Sunday, April 23, 2017

Budgets and Deficits in Government

I know that some of my friends are elected government officials or you are in the process of running an election campaign.  I’d like to offer some information to help you fully grasp the importance of fiscal awareness.  I’m not offering my opinion here.  These are facts and real-life circumstances.

I’ve worked as CFO for a government entity  The responsibilities essentially entailed everything related to the financing of that entity.  There were other important aspects of the job, but finance was the main function.

What is a Budget?
Budgets are part of all municipal, school district, county, state, and federal entities.  A budget is a fiscal plan outlining revenues and expenditures.  However, at its essential level, a budget is used to enact taxation.  A budget works in advance of the spending year; then actual revenues and expenditures are tracked and compared to budgets as that fiscal year progresses.  The estimates provided in a budget are based on both experience and the external factors affecting the governmental unit.  Officials enacting budgets must have an overarching and clear understanding of those external factors so that estimates reflect reality.

The Nature of Deficits
Deficits happen when actual expenditures exceeds actual revenue.  When budgets containing deficits are enacted over more than one fiscal year, the entity adds to the accumulated deficit.  Continually inflating the revenue side of budgets can quickly grow accumulated deficits.  The resulting structural deficits are devastating and can rapidly bring a government entity into a position of defaulting on obligations to employees, vendors, and other stakeholders.  Entities sometimes borrow to fill in budgetary gaps and provide working cash.  Borrowing brings interest into play thereby increasing expenditures even more.  Borrowing to fund operations multiplies the problems and very quickly becomes counter-productive.

Moreover, deficits are serious matters with severe consequences for the taxpayers.

The Largest Expenditures
In municipality, school district, county, state, and federal taxing entities, the expenditures that generally account for over 80% of the total operating expenditures are PERSONNEL AND STAFF related.  These costs include salaries, employer share of health insurance, Social Security, Medicare, workers compensation, unemployment compensation, and pension obligations.  All other expenditures account for approx. 20% of operating expenditures.

During the budget process, when expenditures exceed projected revenue, the entity has choices; either find new collectible revenue sources, cut operating expenditures, or a combination of both.  Enacting new revenue sources is a limited proposition in many entities.  Governments are then faced with cutting operating expenditures in order to enact a balanced budget.

The Essential Truth
When cutting operating expenditures, a budgetary deficit cannot be brought into balance by working solely on the 20% side.  The truth, albeit inconvenient, is that cuts to the largest portion of the budget, the 80% staff related costs, is the ONLY WAY to balance a large deficit budget.  Deep and extensive studies about staffing must take place.  Then staffing must be reduced.  It is just that simple.

Please don’t kill the messenger. As second President John Adams said, “Facts are stubborn things.  And no matter our wishes, desires, or the dictates of our passion, they cannot alter the state of facts and evidence.”

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