Creative Government Budget Fixes: Self-Loansharking Edition

From the Associated Press via the Rochester Post-Bulletin we get an interesting tale of the situation you can find yourself in when you get too creative (or desperate) in figuring out ways to balance a biennial budget.

 Flashback to 2010 when a large state budget deficit existed, divided government reigned, and adamant resistance to even a whiff of a tax increase to get out of the situation was at its peak. The resulting impasse prompted a wide range of budget balancing “solutions” – including tobacco fund borrowing and accounting shifts that got most of the public’s attention. But lawmakers also did a thorough scan of all special fund balances -- funds which collect revenues for specifically dedicated purposes. One such special fund was the Closed Landfill Investment Fund, which supports monitoring and maintenance of closed landfills and is supported by solid waste management taxes. The fund offered an attractive – and raidable – balance of nearly $50 million with the added advantage that the money would not be needed until 2020. Perfect. Pay it back sometime? No problem. Lawmakers agreed to repay the loan with interest and backfill any investment earnings the fund missed out on as a result.

One hitch: the fund was 100% invested in equities, which nobody seemed to realize, and the market has roughly doubled since then. That’s a lot of investment earnings to miss out on, and now its loan repayment time. According to the news report, the state forked over $61 million this year from the general fund and owes about $40 million over the next few years on a $48 million loan, plus $5 million or more in interest. By our rough calculations that’s around a 21% annual interest rate since taking out the loan. That’s not Paulie Walnuts territory, but pretty impressive nevertheless.

Lessons? Senate Finance Chair Dick Cohen summed it up best: "Try to be a little bit careful about borrowing money from various funds because at some point you've got to pay them back.”