Learning From History

A question I'm frequently asked is, "How did we get into this fiscal mess in the first place?" In a state that requires balanced budgets, how could we dig a hole in our general fund so deep that it's still around after a decade? The question is more than academic. While we are almost out of the hole, we need to understand how we got into it so we don't make the same mistakes again.

The piece of Oregon budget law which everyone can quote is that a budget must balance. You can't submit a budget document where the resources (revenue) don't match the expenditures. But after looking at audit reports going back more than a decade, I can show you several ways you can get in trouble while still submitting a balanced budget:

1. Fall short on revenues, but continue spending as planned.
2. Spend more than is budgeted.
3. Overestimate a fund starting balance, then spend everything in the fund including the starting balance.
   
4. Spend grant money that doesn't come in.
5. Operate with balances near zero, without contingency funds for legitimate emergencies.
   
6. Budget ongoing yearly expenses (like payroll or debt service) that don't have a regular source of revenue (like property tax) to cover them in future years.

It is easy to be smug and conclude that you'd have to be pretty careless to do any of these things, but in the real world it's not always so obvious. The budget is a very complex document (a spreadsheet of over 50 pages), and we frequently don't get critical pieces of information (like ending balances from the previous year) until long after we've made decisions where that information was needed. And since most people don't exactly enjoy the budget process, it's easy to ignore it outside of the annual budget season. Unfortunately by the time you're working on the next year's budget it's far too late to adjust course for the previous year.

Last year I proposed a new set of budgeting rules to keep us from making these mistakes. They prohibit the practices that caused the deficit in the first place, and increase the planning horizon so we are working with better information when we prepare the budget. They also mandate greater transparency in budgeting, so it's easier for the council and citizens to provide oversight. Here are some examples:

• Every fund needs a contingency (10% in the general fund). We're not done with our "deficit reduction plan" until we have some buffers in our critical funds.
  
• Recurring expenses like payroll must be covered by recurring revenues like property taxes, not by drawing down reserves.
• Payroll and tax revenues must be forecast three years out, so we don't go down a path of adding staff that we can't afford past the current year.
• All capital equipment (fire trucks, police cars, etc.) need to be on a replacement plan so we know several years in advance how much money we'll need to keep the fleet operating.
• Transfers between funds need to be clearly identified so we can be sure actual expenditures match the plan the council and budget committee have agreed to.
  

None of this is a substitute for careful, timely oversight. We've scheduled a mid-year tune-up to be sure the predictions we made back in June still hold in October. I'm convinced that the budget committee and the city council take their role in getting our finances back in shape very seriously, but you have a role too. Pay attention and ask questions. Every time you ask a question you remind us to take another look. That look might flush out a problem while there's still time to fix it. The more people who are asking questions about the city's finances, the more likely we are to maintain the discipline to keep ourselves out of trouble.