 Welcome to Hawaii Together on the ThinkTech Hawaii Broadcast Network. I'm Kelea Ikeina, president of the Grassroot Institute and your host today. We've got a wonderful program in store. We call it Hawaii's flawed accounting practices. And we're talking about the way our state government keeps track of our finances. You know, when you balance your budget at home, it's absolutely essential that you have accurate information. You need to know how much money is coming in, how much is going out. And above all, you really need to know how much debt you have or how much reserve hopefully. Well, the same is absolutely true for governments. Unfortunately, governments don't always operate with all the right information. But our next guest says that government accounting standards sometimes make finances appear rosier than they actually are. Her name is Sheila Weinberg. She's a CPA who has been in private practice before she founded the organization Truth in Accounting in Illinois. And you're going to enjoy what she has to say. Actually, you might not. You might be crying by the time she's done because she's going to really give us the truth about Hawaii's finances. You see, Sheila says that Hawaii's government bases its accounting upon flawed government accounting standards. And that allows lawmakers to spend more and sweep debt under the rug. They're not really dealing with the real figures that would cause us to pause much more when we take a look at the expenditures of our state. But please join me now in welcoming Sheila. Sheila, thank you so much for joining us here today on the program. I'm delighted to see you. I know we've run into each other many times at national conferences. Your work is well known. Welcome to the program, Sheila. Well, thank you so much for having me. And before we get into this all accounting detail, I like your analogy of a household and their budget. What the governments are doing is kind of like, well, if my husband and I over the holidays, we decided that, you know, to live within our means, we're only going to spend each $500. And I'm an accountant, so I check the checkbook every day almost. And I noticed that my husband is living within that agreement and the holidays come up and his gifts seem very generous and expensive. But I looked at the checkbook and everything seems to be okay. And then in late January, I get the credit card statements. And he has spent $1,200 on the credit card. And when I approach him, I'm like, sweetheart, what did you do? And he's like, well, I only spent $500 out of our account. I'm like, yeah, but you've put money on the credit cards. He's like, well, don't worry about that. We don't have to pay that for years to come. And that's exactly what the government's doing. But instead of my credit card, instead of the elected officials' credit card, they're putting it upon every one of your listeners' credit card, all the taxpayers. Well, Sheila, that's an apt illustration. In fact, that's exactly what's gone on here in the state of Hawaii. We are paying our payroll for our government employees on credit. But we're saying because we were able to use that money this year, the books are balanced this year. And so it sounds eerily like your illustration. But before we get into the weeds right now, tell us just a little bit about truth and accounting. It's been around in almost 20 years, I think. You founded it. What does the organization do? And tell us a little bit about some of the accomplishments. Well, what we do is I started it because I was very concerned about the citizens really having the financial information they need to be knowledgeable participants in their government. I found at the federal side, at the state side and at the local side, that citizens are not just giving information, they're giving the wrong information. So when they're deciding tax or spending policy, or even who to vote for, they're doing it based upon the wrong numbers. And, you know, you say that, oh, in your state, you know, they say they balance their budget. So people think, oh, well, everything must be fine. I'll vote for these guys again. But what we find is that instead of everything being fine, they're charging things in essence to the credit card. And we really believe it's hurting our democracy, our representative forms a government. People are cynical. People kind of understand that something's amiss, and it really gets down to the basic bad budgeting and accounting. Now, your organization, Truth and Accounting, takes a look at the accounting practices of the government, as well as the way governments in our states carry out their financial reporting. You've got a wonderful website that has some comparative data. Can you tell us a little bit about that? Yeah, so what we do is, years ago, 11 years ago, we started issuing the financial state of the states. So that included analysis of every single state. And we calculate, here's your assets, take away your liability. We don't include capital assets because you shouldn't sell your house to pay off your credit card bills. So we don't include capital assets. And we calculate the money needed to pay the state's bills. And then we divide that by the number of taxpayers and come up with a taxpayer burden. Well, the first year we did that study, people in Connecticut, it was the worst state because they have a lot of taxpayers, very few taxpayers and a lot of retiree health care debt. But they were upset because they're like, well, we have higher GDP or higher average salaries. So how dare you? So we created this data-z.org website that we have our numbers on it, but we also have 7,700 other data points. So you can compare the states based on their pension debt, based on the average attorneys in the state. We do find that the more attorneys you have in the state, the worse the state off. Unemployment, demographic, economic data, and voting information. So go on there. You can create online on demand of your own charts to compare your state with other states. Now, you take a look at everything in your approach to accounting. In other words, it's not just how much money do I have in my checking account, so how big a check can I write today as some people practice. You look at what a government might owe in five years or in 10 years, unfunded liabilities