State Budgets Explained: Why Deficit Figures Don’t Always Add Up

Not only has 2011 been the toughest budget year in a long time for many states. It’s also been one of the most confusing in terms of understanding how big the budget gaps really are. 

In Texas, some people talk of a $15 billion budget shortfall. Others put it vastly higher, at $27 billion. Statehouse reporters, unwilling to pick sides, often describe the shortfall as “between $15 billion and $27 billion.”   

In New York, Governor Andrew Cuomo wrote an op-ed in February to discuss how to close a $10 billion deficit. He put the word “deficit” in quotes and called the process for calculating it “a sham.”   

And in New Jersey, Governor Chris Christie condemned the method used to calculate a $10.5 billion shortfall, even though last year he bragged about closing a $11 billion shortfall that was calculated the exact same way.

Is budget math really this difficult? Unfortunately, yes. Here’s a primer on what budget shortfalls are, how they’re calculated and why those calculations have become controversial. 

What’s a budget shortfall?    A budget shortfall is the difference between the amount of revenue a state expects to have for the next year or two and the amount it expects to spend over that time. If a state has more revenue coming in than it expects to spend, it has a surplus. If it has less, it has a shortfall. Shortfalls often are also referred to as “budget gaps” or “deficits.”   

Why are state budget shortfalls important? In states with shortfalls, the basic question is how to bridge the gap to balance the budget. Typically, it requires some combination of spending less, raising taxes or fees, borrowing or shifting money from reserve funds.   

In recent years, huge shortfall numbers have been a badge of shame for the most troubled states. When the public hears that California has a $26 billion budget gap or New Jersey has a $10.5 billion deficit or Nevada’s 2012 shortfall is 45 percent of the previous year’s budget, the message is clear: Something has gone seriously wrong in state government and dramatic steps will be necessary to fix it.   

How are budget shortfalls calculated? Two estimates are needed to calculate a budget gap. The first is to determine how much revenue the state expects to bring in. The second is to determine how much the state plans to spend.    

On the revenue estimating side of the equation, states use economic forecasts to predict how much money their tax systems will bring in. It’s a relatively straightforward process, although a recent report from the Pew Center on the States ( Stateline ‘s parent organization) found that estimating errors have grown worse in each of the past three recessions. Governors and legislators also have been known to argue over estimates, or propose competing budget plans based on different assumptions about how well the economy will perform. 

This year, the biggest disagreements have been on the spending side of the equation. There is a standard way that states generally use to calculate future spending liabilities, but politicians of both parties have promoted using different approaches.   

What’s the standard method? That’s called “baseline budgeting.” When you see 50-state budget gap figures from the National Conference of State Legislatures or the Center on Budget and Policy Priorities , this is the method they are using.   

Essentially, states estimate how much it would cost to provide the same basket of services at the same level they provided in the current year. Adjustments are made to take account for inflation, expected population changes and, importantly, laws that are already on the books.   

In New Jersey, for example, an education funding formula is written into statute. So is a formula for giving homeowners property tax rebates. However, those provisions exist only in statute, not the state Constitution. So lawmakers are free to supersede them when they write a budget. They often do.   

But baseline budgeting assumes that the governor and state legislature plan on following those preexisting laws. The implications of that assumption can be huge. New Jersey’s Office of Legislative Services calculated the budget shortfall for next year at $10.5 billion. More than  billion of that gap comes from the assumption that the state will stick to the laws on education spending and property taxes. “In some sense,” says David Rosen, the budget and finance officer for the Office of Legislative Services, “New Jersey may look artificially worse than it really it is.”     

What if you ignore those laws? That’s exactly what Christie is proposing to do. In his budget address, the governor argued that the $10.5 billion shortfall figure was based on formula-based spending growth he wouldn’t allow. “This number assumes no one is actually managing the budget or setting priorities,” Christie said. “That is yesterday’s New Jersey.” 

The governor’s critics, on the other hand, have an interest in playing up the larger figure, which they have been doing ever since it leaked to the press last summer. Their message is that Christie is trying to have it both ways: Claiming he’s closed large deficits, while saying those deficits were based on faulty math.   

In New York, Cuomo is essentially arguing the same line as Christie. New York’s projected $10 billion shortfall, Cuomo likes to point out, was built on formulas projecting 13 percent spending growth in both Medicaid and education. Change the growth formulas, and the size of the shortfall changes dramatically. “If one assumed these programs would increase at the rate of inflation,” Cuomo wrote in his op-ed, “the $10 billion deficit is really a $1 billion deficit.” 

Cuomo got his way. The budget deal he struck with lawmakers last week removes the formulas. That change got them a long way toward balancing the budget for the upcoming year. It also reduced the shortfall that Cuomo’s office projects for next year from  billion all the way to $2 billion.   

What is “zero-based budgeting”? Baseline budgeting projects future spending by looking at what states spent money on in the past. Some fiscal conservatives argue for a switch to “zero-based budgeting,” or essentially starting from scratch each year. Looking at state spending this way would mean that states would never have a shortfall per se. That’s because there would be no baked-in assumptions about what states expect to spend money on.   

New Jersey’s Christie supports this idea. “You fund what you need — this year — to succeed,” he said in his budget address. “Not every relic from two decades ago that is still on the books.” 

Texas Governor Rick Perry also has shown support for this method. In 2003, the last time Texas faced a budget crunch before this year, Perry submitted a budget with nothing but zeros as a show of support for zero-based budgeting.   

How can Texas have such divergent deficit estimates?  Texas’ often-quoted $15 billion budget deficit figure  was the result of a calculation favored by some Republicans. The state had appropriated $87 billion during the current biennium, including federal stimulus money that was used to bolster the state’s general fund. For the next biennium, it expected to only have $72 billion in revenue. By their math, Texas was $15 billion short of being able to spend the exact same amount of money as last time.   

Critics of this figure say it is unreflective of political, economic and demographic realities. It doesn’t account for Texas’ huge population growth or the cost of inflation in programs that many would deem to be essential. The Center for Public Policy Priorities made the case that the true shortfall was nearly $27 billion, not $15 billion. “We’re not trying to rewrite the 2010-2011 budget,” says Eva Deluna Castro, senior budget analyst with the liberal advocacy organization based in Austin. “We’re trying to write the 2012-2013 budget, when there are more people and health care costs more.”    

Why are these debates happening now? Disagreements such as these are nothing new. Still, it’s not a coincidence that so many of them are bubbling up now.   

For one thing, the end of federal stimulus aid is exacerbating states’ budget problems for the upcoming fiscal year and adding to their shortfalls. To continue the same level of services without the federal help, states will need to spend a lot more of their own tax revenue. That’s reflected in baseline budgets, which is one reason those spending forecasts are dramatically higher in many states for the next fiscal year than the previous one.   

These disagreements also are a sign of the times. When budget figures show a surplus, it’s rare for politicians to get upset about them. Deficits are different. Cutting budgets or raising taxes to close a shortfall is unpleasant no matter how it’s calculated.