Budget math shows a deficit isn’t

Two recent state reports provide contrasting pictures of Wisconsin’s financial condition. In one, the state ended 2016 in the red with a $1.7 billion deficit. The other shows the state in the black with a $331 million surplus.

Which is correct?

Confusingly, both are because they look at state finances differently.

The first, the Comprehensive Annual Financial Report, is prepared by the state controller’s office using generally accepted accounting principles. These official financial statements are prepared the same way businesses prepare annual shareholder reports. It shows Wisconsin with the $1.7 billion deficit.

The other document, the state budget, does not follow GAAP as a CPA would but relies on cash accounting. It shows Wisconsin with a $331 million surplus. GAAP and state budget accounting also differ in how they define general fund spending, the largest share of the state budget.

The following example illustrates the difference between the two accounting methods. If John buys a TV with a credit card, under GAAP, he has spent money, owns the TV, and has incurred an obligation for the entire purchase. Under cash accounting, no expenditure occurs until John actually pays the credit card bill.

How does this apply to state finances? One example is illustrative. The state provides credits on property tax bills each December. However, it delays payment of most of those credits until the following fiscal year, which begins in July. Under cash accounting, there is no spending in the actual year the credits are provided. Under GAAP, the state has spent more than $700 million.

As the example demonstrates, GAAP takes a more complete approach to revenues and expenditures, while the state budget focuses only on items that fall within the two-year spending cycle. State officials sometimes have exploited this difference, using accounting “tricks” to shift spending from one year to the next.

The state’s financial statements reflect the cumulative growth of GAAP deficits…

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