Monday, August 29, 2011

Speaking English: Balanced Budget

balanced budget: noun. A budget is balanced when current expenditures are equal to receipts

balanced budget: Government budget where the current expenditure equals current revenue.

balanced budget: A budget for which expenditures are equal to income. Sometimes a budget for which expenditures are less than income is also considered balanced.

There you have it. A general-purpose dictionary, a business dictionary and an investment dictionary all agree. So, when I looked at Richardson's proposed 2011-2012 budget, saw that expenditures ($188.6 million) exceeded revenues ($186.9 million), and pronounced it "not balanced," it seemed to be an easy call for me. I couldn't understand why the city insisted the budget was balanced. I did have my theories:

"Maybe 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."

After the jump, Bill McCalpin fleshes out that theory.

In an article on worth reading in full, Bill McCalpin cites this section of the Richardson City Charter:

"Section 11.06. - Budget appropriation; tax levy. On final adoption, the budget shall be in effect for the budget year. Final adoption of the budget by the council shall constitute the official appropriations for the current year and shall constitute the basis of the official levy of the property tax as the amount of tax to be assessed and collected for the corresponding tax year. Estimated expenditures for operating purposes will in no case exceed proposed revenue, plus reserved fund balance, and other financing sources. Unused appropriations may be transferred to any item required for the same general purpose."

There you have it. The city considers the budget balanced if expenditures are less than revenue, plus reserved fund balance, and other financing sources.

So, even though the dictionaries are against them, the city council has the backing of the city charter. That's their story and they're sticking with it. And because my own complaint has been the violation of the English language, not a disagreement with the wisdom of city policy, I'll close the book on this question, with just one little postscript. I'll note that the city charter doesn't describe this situation as a "balanced budget." In fact, it doesn't require a "balanced budget," in those words, at all. It does call for expenditures to be less than revenue, plus reserved fund balance, and other financing sources. That's something else.


Sassy Texan said...

Let's try this another way.

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.

Whether CO or GO or Revenue, ALL ARE STILL BONDS! And cannot be used to fund budget shortfalls and is certainly not "other financiang". I do not care what Mr McCalpin says because he is incorrect. The math does not work.

Here is the fund balances, the unallocated reserve amount of that balance and the incr in debt for each fiscal year end of each CAFR:

In thousands

2004 $ 22,860 $14,890 incr in debt 2.9%
2005 $ 49,698 $17,783 incr in debt 5.9%
2006 $104,697 $25,662 incr in debt 24.8%
2007 $102,371 $29,499 decr in debt .8%
2008 $ 86,757 $20,742 incr in debt .74%
2009 $ 58,774 $20,053 incr in debt 1.2%
2010 $115,594 $22,730 incr in debt 22.3%

So what does 2006 have in common with 2010? The fund balances seem to increase with GO/CO bond debt! And what has Mr Townsend aleady started talking for 2013? Bond debt!

Now back to the math of A - L = wealth. This city cannot operate without debt, just like our federal government. And that will be the destruction of assets in the long run. And the asset base (ie our homes and businesses) will continue to be under stress until there are some measurable goals to beat inflation (ie interest on debt).

And the first double bind is the increase in TAV will always increase the debt because we do not sunset the allocation to the Interest & Sinking fund. And frankly, they do not want to because it is their hedge in spending.

The second double bind is in the section of the charter you referred above. Though it says shortfalls can be PLUS THE RESERVE FUND BALANCE, which is the 30-60-90 reserve balances held per fund.

Section 11.09. - Amending the budget.

In case of grave public necessity, emergency expenditures to meet unusual and unforeseen conditions, which could not, by reasonable diligent thought and attention, have been included in the original budget, may from time to time be authorized by the council as amendments to the original budget. Any amendment providing for additional expenditure shall also provide for reductions in other expenditures or supplemental revenues to fund such amendments, or an amount from unreserved fund balance as a supplement. These amendments shall be by ordinance, and shall become an attachment to the original budget.

Article 11 states there must be an unallocated reserve balance for unexpected expenditures. 2010 is the perfect example of a budget of $175m, yet spending was $188m.

I com back to the original question Mark. Where did the money come from?

Sassy Texan said...

Here is a video for you of possible interest.

