The many flavors of government budget deficits

March 2nd, 2011 at 9:17 pm by under General Talk

Since we’re now on the eve of Providence’s fiscal D-Day (as WRNI’s Scott MacKay aptly put it) I thought I’d take a moment to define two key terms we’ll probably hear about tomorrow: structural deficits versus operating deficits.

It’s an issue I alluded to here earlier today when I wondered why there was such a sizable gap between the City of Providence’s projected structural deficit for 2010-11 of $70 million and its actual projected deficit of $29 million. That’s a $41 million difference – no small chunk of change.

As is often the case with these things, both numbers are accurate. They’re just describing different things.

Let’s take the $70 million first. That’s Providence’s structural deficit. It represents the gap between how much money the city can expect to take in through regular sources like property tax revenue and state aid versus how much money it can expect to spend on personnel and municipal services.

Then there’s the other number: $29 million. That’s Providence’s operating deficit. Once the fiscal year ends June 30, if we added up all the money the city spent during the preceding 12 months and subtracted all the money it brought in, the city would be $29 million in the red.

Why do they differ? “One-time fixes,” to use a phrase offered by Taveras spokesman David Ortiz. Those can include borrowing, selling off property, shifting costs into future years – anything that’s not a standard revenue source you can count on year in and year out the way you can with, say, property tax bills.

(I’m not sure exactly what the breakdown of Providence’s $41 million in one-time fixes for this year is – tomorrow’s report should have the answer to that – but it probably includes that funky $25 million green mortgage plan uncovered by WRNI’s Ian Donnis.)

In a sense, the city’s $70 million structural deficit is just theoretical – since those one-time fixes are indeed real for that one time they happen, they do cut the actual gap between revenue and spending down to $29 million. That is, the $41 million does come from somewhere.

But, by definition, some or all of those one-time fixes won’t be available in future years; therefore, including them when you look at the budget numbers doesn’t give you a true sense of the government’s financial health.

Too wonky for you? Although I’m not a big fan of analogizing government budgeting with household budgeting – they’re quite different animals – it might help in this case.

Let’s say I add up my standard expenses for each month – rent, food, beer, cable, all my recurring costs – and find that I’m spending $300 more than WPRI is going to put in my paychecks. Uh oh – I have a structural deficit in my personal budget.

But then I find out that this month, March, I’m going to get a federal tax refund of $250. Nice! That brings my personal budget deficit for March down to $50 – I have an operating deficit of $50. At that point, I can just borrow $50 from Tim White and then conveniently forget to pay him back – problem solved; deficit closed.

Then April rolls around. My standard monthly expenses are once again going to outrun my pay by $300. But this time there’s no federal refund coming. And Tim’s sore at me for not paying back the $50. I’ve got a problem.

That’s what a structural deficit is – it’s built into the structure of your finances. You can find ways to paper it over during any single budgeting cycle – you can get a $250 federal refund and borrow $50 from Tim to eliminate the operating deficit for one cycle – but the structural deficit doesn’t go away. And it’s not always easy to find one-time fixes – nor is it a very healthy way to go about managing your money.

That, in a stylized sense, is where Providence is now. And the State of Rhode Island is in a similar situation, so you can expect to hear more about all this once Governor Chafee unveils his own budget on Tuesday.

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