Explainer: Decoding NJ’s Budget Babble — a Dictionary of Useful Terms
Just in time for budget season, a cornucopia of helpful explanations and abstruse interpretations, from Appropriations Act to zero-based budgeting
Given the exciting gubernatorial election and the bizarre reality show now unfolding in Washington, you may not have noticed that New Jersey’s budget process is once again shuffling toward its yearly anticlimax. Nonetheless, sometime this month, Gov. Chris Christie and the legislative leaders will agree on a $35.5 billion budget for fiscal year 2018 beginning July 1. Just in case you muster the energy to tune in for the thrilling finish, here is a handy dictionary of a few key terms.
Appropriations Act: A law consisting of both narrative and numbers that defines how the state will spend some of its resources during a given fiscal year. Despite its popular perception as “the budget,” the $35.5 billion act does not in fact account for all state government entity spending. Adding in various “expenditures not budgeted” such as dedicated funds, revolving funds, and federal funds, plus special revenue funds, trust funds, bond funds, and proprietary funds, pushes the total closer to $63 billion. And that doesn’t count tax expenditures, reappropriations of unspent amounts from the previous year ($240 million in fiscal 2015), or directory letter supplemental appropriations. Note that, as a duly adopted law, the Appropriations Act routinely includes provisions that override existing spending statutes, albeit only for one fiscal year at a time.
Baseline budget: Every year, the Office of Management and Budget (OMB) develops a baseline budget that starts with the current Appropriations Act and reflects adjustments for actual spending, inflation, and identified new needs. Since the number is always higher than projected revenues, the baseline budget exercise frames the entire budget process as one in which budget-makers “cut back” rather than “build up” to a balanced budget. This defensive orientation has a subtle but important influence on the debate.
Budget cut: Don’t make the mistake of assuming that a budget cut is an actual reduction in spending. Advocates, politicians, and the press routinely use “budget cut” to describe any reduction in projected spending, even if the absolute amount will still increase. For example, every year our education establishment loudly condemns “devastating cuts” that in fact only curb the rate of projected growth. Meanwhile, the state budget’s allocation to education reaches a new high every year.
Budget language: The Appropriations Act contains over 400 narrative budget language provisions that modify, condition, restrict, or override line items or existing funding statutes, such as the school-funding formula or hospital subsidies. As part of the Appropriations Act, budget language expires after one year. Varying from a single line to an impenetrable forest of words, many begin with the enigmatic phrase “notwithstanding the provisions of any law or regulation to the contrary.”
Continuation budgeting: Budgeting to maintain existing services and programs. The opposite of zero-based budgeting, it begins with the question “How much do we need to spend to maintain the same level of services?” Despite justified criticism that budgets should not run on autopilot, this approach dominates governmental budgeting at every level because year-over-year comparisons make it easy for politicians, journalists, and voters to keep score.
Deal bait: Every year, the governor’s proposed budget includes a modest amount of deal bait in the form of budget cuts that everyone knows the Legislature will want or need to “buy back” during the negotiation process. Think around $100 million. This “feeding the beast” works for everyone: the Legislature takes credit for “restoring” cuts to popular programs while the administration retains the playing field advantage and keeps legislators distracted.
Directory letters: The Appropriations Act gives the OMB director the authority to use directory letters to appropriate relatively small amounts of money from available fund balances to address changing needs and circumstances. Although the OMB reports these supplemental appropriations to the Office of Legislative Services (OLS), most of this routine but important work flies below the political radar.
Ending fund balance: Commonly called the “surplus,” the ending fund balance is the state’s anticipated operating surplus as of the end of the fiscal year. Rating agencies consider the size an important indicator of the state’s ability to meet fiscal emergencies and would like to see balances equal to around 5 percent of the Appropriations Act (more than $1.75 billion in fiscal 2018). By contrast, New Jersey’s projected fund balances have rarely reached more than 2 percent in recent years.
Evaluation data: A legacy of the “program budgeting” reform fad of the 1960s, the governor’s budget includes many pages of state program evaluation data (now available as a downloadable Excel file). If you want to know how many beehives the Department of Agriculture inspected last year, this “eval data” is for you. Frustratingly, most of the data is of limited utility as an oversight or transparency tool, because it consists largely of old-fashioned input and output metrics that say very little about performance. Nonetheless, the OLS staff resists any changes, so to keep the peace the OMB insists that agency bureaucracies devote valuable time and resources to cranking out eval data year after year.
Investments: Savvy politicians characterize their ambitious spending plans, for everything from healthcare to infrastructure, as investments in people or the economy that will ultimately yield generous returns in the form of avoided costs (e.g., less sickness) or increased revenue (e.g., from a growing economy). Just remember your financial advisor’s advice: it’s usually a mistake to swing at every investment pitch.
Lapse: This occurs when actual spending is less than budgeted, such that part of the original appropriation expires at the end of the year and becomes available fund balance to help cover supplemental needs elsewhere in the current year’s budget. Savings routinely arise because of hiring and contract delays, over-projections of utilization, and even the occasional efficiency.
Line item: The holy grail for lobbyists, a line item appropriates a specific amount of money to a specific entity or program. Memo to advocates: the more sympathetic the name of the program — e.g., “Abused and Neglected Puppy Aid” — the more cut-resistant it will be.
