Wednesday, August 31, 2011

Keffler: These are Balanced Budgets

"These are balanced budgets." Those are Richardson City Manager Bill Keffler's words Monday evening at a public hearing on the proposed 2011-2012 budget. Keffler seemed unusually agitated as he tried to explain why the budget shows an excess of expenditures over revenues. He said public opinion had "misunderstood" this matter and he wanted to "set the record straight."

I had the uncomfortable feeling that he was speaking to me. So, even though I didn't think there was anything left to say, let's go, after the jump, to Keffler's argument and my response.

Keffler apologized for being "infantile" in wanting to read from a document published by the Government Finance Officials Association (GFOA):

"Budgeting involves a use of estimates. Naturally the conservative use of revenue estimates over time can produce a significant fund balance surplus. While it is usually good financial practice to maintain a healthy fund balance surplus, such amounts may eventually exceed a government's need as expressed in its fund balance policy. In that case a government may decide to fund a portion of the annual or biennial appropriated operating budget with the existing budgeting fund balance rather than by raising new resources, thereby putting fund balance back within the range established by the government's fund balance policy. In such cases an excess of expenditures over revenues will occur in a year in which fund balance is budgeted in place of additional revenue. Clearly it would be wrong to interpret such a planned reduction of fund balance as an indication of a potential financing problem."

This explanation for what makes the proposed budget "balanced" suffers from the same flaw as Bill McCalpin's earlier explanation. McCalpin used the City Charter to defend the city's practice of sometimes having expenditures exceed revenues, Now, Keffler uses a GFOA document. The flaw is this: just like the City Charter, the GFOA document also doesn't call a budget in which expenditures exceed revenues a "balanced" budget. It doesn't define that phrase at all.

Instead, it simply explains the conditions under which an unbalanced budget might be the right thing to do. Under those conditions, an unbalanced budget is not an indication of a potential financing problem. And I agree with that.

My argument isn't that Richardson's proposed budget is not prudent or is not in compliance with the City Charter and GFOA standards. My argument is with Keffler's contention that "these are balanced budgets." When expenditures exceed revenues, the budget clearly isn't balanced, even if the practice is justified, prudent and sensible.

In summary, I agree with everything Keffler said in defense of the budget's bottom line, except for that one introductory sentence: "These are balanced budgets."


Sassy Texan said...

I have summarized the summary!

Summary of Statement No. 34
Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments
(Issued 6/99)

This Statement establishes new financial reporting requirements for state and local governments throughout the United States. When implemented, it will create new information and will restructure much of the information that governments have presented in the past. We developed these new requirements to make annual reports more comprehensive and easier to understand and use.

Most funds are established by governing bodies (such as state legislatures, city councils, or school boards) to show restrictions on the planned use of resources or to measure, in the short term, the revenues and expenditures arising from certain activities.

In current annual reports, fund information is reported in the aggregate by fund type, which often makes it difficult for users to assess accountability.

Fund statements also will continue to measure and report the "operating results" of many funds by measuring cash on hand and other assets that can easily be converted to cash.

Showing budgetary compliance is an important component of government's accountability. Many citizens—regardless of their profession—participate in the process of establishing the original annual operating budgets of state and local governments. Governments will be required to continue to provide budgetary comparison information in their annual reports. An important change, however, is the requirement to add the government's original budget to that comparison. Many governments revise their original budgets over the course of the year for a variety of reasons. Requiring governments to report their original budget in addition to their revised budget adds a new analytical dimension and increases the usefulness of the budgetary comparison. Budgetary changes are not, by their nature, undesirable. However, we believe that the information will be important—in the interest of accountability—to those who are aware of, and perhaps made decisions based on, the original budget. It will also allow users to assess the government's ability to estimate and manage its general resources.

These government-wide financial statements will help users:

Assess the finances of the government in its entirety, including the year's operating results

Determine whether the government's overall financial position improved or deteriorated

Evaluate whether the government's current-year revenues were sufficient to pay for current-year services

See the cost of providing services to its citizenry

See how the government finances its programs—through user fees and other program revenues versus general tax revenues

Understand the extent to which the government has invested in capital assets, including roads, bridges, and other infrastructure assets

Make better comparisons between governments.

In short, the new annual reports should give government officials a new and more comprehensive way to demonstrate their stewardship in the long term in addition to the way they currently demonstrate their stewardship in the short term and through the budgetary process.

And here is the key statement: Evaluate whether the government's current-year revenues were sufficient to pay for current-year services.

Mark Steger said...

I guess we can add GASB Statement No. 34 to the growing list of documents that make no attempt to formally define the term "balanced budget."

Sassy Texan said...

They did a pretty good job since they are not a governing body.

Besides, the Charter is pretty clear on how you amend the budget and hold a criteria for NOT using debt to cover current expenditures. Would be nice if city leaders would follow it.

Sassy Texan said...

GASB 54 adds another level of identification effective this year. Should make for an interesting CAFR in Feb.