State's budget remedy just sleight of hand. (Commentary).

CALIFORNIA is the first state to match new federal legislation tightening accounting rules for business. At the same time, the state is covering a $23.6 billion shortfall in its state budget by pushing the envelope on accounting treatment of revenue and expenses.

Jean Ross, executive director of the California Budget Project, a nonpartisan research group based in Sacramento, maintains that the revenue "created" by the state is really "deductions from future years' revenue or increases in future years' costs."

David A. Costello, a CPA and president of the National Association of State Boards of Accountancy (NASBA), agrees that state governments don't always practice the best accounting procedures. But he also notes that many states are trying to put more public members on regulatory bodies that license accountants.

'Raiding every cookie Jar'

According to Ross, here's how California created revenue by borrowing from tomorrow:

The state is raising $4.5 billion through securitization of future settlements with tobacco companies. California is "using the anticipated payment stream from the companies to sell securities, which it calls certificates of participation, backed by the settlements as collateral, to cover current shortfalls in its $98.9 billion budget," she says.

But this will sharply reduce the payments it gets in the future by the pay outs on the certificates. It's like borrowing from tomorrow to pay for yesterday.

The state is borrowing $2 billion from revenue to from future fuel taxes and payments expected from a variety of lawsuits being settled over the next decade or so.

"These provisions don't increase the amount of taxes owed, but accelerate the state's collection of taxes," Ross says. This pushes collection of "an estimated $625 million into 2002-03 that would otherwise have been paid in later years."

California is suspending businesses' net operating loss deductions for 2002 and 2003 but increasing the percentage of losses that businesses can carry forward and deduct from state taxes in 2004 and beyond.

"Over the long term, the revenue lost from the increased deductions will exceed the revenue raised by the suspension," says Ross. "It will raise an estimated $1.2 billion in 2002-03 and $800 million in 2003-04, but cost $400 million in 2004-05 and increasing amounts thereafter."

California" is raiding every cookie jar and borrowing in every way it can," Ross says. While some states are struggling to meet their operating budgets through dubious means, paradoxically they are also trying to reform state bodies that license accountants to practice in the state.

Just as the new federal legislation is creating a five-member independent board to oversee accounting for public companies, the states are also trying to put more public members on their state license boards, which regulate accountants.

Costello notes that California, which has a six-person state regulatory board with five CPA members, has just passed a law requiring a majority of four members to be from the public -- that is, non-accountants.

Costello fears that with the new federal law governing accountants who audit public companies many states will begin passing different laws for accountants who work for nonpublic businesses or entities. "It would be a nightmare for hundreds of thousands of small businesses to follow different rules in different states," he says.

That's why NASBA has scheduled a meeting of representatives from each of the boards for Oct. in New Orleans to, as Costello calls it, "harmonize" state regulations for all accountants.

Lee Berton, a consultant to the accounting department of the City University of New York's Baruch College, is a columnist for Bloomherg News.