Sassy Texan said...

Here is another one:

Sassy Texan said...

One other thing! A friend just reminded me in 1999, GASB 34 was created and enacted in 2001. It holds very strict guidelines for a balanced budget to be "total revenues and expenditures, non-inclusive of reserve fund balances".

So really open communication needs to be on the adgenda very, very soon!

Mark Steger said...

Cheri, thanks as always for your feedback.

I'm curious why you consider the statement "The fund balances seem to increase with GO/CO bond debt!" worthy of an exclamation mark. As the city sells bonds to execute capital projects, the reserves for capital projects go up. As the projects are executed, the reserves drop and capital assets rise. No?

Can you provide a link to GASB 34 and its guidelines for a balanced budget? I've been unable to find same.

Sassy Texan said...

I guess I am confused by your question. How much do you think is reserved for the 30-60-90 day reserve balances? And when it is depleted for budget shortfalls, what fills it back up? And what excess is there to cover the deficits in the budget? Your dependency is on the steady increase in TAV.

If you earn $75,000 a year and spend $85,000 and you have a savings account and take $5,000 from savings and $5000 in debt to cover the shortfall, how long will it take to be upside down? Well, if you get an raise every year, you can push the problem forward and pay the minimum on debt till you earnings get better. Same with the city.

So let's take this perspective. If the actual expenditures are always in excess of revenues as stated on page 99 of the CAFR and there is and increase in cash, where did the money come from to increase the reserve balances? Stripping funds is one part noted by the sweeps to the General Fund. What could the other part be? It is just math!

With reference to GASB 34, you can go to their website

Isn't the internet wonderful!

Sassy Texan said...

There is a movie you might be interested in. It is called Too Big To Fail. It is about the collapse in 2008. Most interesting stuff!

Mark Steger said...

Cheri, I guess I am confused by your questions, too. You answer my question with more questions. We seem to be talking past each other. You have a lot of experience in this area, but you're not getting your points across. That's unfortunate on both sides.

Example: I've been to the GASB website. I've been unable to locate anything that matches what you report, namely that GASB 34 "holds very strict guidelines for a balanced budget to be 'total revenues and expenditures, non-inclusive of reserve fund balances'."

Example: You ask, "If you earn $75,000 a year and spend $85,000 and you have a savings account and take $5,000 from savings and $5000 in debt to cover the shortfall, how long will it take to be upside down?"

The CAFR shows Richardson's net assets to be essentially the same today as five years ago. At this rate, it will take forever to be upside down (unless "upside down" is an accounting term I'm interpreting wrong).

As for the movie, "Too Big To Fail," I, too, recommend it.

Sassy Texan said...

It will not take forever when debt is growing larger than the economy. And the economy is defined by the TAV. In the last 5 years I showed you (above) how the fund balances and unallocated reserves are fed with increased debt beyond the growth of the city. I do not know how else to explain it, Mark.

Assets (flatto shrinking) - Liabilities (growing debt) = Equity (declining).

Sweeps back and forth from/to general fund muddy the waters. To really see, look how they strip a fund one month/year to cover a shortfall in another and then have to cover it again back to the original fund because it cannot meet the next obligation. This is a shell game that requires some dilligence to follow.

The golf fund is a prime example. For years the lack of fiscal management and maintence of the asset have led up to the 2010 actual. Some saw it coming. If you look at the 2010 actual numbers in the current budget, you see the evidence. Transfers out for $91k for G&A (management payroll)to the general fund, and then have to replenish the expenditure shortfall of $575k to balance and honor the reserve requirement. In the current year you have $30k transferred out for G&A, yet there is $165k to cover the expense shortfall. Some of us belive that is light on the cover. Look to the 2010 CAFR and you realize why there is an unallocated reserve balance of ($276k). That is negative. A negative unallocated reserve. Is that even possible to have a negative reserve? Seems like an oxymoron to me!

The TIF is even worse because there is not enough in TAV created to even pay the obligations based on agreements made of $15m at 7% interest. They are paying these obligations out of the general fund. Well they have paid 2.3m at this point from the general fund.

These are all in violation of the charter. Article 11. So back out all the sweeps (they are a violation anyway)to see a more clear picture.

