Shortfalls and bad math

By Geoffrey Lawrence and Patrick Gibbons

The Las Vegas Sun now reports that Nevada is facing a $2.5 billion shortfall that could slash state budgets in half. Previous estimates in the newspaper (and elsewhere) put the shortfall around $3 billion. If you've been following Geoff Lawrence recently you'd know that was a bunch of nonsense.

The latest attempt simply sums up all the previous gimmicks from tax increases, budget cuts, fund sweeps and other short term band-aide fixes. It adds up to $2.5 billion - but this is bad budgetary math.

This estimate is calculated by state Budget Director Andrew Clinger using a patchwork of assumptions about the 2011-2013 budget cycle. Clinger's major assumption is that adjustment decisions in the 2009-2011 state budget should be applied automatically to the ensuing 2011-2013 budget. Thus, he has attributed all of those adjustments (including expiring tax hikes and furlough programs) to come up with a $2.4 billion estimate.

This approach, of course, assumes that 2009-2011 spending levels are necessarily appropriate for the 2011-2013 cycle. In truth, any "shortfall" projection is the result of a flawed budgeting process that assumes that the state should spend more money than it has.

Even so, assuming the baseline approach is appropriate, Clinger's current calculation does not conform to that approach. Instead of subtracting expected revenues from the desired spending amount, he is making assumptions about the adjustments made in the current cycle. For instance, there is no reason to believe that a furlough program for state workers would not be continued into the next cycle.

In fairness, Clinger is likely using this patchwork of assumptions because no official estimate for state revenues yet exists. However, it is reasonable to assume that revenues would be in the $5.0 - $5.5 billion range. Assuming a $6.4 billion budget (about what we spend now), therefore, a simple subtraction would yield far less than a $3 billion shortfall.

It also looks like there is some double-counting within Clinger's reported calculation. The Sun reports that $939 million in new revenues from the 2009 tax hikes will expire in addition to $220 million in revenues from the room tax hike being moved out of the General Fund. However, the $939 million number should include the $220 million in room taxes. Moreover, the room tax revenues will be moved out of the General Fund and serve as a dedicated revenue stream for K-12 education. This should partially offset the need for General Fund dollars to supplement local K-12 spending, meaning that the $220 million is unaccounted for.

If you recall, the last billion-dollar "shortfall" brought the legislature together for the last special session and that only resulted in a General Fund spending reduction of around $300 million. Meanwhile, the billion-dollar "shortfall" prior to that resulted in no General Fund reduction at all.

The key lesson here is that budget shortfall calculations frequently amount to little more than an intellectually dishonest endeavor.

As Geoff Lawrence has shown, current iterations of this flawed exercise are not in sync with reality. Even if one buys into the cost-plus, baseline process and the resultant "shortfall" scenario, it is highly dubious whether the size of that shortfall would approach $3 billion.

Instead of trying to calculate these budgetary shortfalls we should prioritize spending and fund what works, rather than continue this outdated, backward and dishonest budget process that has laid the state into an unsustainable quagmire.

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