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States Continue to Use Dishonest Budget Tactics Making Shortfalls A Mystery

by Andrew Guevara | January 30, 2012

Many state legislatures have reconvened for the new legislative season to examine upcoming fiscal year budgets, and inevitably, budget shortfalls. Determining the size of those budget gaps, however, is especially difficult; the accounting maneuvers and budget gimmicks that states traditionally use to "balance" their budgets often serve as temporary façades of fiscal health. These gimmicks make determining accurate deficits and revenues increasingly difficult, and lawmakers and taxpayers alike must wait as the fiscal year progresses for the true health of the state to reveal itself.

Various methods of calculating deficits exist and lawmakers often pick and choose the methods they will use based on the promise of the fiscal outlook of each. In an effort to frankly determine the fiscal health of their states, some lawmakers are recognizing their previous budget errors but are not acting to correct these errors. Still, many other states continue to simply utilize the same misleading methods.

Below is an analysis of three state budgets of the most populous states and how each state faces their own budget and shortfall challenges, respectively.

NEW YORK

Gov. Andrew Cuomo released a budget proposal for fiscal year 2013 to close a $2 billion deficit but ignored the mid-year analysis reporting higher-than-expected deficit figures resulting from lower than expected revenue forecasts.

Cuomo proposed a $132.5 billion budget for fiscal year 2013. The budget does close the $2 billion deficit without any new future taxes, in part by incorporating $1.14 billion in savings from consolidating purchasing and human resources.  A tax deal reached last month that raised rates on those earning $2 million or more added $1.5 billion in revenue to the state's coffers so the current deficit was reduced.

In November, the Budget Division's mid-year update released by Cuomo's office estimated the budget shortfall for fiscal 2013 to be between $3 billion and $3.5 billion, an amount that grossly exceeds the deficit closed by the current budget. The division also forecasted a $350 million shortfall in the current year.

An optimistic revenue estimate was part of the reason for the increasing shortfall. But tax collections for the first half of the fiscal year were off by $391.9 million, meaning a shortfall figure greater than anyone estimated at the beginning of the fiscal year.

CALIFORNIA

In California, the actual size of Gov. Jerry Brown's proposed budget is not the only a matter of debate. In addition, many questions exist regarding the revenue assumptions he uses, which have been a point of concern in past budgets.

This month, Brown released a $137.3 billion budget proposal for fiscal year 2013. The $137.3 billion figure ignores roughly $70 billion to be spent by the state in federal funds, bringing the total spent to more than $200 billion. That does not include another $50 billion or so owed in public pension payouts, totaling to a quarter of a trillion dollars.

Optimistic revenue assumptions play a part in the Governor's proposal. The $92.6 billion general fund budget, the main portion of the budget, assumes that voters will approve new taxes in November of this year, which is expected to bring in $4 billion in revenue. This revenue may never be realized, since the results of the elections are uncertain. These revenue projections should be based on more than hope of an outcome.

California has a history of basing its budgets on overly ambitious revenue forecasts. When the California state legislature passed its 2012 state budget, they incorporated steep spending cuts to close the $10 billion dollar gap in the $90 billion dollar general fund budget. The budget assumed $4 billion dollars in additional tax revenues similar to this year, but fiscal experts were very doubtful that this amount of revenue would actually materialize. Brown noted that if these revenue assumptions were over-optimistic, the state would have to make severe cuts to education, corrections, and safety-net programs.  That is precisely what happened.

Reports in December revealed that the fiscal experts were correct, and Brown was forced to dramatically cut spending as a result of underperforming revenue estimates, which would trigger these automatic cuts.  

TEXAS

In Texas, Gov. Rick Perry closed a $27 billion shortfall in the state's two-year budget by using accounting gimmicks, deferred payments, and ignoring upcoming payments.

The state arranged to collect more than $700 million in taxes ahead of schedule, by simply taking money out of the budget appropriated for fiscal year 2013. Another phantom $800 million was drafted into the budget by instructing the Legislative Budget Board to predict a faster increase in property values along with the complementary taxes. Perry's budget also ignored a $8 billion structural deficit resulting from the 2006 bipartisan reform offsetting lower property taxes.

With regard to public education, Texas used the calendar gimmick and delayed a $2.3 billion payment to its public schools by simply deferring the payment one day, but so that it would fall in the next year. The budget also assumes no student enrollment growth for the first time in 25 years, despite an increase of an estimated 160,000 new students in the next two years.  

Furthermore, the budget only covers Medicaid funding through the spring of 2013, allowing lawmakers to avoid coming up with more funds. By avoiding funding Medicaid, the state is simply delaying the inevitable $4.8 billion payment due at a future date.

Texas State Comptroller Susan Combs said last month that the state ended 2011 with a $1.6 billion more in revenue than predicted; however, state fiscal experts, such as Eva DeLuna Castro of the left-leaning Center for Public Policy Priorities, believe that the state could still face the same budget shortfall as it did in the last legislative season. She pointed to the state's estimated $8 billion Rainy Day fund as a potential source of funding to cover the shortfall. Talmadge Heflin, who directs the conservative Texas Public Policy Foundation's Center for Fiscal Policy, said that he advocates the state not reach into the Rainy Day fund but could potentially in order to cover the state's delayed Medicaid payment.

Despite all of these budgeting gimmicks, a report released last week by the Center for Budget Policies and Priorities found that Texas has one of the largest current budget gaps of all the states in terms of dollars: $9 billion.

In the case of New York and California, these states have not recognized past errors in overestimating revenue assumptions. This accounting gimmick will continue to leave these states trying to close shortfalls in coming years, and they will most likely do so by reusing this tactic or similar ones that Texas has utilized. Texas has incorporated a myriad of schemes to disguise its shortfall as a "balanced budget,' but shortfalls will remain a reoccurring problem if the state continues to employ these clandestine maneuvers. All three states will confront the even murkier problem of determining their precise shortfalls if they continue to blemish the facts of the true state of their finances.

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