by Joseph Henchman
The Center on Budget and Policy Priorities (CBPP) has released an updated report on the impact of the recession on state budgets, concluding that more federal aid is needed. The report relies heavily on CBPP’s own calculation of state budget deficits, drawn from state government documents. Adding them all up, CBPP estimates somewhere around $425 billion in state budget shortfalls for FY 2009-11, with more for FY 2012 and FY 2013.
The number is probably accurate from their methodology, but is ultimately meaningless. Here’s why:
* A state “budget deficit” is the revenue projected (usually by the Governor’s office) minus hoped-for spending according to some formula, in the initial budget plan. For instance, say a state raised and spent $10 billion this year, but wants to spend $20 billion next year, projecting $11 billion in revenues. Ultimately they settle on spending $11 billion. That state has “closed a $9 billion budget deficit” even though revenues and spending are up from the previous year.
* The exact method of estimating next year’s spending varies by state, with some starting with last year’s budget while others throw in additional wish list programs. Adding up all the states’ numbers is adding apples and oranges.
* States must balance their budgets so there really is no cumulative state budget deficit in the end, at least on paper.
* It’s routine for states to want to spend more than they actually can, at least at first, and having a deficit in the initial plan happens even in flush times. Thus, CBPP’s numbers overestimate the scope of actual state budget deficits.
* CBPP also presents the deficits as a percent of each state’s general fund. While the general fund is usually the largest and most important part of a state’s budget, in many states it can represent less than half of the total budget. This number thus exaggerates the seriousness of a budget deficit.
* A budget deficit could exist because of overly ambitious spending plans that are whittled down to reality, overly optimistic revenue projections, fiscal irresponsibility, or structural imbalance. CBPP’s tale of the recession causing everything and federal aid being the only salvation doesn’t fit the facts. For instance, California’s deficit this year includes unpaid bills kicked over from last year, so it’s the same money being double-counted. This irresponsibility is glossed over in CBPP’s report.
News organizations and others like to cite a number for total state budget shortfalls, and CBPP gets a lot of media attention for its numbers, so they’re probably not changing how they do things. But I’d urge folks to look more to NCSL and NASBO, two quasi-governmental organizations, that track state budget actions with more specificity. However, a common comparison model across the states is still needed.
In addition to Henchman’s analysis, readers should remember that local government budgeting works in essentially the same way. Therefore, it is important for taxpayers and voters to see their financial audited reports in order to prove that real financial need exist as is usually sold during efforts to pass tax levies.
Source: Tax Foundation’s Tax Policy Blog, October 7, 2010