I asked questions of you to get you to look for the answers in order to get it. As I said in the very beginning is would be better to meet and SHOW you the issues. Looks like I have written half a novel to attempt understanding.

Sassy Texan said...

GASB 34 covers many areas in the CAFR. The specific point I made is realized on pages 99-100. You see the revenues less expenditures equaling a deficit on page 99 and the evidences of other xources to cover are on page 100.

Here is the link. I guess I do not understand what you do not understand on the guidelines.

Mark Steger said...

Cheri, to me, what the CAFR shows over the last five years is:
Assets (growing) - Liabilities (growing debt) = Equity (flat).

You said GASB 34 requires "a balanced budget to be 'total revenues and expenditures, non-inclusive of reserve fund balances'." I can't find that requirement anywhere in the document you linked to or anywhere else on the GASB website.

Sassy Texan said...

I have no clue where you get your info because the CAFR is most clear. I have tried 6 ways from Sunday to point out the deficit areas. And all you could write is one sentence. Well alrighty then!

This is the first year in 4 that there was some sort of increase in TAV due to new construction.

I showed you net assets have gone from $215,330 in 2006-2007 to $202,622 in 2009-2010. And if 2010-2011 is spot on per the budget, net assets will be $200,528. And this budget will drop it to $198,873. In thousands of course. And there is the prepaid/deferred expenses of $3.49m that really are not assets, but time will erode those away.

I showed you debt has climbed year over year relative to the fund balances - allocated and unallocated. Debt has grown from all tax authorities

I pointed out that unfunded liabilities for defined benefit plans and healthcare have grown over the last few years but adjusted to push the debt forward. Dan Johnson confirmed $359m in the last budget worksession.

I showed you the pages in the CAFR where expenditures have exceed revenues year over year for the last 10 yrs.

I pointed out another off balance sheet liability of $500m in infrastructure projects to be addressed, and growing. Or is it $350m? I keep hearing different numbers and never is there is 5 yr schedule required per the CAFR to confirm.

I pointed out that the income per capita is $32K. A slight rise from 2001 of $27k. Yet this budget has 48% salary expense of $88m divided by 955 employees is over $92k per employee. Granted benefits are 1/3 of that number, but that still puts avg salaries double the community.

I pointed out the Golf Fund failures. The Tif Fund shortfall. The Hotel Occ deficit.

AND all you can say is one sentence????

AND THEN I give the GASB page. I even referenced the same pages in the CAFR pointing out the results of what you wanted to know.

I have no idea what you are reading or not reading, much less what you understand or do not understand. Devil is always in the details if you are willing to look.

We will have another CAFR by the first part of Feb so we will see what happens next!

Have a nice day!

Sassy Texan said...

On a lighter note!

Mark Steger said...

Cheri, you're being unfair. One sentence? I've blogged more about the budget recently than any other topic. And I'm getting my data the same place you are, the CAFR.

Net assets as of September 30, 2005 were $201,383,000.
Net assets as of September 30, 2010 were $202,622,000.

None of the detail you've dived down into has refuted the fact that net assets were higher at the end of 2010 than they were in 2005.

As for GASB 34, I'm telling you that it doesn't contain what you claimed, that it requires "a balanced budget to be 'total revenues and expenditures, non-inclusive of reserve fund balances'." It's not in the document you linked to.

Sassy Texan said...

Mark, I am not being unfair. With the influx of the 2006 bond, net assets moved to $215m from the 2005 CAFR. And all of that gain was lost in the journey to the 2010 CAFR from overspending. And overspending is taking the lead in 2011 and 2012 as referenced by the budget. The last bond was 1997 and it took to 2006 to even complete the projects because of over spending. And we will face another on in 2013 because the primer has already been programed. That is unless the bond market collapses and we will really have to live within our means.

I heard a guy talking about the $960B rush to bonds in the month of Aug because of all the volatility. My first thought was he was going to call bonds a safety net. But he surprised me and strongly said the rating downgrade was to the bond market and not the stock market! Yes! Someone who gets it!

I will go back to the GASB page and give you the section. I have other obligations this morning.

Mark Steger said... investigated the claim that GASB 34 requires "a balanced budget to be 'total revenues and expenditures, non-inclusive of reserve fund balances'" and judges the claim to be false.