Risky business: US states cutting financial management

WASHINGTON Tue Aug 16, 2011 11:37am EDT

WASHINGTON Aug 16 (Reuters) - Many states, walloped by budget problems, have cut spending on financial management and put themselves at greater risk of fraud and theft while making it harder to bring in revenues, according a survey released on Tuesday.

About eight out of 10 state financial managers said that budget cuts "mean new kinds of risks for their governments' financial and operations activities," according to the Association of Government Accountants' Annual CFO Survey.

They are having a harder time rooting out fraud, waste and abuse, the financial officers told the survey, which was conducted by Grant Thorton LLP's Global Public Sector. They also do not have as many monitors in place to make sure employees do not abuse systems, such as charging the state for excessive or fraudulent travel.

The cuts might also catch states in a trap, causing them to lose more revenues. The survey of state government workers, state financial officers, and federal employees such as Inspectors General, found that states could end up losing federal funds "if they cannot comply with federal reporting and other requirements that accompany the money."

They also said shoddy reporting could reduce their credit ratings resulting in higher borrowing costs. It may also inadvertently cause them to make inaccurate payments to vendors and to run afoul of the Securities Exchange Commission and the Internal Revenue Service's regulations.

Even though the recession officially ended in 2009, many states have been caught in a slump and they are unlikely to see any federal help soon because of debt and deficit fights in Congress. Lately, states' revenue collections have begun improving, but the increases are modest and revenue has yet to return to levels reached before the recession began in 2007.

All states, except for Vermont must end their fiscal year with balanced budgets. To make up for less revenue, many governments were forced to cut spending. The cuts are not likely to stop any time soon, worrying the officers charged with carrying out the states' budgets.

"For them, doing more for less is virtually impossible, so they must instead do less for less," the survey found.

That includes finding duplicative or unnecessary activities or automating work. The problem many face in implementing those solutions is that there is no money for the up-front costs.

The officers also believe debt management should be centralized within states, providing smaller borrowers with access to more technical expertise and shielding them from mistreatment by Wall Street. In the same light, they are pushing for making employee benefits less political and for better planning for future healthcare and pension payments.

Economic recovery, too, poses risks, the survey found.

"State governments will once again lose the competition to attract and retain qualified financial professionals, who instead will go to the private sector," it found.

(Reporting by Lisa Lambert; Editing by Andrew Hay)