A Question, Dr. CFO, If You Please

This article from The Atlantic’s City Lab, titled The Accounting Rules That Bankrupt Cities raises some interesting questions for El Pasoans.

Cash-basis accounting is a recipe for fiscal disaster. State and local governments make long-term commitments for programs like employment compensation plans and public works projects. But they write their budgets on a year-to-year basis, as if starting all over again each year with fresh revenue and expenses. They leave out any revenue not received or, more importantly, any expense not incurred that year. The implications of this financial-planning decision can be immense. In 2010, Virginia reported that it had a cash-basis surplus of nearly $50 million in a budget of $34 billion. When converted to accrual accounting, the surplus turned into a $674.3 million deficit.

The people who should be most interested in the City’s finances are the employees eligible for pensions.

In November 2014, a Michigan bankruptcy judge confirmed a plan that allowed Detroit’s government to shed $7 billion in liabilities, averting a total financial collapse. One year later, however, many in Detroit are still dealing with the fallout of the massive debt reorganization.

Among the many shortchanged by the city’s bankruptcy, Detroit’s retired municipal workers have gotten a particularly raw deal. The plan imposed deep cuts in future pension and health-care benefits. Perhaps more galling, it also required retirees to pay back a decade of interest they earned on city-sponsored retirement savings accounts. These so-called clawbacks averaged nearly $50,000 per retiree. In one circumstance, a retiree returned $96,000.

Does El Paso evaluate its finances on a Cash Basis accounting system, or the more realistic Accrual accounting system? Given the financial manipulations of our former regime, I’d be surprised if reality was much of a consideration.

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