in taxes and other income, and pays out Y dollars in services and benefits. Sounds right. But it doesn’t recognize that the employees earn portions of pension and health care benefits to be paid tomorrow for services rendered today. These are liabilities for which the state is responsible, and there are others as well. Any firm more complex than Uncle Charlie’s Variety Store accounts on an accrual basis. That means that any additional future obligations incurred (promised) during a year are an expense for that year. If a public company tried to account on a cash basis, the auditor would refuse to sign the financial statement and the regulatory authorities would swoop down on the miscreants. Do you think the State of Hawaii is more like a very large business or more like Uncle Charlie’s? (Uncle Charlie’s should probably go accrual as well.)

Many of the private sector accounting scandals of the past few years have resulted from playing around with corporate liabilities, either minimizing them or taking them off the balance sheet. Companies have been heavily fined, and executives have gone to prison. The State of Hawaii is guilty of both techniques, but no one holds government to account. Fines are useless here—the taxpaying victim would simply end up with the payments. You can’t threaten criminal actions. Our government has made legal what it does. No chance that Rep. Oshiro as chair of House Finance Committee, or Sen. Ige as chair of Senate Ways and Means Committee, or Governor Abercrombie will face felony charges any time soon. To be bipartisan about this, former Governor Lingle is also safe from accounting fraud penalties. They all believe the voters are too stupid to understand basic accounting. They can tell the voters they are balancing budgets by defining balance on a cash rather than accrual basis. They don’t have to worry about regulators upsetting their con game.

And, brother, future taxpayers will pay lots for all the legalized flimflam. The Institute for Truth in Accounting annually publishes “The Financial State of the States”. They produce a balance sheet for all the states showing accumulated liabilities to present, and the assets on hand to pay them. Based on financial information provided by the State of Hawaii (often in obscure footnotes), unfunded liabilities (money we have committed to pay in the future for services rendered in the past) amount to nearly $20 billion. Assets currently held to pay these future obligations amount to just over $4 billion. The $16 billion gap is close to the entire state budget for three years. If each current taxpayer had to make up this shortfall, it would cost him $33,000. Much of the gap is due to underfunding state pensions and retiree health care. Do you think the public might be interested in this state of affairs? Do you think it’s a more important issue of public policy than the carving up of revenues for payments to all the usual suspects among the interest groups?

All but six states have these unrecognized burdens on taxpayers. But Hawaii is special. It ranks 48th worst at $33,000 per taxpayer. Only New Jersey at $36,000 and Connecticut at $49,000 are worse than our state. There has been a lot of publicity about unfunded liabilities in Illinois and California. Illinois is right behind us in 47th place. Those who cast stinkeyes at the idiots in California government should know that, on a per taxpayer basis, the burden is down the list at $21,000. If you think it’s hard to believe that Hawaii is even less financially responsible than California, you’re not paying attention.

All this information is based on 2010. It took 469 days for the state to release its financial information, a long time for even the expected inefficiency of a state government. (As a retired businessman, I dream about what would happen if my company could not provide financials on a given year for more than a year.) Presumably, the situation is even worse in 2012. Between 2009 and 2010, the gap burden per taxpayer increased by around $8,000. Imagine what it could be today! Folks, the situation is not improving. By the way, the study probably understates the problem since it relies on state provided information that probably undervalues unfunded liabilities. We face similar problems with local government as well.

So, what can we do? Do we accept being one of the five worst “sinkhole states” and what that means for our future? No, we can do better.

Our state constitution needs to reflect a balanced budget requirement that operates on a modern accrual basis. All future budgets need to balance in reality, not in fantasy. We need to fund past shortfalls on a long term (perhaps 20 years) schedule. It’s too late to save our keiki, but not our keiki’s keiki.

We should require by statute accrual accounting in all state financial statements, and these should provide consolidated data for all aspects of state government operations. Statements must be signed by the Governor, and audited (with an opinion statement) by a major accounting firm. Any attempts to “cook the books” should carry criminal penalties for any state employees involved. Even the Governor, or the critters in our legislature! It’s time for even Hawaii to come into the twenty-first century.

We can consider all this financial mismanagement as just one more price to be paid for living in our natural paradise. We can surf the waves and lay in the sand as we allow our government to impoverish us without our knowledgeable consent. Or we can visit the next session of our legislature and let them know we are on to their games, and we won’t take it anymore.

Stephen Zierak, CPCU/ARM, graduated from Boston University with a BA in Political Science in 1969.  After a forty year career in property casualty insurance underwriting, Mr. Zierak retired as a Vice President of Swiss Re America in 2010.  At that time, he relocated to Hawaii, a move he had always wanted to make, but had delayed due to lack of appropriate professional opportunities here.  Mr. Zierak plans to continue his studies in Political Science, never really abandoned even during his professional career, and to write on matters of public policy.  Recently, he produced for Grassroot Institute summaries of Hillsdale’s ten part internet course on our Constitution.  Stephen Zierak is married to the love of his life, Teodora, and they reside in Honolulu.

Subscribe to our free newsletter!

Get updates on what we're doing to make Hawaii affordable for everyone.
Want more?

Get content like this delivered straight to your inbox. We’ll also send updates on what we’re doing to make Hawaii affordable for everyone.

Recent Posts