WASHINGTON – Financially-strapped states are masking their fiscal problems with borrowed funds, says a State Budget Crisis Task Force in a report released Tuesday. It’s imperative to change this practice before the burden falls on the next generation, the budget experts say.

Paul Volcker, onetime chairman of the Federal Reserve, and Richard Ravitch, former lieutenant governor of New York under David Paterson, established the Task Force in June 2011 to examine an impending fiscal crisis they saw forming at the state and local levels of government.

“There is no subject less sexy than accounting,” said David Crane, a Stanford University professor and member of the Task Force, but there is no subject as crucial.

The study focused on six large states: California, New York, New Jersey, Texas, Illinois and Virginia.  The Task Force’s Final Report offers broad ideas about accounting practices and budget transparency, but fails to offer any specific guidelines for states to follow to properly balance their budgets.

Each state has different fiscal priorities, Ravitch said, but problems in the very structure of state budgets — made worse by the recession — underlie a pension crisis in some of the states and crumbling, investment-starved infrastructure around the country.

“We’re on a course that’s going to produce more Detroits, more Puerto Ricos,” said Ravitch.

The biggest problem cited in the Volcker-Ravitch report is that many state governments disguise borrowed funds — that must be paid back with interest — as “revenue” when trying to produce a balanced budget. That’s a legal requirement in forty-nine states.

In the current system of cash accounting, states list these debt-based funds as income, similar to tax dollars. Crane outlined the Task Force’s suggestion for using a system called “accrual-based accounting” which would give a more accurate fiscal picture. Accrual-based accounting takes into consideration the eventual need to pay back the funds.

Ravitch, Crane and their colleague Marc Shaw, former deputy mayor of New York under Bloomberg, laid responsibility for giving attention to these budgetary shortcomings on the media. Reporters should be challenging these official, debt-based budget numbers, said Ravitch. We only see these issues when a city goes bankrupt or pensions are not paid, he said, then it’s front-page news. Without more public interest to inspire change, Ravitch said he feared the burden for these fiscal woes will fall on the next generation.

Ravitch said he’s received a lot of benefits from the government over his career. He has thirteen grandchildren and it “galls” him to think they will be paying for those benefits, he said.