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Sheila Weinberg, founder and CEO of the one of the nation’s most important government watchdog groups, Truth in Accounting, was the special guest Feb. 15, 2021, on Keli’i Akina’ “Hawaii Together” program on ThinkTech Hawaii.

The show took place on the heels of the Grassroot Institute of Hawaii submitting a comment letter to the national Governmental Accounting Standards Board urging it to dismiss two proposals that would normalize misleading government accounting practices, which Truth in Accounting also has urged GASB to reject.

In late January, Truth in Accounting released its “2020 Financial State of the Cities” report, which ranked Honolulu’s fiscal health as third from the worst (No. 73) among the nation’s 75 most populous cities. In September, its “2020 Financial State of the States” ranked Hawaii fourth from the worst (No. 47).

Asked by Akina in closing to summarize “some best practices that Hawaii could institute in order to get ourselves out of our crisis,” Weinberg responded:

You should only include the revenues that you earn in your budget, not loan proceeds. You should include all the costs that are incurred including those pension and retiree health care costs. On our website truthandaccounting.org, you can find facts-based accounting and fact-based budgeting and how to fix that.”

Watch this highly educational and instructive half-hour show below. Then urge your elected officials to watch it. A full transcript follows.

2-15-21 Sheila Weinberg of Truth in Accounting on “Hawaii Together”

Keli’i Akina: Aloha, and welcome to “Hawaii Together” on the ThinkTech Hawaii broadcast network. I’m Keli’i Akina, president of the Grassroot Institute and your host today. We’ve got a wonderful program in store. We call it “Hawaii’s flawed accounting practices,” and we’re talking about the way our state government keeps track of our finances. 

When you balance your budget at home, it’s absolutely essential that you have accurate information. You need to know how much money is coming in, how much is going out, and above all, you really need to know how much debt you have — or how much reserve, hopefully.

Well, the same is absolutely true for governments. Unfortunately, governments don’t always operate with all the right information, but our next guest says the government accounting standards sometimes make finances appear rosier than they actually are. 

Her name is Sheila Weinberg. She’s a CPA who had been in private practice before she founded the organization Truth in Accounting, in Illinois. You’re going to enjoy what she has to say. Actually, you might not. You might be crying by the time she’s done, because she’s going to really give us the truth about Hawaii’s finances.

You see, Sheila says that Hawaii’s government bases its accounting upon flawed government accounting standards, and that allows lawmakers to spend more and sweep debt under the rug. They’re not really dealing with the real figures that would cause us to pause much more when we take a look at the expenditures of our state. 

Please, join me now in welcoming Sheila. Sheila, thank you so much for joining us here today on the program. I’m delighted to see you. I know we’ve run into each other many times at national conferences; your work is well-known. Welcome to the program, Sheila.

Sheila Weinberg: Thank you so much for having me. 

Before we get into this whole accounting detail, I like your analogy of a household and their budget. What the governments are doing is like, well, my husband and I over the holidays we decided that to live within our means, we’re only going to spend each $500. And I’m an accountant, so I checked the checkbook every day almost and I noticed that my husband is living within that agreement,and the holidays come up and his gift seemed very generous and expensive. But I looked at the checkbook and everything seems to be OK. And then in late January, I get the credit card statements and he has spent $1,200 on the credit card. When I approach him, I’m like, “Sweetheart, what did you do?” He’s like, “Well, I only spent $500 out of our account.” I’m like, “Yes, but you’ve put money on the credit card.” He’s like, “Well, don’t worry about that. We don’t have to pay that for years to come.” 

That’s exactly what the government’s doing, but instead of my credit card, instead of the elected officials’ credit cards, they’re putting it upon every one of your listeners’ credit card or the taxpayers.

Akina: Sheila, that’s an apt illustration. In fact, that’s exactly what’s gone on here in the state of Hawaii. We are paying our payroll for our government and employees on credit. But we’re saying because we were able to use that money this year, the books are balanced this year. So it sounds eerily like your illustration. 

But before we get into the weeds right now, tell us just a little bit about Truth in Accounting. It’s been around for almost 20 years I think. You founded it. What does the organization do? Tell us a little bit about some of the accomplishments.