we often call them. And other things, you look at how much they're borrowing and so forth and try to bring all of these variables to bear upon coming up with a figure that tells us what the financial health of a government is. Isn't that right? Yeah, and what we do is we go to the state's audited financial report and we pull off their assets. As I say, we take off capital assets because you shouldn't spend those to pay your bills. We take off restricted assets and then we include the liabilities. Now you're mentioning that these liabilities are owed in a few years and I kind of would disagree with that. They are owed today. We get this from elected officials all the time. It's like, well, that pension debt, we don't need to worry about that. We're going to pay that off in years. Well, again, it's kind of like your credit card. Even if you choose to pay the minimum balance, minimum payments, it doesn't mean you don't owe the whole balance right now. So it's all the debt that they've incurred to date and that they're choosing to pay off in the future. If they really balanced their budget, they wouldn't have any debt to pay off in the future. They would have already paid it off. Well, Sheila, this is one of the first times I really enjoy being corrected. And I'm glad you did correct my language because, you know, you're absolutely right. We all start talking like our politicians sooner or later. We say this isn't due until such and such, but the reality is if it's due, it's due. You're helping us to take a hard look at our condition and, in a sense, you're like a financial doctor. Now, let me ask you about something because a lot of people place great faith in this, government accounting standards. Don't we have a system of government accounting standards that is supposed to tell us how finances are to be accounted for and how they are to be reported? And isn't this supposed to keep governments in check in terms of the reports that they make? Just so people, people might have heard of the Financial Accounting Standards Board. They set standards for corporations. So, you know, when IBM reports their numbers, they have to follow the generally accepted accounting principles set by FASB, the Financial Accounting Standards Board. Years ago, the Financial Accounting Foundation tried to have state and local governments start to follow those standards, but state and local government officials said, oh no, we're different than corporations. We can't live by those rules. So therefore, we're going to set up our own board. So they set up their own governmental accounting standards board. Right now, there are four people who currently are former government employees from around the country. And then there are two CPAs who have CPA firms that have large government clients. And then there's a rating agency person. So you could question the independence of this board, but that's who sets standards. And that board, and the reason we had to start doing the financial state of the states and doing the financial state of the cities is because that board for years did not require state and local governments to put their pension and retiree health care liabilities the full amount on their balance sheets. Fortunately, we got that change, but there's other improvements that GASB also needs to improve a change. There's something that you were actually instrumental in getting the GASB, the government accounting standards board, to change what it looks at. And I'm kind of shocked in a sense that they weren't looking at the pensions as well from the beginning because one would think as you used in your earlier analogy of household, you've really got to take account of all the financial information in order to know what your condition is. So in the news recently, there has been a disturbing movement in the GASB, and that is in terms of something they're doing now to alter the accounting standards. You've written about that recently and we at Gratitude Institute did a news release in which we referred to that yesterday. Do you want to talk a little bit about that? What is the concern in terms of some of the changes that are coming about right now? As I mentioned, previously governments were not required to put their pension, retiree health care, all of it on their balance sheets, on their government consolidated financial statements. And then we were able and recently within the last five years to get that change. So now governments have to put those liabilities on their consolidated statements. Fortunately governments don't budget on a consolidated basis, they budget on a fund basis, the largest one being the general fund. Well those statements don't have to include those liabilities. Those are still done using the cash basis accounting, again that thinking of your checkbook. It includes what goes into your checkbook and it includes only what comes out. So like in your state, in the general fund statements you will have a general fund balance, which to me means that you have extra money, but those don't include all your liabilities. So those are not a good, it might be good for cash management purposes, but the legislators and the taxpayers, there's long term commitments that have to be accounted for and those are not accounted for at the general fund level. Let me just interject something here. Does this mean that we're not really seeing the full picture when our government tells us we've got a billion dollar surplus at any given point? Yes, that's exactly right. The billion dollar surplus is based upon. It's a surplus might be, it's kind of related again back to your, you know, to the individual. It's like hey, I got a thousand dollars in my checkbook, ignore my credit card debt, but I do have a surplus in my checkbook and that's what's going on. Wow, this is so incredibly simple that it's frightening. We're going to have more questions for you when I come back from a brief break. My guest today is Sheila Weinberg. I hope you find what she's saying fascinating. She's the head of truth and accounting, a firm that she started that is exposing the truth about finances and our government. Don't go away. We'll be right back on Think Tech Hawaii. Thanks for staying with us. I'm Kayleigh Ikeena, president of the Grassroot Institute. My guest is my friend Sheila Weinberg, the