Submitted by Mark O’Byrne, Goldcore:
– U.S. state budgets rely on “faulty practices” – Volcker
– Shoddy budget practices push costs to future generations
– Faulty budget practices lead to poor policy making
– “Problems hidden by lack of truth and integrity” – Volcker
– No common definition of balanced budget allows for gimmicks
The highly regarded former chairman of the Federal Reserve, Paul Volcker, has severely criticized the State Governments in the U.S. over “faulty practices” used to devise budgets which mask the true financial position of those states.
Mr. Volcker, who as Fed chair reined in escalating inflation and stabilised the economy during Ronald Reagan’s tenure, announced in 2013 his intention to form the Volcker Alliance to focus on reforming democracy in the U.S.
It was in a report from the Volcker Alliance that the criticisms were published.
“The palpable erosion of trust in our democratic institutions of government demands a response,” he was quoted as saying.
Mounting fiscal problems in Obama’s Illinois, Detroit’s bankruptcy and the financial troubles coming to a head in Puerto Rico demonstrate the importance of developing better financial policies according to the report.
The dire state of finances in many states has intensified in recent years due to drastic cuts in federal funding following the recession. As a result state budgets are recklessly pushing the costs of current expenditure onto future generations.
“The continued fiscal stress is tempting states to continue, and even intensify, budgeting and accounting practices that obscure their true financial position, shift current costs on to future generations, and push off the need to make hard choices on spending priorities and revenue practices,” the report states.
States are on a constant emergency footing where their budgets are concerned as they try to fund current expenditure with transient sources of revenue. As a result policy making is haphazard and short-sighted.
“The never-ending sense of crisis leads to stop-and-go funding of vital programmes and stifles the need for serious discussions about policy,” according to the report.
As a consequence infrastructure is crumbling, public schools and state lack funding, “rainy day” funds are being depleted, and public workers rely on pension plans that may evaporate.
Volcker believes that there is a lack of honesty in budgeting. “There are problems hidden by a lack of truth and integrity”, he said. The absence of an agreed definition of “balanced budget” allowed States to engage in gimmicks that gave the appearance that spending had not exceeded revenue.
“Techniques include shifting the timing of receipts and expenditures across years, borrowing long-term to pay for current bills, using non-recurring revenues to cover recurring costs and delaying funding of pension and healthcare retirement benefits,” reported the FT.
The report paid particular attention to three states selected at random. They were Virginia, California and New Jersey. Volcker believes that Virginia’s methodology is good, using impartial outside economists. It was still heavily reliant on federal funding however.
The current governor of California has acknowledged the “wall of debt” that was hidden behind budgetary gimmicks and has reduced the debt significantly since 2010.
New Jersey, however, is a case study in bad budgetary practices. The New York Times reports,
“In contrast to California, New Jersey is still producing structural imbalances, according to the report. It has been struggling from year to year by, among other things, taking money out of special dedicated funds and spending it on unrelated activities.”
“For instance, the state has raided hundreds of millions of dollars in toll revenue from the New Jersey Turnpike Authority and used the money to pay for the day-to-day operations of New Jersey Transit. The toll money was supposed to pay for highway construction and maintenance, not mass transit.”
The NY Times adds
“One factor that appeared to make such raids possible is that New Jersey’s official budgeting process is centralized in the governor’s office, giving the executive branch almost sole control over revenue forecasts and spending decisions.”
Mr. Volcker hopes that by identifying various problem areas in state budgets, a common approach may be developed across the U.S. which would help nurse the ailing states back to good health. If improvements are not made an unpleasant day of reckoning may be approaching.
“It’s like termites eating at a structure,” said Mr. Volcker, “The building hasn’t fallen down yet. But if you get enough termites, the building’s going to get pretty rickety.”
How true. Indeed, the problem with the U.S. finances is not just at a state level but also at a national level where there is a similar “lack of truth and integrity.”
The national fiscal position of the U.S. is dire – with a National Debt or Federal Debt of $18.2 trillion and a real national debt and “unfunded liabilities” alone of over $100 trillion.
Today’s AM LBMA Gold Price was USD 1,181.00, EUR 1,046.75 and GBP 772.40 per ounce.
Yesterday’s AM LBMA Gold Price was USD 1,173.40, EUR 1,053.32 and GBP 769.85 per ounce.
Gold climbed $3.10 or 0.26% percent yesterday to $1,174.00 an ounce. Silver slipped $0.08 or 0.5 percent to $16.02 an ounce.
Gold in Singapore for immediate delivery inched up 0.4 percent to $1,177.60 an ounce near the end of the day, while gold in Switzerland saw a rise to touch $1,182 an ounce.
Gold is higher today on what appears to be a safe haven bid after equities in Asia and Europe sold off today.
Concerns about the slowing U.S. and Chinese economy and their impact on the global economy are causing jitters.
Gold may also be seeing more safe haven bids from the uncertainty of the ongoing Greece crisis. German Chancellor Angela Merkel warned yesterday that Greece’s time was running out to negotiate a reform-for-aid deal to stay in the eurozone.
Oil prices are 1.2% higher today and that is likely supporting gold. Higher seasonal demand in developed markets and geopolitical risk in the Middle East is offsetting the impact of the global supply overhang.
Shanghai Gold Exchange premiums were almost $2.50 an ounce over the global benchmark, up slightly from $1.50-$2 last week, suggesting Chinese demand remains robust.
In late morning trading gold is up 0.70 percent at $1,182.55 an ounce. Silver is up 1.3 percent at $16.22 an ounce, while platinum is up 1.05 percent at $1,113.20 an ounce.