So a deficit and a debt are two different things. Readers of Fiducate will know that a debt is money you owe - and more to the point, money you pay interest on to the lender. A deficit is the projected or actual difference between what you have budgeted and what you have coming in. For you and me, this might be what happens when we suddenly lose a job or take a pay cut. Our budget might have been nice and tight, ensuring we pay the bills, set aside savings and stay out of debt. But then our income level changes (downward). We suddenly have a deficit - more money allocated to go out than we have coming in.
Unless we want to go into debt as individuals (and get stuck in that life sucking trap paying interest and minimum payments for 20 years) we have to go back to our budget and decide what gets cut. Either we stop saving or we reduce expenses. In extreme cases, we may have to downsize our apartment or move to a less nice neighborhood to get a cheaper rent. In any case, we have to cut spending OR take on debt, which, as we know, has the effect of increasing our spending (by adding an interest payment to our budget line items) over the long haul.
So, for a municipal (local) or state or even federal government, how does this all work? Let's start by looking at the budget in general terms. A governmental body doesn't get a pay check like you and me, they typically are funded through taxation and fees. Taxes, as you no-doubt have observed, come in many forms. We pay income taxes, property taxes, sales taxes and sometimes special taxes called assessments for local improvements like sewer, public water or street repairs and construction. Then we have fees: building permits and inspection fees, dog licenses, car registration fees, some times you pay a fee to use your state or local parks and so on. Then there are those fees we all love to hate - parking tickets, fines for local code violations and you can even go down the list to fines or penalties you may pay for breaking the law. All told, it's pretty much a grab bag of income sources. It is volatile to be sure. Consider that revenues from income and sales taxes are going to be directly impacted by the employment rate and volume of sales. When those things go down, so too do the monies derived from them.
Recall the different scenarios I laid out in The Hows and Whys of budgeting for individual incomes. Some of us have a stable income, some of us do not. Do you remember what I said you would need to do if you have a variable (unstable) income?
But if you own your own business or have a job, like sales, where the pay tends to rise and fall with the season, you'll want to consider your total yearly income.That's right, you need to average your income over time to come up with a realistic budget. For a municipality that has the potential for huge swings in income, historical averaging is a good way to plan for the future. Any city, county or state that has been around for more than 10 or 15 years has been through at least one boom and bust cycle. That's plenty of time to see where the peaks and valleys are in terms of income. This information ought be used to average out what the effective income and outflow can be safely assumed to be.
So, for example, if I am the mayor of Anytown and I know that our tax revenues bottomed out at $1.2 million in 2001 and peaked at $3.4 million in 1999 and just a while back in 2009 we again saw a dip down to $1.5 million, I have a pretty good scatter chart to work with to establish a trend line. The trend line will describe my average projected income year over year. The trick for me as mayor is to keep my expenses BELOW that line each year. Like a smart individual, anything that comes in above and beyond that line is going into the savings fund for future down-turns in the economy. Just because we have an off-year, I still want to be able to keep my fire and police and emergency services running, the streets lit and repaired and so on. If I plan carefully, I'll be able to do this. If I have a short term view of things, however, or decide to spend a