Weinberg: What we do is … I started it because I was very concerned about the citizens really having the financial information they need to be knowledgeable participants in their government. I found out at the federal side, at the state side and at the local side that citizens are not just given information. They’re given the wrong information. So when they’re deciding tax or spending policy or even who to vote for, they’re doing it based upon the wrong numbers. 

You say that, oh, in your state they say that they’ve balanced the budget, so people think, “Oh, well, everything must be fine. I’ll vote for these guys again.” But what we find is that instead of everything being fine, they’re charging things, in essence, to the credit card. And we really believe it’s hurting our democracy, our representative forms of government. People are cynical, people kind of understand that something’s amiss, and it really gets down to the basic bad budgeting and accounting.

Akina: Now your organization, Truth in Accounting, takes a look at the accounting practices of the government, as well as the way governments in our states carry out their financial reporting. You’ve got a wonderful website that has some comparative data. Can you tell us a little bit about that?

Weinberg: Yes. What we do is, 11 years ago we started issuing a “Financial State of the States.” That included analysis of every single state, and we calculate: Here’s your assets, take away your liability; we don’t include capital assets because you shouldn’t sell your house to pay off your credit card bills. So we don’t include capital assets. But we calculate the money needed to pay the state’s bills, and then we divide that by the number of taxpayers and come up with a taxpayer burden. 

Well, the first year we did that study, people in Connecticut, it was the worst state because they have … very few taxpayers and a lot of retiree health care debt. But they were upset because they’re, like, “Well, we have higher GDP or higher average salaries, so how dare you.”

So we created this data-z.org website that we have our numbers on it, but we also have 700 other data points, so you can compare the states based on their pension debt, based on the average attorneys in the state — so we do find that the more attorneys you have in the state, (chuckles) the worse the state’s off. Unemployment, demographic, economic data and voting information. So on there, you can create online, on-demand, your own charts to compare your state with other states.

Akina: Now, you take a look at everything in your approach to accounting. In other words, it’s not just how much money do I have in my checking account, so how big a check can I write today, as is some people’s practice. You look at what a government might owe in five years or in 10 years — unfunded liabilities we often call them — and other things, and you look at how much they’re borrowing and so forth and try to bring all of these variables to bear upon coming up with a figure that tells us what the financial health of a government is, isn’t that right?

Weinberg: Yeah. And what we do is we go to the state’s audited financial report and we pull up their assets. As they say, we take off capital assets — because you shouldn’t spend those to pay your bills. We take off restricted assets. And then we include the liabilities. 

Now you’re mentioning that these liabilities are owed in a few years and I kind of would disagree with that. They are owed today. We get this from elected officials all the time. It’s like “Well, that pension debt, we don’t need to worry about that. We’re going to pay that off in years.” Well, again, it’s kind of like your credit card: Even if you choose to pay the minimum balance, minimum payments. It doesn’t mean you don’t owe the whole balance right now. So it’s all the debt that they’ve incurred to date and that they’re choosing to pay off in the future. If they really balanced their budget, they wouldn’t have any debt to pay off in the future; they would have already paid it off.

Akina: Well, Sheila, this is one of the first times I really enjoy being corrected. [laughs] I’m glad you did correct my language because you’re absolutely right. We all start talking like our politicians sooner or later. We say this isn’t due until such and such, but the reality is, if it’s due, it’s due, and you’re helping us to take a hard look at our condition, and in a sense, you’re like a financial doctor.

Now, let me ask you about something because a lot of people place great faith in this: government accounting standards. Don’t we have a system of government accounting standards that are supposed to tell us how finances are to be accounted for and how they are to be reported? Isn’t this supposed to keep governments in check in terms of the reports that they make?

Weinberg: People might have heard of the Financial Accounting Standards Board. They set standards for corporations. So when IBM reports their numbers, they have to follow the generally accepted accounting principles set by FASB, the Financial Accounting Standards Board. 

Years ago, the Financial Accounting Foundation tried to have state and local governments start to follow those standards, but state local government officials said, “Oh, no. We’re different than corporations. We can’t live by those rules. Therefore we’re going to set up our own board.” They set up their own Governmental Accounting Standards Board.

Right now there are four people who currently are former government employees from around the country. Then there are two CPAs, CPA firms that have large government clients. Then there’s a ratings agency person. So you could question the independence of this board, but that’s who sets standards. 

