Our little secret

Tomorrow’s Alameda Sun will contain my column on the FY 2013-14 and FY 2014-15 budget.  The column was written before the City released its latest draft last night.  Among other things, I note that the April 18 draft budget employs something called “use of carryover of projected budget savings from FY 2012-13” to cover a projected $1 million shortfall in FY 2014-15.  The latest draft budget takes this tactic a step further.  Now, the “use of carryover of projected budget savings from FY 2012-13” covers both a $700,000 shortfall in FY 2013-14 and a $1.8 million shortfall in FY 2014-15—i.e., a total of $2.5 million.  If you look carefully, you will see that the result is to decrease the general fund balance by like amounts in those two years.

So just what is this “use of carryover of projected budget savings from FY 2012-13”?

Using a household analogy, here’s how it works.

Suppose when you prepared last year’s family budget, you expected your expenses would be $50,000 but you’d make only $49,000, leaving a $1,000 shortfall.

Last year’s projected budget

Expenses:        $50,000

Income:           $49,000

Shortfall:          ($1,000)

But suppose you have $100,000 in a savings account.  You planned to cover the shortfall by withdrawing $1,000 from that account.  Of course, that lowered the savings account balance to $99,000:

Last year’s projected savings account

Opening balance:                                $100,000

Withdrawal to cover shortfall:            ($1,000)

Ending balance:                                    $99,000

As it turns out, your actual expenses turned out to be less than you expected – say, $48,000 rather than $50,000.  This means, at year end, you had earned enough to pay all your bills and still had $1,000 left over.

Last year’s actual results

Expenses:        $48,000

Income:            $49,000

Leftover:              $1,000

You put the leftover money into your savings account:

Last year’s actual savings account

Opening balance:                    $100,000

Deposit of leftover money:         $1,000

Ending balance:                        $101,000

Now let’s go to this year’s budget.  Suppose you expect your earnings will stay the same at $49,000.  But you expect your expenses will rise to $51,000.  So you expect a $2,000 shortfall.

This year’s projected budget

Expenses:        $51,000

Income:           $49,000

Shortfall:          ($2,000)

So what do you do?  Remember, last year you made $1,000 more than you spent, which you added to your savings account.  Why not apply the leftover money from last year to this year’s projected shortfall?  You’ll still have the $100,000 savings account balance you started with.

This year’s  projected savings account

Opening balance:                                            $101,000

Withdrawal of amount deposited last year: ($1,000)

Ending balance:                                              $100,000

But that still leaves $1,000 of the $2,000 shortfall to cover.  Here’s where you get creative.  Last year, you expected you would need to withdraw $1,000 from savings to cover the shortfall.  But you didn’t have to do it. So why not add the money you expected to withdraw from savings but didn’t have to ($1,000) to the amount you actually added to savings ($1,000) and use the entire $2,000 to cover this year’s $2,000 shortfall?

This year’s  projected savings account

Opening balance:                                                     $101,000

Withdrawal of amount deposited last year:          ($1,000)

Withdrawal of amount not withdrawn last year: ($1,000)

Ending balance:                                                          $99,000

And you don’t feel so bad, because this year’s projected ending savings account balance is the same as last year’s projected ending savings account balance.  True, you had to withdraw $1,000 from your savings to cover your bills, but since you expected you’d have to do that last year anyway, it’s no big deal.

This is exactly the process the City is using to “balance” the FY 2013-14 and FY 2014-15 budgets.  Look at the FY 2012-13 summary.  It shows that the City budgeted expenses to exceed revenues by $1.1 million in FY 2012-13, which would be covered by drawing down reserves.  Now staff estimates revenues actually will exceed expenses by $1.4 million in FY 2012-13.  So no drawdown from reserves will be needed; instead, the gain will be added to reserves.  By the City’s math, it can use both the former $1.1 million – the equivalent of the $1,000 you expected to withdraw from savings but didn’t have to – and the latter $1.4 million – the equivalent of the $1,000 you actually added to savings – to cover future shortfalls – i.e., a total of $2.5 million.

And that’s what the proposed budget does: The City calls the $2.5 million total the “carryover of projected budget savings from FY 2012-13.”  It uses $700,000 of that amount to cover the projected shortfall in FY 2013-14 and $1.8 million to cover the projected shortfall in FY 2014-15.  These amounts will be paid out of reserves.  But the result, like the result in our example, is that the projected reserve balance in FY 2014-15 ($19.5 million) is virtually the same as the previously projected reserve balance for FY 2012-13 ($19.4 million).

Pretty neat, huh?

Just don’t tell anyone staff has managed to “balance” the budget by drawing down reserves.  We’ll keep that as our little secret.

Sources:

May 28, 2013 budget summary: 052813 budget_summary

May 28, 2013 Powerpoint presentation: 052813 PPT presentation re FY 2013-15 budget