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The Honolulu Advertiser
Posted on: Monday, June 18, 2001

Second Opinion
State must change accounting

By Cliff Slater

We need to have sensible, transparent accounting systems so that we can all know the cost of everything the government does.

 •  Cliff Slater is a regular columnist whose footnoted columns are at www.lava.net/cslater.
The recently passed privatization bill will hopefully lead to a less-bloated state government. However, as privatizing goes into effect, we also need to establish a more sensible state accounting system — something like that required of all public companies.

As Mayor Goldsmith of Indianapolis once put it, "Government accounting systems do prevent people from stealing money, but they do nothing to prevent people from wasting it."

The problem is that our state's accounting system is not "activity-based." That is, all costs relating to an activity, say public education, are not charged to that activity. For example, accounting costs for the Department of Education are borne by the Department of Accounting and General Services, DOE's legal costs are borne by the Department of the Attorney General and employee benefits are accounted for at the Department of Budget and Finance.

And there is no intelligent way of accounting for capital costs — for the DOE this is the cost of classrooms, buildings, land and vehicles.

Thus, any attempt to find the true cost of operating schools, public hospitals or prisons can drive you straight into Kane'ohe State Hospital (we don't know full costs of operating that either).

Not knowing the full cost of any government activity leads to unintelligent decisions. For example, when budgets contain no capital-related expenses such as depreciation costs and the associated financing expenses, there is a tendency to overspend on buildings and under-spend on preventive maintenance, to under-maintain vehicles and then replace them too frequently, and to build exquisite libraries but skimp on the books.

On the other hand, an activity-based accounting system would allow government managers and supervisors — and also legislators — to understand where the money they manage goes.

The state needs activity-based accounting not merely to prevent theft but to allow managers to make sensible decisions. In other words, accounting that will enable them to use our taxes to best advantage — to prevent waste.

For example, alert readers of this newspaper will have noticed that public education's cost per student varies depending on who is discussing it. Our state auditor, Marion Higa, calculated that the cost per student was $7,000 for the year ending 1999. The federal government used $5,858 for 1998 (it should have been quite close).

The latest the State Data Book shows is $5,794 for 1995 since DBEDT cannot get financial data from the DOE.

Contrast this mess with that of public companies: Imagine if your assessment of, say, Bank of Hawaii's earnings depended on whom you asked. And imagine if the appropriate federal and state agencies could not get timely information from the bank. Bankoh's investors would immediately head for the exits and the stock price would tank.

Investors know that the lack of timely, accurate, chiseled-in-granite financial data is a major indicator of trouble.

Why do we not have sensible, transparent accounting systems so that we can all know the cost of everything the government does? After long and considerable pondering on the subject, I have decided that the answer is quite simple.

They do not want you to know.

Our taxpayers are smart; they can shop. If they were to know that daily costs per prison inmate in Hawai'i were really $150 a day, or $55,000 a year, rather than the much lower figure usually reported, they would start asking awkward questions.

What if taxpayers were to find that the city's $25-a-month express bus service averaged $150 a month per rider in taxpayer subsidies?

Taxpayers might get a little annoyed.

Or what if taxpayers found that residential garbage collection on O'ahu costs $24 per household and then compared that with St. Paul, Minn., where the service costs $11?

If we are to ever look forward to open, transparent government in Hawai'i, it should start with the accounting system. If government requires certain open and clear accounting standards for businesses, why should it not require the same of itself?