Accounting shift in state budget raises questions

Months before California voters approved new taxes in the Nov. 6 election, accounting practices in the state budget were changed – changes that ultimately could make it much harder to define just how much money the state has taken in or is likely to get.

The changes were approved by the Legislature and governor as part of the budget’s assumption that voters would back Proposition 30, which raises some $7 billion annually in temporary sales and income tax hikes, and Proposition 39, which raises $1 billion annually by halting a 3-year-old corporate tax break.

At issue is a shift in the state’s accrual accounting procedures related to revenue from the two propositions. The Legislature’s nonpartisan fiscal adviser says the shift should be scrapped and replaced with a “simpler, logical” system by 2015.

Budget legerdemain is nothing new: The change this year was only the latest in a series of accounting moves over many years that ultimately have the effect of showing a state budget in better balance than it actually is. Money isn’t hidden, it’s moved around, and it often flows backward instead of forward.

In business, cash accounting reflects revenue from a transaction when the money is paid or received. Accrual accounting, universally used by all but the smallest businesses, counts money at the time the transaction is reported.

“In recent years, the state has altered its accrual policies,” the Legislative Analyst wrote on California’s 2013-14 fiscal outlook. “Some of the changes have a theoretical basis in accounting principles, but their effect has been to move more revenue collected in one fiscal year to a prior fiscal year (thereby helping to balance the state budget).” The shifts also affect the way schools are funded under Proposition 98, the guarantee that voters approved nearly 25 years ago.

But the change this year, which was part of the Budget Act, could prove more significant.

“A portion of final income tax payments paid in, say, April of one year will be accrued all the way back to the prior fiscal year (which ended ten months in the past),” the LAO wrote. April is a critical month in calculating state revenue because of the April 15 deadline to pay income tax.

That means “we will no longer have a good idea of a fiscal year’s revenues until one or two years after that fiscal year’s conclusion. Because the volatile capital gains-related revenues from Proposition 30 are the subject of the accrual changes, the late adjustments to revenues could total billions of dollars — much more than in the past.”

“As a result, the LAO added, “the chances of large forecast errors by us and the administration will increase.”

The LAO noted that an apparent $1.4 billion budget surplus reflected a shift in accruals. The office urged that future shifts be made available online.

The 2012-13 state budget totals some $142 billion, including $91.3 billion in the main General Fund, nearly $40 billion in special funds and $11.7 billion in bonds.