Tuesday, August 23, 2011

Budget Apples, Oranges and Cherry-Picking

Yesterday, I cited Texas jobs' data as the perfect example of how data can be cherry-picked in different ways to tell two completely different stories. Do the jobs' data make Rick Perry's case for a Texas economic miracle? Or do they make his critics' case for a Texas economic myth? The answer to both questions is yes.

Last week, I explored the City of Richardson's proposed budget. I reconstructed historical data from the last six of Richardson's budgets. I concluded that "the fact that Richardson's proposed 2011-2012 budget shows a very slight deficit is not a cause for concern."

Is this another case of cherry-picking data? After the jump, an analysis.

Here's the table I presented that shows the bottom line in Richardson's budget for each of the last six years.

Fiscal YearRevenuesExpendituresSurplus(Deficit)
2006-07 $160,493,566 $161,996,690($1,503,124)
2010-11 est.$181,789,992$183,707,788($1,917,796)
2011-12 budget$186,906,381$188,561,154($1,654,773)

In the comments for that post, I was told repeatedly (by the same person, but still ...) that I had the "wrong numbers" without ever being told exactly what was wrong with them. What I inferred was not that I had made a data transcription error, but that I wasn't using the commenter's preferred set of data from the Comprehensive Annual Financial Reports (CAFR). I was using budget data. The data in the CAFR tells a (slightly) different story.

Fiscal YearRevenuesExpensesIncrease(decrease)
in net assets
2005-06 $167,491,000 $153,545,000$13,946,000
2006-07 $171,265,000 $165,643,000$5,622,000

Year by year, there is a lot of variability, but over the long run it cancels out.
Net assets as of September 30, 2005 were $201,383,000.
Net assets as of September 30, 2010 were $202,622,000.
Almost flat. That's not bad if you consider the country as a whole is experiencing the worst economic downturn since the Great Depression. If you look at families' change in net assets over the last five years, how many wish they had managed a net gain, even a very slight net gain? But if you take a shorter time span, say the last three years, the city's books look more like what's happening nationwide. Net assets declined by about $18 million, about 9%, in the last three years.

So, which do you prefer? Budget or CAFR? Apples or oranges? Which one has the "wrong numbers?" Neither. Which dataset you choose to highlight, and which years within those datasets, depends on your politics. The city, wisely, looks at everything. Only that way can you see the whole picture. Neither apples alone nor oranges alone make a tasty fruit salad.

If you're still with me, an obvious question should be: why are there two sets of numbers? Basically, it comes down to a difference between using a cash basis of accounting (the budget) and an accrual basis (the CAFR). One tracks the cash flowing in and out of the city's accounts each year. The other takes a longer view, looking at future liabilities like pensions and apportions a share of those future costs to the current year, even if no money changes hands this year.

Large swings in net assets can happen for many reasons. Some are difficult to predict or control. For example, make a simple change in expected future interest rates or make a deliberate change in employee retirement benefits and watch how your long-term liabilities can change dramatically. Note this paragraph buried deep (page 21) in the presentation to the City Council during this year's budget preparation "retreat." Expect it to have a significant positive impact on the next CAFR.
"Significant revisions in the City’s retirement benefit program will result in a reduction in the annual TMRS contribution rate and the long term liability for this program. Beginning Jan. 2012, the rate will be 14.79% of payroll, a reduction from the current year’s rate of 19.31%. This change lowered the city's unfunded liability by $29.6 million from $75.7 million to $46.1 million."
It's important for the city to understand and be in control of finances that impact both the budget and the CAFR. Based on the data above, in my judgment the city has such control. I conclude that the fact that Richardson's last three CAFRs show declines in net assets is not a cause for concern (at least, not yet).


City of Richardson budget information can be found here.

Rumorcheck.org's explanation of the difference between the budget and the CAFR can be found here.


Sassy Texan said...

Mark, what did increase year over other than net assets?

Sassy Texan said...

