The Bond Buyer published an op-ed from New York State Comptroller Thomas P. DiNapoli and William Glasgall, Senior Director, Public Finance, at the Volcker Alliance, a nonprofit based in New York City. The full op-ed is below:
In 2020 and 2021, the federal government sent an unprecedented amount of money to states and localities to blunt the impact of lockdowns and other COVID-19 pandemic-related challenges.
The New York State Comptroller's office issued a report showing that the surge in federal spending in federal fiscal year 2020 meant that every state had a positive balance of payments — the dollars sent to the federal government compared with the amount given back — for the first time in recent memory.
As state and local governments continue to spend down federal funds, legislators, advocates, and others are now asking very important questions: How have these funds been used? How do state and local finances look in the aftermath of the pandemic? Has fiscal federalism entered a new era, and will state budget practices be transformed along with it? At the core of these questions is one main issue: transparency.
For states to create a more transparent, understandable process for reporting finances, they must improve the systems and processes for how they conduct and report public accounting practices, debt, and disclosures.
The first component in improving transparency in the finances of state and local governments is improving public accounting practices. In New York in the 1970s, we saw first-hand how a lack of transparency — coupled with generous spending and an over reliance on debt and accounting gimmicks enabled by cash basis budgeting — brought New York City to the precipice of bankruptcy.
As the city emerged from its crisis, in part due to the stewardship of a true civic leader, Richard Ravitch, state legislators enacted key transparency and accountability policies and procedures that helped it regain and improve its fiscal standing in the markets.
Dick, the former New York State Lieutenant Governor, who died in June just shy of his ninetieth birthday, spent the last half of his life fighting for greater fiscal responsibility by states and cities. We are grateful for his friendship and his passionate discussions with us over the years on this subject have greatly informed this article.
Dick's beliefs in durable foundations can be seen not only in his work as a builder of office and residential towers, but also in his efforts to shore up New York City's financial base. As part of New York State's Financial Emergency Act, the city was required in law to undertake a complete overhaul of its accounting and financial reporting and practices, overseen by a financial control board.
The most notable of these changes was its adherence, for the first time, to Generally Accepted Accounting Principles (GAAP) for its budget as well as annual comprehensive financial reports. This comprehensive accounting forced the city away from the cash basis accounting it had used in budgets to hide its fiscal issues through the use of borrowing and other maneuvers.
While this was a unique and foundational change in the city's financial practices, additional requirements, such as adopting an on-time budget and conducting quarterly updates to its four-year financial plan, were implemented. This enhanced transparency will help municipal leaders and the public better understand the city's fiscal outlook.
The second component in improving transparency in the finances of state and local governments is clear, understandable debt practices. Investors deserve to have a complete picture of the finances and commitments of a state or local government when evaluating a municipal bond. Taxpayers and voters deserve to know what the debt is going to be used for, that the debt is structured responsibly, and that a new issuance of debt will not pose an unaffordable burden on the government.
In fact, the Volcker Alliance, where Dick was a director, released a study in January 2022 that pegged the total outstanding liabilities of New York state in 2020 at $186.6 billion, almost two times its general obligation and revenue-supported bond debt. Again, New York's experience is instructive. Simply stated, we have not fully lived up to these goals.
That's why we propose implementing clear, understandable debt practices for New York state: Set limits that are comprehensive and binding; ensure affordability; retain flexibility in times of emergency; and, most importantly, restore accountability to voters. The state must also work on enshrining in its Constitution a debt cap based on personal income, eliminating unaccountable "backdoor borrowing" by public authorities, and requiring other prudent debt management practices. Only then will we have the trust of investors and most importantly the citizens of our great state.
The third component in improving transparency in the finances of state and local governments is disclosure. In New York, there are more than 3,000 local governments.
The Office of the State Comptroller is charged with oversight of these local communities and has employed several strategies to improve disclosure: requiring annual reporting even for those governments not required to complete GAAP compliant audits; training and dialogue with local officials on modified accounting standards; auditing local governments and school districts to highlight areas of fiscal improvement; and review and approval of privately placed debt.
One of the office's key efforts to help local governments with their finances is a Fiscal Stress Monitoring System, which began in 2013. This system helps give municipal and state leaders early warning of fiscal stress indicators so they can take action before a crisis develops.
Improving transparency in state and local finances is a continuing priority for us. Especially now, we believe it's important to focus on this critical issue. While greater federal interest in state and local budgeting is necessary and welcome, it should also come with the support that ensures smaller states and local governments are not unduly burdened.
A federal initiative, focusing on states, and eventually, larger municipalities and authorities, that places a premium on enhancing transparency, is fundamental to improving the fiscal health of state and local governments. And it can provide us with critical knowledge on how federal, state and local dollars are being used.
Despite the 1975 federal Tower Amendment, which bars the Securities and Exchange Commission and Municipal Securities Rulemaking Board from obliging municipal securities issuers of municipal bonds to file documents with either entity prior to a sale, more disclosure is needed by states, and, eventually, larger municipalities and authorities. This would be fundamental to improving the fiscal health of state and local governments. And it could provide us with critical knowledge on how federal, state and local dollars are being used.
One thing is clear: The current environment demands greater interest and knowledge on whether state and local governments are using the federal relief aid efficiently to help improve the lives of all of our constituents. The time is now to create a more transparent, understandable process for reporting and oversight of federal, state and local finances. Just like what Dick fought for and showed us that it worked.