Financial Assistance
provided by:

1.3 Income and Expenses

Did the State End the Year in the Red or in the Black?

The state budget shows all the money appropriated for some purpose during the fiscal year and the sources of the money used to cover those appropriations. By definition the two must be equal.

The budget does not tell us whether the state collected more money than it spent and was able to add to its financial resources or spent more than it collected and had to dip into savings to pay its bills. This is important because the state gets a large and increasing share of its current income from the earnings on its financial assets, in particular the Permanent Fund.

To determine if the state ended the fiscal year in the red or in the black, we need to compare total state revenues collected (not sources as reported in the budget) with total state expenditures (not appropriations as reported in the budget).

The answer is—it depends, and this is one reason why the budget process is confusing and people are suspicious of budget statements. Different people can look at the same numbers and reach different conclusions depending on whether they are looking at the Cash Position of the state, the Real Surplus, or the Available Surplus.

Read on, but it gets complicated!

This analysis is based on the Fiscal Year 1999 budget. We hope to update the analysis for the most recent fiscal year in the near future. The analysis will be the same, although the conclusions might be different.

The starting point for the analysis is Total State Revenues. This is all revenues flowing into all state funds during the fiscal year, excluding intra-agency transfers which are simply movements of money among the various government funds.

How is this measure of total state revenues different from the sources of revenues reported in the budget?

Next we calculate Total State Expenditures. This includes all the money the state actually spent (outlays) during the year. It excludes interagency transfers which are simply movements of money among the various government funds. (Sometimes there is a lag before the money actually is spent, particularly with capital appropriations where the money may not hit the street for several years after the appropriation.)

Notice that we use the 1999 Permanent Fund dividend. This is because the dividend paid in the fall of 1999 was based upon fund income through the middle of calendar year 1999 (the end of fiscal year 1999). So, although it was paid in the fall, it is properly associated with income produced in the prior fiscal year.

How is this measure of total state expenditures different from appropriations reported in the budget?

Notice that Total State Revenues were greater than Total State Expenditures. The Change in the Cash Position is the difference between Total State Revenues and Total State Expenditures.

The change in the cash position of the state was deposited in the two biggest funds of the state (ignoring some small changes in other fund balances that would only add to the confusion). The Permanent Fund (including the Earnings Reserve) was larger at year end than at the start of the year, but its growth was partially offset by a drop in the Constitutional Budget Reserve. Based on the fact that there was more money in state funds at the end of the year than at the beginning, the state operated in the black.

The Real Surplus is a more useful measure of how the state ended the year. Inflation proofing of the corpus of the Permanent Fund can be treated like an expenditure (even though it is just a transfer to the Permanent Fund) because it is necessary to maintain the purchasing power of the Fund against erosion from inflation. (Inflation also erodes the value of the Constitutional Budget Reserve but there is no provision to inflation proof it.) If we subtract this expenditure for inflation proofing of the Permanent Fund from the change in the cash position of the state, we get the Real Surplus. This is the real increase in the purchasing power of state financial assets.

Most of the New Cash paid into the Permanent Fund and Constitutional Budget Reserve is restricted in use, either by the Constitution, state law, or political pressure. Also New Debt—the Constitutional Budget Reserve loan to the general fund—must in theory be repaid from future general fund revenues. Subtracting one or more of these new committments from revenues further reduces the year-end surplus.

So in addition to the Cash Position and Real Surplus calculations of the budget surplus, there are several others based upon netting out one or more of these new obligations. Here are some measures of the Available Surplus.

Myopic Interpretation. The CBR loan will never be repaid; the Permanent Fund earnings reserve can be spent; and the effect of inflation on the purchasing power of the Permanent Fund will be ignored.

Realist Interpretation. The loan from the CBR will never be repaid; the Permanent Fund earnings reserve can be spent.

Legal Interpretation. The Permanent Fund earnings reserve can be appropriated by the legislature; the CBR must be repaid.

Strictest Interpretation. None of the cash is available to pay for future state expenditures, and the CBR loan must be paid back from future general fund revenues.

Savings and the change in available cash are hard to forecast because they represent what is left at the end of the year. Total expenses can be predicted pretty accurately, but total income, which comes mostly from oil and financial asset earnings, can change by several hundred million dollars in a few months. The estimated CBR draw grew as the price of oil fell during the winter of 1998-99, and then decreased as the price of oil recovered in the spring. These figures for savings and change in available cash are still rough estimates for 1999.

Why this analysis is a moving target over the course of the fiscal year?

(This analysis is similar, but not identical, to the treatment of revenues and change in assets appearing in the Revenue Sources report published by the Department of Revenue.)

Fiscal Policy Papers