Look at the budget for 09-10. Original, proposed was $175,840,000. The CAFR on page 23 shows total spending of $188,146,000 in expenditures. That is is $12.3m shortfall. The question becomes how did they cover that shortfall to show a positive? A clue is on page 22 of the CAFR. Can you find the other portion is a better question!

And I take 'cherry-picking' ie accounting standards every day of the week over what you have presented here.

Sassy Texan said...

Secondly, there is not a CPA on the planet that agrees with your explanation on government pensions. Because THE MATH DOES NOT WORK! When you have staff turn over and staff increases, the contributions will diminish and forward growth of the liability is doable.

It is like SS. When it was originally enacted there were 7 people in the workforce for every senior on the plan. But what we face now is there are more seniors than there are younger generations to pay for the obligation we have a large problem. Like in Richardson, when you see numbers like 50% of staff at the top of their paygrade and 1/3 of staff at the 15 to 20 yr limits to draw a pension, you see the increase in the unfunded liability. In 2010 that number was $266m. As stated by Dan John in the worksession that unfunded liability is $369m!! It's all in the math, Mark!

The Fed government knew there was a problem with SS in the mid 1970's with the enactment of ERISA and forces the liability off private enterprise and on to the government. So happened in that timeframe also? Nixon took us off the gold standard and started LEASING gold to create paper assets we see in the market. Today that lease rate is 45 to 1. Hence the same problem here in Richardson, or the state or the country still exists. I have heard from several economists (Including one from the Fed Res-Dal)that the detrimental effect of gov pensions on the overall liability to the taxpayer is 4-5 times greater than SS. So why do you think that liability is off balance sheet?

Sassy Texan said...

It you have followed the financial markets just this year, what did you see, Mark.

History lesson #1 - When the S&P drew down below 900 in Nov 2008, Fed announced their first bailout and pushed $600m into the market. And the market when down farther. So in March of 2009 the Fed added another $1.15T and the market(S&P) rose to almost 1200 again. But the moment the influx of cash from the Fed ended the market started drifting south again. So then Bernanke announces more money is coming in Aug 2010 and the market struggles to push itself back up again. So here comes this blast of money again. And that last blast ended June 2011.

So let's talk about this year. What has happened to be of interest?

In March Bernanke says the market is struggling with this inflow of cash and is not having the impact he thought it would. In April Dr Hu comes to the US and meets with Obama and says we have slowed down on buying your paper and believe your credit rating is B+ at best and your spending is out of control, so we are ceasing thepurchase of your treasuries. Oh, and do be mindful that Japan had a major catastrophy not to long ago and ceased the purchase of our paper to take care of their own. And if you have seen the Yen over the dollar you have your answer. The Federal Reserve has taken over the Task of buying our treasuries and keeps threatening to offer reverse repo's to any buyer. Of which there are none because no one really knows what a reverse repo really is!

So what happened in May, you ask? Geithner borrows $268B from the gov pensions to to gover the excess spending in Washington. Uh-oh...

And as I said earlier in June the QE 2 ends. Then the July fuss over the budget to be approved and we get the end of the month and the talks over raising the debt limit abounds. And by Aug 1st the debt ceiling is raised and the budget is filed. But what happened on Aug 2nd? Seems all that borrowed money from other funds, Geithner moved back to the national debt and it was at it's max again in just one day! That took the national debt equal to GDP! What happened in the broad markets? They tanked! And then S&P came out and declared a downgrade in the credit rating of the whole country. Then on Sunday after that Geithner has the audacity to come out and declare they don't understand budget math! This my friend is a prescription for monetary collapse. You watch very closely what happens in the world markets in the coming months.

So what does this have to do with Richardson? It is the exact same math. When your liabilities exceed the revenues by x% year over year, you are in trouble. Now, you just have to decide it is worth learning.

So here is another clue for you.....the message you are speaking has one hard fast rule. And that rule is the markets will ALWAYS go up! But what happens when they don't?

Sassy Texan said...

By the way, Just in the last 10 days Bernanke anounces that QE did not work and there is nothing else the Fed can do because their balance sheet is at par. To quote him - it will be up to the private sectors to save this economy.