That board — and the reason we had to start doing the “Financial State of the States” and the “Financial State of the Cities” is because that board for years did not require state and local governments to put their pension and retiree health care liabilities, the full amount, on their balance sheets. Fortunately, we got that changed, but there’s other improvements that GASB also needs to change.

Akina: That’s quite something that you were actually instrumental in getting the GASB, the Government Accounting Standards Board, to change what it looks at. And I’m shocked in a sense that they weren’t looking at the pensions as well from the beginning because one would think, as you used in your earlier analogy of households, you’ve really got to take account of all of the financial information in order to know what your condition is.

In the news recently, there has been a disturbing movement in the GASB, and that is in terms of something they’re doing now to alter the accounting standards. You’ve written about that recently, and we at Grassroot Institute did a news release in which we referred to that yesterday. Do you want to talk a little bit about that? What is the concern in terms of some of the changes that are coming about right now? 

Weinberg: Yes. As I mentioned, previously governments were not required to put their pension, retiree, health care, all of it ,on their balance sheets, on their government consolidated financial statements. Then we were able, recently, within the last five years to get that changed. So now governments have to put those liabilities on their consolidated statements. 

But unfortunately, governments don’t budget on a consolidated basis. They budget on a fund basis, the largest one being the general fund. Well, those statements don’t have to include those liabilities. Those are still done using the cash-basis accounting;  again, thinking of your checkbook: It includes what goes into your checkbook and it includes only what comes out.

Like in your state, in the general fund statements, you will have a general fund balance, which to me means that you have extra money, but those don’t include all your liabilities. So those are not a good … It might be good for cash-management purposes, but for the legislators and the taxpayers, there’s long-term commitments that have to be accounted for, and those are not accounted for at the general fund level.

Akina: Let me just interject something here: Does this mean that we’re not really seeing the full picture when our government tells us we’ve got a billion-dollar surplus at any given point?

Weinberg: Yes, that’s exactly right. The billion-dollar surplus is based upon … I kind of relate it again back to the individual. It’s like, “Hey, I got $1,000 in my checkbook; ignore my credit card debt, but I do have a surplus in my checkbook.” That’s what’s going on.

Akina: Wow. This is so incredibly simple that it’s frightening. We’re going to have more questions for you when I come back from a brief break. My guest today is Sheila Weinberg. I hope you find what she’s saying fascinating. She’s the head of Truth in Accounting, a firm that she started that is exposing the truth about finances in our government. Don’t go away. We’ll be right back on ThinkTech Hawaii.

 

[Intermission]

 

Weinberg: Thanks for staying with us. I’m Keli’i Akina, president of the Grassroot Institute. My guest is my friend, Sheila Weinberg, the founder of Truth in Accounting. 

Before we go on any further, we have such popular response to the program that our inbox is getting flooded with questions. I’m sorry that I won’t be able to get to all of them, but I want to get to many right now and do a speed round. Sheila, can we do a speed round with some of the questions that have just come up?

Sheila: Sure, sure.

Akina: First of all, does the COVID-19 pandemic excuse the high debt incurred at this time?

Weinberg: Well, yes and no. I would say that governments know that crises are going to happen, and they should have reserves set aside. You mentioned that they theoretically had $1 billion of reserves, but those numbers are all bogus, so they really don’t have any reserves going into this crisis.

Akina: Here’s another one. I chuckled, but I know you’ve addressed this actually in your own research. Is there a relationship between the number of attorneys in a state and the amount of debt incurred?

Weinberg: Yeah. On our Data-z.org, website, we do have the number of attorneys in each state, and we do find that there is a direct relationship: The more attorneys you have in the state, the worst financial condition you are. Go onto that website, Data-Z, create your own chart and you can see the numbers yourself.

Akina: That sounds like a fun correlation. I’m not sure whether there’s a causality there, but it’s an interesting correlation that we need.

Weinberg: Well, don’t tell the women in your audience that the more women you have, the worse financial shape, but don’t mention that one.

Akina: No comment from me on that. 

Here’s another question. Are there any issues that would warrant increasing the state debt? Are there any circumstances that would make it justified?

Weinberg: Well, you know, they do borrow money for capital assets. In that, I would say yes. Again, kind of like borrowing for your mortgage, and in our numbers we don’t include capital assets, but we don’t also do not include debt-related to capital assets.

