Thursday, August 18, 2011

Deficit or Not, Numbers Matter More Than Words

"A billion here, a billion there, and pretty soon you're talking real money."
-- Senator Everett Dirksen

Yesterday, I asked what I considered to be a very simple question: Is Richardson's proposed 2011-2012 budget in balance? The city says yes. I looked at the numbers and concluded no.

Wouldn't you think that's a simple question that we ought to be able to agree on? Look at revenues. Look at expenditures. Subtract. If the number is positive, you have a surplus. If the number is negative, you have a deficit. I have a pretty hefty background in mathematics. I've studied differential calculus and matrix algebra and non-Euclidean geometry. But I admit my accounting training is limited (and by limited, I mean non-existent). So, I won't claim I'm necessarily right on an accounting question. But this one seems simple. And no one's stepped forward to educate me on why I'm wrong. I have several theories why that might be.

One, maybe because I'm actually right, but the city has a mental block preventing them from admitting that their budget has a (slight) deficit. Their belief that it's just prudent fiscal management to draw down those excess funds (it might well be) prevents them from conceiving how that can be compatible with a budget deficit. They are ingrained to believe that deficits are always bad, so how can they possibly be recommending a budget that is in deficit? The only way to resolve their cognitive dissonance is to deny the obvious: that their budget has a (slight) deficit.

Or two, maybe because there's a state legal requirement that city budgets be balanced, meaning there's a legal definition of what "balanced" means that doesn't exactly match the dictionary definition. As long as the city meets the legal definition, their budget is in (legal) balance, even if the numbers show a teensy-tiny (dictionary) deficit.

Or three, maybe because I'm just too dense to understand accounting and the city has given up trying to explain it to me. Let's go with this last possibility as our working hypothesis.

After the jump, moving on to the next question.

The next question is, does it even matter if we decide to call Richardson's budget a surplus or a deficit? In a way, the answer is no. What really matters are the numbers, not the words. If the numbers are big, then the difference between surplus and deficit is important. But if the numbers are teensy-tiny, then the difference between surplus and deficit is inconsequential.

Richardson's numbers tend towards the teensy-tiny end of the scale. My analysis indicated that the city's proposed 2011-2012 budget showed a deficit of $1.6 million dollars. Now, any dollar figure with a "million" after it should be considered "real money," in the (possibly apocryphal) words of Everett Dirksen. But, when your budget is $188 million, a deficit of $1.6 million amounts to less than 1%. With all the vagaries of the economy and the weather and the whims of state government, we really shouldn't demand more accurate forecasts.

The next thing we should worry about is whether the city consistently runs a surplus or deficit. Either way, even if the numbers each year are teensy-tiny, pretty soon they can add up to real money (to paraphrase Everett Dirksen again), no matter how small each year's increment might be individually.

Here's a table 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)

As you can see, in three of the years, the budget was in surplus; in the other three years, it was in deficit. Each year's difference between revenues and expenditures was less than one percent (except for the current year estimate which is just a smidgen over one percent). This is exactly how I would expect a well-managed budget to appear.

Finally, and most important, there's that matter of those excess fund balances. As the city argues, it's prudent fiscal management to draw those excesses down. That's revenue that doesn't need to be raised. That's a Good Thing™.

I conclude that the fact that Richardson's proposed 2011-2012 budget shows a very slight deficit is not a cause for concern. In fact, because of those excess fund balances, a slight deficit is even prudent fiscal management. But how can the city admit that when they won't even admit we have a budget deficit at all.

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'm not accusing Richardson of using similar accounting tricks. I just don't want anyone to read more into my limited analysis than it warrants.


Andy Gross (You are welcome name nazis) said...

Zounds! How could this just now come to light after the election?

Sassy Texan said...

Your numbers are a little off. There has never been an excess in the budget. Ever. And I can show you why if you are interested.

Cheri Duncan-Hubert

Mark Steger said...

Andy, the historical budget data I show has been freely available on the city's website all along. This year's budget is only being put together now, by the new council.

Cheri, I'm always interested in being educated. The data I show is from the city's budget documents. Did I make a transcription error? Exactly which numbers are "a little off?"

Sassy Texan said...

I understand where you got your numbers and as Walter Cronkite used to say: "There is always more to the story". This is not a discussion for this venue. I will be more than happy to meet with you and will show you why. Just let me know when your time permits.

Cheri Duncan-Hubert

Mark Steger said...

Cheri, if I understand, you aren't saying my numbers are wrong, only that there's more to the story. Well, I agree with you. There always is. As for this venue, I kind of like it. It keeps all the discussion out in the open where we can all learn together.

Sassy Texan said...

Mark, I would be writing novel here. And yes, your numbers are wrong. I just understand your source. And the best time I have made 'speaking' the issue is 1.5 hrs. To write it would be my newly published book. I understand why you want an open form and I agree this should be an open message. There are reasons for my asking for a meeting. If you are truly interested in learning more, it is up to you to follow through. Regards, Cher

Mark Steger said...

Cheri, that's twice you've told me my numbers are wrong and twice you've failed to say where. I'm truly interested in learning more, but I don't want to spend 1.5 hours taking notes. When you have something in writing for me to read, let me know.

Sassy Texan said...

That is what I thought you would say. So when learning is time sensitive, it is not important to you. Got it.

So here is my gift to your learning. This is a really big clue as to why your numbers are wrong! When net assets per the CAFR are declining YoY and the cash in funds per the budget is increasing YoY, where did the money come from?

Sassy Texan said...

Figures never lie, but liars always figure to the swinging pendulum of bias!

Mark Steger said...

Everything is time sensitive, I'm afraid, Cheri. You don't want to take the time to put your arguments down on paper. I don't want to take the time to do the note-taking for you. It's a draw, I'm afraid.

By the way, I'm already using my valuable time instead reading the CAFR, which is down in writing. I'll have more to say about it anon. (Use a word three times and it's yours.)

Sassy Texan said...

Not sure what you are afraid of, but I can assure you your assumption on my intentions is completely off base. You do not know what you do not know, Mark.

And I am sure your time is very you! And by the same token time my time is more me. Now what that has to do with the price of apples in Spain (or their debt woes)only you would know.

So you go right ahead and and use your valuable time reading the the CAFR and creating your own learning curve. You are capable of doing such.

For FREE, I offered you my valuable time and the valuable experience, research and expense I have incurred. You are completely at choice to refuse it.

Have a wonderful day!

Andy Gross (You are welcome name nazis) said...

sarcasm........ that is what my post was dripping with.....

Mark Steger said... explains how the city justifies calling this a balanced budget here.