founder of truth and accounting. And before we go on any further, we have such popular response to the program that our inbox is getting flooded with questions. I'm sorry that I won't be able to get to all of them, but I want to get to many right now and do a speed round. Sheila, can we do a speed round with some of the questions that have just come in? Sure, sure. First of all, does the COVID-19 pandemic excuse the high debt incurred at this time? Yes and no. I would say that governments know that crises are going to happen and they should have reserves set aside. And you mentioned that they theoretically had a billion dollars of reserves, but those numbers are all bogus. So they really don't have any reserves going into this crisis. Here's another one. Is there, and I chuckled, but I know you've addressed this actually in your own research. Is there a relationship between the number of attorneys in a state and the amount of debt incurred? On our data-c.org website, we do have the number of attorneys in each state, and we do find that there is a direct relationship. The more attorneys you have in the state, the worse financial condition you are. So go on to the website, data-c, create your own chart and you can see the numbers yourself. That sounds like a fun correlation. I'm not sure whether there's a causality there, but it's an interesting correlation. Don't tell the women in your audience that the more women you have, the worse financial shape you are, but don't mention that one. No comment from me on that. Don't mention it. Here's another question. Are there any issues that would warrant increasing the state debt? Again, you know, right now you're going to have- Are there any circumstances that would make it justified? Well, you know, they do borrow money for capital assets, and that I would say yes, kind of like, again, borrowing for your mortgage. And in our numbers, we don't include capital assets, but we also do not include debt-related capital assets. Right. And I would think that there's a big difference between short-term operating capital that needs to be borrowed for infrastructure or for some project versus our long-range condition. And you look at both of these, and we're not looking enough at the long-range. And again, you're really not- if you're borrowing money to pay your current expenses, you're really not balancing your budget. That's a total fallacy. Here's another question. How do we determine the accurate amount of debt that our government is incurring? One, you can go to our data-z.website. You can click on Hawaii, and we also do the financial state of the city. So you can click on Honolulu, and we prepare a financial state of the state or financial state of the city for each one of those. So you can get there. If you're looking at another government, you can go to their, as accountants call it, the comprehensive annual financial report. And you can find- there's a number in there called unrestricted met position, and you can find that. We have just- in case people really want to look into it, we have a video on YouTube called How to Read a Caffe, a comprehensive annual financial report, and that would walk you through how to read- even how to read your own governments. Great. Appreciate that tool. You know, I really want to get to a few questions to help us understand the transparency level of our government's reports here in the state of Hawaii. We recently, as the Gratiot Institute, submitted some testimony to the GASB pointing out that our state borrowed money to pay for payroll costs. Now, Sheila, how is this accounted for in our financial documents? And how should it be accounted for? Well, at the fund level, which would be your general fund and your budgeted fund, it would be counted as a resource, almost like recording loan proceeds as revenues. So it would be accounted for as an inflow and it would increase your balance. They would not show the corresponding debt you incurred on these general fund statements, but they would record the loan proceeds as an inflow, so they would increase the general fund balance. You know, we also recently noticed that our state is swapping money for debt, such as when the legislature last year took $250 million out of the rental housing fund and replaced it with debt. What do you think about this practice? Well, again, you know, you're incurring debt. And again, you have a balanced budget, it's just not a mathematical thing. You have balanced budget requirements. Every state except for Vermont has a balanced budget requirement. The 75 most populated cities that we study have balanced budget requirements and they have them for very good reasons. Number one, so governments do not get unsustainable debt. And number two, so people can hold them accountable. IE, it was said best by a former Treasury official who said the politician shouldn't have the pain, the pleasure of spending. IE, I'm going to get a vote without the pain of taxing. IE, I'm going to lose a vote. And that's how why you have a balanced budget so you can hold your elected official accountable for what they spend. But if they can go ahead and borrow and pretend the budget is balanced by borrowing, they're circumventing the intent of the balanced budget requirements. Absolutely. And we could talk a lot about that. But I want to get to some other queries that have been kind of bugging me for a while. Looking at our state's financial documents at grassroots, we noticed that Hawaii lists capital assets, like buildings, bridges on the balance sheet. I'm not an accountant, but does this raise your eyebrow a bit? Well, they listed on the consolidated government wide financial statement. And they are saying, well, we have this road, it is providing us with some value. Now, there is an organization called Strong Cities that we were just talking to. I was on one of their webinars just last week. And they really believe all those capital assets are liabilities because you have to maintain them. And then the road eventually runs out. So they're putting these assets on their books, but they're not putting a offsetting deferred maintenance or, hey, we're going to have to replace these in the future on their books. They only have the asset, not the liability side. So this is another case of not having the whole