SADOW: On The Purported Louisiana Budget Surplus…

Regardless of the explanation of how it got there, the asserted budget surplus for Louisiana to close Fiscal Year 2014 becomes real only through a political process that would benefit from some less ambiguous legal specifications.

Last week, the Gov. Bobby Jindal Administration declared FY 2014 ended with a surplus of about $178.5 million. But apparently $319 million of that came from an accounting change that caught Treasurer John Kennedy by surprise, leading him to muse whether there was a $141.5 million deficit as computed under some theoretically previous standard.

He hypothesized that discovery of these surplus funds may have come because of a shift of basis of accounting from the modified accrual basis to a cash basis. In essence, that means that balances would be computed by cash inflows and outflows and what was physically on hand, not adjusted for some anticipated, with varying degrees of certainty, receipts and disbursements and disregarding others that would be off the books. That would be unusual for the state to head in that direction because of the 1999 pronouncement of the Government Accounting and Standards Board Statement #34 which said for most things governments should report using the modified accrual basis, so deviation from that in budgeting would complicate reporting, and also for complex organizations like state governments cash basis accounting provides more limited information for decision-making.

More likely, it could be explained as a step not quite so far over, to a modified cash basis. Here, cash on hand plus that expected to be incoming or outgoing for a period after the end of the reporting period, which could mirror the state’s existing practice by closing the year’s books 45 days after its end. As it was reported a 12-year span was used by the Administration in coming up with this figure, it could be that, going back that far, the 45-day adjustment was made, pushing varying inflows and outflows into a previous fiscal year, and the cumulative effect, now applied going forward, added $319 million more to what already had been calculated.

While this is a less exact basis than modified accrual, note that this is not in reference to reporting, but budgeting. And this actually is fairly reflective of the basis the vast majority of governments in the country, including the federal government, uses. There’s nothing inherently wrong with the approach and whatever cash was measured would be genuinely there, it’s just a different way for use, although arguably producing less precision and making it less amenable for simplicity, in planning and reporting purposes.

Yet even regardless of how a surplus figure got there, it means nothing until the Revenue Estimating Conference ratifies the figure. That has a profound impact on the budgeting process, for depending upon the REC’s decisions about exact amounts, it could change figures on a continuum of increasing mid-year budget cuts, forcing mid-year cuts, or making available surplus funds to be spent on a limited number of long-range purposes. In other words, no matter how a figure comes about, it means nothing until the REC takes it or alters it on whatever basis it likes (usually it asks for the administration and legislature to submit competing estimates and then chooses between the two, where its three political appointees and one government outsider must be in unanimous agreement or the prior forecast remains in effect).

But this illuminates a larger issue, this being that nothing legally requires the REC or any other part of government to have to use a particular basis of accounting. For years, advocates of transparency and good government have argued that governments need to make the transition from cash to modified accrued basis, with numerous bills introduced in Congress over the years to do this at the federal level. Emulating this for Louisiana would produce more easily-understood budgeting and more faithfully reflect the state’s financial condition (even as it would not affect off-budget financing, such as linking the state’s financial statements to unfunded pension liabilities hovering in the $20 billion range that the state must have paid off by 2029, although GASB Statement #68 that has just gone into effect should shed some light onto that in reporting). Passing a bill to do that during this upcoming session would bring needed clarity to the state’s budgeting and reporting.

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