Akina: Right. And I would think that there’s a big difference between short-term operating capital that needs to be borrowed for infrastructure or for some project versus our long-range condition. You look at both of these and we’re not looking enough at the long-range. 

Weinberg: Yes. And again, we’re really not. If you’re borrowing money to pay your current expenses, you’re really not balancing your budget. That’s a total fallacy.

Akina: Here’s another question: How do we determine the accurate amount of debt that our government is incurring?

Weinberg: Well, one, you can go to our Data-Z that website. You can click on “Hawaii” and we also do the financial state of the cities, so you can click on “Honolulu,” and we prepare a financial state of the state or financial state of the city for each one of those. 

So you can get there. 

If you’re looking at another government, you can go to, as accountants call it, the Comprehensive Annual Financial Report, and you can find, there’s a number in there called unrestricted net position, and you can find that. 

In case people really want to look into it, we have a video on YouTube called “How to read your government’s CAFR,” a Comprehensive Annual Financial Report, and that would walk you through how to read, even read through your own governments.

Akina: That’s great. I appreciate that tool. 

I really want to get to a few questions to help us understand the transparency level of our government’s reports here in the state of Hawaii. We recently as the Grassroot Institute submitted some testimony to the GASB pointing out that our state borrowed money to pay for payroll costs. Now, Sheila, how is this accounted for in our financial documents, and how should it be accounted for?

Weinberg: Well, at the fund level, which would be your general fund and your budgeted fund, it would be counted as a resource, almost like recording loan proceeds as revenues. So it would be accounted for as an inflow and it would increase your balance. 

They would not show the corresponding debt you incurred on these general fund statements, but they would record the loan proceeds as an inflow, so they would increase the general fund balance.

Akina: We also recently noticed that our state is swapping money for debt, such as when the Legislature last year took $250 million out of the Rental Housing Fund and replaced it with debt. What do you think about this practice?

Weinberg: Well, again, you’re incurring debt, and again … You have a … you know, balanced budget; it’s just not a mathematical thing. You have balanced-budget requirements. Every state, except for Vermont, has a balanced-budget requirement. The 75 most populated cities that we study have balanced-budget requirements, and they have them for very good reasons: No. 1, so governments do not get unsustainable debt, and No. 2, so people can hold them accountable, i.e., it was said best by a former Treasury official who said, “The politicians shouldn’t have the pleasure of spending, i.e., I’m going to get a vote without the pain of taxing, i.e., I’m going to lose a vote,” And that’s why you have a balanced budget, so you can hold your elected officials accountable for what they spend. But if they can go ahead and borrow and pretend the budget is balanced by borrowing, they’re circumventing the intent of the balanced-budget requirements.

Akina: Absolutely. We could talk a lot about that, but I want to get to some other queries that have been kind of bugging me for a while. Looking at our state’s financial documents at Grassroot, we noticed that Hawaii lists capital assets like buildings, bridges, on the balance sheet. I’m not an accountant, but does this raise your eyebrow a bit?

Weinberg: Well, they’re listed on the consolidated government-wide financial statement and they are saying, “Well, we have this road, it is providing us with some value.” 

Now, there is an organization called Strong Cities that we were just talking to. I was on one of their webinars just last week. They really believe all those capital assets are liabilities, because you have to maintain them, and then the road eventually runs out. They’re putting these assets on their books, but they’re not putting an offsetting deferred maintenance or, “Hey, we’re going to have to replace these in the future on their books” They only have the asset, not the liability side.

Akina: So this is another case of not having the whole picture in one document. 

Weinberg: Right.

Akina: Now, we’ve talked a lot about our state’s unfunded liabilities, especially for its pension system. Currently, that’s $14 billion approximately and $11 billion for our other post-employment benefits such as health. Are governments allowed to sweep this debt off the books as well?

Weinberg: Well, as I say for decades, most of that … was not included on their balance sheets. We did fight and get that to now it has to be on their consolidated balance sheets, but now we’re fighting to get that done at the general fund level, so again, … if your government goes ahead and says, “Hey, we have a $1 billion reserve in our general fund,” there should be a financial statement that says, “Yes, well, you might be able to say that you have that cash reserves, but here’s all the debt that is dedicated to that money.” So you really don’t have surplus money that can be spent; it’s already dedicated to some of these liabilities you’ve already committed the government to.

