When is a Shortfall a Budget Gap and Not a Budget Deficit?

The distinctions between gaps and deficits can show just how dire a city or state's condition is.

On March 1, The Wall Street Journal told its readers that Ohio’s Republican Gov. John Kasich faced "a deficit estimated between $5 billion and $8 billion for the two-year budget cycle ending June 30, which represents about 9 to 14 percent of Ohio’s annual state spending."

Those numbers seemed beyond belief. But then, things got even more puzzling. The article also noted that Ohio was in OK shape relative to other states. The Journal pointed to "such states as California, where a $25.4 billion one-year deficit is equivalent to 29.3 percent of its budget."

It’s no wonder that so many people are talking -- foolishly, we think -- about state bankruptcies these days. We’re told that Ohio isn’t the worst and yet, just two months away from the end of its fiscal year, it presumably has to fill a hole equal to 9 to 14 percent of its spending. Perhaps equally horrifying is that Ohio apparently doesn’t even know whether it needs $5 billion or $8 billion over the next few months.

How could any budget office fix such a deficit, short of taxing like the Sheriff of Nottingham?

It doesn’t really have to. The Journal’s references to "deficits" simply aren’t accurate (nor, by the way, were the numbers it attributed to the current fiscal year). The problem is lodged in the way it uses the word "deficit" itself. The mistake the Journal and others make is using that word to refer to money a state would need over the course of the next year or the next biennium -- shortfalls that the state has some time to fix through cuts in expenditures, increases in taxes and fees, or other measures. Ohio’s budget office has that number pegged at about $4 billion for each year of the coming biennium. The sky may be cloudy. It may even be storming. But it’s sure not falling.

As Ohio budget director Tim Keen says, "In Ohio, deficits are not permitted. We do not have a fiscal year 2011 problem. That’s a misstatement." In fact, the current biennial budget, which ends June 30, is in balance, as is required by law. That wasn’t easy and required using one-time revenues and other budgetary gimmicks to keep the budget in balance -- not an unusual circumstance in many states as they muddle through the hideous economy of late.

One important note: We bear no ill will toward The Wall Street Journal, even though the example we’ve focused on comes from its pages. The confusion about deficits is widespread in the press, in studies and reports, in blogs and other media. In fact, the reason we’ve chosen to spend this much space on the Journal is that it is one of the most highly respected financial publications in the United States. On the whole, a blogger with 43 followers can make this kind of mistake, and it’s not really a big deal. But when it reaches into the pages of hugely influential publications, that’s another story.

Curiously the "deficit" figures used by The Wall Street Journal were taken directly from a chart prepared by the Center on Budget and Policy Priorities. But the CBPP carefully uses terms like "budget gaps" and "shortfalls" to refer to these figures. Says Elizabeth McNichol, senior fellow at the CBPP and one of the authors of the recent reports on upcoming budget shortfalls, "We try to be clear in the text of our paper that we are talking about projected gaps, comparing projected revenues to the cost of continuing current services, and we do say when we talk to reporters, that states have to balance their budgets so they don’t run deficits in the same way. I do see the confusion as a concern."

Why do we seem so worked up over something that sounds like little more than verbal confusion? It’s because we see that misusing the word "deficit" is widespread and we fear that it helps lead to the conclusion that states and cities are in dramatically worse shape than they actually are -- which is bad enough. "Deficit is a much more loaded word because it connects to what people see at the federal level," says Scott Pattison, executive director of the National Association of State Budget Officers. And of course, the federal government is actually allowed to run a deficit at year’s end, unlike virtually all states.

"I get really frustrated," Pattison continues. "'Deficit' implies the actual financing of debt. People who don’t know assume that states are using the equivalent of Treasury Bills to finance a deficit. But except in rare instances, debt at the state level is used to finance capital (not operating) expenses. You shouldn’t use the word ‘deficit’ for shortfall because deficit implies the financing of debt."

As Pattison further notes, having a shortfall in a future budget provides no proof of financial distress. It just means that projected spending (however that is calculated) is greater than projected revenues, or that budgetary estimates of revenues or expenditures turned out to be wrong. Pattison was budget director in Virginia between 1997 and 2001. The late 1990s were robust times for Virginia’s budget, as for most states. "Every year in Virginia we started with a huge shortfall because everyone comes in and says, 'We need this amount of money,'" he says. "Even in good times, every state that I know of starts with a shortfall."

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