Wrong Irk; Right Irk

Op Ed: Yours truly will concede that everyone is entitled to his or her own pet irk.  There is a headline in the Capitol Alert blog of the Sacramento Bee entitled “Cap-and-Trade Loan in Budget Deal Irks Environmentalists.”*  Actually, there is nothing unusual about borrowing by the general fund from other earmarked funds of the state.  The controller routinely does such borrowing when the general fund is short of cash – which was the situation much of the time during the last few years.  What is the real irk here is that as part of the budget that looks likely to be enacted for 2013-14, borrowing from the cap-and-trade fund will be treated as if it were revenue.

This elastic view of revenue is an unfortunate characteristic of state finance in California.  [The budget often just reports “revenue and transfers” with the word “transfers” the term of art for obfuscation.]  Let’s make an obvious point: If borrowing were revenue, the state budget could never be in deficit.  During budget crises, revenue falls short of spending and the state borrows externally (from Wall Street) and internally (from special funds outside the general fund).  So spending = revenue + borrowing.  If we redefine borrowing as a form of revenue, spending = revenue at all times (even when IOUs were issued back in 2009, since IOUs are a form of borrowing) and the budget is “balanced” by definition.  If borrowing were revenue, the federal government would also have a balanced budget today.

Borrowing is not necessarily a Bad Thing.  But budget trickery and elastic definitions are always Bad Things since they obscure fiscal reality.  That tendency to obscure how we get ourselves into budgetary trouble in the first place.

*The cap-and-trade program in effect sells a limited number of permits to pollute which polluters must buy – generating revenue for a special fund.  Environmentalists want such revenue to be used for “green” purposes, not for the general expenditures of the state.  The Bee blog post is at http://blogs.sacbee.com/capitolalertlatest/2013/06/cap-and-trade-loan-in-state-budget-deal-irks-environmentalists.html

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