DEFICIT BUDGETS

There seems to be an increasing concern among the general population regarding the spending decisions of local government Boards and Councils. If not a concern, there certainly is an awareness. We all know, or seem to think that local government should behave - - - fiscally, that is - - - like we must behave within the confines of our home as we plan our personal expenditures based upon our own personal, and limited incomes.

The newspapers love to sensationalize and criticize local governments. In their view, it apparently is newsworthy if a local board adopts a “Deficit Budget”. The implication being that it is fiscally irresponsible to budget, or appropriate expenditures that are greater than anticipated revenues. “We surely would go bankrupt if we did that at home”. Any businessperson surely knows that you can't operate at a loss unless you have reserves to pay for these losses. When those reserves are depleted - - - it's bankruptcy and goodbye.

Well, Government is different.
When is it appropriate to have a
“Deficit Budget”, in Government?

Budgets in government are based upon the annual needs for cash. A local government agency can only levy for current cash requirements. We cannot ask the taxpayers for any more cash then we need for one year only. In business, accountants like to “match” annual sales dollars with disbursements that are directly or indirectly associated or responsible for those sales. This “matching theory” is one concept that separates government from business. The purchase of a fixed asset, in business, does not flow through the income stream. This purchase is basically recorded on the Balance Sheet and is not “charged” against any current years income. In business, a non-cash charge called depreciation expense is charged annually to the income statement, therefore spreading the value of the purchased asset over its useful life.

So what does a local government do if they need to buy or build a capital asset that has a useful life of more than one year? They have two options. They can borrow the money and levy for the annual principal and interest payments, or they can adopt a “Deficit Budget”. A “Deficit Budget” would be appropriate in this case if the government agency had adequate reserves to pay for a new capital asset. The income statement of a government agency would reflect the entire cost of the fixed asset purchased in the year the cash was disbursed. This transaction would produce a deficit of expenditures over revenues in the year of the acquisition.

Cash basis, or modified accrual basis reporting in government forces this type of budgeting, and the only way for the reader to monitor government finances is to watch the “Fund Balance”, or Equity Section of the Balance Sheet.

Watch how the Agency finance director, or CEO adjusts his reserves or accumulates fund balances from one year to the next. Ask questions. It's your money.

The Township fiscal year begins April 1, 2004. We are developing our budgets now. Watch us; ask questions; make suggestions - - - it's your money.

John