'Figures Don't Lie, But Liars Figure'
By Harris R. Sherline
May 5, 2008

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.

The accounting systems for a lot of government entities, perhaps most, are often so bad they can't be audited. Amazingly, in many instances, they don't even keep track of the funds they receive. Three examples graphically illustrate the point:

A June 2001, a report titled, "Government at the Brink," issued by the Senate Committee on Governmental Affairs, stated, "The Education Department reported in its financial statements that it had $7.5 billion in the bank, when it actually owed that money to the U.S. Treasury," a discrepancy of $15 billion.

How is it possible to lose billions of dollars without even having a clue as to where it went? Think that's not possible? Think again! In August 2005, the Sacramento Bee reported, "In 1994, Congress found problems with the Interior Department's administration of 260,000 Indian trust accounts containing $400 million. The Indians allege the department mismanaged oil, gas, grazing, timber and other royalties from their lands dating back to 1887," failing "to account for billions of dollars belonging to about 500,000 Indians."

A July, 2001 article titled, Billions Missing at Education, by Reed Irvine and Cliff Kincaid, stated, "In addition to the $15 billion discrepancy at the education department, the report says that the Internal Revenue Service 'does not know how much it actually collects in Social Security and Medicare.'"

Perhaps the most alarming aspect of the Irvine/Kincaid report is their observation that, "Neither the federal government as a whole nor many agencies can pass a basic financial audit. The books don't add up, major expenditures are missing, large amounts of property and equipment can't be located, and often, agencies don't even know how much they have."

If we don't force our politicians to stop treating public monies like personal slush funds and demand straight, accurate accounting, we may ultimately be forced to openly repudiate our debts or cause hyperinflation by printing too much money, which will wipe out tens of millions of our citizens financially.

It has happened many times before in other nations: Germany in the 1920s, Greece during WWII, Hungary after WWII, and Argentina in 1989, to name a few. And, "Hyperinflation in Mexico eventually forced prices so high that (the president) had to replace the peso . . . In short, (in 1993) he stripped three zeroes from the peso." (Wikipedia)

And, it can happen in America if we don't put a stop to fiscal irresponsibility. We came perilously close to disaster during the Carter administration when interest rates soared to 21%.

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NOTE: Read more of Harris Sherline's commentaries on his blog at "opinionfest.com."

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Note -- The opinions expressed in this column are those of the author and do not necessarily reflect the opinions, views, and/or philosophy of GOPUSA.