Sunday, August 4, 2013

The Financial Tale of Two Cities: Detroit and Rahmaland

State Data Lab explains the chart:

Forty nine of the 50 states are required to ‘balance their budgets,’ either via statute or state constitutions. Debt loads have been rising sharply anyway, as government accounting standards and budget gimmicks have enabled some states to persistently spend more than they take in. This is particularly true as retirement obligations accumulated off balance sheets, when true accrual accounting would have included that growth in any valid ‘balanced budget’ calculation.

How about cities?

Cities can have similar requirements, in their own city charter or from state constitutions. Both Detroit and Chicago, for example, are in states with laws requiring balanced budgets for cities within the states. Like the states, however, ambiguity in the language of the law can couple with accounting practices to allow cities to accumulate debt while they spend beyond their incoming revenue.

At State Data Lab, we calculate and report a metric called ‘Net Revenue’ for all 50 states. Net Revenue subtracts total reported net expenses from general revenue. It can inform whether a state is truly ‘balancing its budget,’ at least as far as reported results. States reporting net expenses higher than general revenue have negative net revenue in a given year. In some states, like Illinois, net revenue has been persistently negative despite a state ‘balanced budget’ requirement.

Net revenue can also be calculated for cities. The chart above shows how net revenue in Detroit was persistently negative in the five years before its bankruptcy filing. The chart also shows an even more alarming trend for the city of Chicago. And those results can understate reality; they rely on the city’s financial reports, which do not include accumulating off-balance sheet retirement obligations.

(Chart created by Bill Bergman)

1 comment:

  1. Totally off topic, but do you have any insight into the jailing for insider trading of Joe Nacchio? He was the Qwest ceo who refused to cooperate with NSA spying.