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Let's face it, we're broke. Many of our cities, counties, states and the Federal government have more debts than assets and are spending more money than they take in. And, politicians and bureaucrats are often very good at hiding what they're doing.

Even with audited numbers, the information in government financial reporting is generally presented in a way that is so confusing that both average readers and many professionals don't understand them.

Mark Twain's famous quotation, "Figures don't lie, but liars figure," has never had greater meaning than when it is applied to today's politicians and government accounting.

For example, the balance sheets of the City and County of Santa Barbara, the City of San Diego, the State of California and the Federal government do not include what are called "unfunded" obligations as part of their liabilities. At the state and local levels, the biggest of these are the employee pension plans, but there are also often other inaccuracies, some quite shocking, such as simply losing track of money.

A good case in point is the City of San Diego, which is currently confronted with $1.9 BILLION in pension liability that they will be unable to pay when the bills come due. And, Santa Barbara County's "unfunded" pension liability has been reported to be $200 million.

Contrary to popular belief, it is possible to be insolvent yet continue to operate without the formality of declaring bankruptcy. It happens all the time. What's required is the ability to print money or borrow it. The Federal government, of course, can borrow by issuing notes or bonds, and the Federal Reserve System can create money by adjusting the reserve requirements of the banks. Since, state and local governments don't have the ability to print money, they borrow.

"When a business cannot meet its financial obligations (i.e., pay its bills and debts), it is said to be insolvent." (SpecialInvestor.com, Financial Dictionary). Expressing it another way, it is having more liabilities (debt) than assets. That's the situation with many government entities today, if their financial reports included unfunded liabilities.

The big one is usually "unfunded" pension obligations. If these liabilities were included, many government entities would clearly be insolvent. However, politicians have generally been able to get around the problem by borrowing.

It often takes a long time for the effects of insolvency to reach the point where an enterprise is forced to close its doors. Borrowing from "Peter to pay Paul," shifting funds from one source to another, dragging out payment of bills are among the various techniques that managements employ to keep going. The finality of closing the doors is often a shock to the public when it happens, but it's safe to say that the process has extended over a long period of time before an enterprise is finally forced to shut down.

Today, many governmental entities in America, local, state and Federal, are clearly insolvent, with those in charge juggling funds to stay afloat, primarily by borrowing. Financial professionals generally warn that borrowing money long term to pay short-term obligations, such as operating expenses, is a guaranteed formula for disaster. But that's exactly what has been going on for years, especially at the state and Federal levels, although many cities and counties have been doing the same thing.

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