Oh what an interesting web we weave when we do not take heed in the downside warnings of Reaganomics!!

Mark Steger said...

Cheri, thanks for the feedback. You've given us all a lot to chew on.

The 2009-2010 Net Budget Appropriations were $175,840,035. The 2010 CAFR Total Expenses were $188,146,000. These don't match because the budget and the CAFR measure different things. That's the apples to oranges reference in the blog title.

The 2009-2010 Net Budget Revenues were $173,032,617. The 2010 CAFR Total Revenues were $184,796,000. That's also an apples to oranges comparison. When you stick with apples-to-apples (or oranges-to-oranges), which my tables do, the differences between revenues and expenses are revealed to be under control.

The CAFR includes the effects of future retirement benefits on Richardson's net assets. More details can be found in Note 4(d) of the 2010 CAFR. It shows an unfunded actuarial accrued liability (UAAL) of $60,896,447 as of September 30, 2010. That's consistent with the numbers shown in the recent budget presentation to the city council.

Your comments on Social Security are outside the scope of this item, but I agree with the general point that Social Security and, more importantly, Medicare need adjustments in both funding and benefits to remain sustainable. As for your other comments on fiscal and monetary policy, I think you might have made a typo. I think you meant: "Oh what an interesting web we weave when we do not take heed in the downside warnings of Keynesian economics." ;-)

Sassy Texan said...

Mark, we are back to what I asked in the very beginning. Where did the money come from to balance the budget with a surplus?

Go look at page 99 of the CAFR as far back as 2001 of this CAFR there has never been a surplus in any "cash basis" budget year. (You can look at other years with previous CAFRS. In 2007 that same page shows the same overspending back to 1997. It has been balanced with other means. Look to page 100 for the answer. It is called debt, Mark. That is what your excess budget reserves are. Doesn't mean they are actually reserves, but the CAFR reports the impact and liability appropriately.

I used Social Security as an example because its functionality mirrors that of defined benefit plans. It was/is forced on the public and no one has ever wanted to work on it. Perry described it as a big Ponzi scheme a couple of years ago. I read an article today that he is changing his mind on talking about because many of the senior population THAT VOTE need to pension monies to survive. Once again another gov program that destroys the middle class. But that is another story.

My point is Social Security and Government Pensions are both 'defined benefit plans' are the same Ponzi schemes and mathematically do not work. And I understand what note 4(d) says but maybe you do not understand the impact based on the criteria I stated earlier.

So lets look at it this way:

In 2001 the population was 94,259 with a per capita income of $29,447. Annual pension costs were $6.2m; annual covered payroll $46.1m and the accrued liability was $159m.

In 2010 population = 101,200 with a per capita income of #32,083. Annual pension costs doubled to $13.5m with an annual payroll of $58.7m. Yet the accrued liability grew to $266m with the healthcare portion of $61m additionally.

Sassy Texan said...

Dan said in the work session that number has increased to $369m. So in basic accounting (just like the Federal CAFR and the Federal Reserve having balance sheets with liabilities exceeding assets and growing exponentially.

This obligation has grown far faster than the income of the community and the average salary at city hall now double the community. And if you add all the benefits to base payroll, which equates to $88m (49% of the entire budget), you get a 'people' obligation of $92,000 per person. So if the number of emplyees has gone down from 989 to 955 and costs to service personal expenses have gone up, is this reasonable to you?

You can push this debt forward all you want, but when 1/3 of your staff is ready to collect, that pushed forward liability will show up as current obligations faster than you think! Couple that with the fact that in 2006, the TMRS changed investing criteria from only fixed income financial vehicles to the broad market and extended the actuarial computations from 25 to 30 yrs, of course the number looks smaller. So in 2010 what did the market do? Rise off the bottom. So look at TMRS financials and you see a hefty increase in market value. But what happens when the market goes sideways, which it has done since March? Those people with defined benefits get their cost of living increases each year, which is less than CPI and there is no appreciable increase in the market or it goes down what funds the shortfall? The answer is the general fund.