One-shot: Also known as a nonrecurring resource, a one-shot is an item of revenue or avoided cost that arguably should not be anticipated in subsequent years. Using lots of one-shots to balance the budget is an indication of structural imbalance and appropriately invites rating agency reproach. Trouble is, definitions of one-shot vary and are not always obvious. For example, New Jersey scores revenue that is anticipated to phase out under a multiyear phased-in tax cut as a one-shot. Does that meet your definition?
Performance budgeting: This fiscal approach allocates resources to maximize desired performance, using performance measurement and management techniques. Although an extremely useful tool for management and oversight, the politics of continuation budgeting and a lack of true fiscal flexibility limit its practical impact. When push comes to political shove, spending remains the most politically salient measure of program success. Measuring how much a program spends is easy; measuring how effective that program is in meeting its stated objectives is hard, and often embarrassing.
Poison pill: A statute that triggers an undesirable action upon certain conditions, usually with the intent to enforce a specific allocation of resources. For example, a 1997 law that restructured the taxation of energy and utility services contained a provision that revokes the state’s authority to collect certain taxes if it fails to distribute a specified amount of the revenue from those taxes to the state’s municipalities. Most lawyers agree that such provisions are unenforceable and practically meaningless because subsequent legislation (including budget language) can always override them.
Property-tax relief: Since 1977, the state constitution has dedicated the gross income tax and a penny of the sales tax — now over 40 percent of state revenues — to property tax relief, New Jersey’s political El Dorado. Over time, as the gross income tax has become a larger component of the state’s revenue base, this dedication has had the effect of reducing the relative size of the state’s general fund, threatening the programs it supports. Accordingly, New Jersey budget makers have become skilled at recharacterizing formally general fund programs as property-tax relief. Meanwhile, of course, New Jerseyans pay the nation’s highest median residential property taxes.
Refundable credit: Unlike normal tax credits that offset tax liabilities only to the point of eliminating the liability, a refundable credit can create a negative tax liability that is returnable to the taxpayer as a refund. The most famous example is the Earned Income Tax Credit (EITC), but recent years have seen an explosion of refundable credits as economic development incentives. From a fiscal perspective, there is little that distinguishes a refundable tax credit from a traditional grant program: Both allocate public funds to private parties. However, the politics are radically different. Unlike grants, tax credits don’t appear as a line in the budget and their fiscal impact is obscured within larger revenue projections. Moreover, tax credits convey the image of economic efficiency while grants look and feel like “pork.”
Risk: The fund balance is only one important metric of fiscal risk. Every budget contains risk. Budget makers can recognize that risk in a variety of ways: adopting ambitious revenue projections; booking one-shots such as asset sales or legal settlements; assuming modest program utilization; not budgeting for snow removal and other likely-but-still-variable costs; or budgeting for a relatively low ending fund balance. Of course, they can use the same techniques to reduce risk. These options have political implications. For example, some might argue that it makes sense to adopt conservative revenue growth assumptions (lowering risk) even if that results in a lower projected fund balance (increasing perceived risk), because better-than-expected revenue growth can be a huge political plus while offering up a budget with a relatively low projected fund balance has little, if any, negative political consequence. Others might prefer to take additional revenue risk to protect funding for politically important programs. In practice, the choices are rarely binary and become exponentially more complicated as the overall level of risk increases.
Structural deficit: Every now and then, the OLS will identify a terrifying structural deficit representing the difference between projected revenues and the theoretical amount necessary to fund fully all existing spending-related statutes (like the school-aid formula). Don’t panic. Although it’s clearly appropriate to track statutory spending commitments, no New Jersey budget could ever fund all those commitments. That’s why New Jersey’s governors and legislators invented the budget language mechanism to override spending statutes.
Structural imbalance: A more reasonable but subjective form of structural deficit, a structural imbalance excludes the most obviously unrealistic statutory spending commitments. Of course, the decision as to what to include or exclude from the calculus is inherently political.
Supplemental appropriation: This type of appropriation meets an unbudgeted need that arises during a fiscal year. Most of the time, supplementals cover needs that are genuinely unanticipated. But not all the time. For example, New Jersey routinely underbudgets for snow removal ($80 million supplemental in fiscal 2016) and medical malpractice and tort claims ($69 million supplemental in fiscal 2016). This is not necessarily inappropriate as a means to retain some fiscal flexibility.
Tax expenditures: Every tax break has a cost in the form of foregone revenue. New Jersey’s Treasury Department annually identifies more than $20 billion in tax expenditures arising from more than 130 deductions, exclusions, exemptions, deferrals, credits, preferential rates, and other special provisions in the tax law. Although $20 billion is an inflated number due to interactions between the various tax breaks, tax expenditures clearly constitute an extremely important but essentially unbudgeted allocation of public resources.
Zero-based budgeting: The opposite of continuation budgeting, zero-based budgeting treats every appropriation as “new” starting with a funding base of zero. This holds enormous appeal to those who believe that the budget process should affirmatively review and justify every spending initiative every year. Trouble is, true zero-based budgeting is a practical and political nonstarter. Given the limited time available, it would be impossible to build an Appropriations Act without reference to the previous year, especially since many programs involve multi-year contracts and commitments. Similarly, our political process rarely welcomes a “fresh look” at existing programs and instead tends to focus on the horse race of incremental changes.