Akina: You recently released information from Truth in Accounting about government reporting in all 50 states. Tell me a few more things about Hawaii that our average citizen or government politician may not really realize.

Weinberg: Well, we calculate that the state has $16.1 billion that it needs to pay its bills. This is the money that elected officials have put on the taxpayer’s credit card. That averages to $31,700 per taxpayer. That works out to be about per household. 

We give any state that has a taxpayer, what we call a taxpayer burden, each taxpayer’s share of the debt, we give a grade. If a state has $20,000 or more, we give them an F. So your state received an F for its financial grade. It is 47 out of the 50 states. It is one of our — we never know whether to call it a bottom or a top sinkhole state. (laughs). It’s one of the worst, the third-worst in the country.

Akina: Sheila, we happen to rank in the bottom quartile and the bottom five even and sometimes the bottom one in numerous rankings of the economy, business climate, and so forth. What does this mean in terms of your accounting for our finances, our financial health, so to speak, to be number 47 at the bottom out of 50? In practical terms, what does that really mean for our state?

Weinberg: What this means is that in the future, taxpayers are going to have to pay more than $31,000 in taxes and they’re not going to receive any government services and benefits for those taxes. That’s going to be used to pay off the credit card debt that’s already accumulated. 

Then, just to make your life even worse, we did just issue our Financial State of the Cities; Honolulu also received an F, and was the third-worst city of the 75 cities that we have studied, so I hate to give you even more bad news. 

So if you add those up you’re talking $31,000 plus another $29,000. You’re talking more than $60,000. For everybody who lives in Honolulu, this is what they’re going to have, this is their share of the government’s debt. You can think of it as “This is an additional credit card that I’m going to have to pay in the future in the form of additional taxes.”

Akina: I don’t think most of the people in the state of Hawaii and most of our government leaders realize the impact of what you’ve just revealed. 

I remember back when I was in college studying economics at Northwestern University. I majored in what was Keynesian, called Keynesian economics. I would often go down south into Chicago to visit the University of Chicago and listen to a professor there named Milton Friedman. You know all about him because you live in Chicago right now. There was a little restaurant near his office on campus called TANSTAAFL. To the informed that was the definition of economics. TANSTAAFL: There ain’t no such thing as a free lunch. Sheila, I think you’re telling us that’s what’s wrong with our accounting.

Weinberg: It … has not just financial implications. Like in Chicago, Illinois, a state worker when they get health care, because the state is so far behind in paying its bills, a state worker has to pay for their health care upfront. Then the state will eventually reimburse them in six months to a year. 

Nonprofits have gone out of business because they’ve been counting on state money and they don’t get it. So this does have, it’s having ramifications right now. Also, the state and local governments are not being able to provide the services that people need and want from their government because they’re having to cover these prior costs that have accumulated.

Akina: We’ve so far somehow dodged the bullet, but we may not be able to do that all the time because these costs are going to add up. In the long run, someone will have to pay. 

Sheila, let’s shift gears now as we go to the close of our program. What are some best practices that Hawaii could institute in order to get ourselves out of our crisis?

Weinberg: We call it fact-based budgeting for accrual calculations and techniques. You should only include the revenues that you earn in your budget, not loan proceeds. You should include all the costs that are incurred including those pension and retiree health care costs. 

On our website truthandaccounting.org, you can find facts-based accounting and fact-based budgeting and how to fix that.

Akina: Tell our listeners and viewers once again how to get ahold of you and a little bit about your website.

Weinberg: Truthunaccounting.org and our Data-Z, a sister website, data-z.org. On there you can also sign up for our daily email, Morning Call. And there is a donate button; we’re 501(c)(3), so always looking for additional resources. So go to those websites and help us out.

Akina: Sheila, thank you so much for your time today. I hope we can host you back in Hawaii again. Until then, keep up the good work.

Weinberg: Thank you and thank you for your [GASB] comment letter.

Akina: Everyone, we want to thank you for tuning in today. Sheila Weinberg, founder, and CEO of Truth in Accounting, has given us some great insights we need to take to our own state government in Hawaii. 

Until next time, I’m Keli’i Akina, president of the Grassroot Institute on “Hawaii Together” on the ThinkTech Hawaii broadcast network. Aloha.