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The dangers of financially illiterate politicians

Published: Monday, April 14 2014 4:20 p.m. MDT

Other financial problems come not from lack of simple financial understanding, but from increasing complexity. "We are trying to live a contradiction," says Justin Marlowe, a professor of public affairs and public finance at the University of Washington in Seattle. "People want government to do more and more, yet they are told they can pay less and less on property and income taxes. So government is expanding programs and services or offering the same services with less resources."

So municipal and state governments come up with very sophisticated and complicated ways for borrowing money and financing obligations such as pensions, Marlowe says.

"They come up with technical solutions to political problems," he says. "And every time you do that, it becomes more and more complex."

This complexity causes problems when political officers either take action without understanding everything involved (or without consulting the best experts on the question) or do not take the action required because of a lack of political will to do what is necessary, Marlowe says.

Marlowe points to Wenatchee, Wash., where Wenatchee and surrounding municipalities issued $42 million in bonds in 2008 to build an ice hockey facility. An independent consultant didn't think the facility would generate enough cash to support itself — and pay back the bonds' interest and principal.

Government leaders, however, let their optimism push the project forward; they lacked the will to back down on a popular project and the information for bond buyers hid the consultant's negative assessment. The Securities and Exchange Commission fined the bond issuers in late 2013 for "misleading investors."

Getting engaged

Part of the solution would be for citizens to also have a better sense of what is going on financially, Marlowe says.

"If people are engaged even a little bit, if they don't like what they see, they vote them out," he says. "But it doesn't seem to happen all that often. … Usually it takes a scandal."

One way of getting people more informed, and presumably more engaged, is to give them more information, says Relmond Van Daniker, executive director of the Association of Government Accountants, based in Alexandria, Va.

"One of the key players in the whole gamut of decision are citizens," Van Daniker says. "It is incumbent upon us to provide information to citizens that they can understand."

Based in part on something Mike Leavitt did when he was governor of Utah, Van Daniker is pushing for governments, municipalities and agencies to periodically produce a concise four-page breakdown of their financial condition. The report, called a "Citizen Centric Report," has one page for demographics, one page for performance indicators (i.e., did the government achieve its goals), one for financial statements (using graphs and so forth) and one for the challenges the entity faces.

Van Daniker contrasts the Citizen Centric Report with the standard audits required by law — huge book-like documents that are basically good for legal action, but are difficult for the average citizen to understand. The Citizen Centric Report also has advantages for elected officials heading government agencies.

"It makes it easier for the politicians to go out and talk to the people in language they can understand," he says.

And, presumably, make better decisions.

Basic help

Pattison of the National Association of State Budget Officers doesn't think that solutions to the problems of governmental financial illiteracy are hard to implement. He suggests elected officials meet regularly with their financial people.

"The budget process is a year-long process," Pattison says. "But a lot of agency department people (for example), only pay attention to finances at the end of the fiscal year or during the legislative session. They need to pay attention throughout the year."

For example, if an agency head knows how much money is going to print various reports, he or she may decide in a budget pinch to cut one of those reports to save money. Without that type of knowledge, Pattison says, the agency head might just implement a general 1 or 2 percent reduction in the agency's budget across the board.

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