picture in one document. Now, we've talked a lot about our state's unfunded liabilities, especially for its pension system. Currently, that's $14 billion approximately and $11 billion for our other post-employment benefits such as health. Are governments allowed to sweep this debt off the books as well? Well, as I say, for decades, most of that was put, that was not included on their balance sheets. And we did fight and get that to now it has to be on their consolidated balance sheets. But now we're fighting to get that done at the general fund level. So again, if your government goes ahead and says, hey, we have a billion dollar reserve in our general fund, there should be a financial statement that says, yeah, well, you might be able to say that you have that cash reserves. But here's all the debt that is dedicated to that money. So you really don't have surplus money that can be spent. It's already dedicated to some of these liabilities you've already committed the government to. Well, you recently released information from Truth and Accounting about government reporting in all 50 states. Tell me a few more things about Hawaii that our average citizen or government politician may not really realize. Well, we calculate that the state has $16.1 billion that it needs to pay its bills. Again, this is the money that the elected officials have put on the taxpayers credit card that that averages to $31,700 per taxpayer. That works out to be about per household. We give the any state that has a taxpayer what we call a taxpayer burden each taxpayer share of the debt. We give a grade of if it if a state has $20,000 or more, we give them an F so your state received an F for its financial grade. And it is 47 out of 50 state out of the 50 states. So it is one of our, we never know whether to call it a bottom or a top sinkhole state. It's that bottom or it's the worst one of the worst that the third worst in the country. Now Sheila, we happen to rank in the bottom court oil and the bottom five even and sometimes the bottom one in numerous rankings of the economy, business climate and so forth. What does this mean in terms of your accounting for our finances our financial health, so to speak to be number 47 at the bottom out of 50 in practical terms. What does that really mean for our state. Well, what this means is that in the future, taxpayers are going to have to pay third more than $31,000 in taxes, and they're not going to receive any government services and benefits for those taxes. That's going to be used to pay off the credit card debt that's already accumulated. And then just to make your life even worse. We did just issue our financial state of the cities. Honolulu also received an F and was the third worst city of the 75 cities that we have studied. So I hate to give you even more bad news. So if you add those up, you know, you're talking 31,000 plus another 29,000, you're talking more than 60,000 for everybody who lives in Honolulu. This is what they're going to have. This is their share of the government's debt, you know, you can think of it as oh well this is an additional credit card that I'm going to have to pay in the future in the form of additional taxes. You know, I don't think most of the people in the state of Hawaii and most of our government leaders realize the impact of what you've just revealed. I remember back when I was in college studying economics at Northwestern University, I majored in what was Keynesian called Keynesian economics. I would often go down south into Chicago to visit the University of Chicago and listen to a professor there named Milton Friedman. You know all about him because you live in Chicago right now. There was a little restaurant near his office on campus called Tanstaffel, T-A-N-S-T-A-A-F-L. And to the informed, that was the definition of economics. Tanstaffel, there ain't no such thing as a free lunch. Sheila, I think you're telling us that's what's wrong with our accounting. Well, and it doesn't just have, it has not just financial implications, like in Chicago, Illinois. A state worker, when they get health care, because the state is so far behind in paying its bills, a state worker has to pay for their health care up front. And then the state will eventually reimburse them in six months to a year. And nonprofits have gone out of business because they've been counting on state money and they don't get it. So this does have, you know, it's having ramifications right now. And also the state and local governments are not being able to provide the services that people need and want from their government because they're having to cover these prior costs that have accumulated. And we've so far somehow dodged the bullet, but we may not be able to do that all the time because these costs are going to add up in the long run. Someone will have to pay. Sheila, let's shift gears now as we go to the close of our program. What are some best practices that Hawaii could institute in order to get ourselves out of our crisis? Well, at fact-based budgeting, follow-cruel calculations and techniques, you know, you should only include the revenues that you earn in your budget, not loan proceeds. You should include all the costs that are incurred, including those pension and retiree health care costs. And just so on our website, truthandaccounting.org, you can find fact-based accounting and fact-based budgeting on how to fix that. Tell our listeners and viewers once again how to get ahold of you and a little bit about your website. Yeah, truthandaccounting.org and our data-z sister website, data-z.org. On there, you can also sign up for our daily email morning call. And there is a donate button. We're 501-C3, so always looking for additional resources. So go to those websites and help us out. Sheila, thank you so much for your time today. I hope we can host you back in Hawaii again. And until then, keep up the good work. Thank you and thank you for your comment letter. And everyone, we want to thank you for tuning in today. Sheila Weinberg, founder and CEO of Truth and Accounting, has given us some great insights, insights we need to take to our own state government in Hawaii. Until next time, I'm Kelea Iakena, president of the Grassroots Institute on Hawaii Together on the ThinkTech Hawaii Broadcast Network, aloha.