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Case 11.1: Dangerous Stratagems
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Case 11.1: Dangerous Stratagems
Introduction
Public funds are commonly misused, but most of the time the misappropriations cannot be pointed out because it is completely hidden. Some of the ways in which the misuseis disguisedare through theuse of shortcuts such as borrowing, leasing, and selling off assets. These are a few of the dangerous stratagems applied by politicians hoping to secure their positions and reputation. However, it is important to note that the politicians are unable to execute this kind of stratagems by themselves leading to the use and help of CFOs and their financial wizards. This essay is a discussion of the nine common stratagems used by politicians and their drawbacks.
- Identify the weaknesses in each strategy. (Hint: How do you think the bond rating agencies reacted to California’s 2003 budget?)
There is a total of nine different stratagems that are employed by politicians through the help of CFOs (Chief Financial Officers) who are assumed to be financial wizards. Each stratagem has its drawbacks that impact the people and the economy. These dangerous tricks include Delay maintenance and replacement of assets, selling assets, lease rather than buy equipment, rob Peter to pay Paul, Nickel and dime employees, make across-the-board cuts rather than targeted cuts, fudge the numbers, borrowing and using accounting gimmicks. California’s 2003 budget is a classic example of the problems associated with using of the above stratagems. The credit rating in that state was in jeopardy as a result of the budgeting put across by the governor. Bond rating agencies are rumored to have decreased the credit opinions of the state of California from an AA to an A.
This downgradeis attributed to the carrying of the previous year’s budget totaling to 2.7 billion dollars in deficit. Some of the stratagems applied by some of the governors such that the scenario is similar to that of California is borrowing, making off across the board cuts rather than focused borrowing, using accounting gimmicks and delaying of maintenance and replacement of assets. Robbing Peter to pay Paul is a strategy that leads to using of off budgets accounts to cater for the deficit. On the other hand, Nickel and dime of employees involve putting workers in undesirable circumstances with the objective of making cuts on lighting, heating and other expenses. Like all other stratagems, this one also has its disadvantages such as employee dissatisfaction.
2. Which strategies are the most dangerous? Least? Why?
Borrowing is one of the most dangerous stratagems employed by politicians and CFOs. Since the fiscal policy focusses on reducing government spending by increasing taxation, to account for deficits, the governmentputs a restriction on borrowing by the state agencies. However, the state agencies find other loopholes of borrowing or find other means of financing despite the limitations put across by the government. For instance, they can decide to issue bonds, although the strategy is dangerous because it lowers the credit rating. Due to a low credit rating, investors become hesitant to invest in such states leading to loss of investor as a result of the increased public debt.
Another equally dangerous strategy is the rob Peter to Paul which entails transferring of funds from general accounts to off-budget accounts. The drawback of using this approach is that it adds to the deficit on government budget in each year. The transferring of funds from off budget to on budget does not solve the issue but merely shifts the deficit between the systems. The problem is extended to the next year which continually increases the deficit.
Two stratagems that are considerable least dangerous include the accounting gimmicks and the nickel and diming of employees strategy. Nickel and diming of employees involve the cutting of budgets that touch on the agencies and state organizations. Unfortunately, the amount saved as a result of this strategy is insignificant with no impact on the deficits. Conversely, using of accounting gimmicks does not further hurt or improve the situation. Accounting gimmicks allow for assumptions to be made which is a somewhat important step in theallocation of funds across the states. Since accounting gimmicks use accounting forecasts, they are deemed less dangerous in comparison to the other stratagems.
3. Provide a recent example of each strategy.
- Delay maintenance and replacement of assets
In 2004 railtransit accidents lead to the loss of 29 million dollars, 297 injuries and 13 deaths (The United States, 2011). Failure of upgrading the rail transits attributed to the mentioned losses. The alarming rate at which fatal outcomes kept increasing thelead to a nationwide replacement and repair of all rail-transits.
- Selling assets
The leaders of Jacksonville city in the state of Florida decided to sell their sewer and waterworks which were traded off the balance sheet. The city managed to sell the entity for 32.2 million dollars after one year through selling 51.2 million dollars in sewage and tax liens(JEA, 2017).
- Lease rather than buy equipment
In the 2013 fiscal year, Congress decided to 7 existing jets, for example, the U-2 models as opposed to buying the planes (Presse, 2013). Buying of the i8 fighter jets of the Block 30 prototypes was expensive according to Congress hence the decision to lease.
- Rob Peter to pay Paul
One of the states in the United States saved an estimated 175 million dollars after transferring the supervision of a parking garage and convention center to reduce its on-budget expenses.
- Nickel and dime employees
To increase earnings and charge for services offered without increasing the ticket fee, the airlines in the United States started charging fordiminutive services such as onboard meals, luggage, and water(Negroni, 2014).
- Make across-the-board cuts rather than targeted cuts
The New Hampshire state government made significant cuts on all employees working in the state. Collectively the deducted funds amounted to 50 million dollars according to Grossmith (Grossmith, 2013).
- Fudge the numbers
The city of Lynwood stated that it needed an additional 10.7 million dollars for its storm water scheme. The city used the fudge the numbers strategies leading to a fivefold increase in the fiscal budget from the previous allocation(Starling, 2011).
- Borrowing
500 million dollars was the amount borrowed from the special funds account by the governor of the state of California, Jerry Brown (Mulkern, 2013).
- Using accounting gimmicks
The city of South Pasadena which has a small population decided to manipulate their books and increase their expenses to about 29 million dollars in 2012.
Conclusion
In conclusion, the various shortcuts that are provided by politicians in order to maintain their status of power and reputation hurt the economy in various ways. Depending on the strategies employed, the tax payer’s money is used excessively with no visible results while some of the strategies are fatal such as lack of repair and maintenance. It is the objective of the federal government and concerned agencies to ensure that the people are protected from the loopholes within planning and management of a budget. The people also have a responsibility of choosing leaders with their interests at heart to help in building the future and getting solutions to the current problems.
References
France-Presse, A. (2012,). U.S. Air Force gives U-2 spy plane another lease on life. <http://www.rawstory.com/rs/2012/02/13/u-s-air-force-gives-u-2-spy-plane-another-lease-on-life/>
Grossmith, w. (2013). Hassan faults NH Senate for across-the-board cuts. New Hampshire Union Leader. Unionleader.com. Retrieved 9 March 2017, from http://www.unionleader.com/article/20130531/NEWS06/130609994>
JEA, city of Jacksonville to spend $30 million to reduce septic tanks. (2017). jacksonville.com. http://jacksonville.com/news/metro/2016-04-04/story/jea-city-jacksonville-spend-30-million-reduce-septic-tanks
Mulkhern, C. (2013). Gov. Brown proposes to borrow $500M from cap-and-trade revenue. E&E Publishing LLC. http://www.eenews.net/stories/1059981189/>
Negroni, C. (2017). Less Baggage, Big Savings to Airlines. Nytimes.com. http://www.nytimes.com/2010/04/07/business/07bags.html
Starling, G. (2011). Managing the public sector (1st ed.). Belmont, CA: Wadsworth Cengage Learning.
United States. (2011). Rail transit: FTA programs are helping address Transit agencies’ safety challenges, but improved performance goals and measures could better focus efforts: report to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate.Washington, D.C.: U.S. Govt. Accountability Office.
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