Wednesday, July 10, 2013

Reconcile Yourself to the State Budget

You might as well reconcile yourself because you won't find a reconciliation from any official source between the governor's accrual budget (released in late June) and the state controller's cash budget (released today).

In theory, there are advantages to accrual accounting over cash accounting in judging performance, whether of a state budget or a corporation.  Accidents of timing of receipts and expenditures can distort the results for any given period.  For example, there really is no difference in a check arriving on June 30 or July 1.  But if you are on a July 1-June 30 fiscal year and look at cash flows rather than accrual, it will make a seeming difference.

That's the theory.  In practice, accrual opens the door to cosmetic adjustments as practiced in California state budgeting for the general fund (the operating budget for the state).  The fiscal year that just ended on June 30, 2013 began with a negative reserve in the general fund as the controller (cash) saw it of -$9.6 billion, as you can see on the table below.  Yet the governor (accrual) tells us that the reserve was -$1.7 billion.  The gap between them of well over $7 billion is large.  But you will find no table to reconcile the reports from any official source.  At the end of the fiscal year, the unreconciled gap had narrowed.  The controller still put the reserve as of June 30, 2013 for the general fund in negative territory (-$2.4 billion) while the governor shows it as slightly positive ($0.9 billion). 

             Controller    Governor      Absolute
$billions          Cash     Accrual    Difference
- - - - - - - - - - - - - - - - - - - - - - - - -
GF Balance        -$9.6       -$1.7          $7.6

Inflow*           103.4        98.2           5.2

Outflow**          96.3        95.7           0.6

Surplus***         +7.2        +2.5           4.6

GF Balance         -2.4        +0.9           3.3
- - - - - - - - - - - - - - - - - - - - - - - - -
*Refers to “revenue and transfers” in governor’s budget and “receipts” in controller’s budget.
**Refers to “expenditures” in governor’s budget and “disbursements” in controller’s budget.
***Inflow minus outflow.
Note: Details differ from totals due to rounding.
- - - - - - - - - - - - - - - - - - - - - - - - -
Now neither version of the budget suggests some imminent danger.  The California economy is recovering and the governor got his temporary tax increases under Prop 30.  Both factors are bringing in more state revenue.  Moreover, even with a negative reserve in the general fund, other state funds currently provide a comfortable cushion.  The controller can borrow from these other funds - outside the general fund - to cover short-term state cash needs.  We are far removed at present from the situation we experience only a few years ago when the state had to hand out IOUs instead of paying its bills.

However, for cosmetic reasons, the governor wanted a positive general fund reserve at the end of the just-concluded 2012-13 fiscal year so that we could "sleep well" as he put it in signing the 2013-14 budget.  And his outgoing finance director delivered.  Any harm done?  Not immediately.  But over time, the notion that the state budget is conveniently adjustable undermines public confidence.  When there is a budget crisis in the future - and at some point there will be one - impressions that the numbers aren't real is a Bad Thing.
The governor's budget summary can be found at  The controller's budget can be found at

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