And just a side note, CPI has been adjusted 18-19 times since the Clinton administration. This last adjustment by the Obama administration took energy and food out of the computation to keep from raising SS/Disability payments to 'save' the federal budget. What does that mean? Well, if you do not eat, drive a car or have electricity in your home there is no inflation. lol All you have to do is look at the futures market to see the problem there.

Sassy Texan said...

But I digress, back to Richardson. And once again the operations of the city is secondarBy to cover the people costs that are increasing. And more CO's will be issued to reimburse the general fund for pencils, paper clips, small tools and library books as it is today to make it look like a happy financial statement.

Per the charter (article 11) and statute (chapter 102) declare the requirement of all liabilities is mandated to be presented. Charter even says to provide capital progects and expeditures 5 years out. That is not in the budget. So my objection for years has been a growing infrastructure decline with noted projects by Bill Keffler of $500m. But this last year he has said now $350m and growing. He said himself the projects are growing faster than they can address. That is a problem! It is also a liability and maintenace that has been neglected.

So if you have off balance sheet liabilities that exceed assets, is there a problem?

I go back to the basics.
Accounting 101 Assets- Liabilities = Wealth
Economics 101 GDP = Consumer spending + investment in industry (bonds/treasuries/taxes)+ excess of exports over imports + government spending

There is a problem. Not only federally but locally. What I see in the financials of the city of Richardson is a stripping of funds even when they are under performing freed the growing personal costs.

Oh, I can spell, but it seems my typing is less than perfect. lol

And finally, you may be right on Kenysian economics. I look at it this way: Look at the DOW from 1928 to 1982. 300% rise. From 1982 to 2006 - 1400% increase. Part of Reaganomics was to monetize debt for growing the economy and reduce gov spending in order to promote private sector growth. The partnering of gov and business, so to speak. He warned of the delacacies of doing so, but greed got in the way. We are now facing a bond market bubble that will not be pretty.

So how much of that increase in values since 1982 is the "printing of money (ie. debt)out of thin air" called interest? And how far do you think the market will correct to get to value if there is a monetary collapse? And how much surplus of debt is there that is not reflective in this market? And if Richardson cannot borrow to balance the budget, what will happen?

Bottom line: You cannot borrow your way out of debt!

Sassy Texan said...

BTW, Mark....there is a projected shortfall of $2m at the end of this fiscal year (Sept 2011) and a projected shortfall for next year of $1.6m. How many years of defedit spending does it take to deplete the Unallocated Reserve Fund?

Mark Steger said...

Cheri, you ask, "Where did the money come from to balance the budget with a surplus?" That is a good question, but it is not the question I explored in my series of blog posts. I explored whether or not the current budget is balanced. You've moved on to whether debt and unfunded liabilities threaten our city's ability to continue to balance the budget in the future.

I'm not ready to pass judgment on that issue, but I did say in one of my own posts, "Caveat: this isn't the whole story. There are ways to hide deficits. See the recent budget passed by the state of Texas for a prime example of how to hide budget deficits by simply not paying all of your bills (that is, by passing IOUs off on future legislatures) and by borrowing (that is, by paying for current spending with long-term debt)."

I may explore Richardson's debt and unfunded liabilities in the future. Your comments here will be useful in that exercise. Thanks for commenting.

Sassy Texan said...

Mark, not to be interested where the additional money comes from is odd to me. But if it works for you then ok. I look at issues contextually so I understand the cause and effect. But that may not be everyone's cup of tea. At the end of the day they will do what they are gonna do! I will add this little bit of info to your dialogue.

Article 19.01 of the charter: No bonds shall be issued to fund any overdraft or indebtedness incurred for current expenditures of the city government or any subdivision thereof. Statute has the same language. Check with an attorney if you like.

So to cover shortfalls in the budget seems to be a big issue here. This stuff about the differences between cash basis and accrual is not a justification nor is it reasonable as an explanation. Accountants understand this! lol And interestingly enough I have been one for 35 years.

Have a good weekend!