Last week, Timothy Williams wrote an article in the New York Times examining a debate in some states over what to do with rising ‘surpluses,’ and whether they should be saved in rainy-funds or redistributed to cities with pressing cash-flow requirements. Among other things, he penned “Still, the combination of a surplus and fresh revenue means that states that had endured years of involuntary frugality are virtually swimming in cash.”
The rhetoric over surpluses, and public perception, could benefit from a refresher course on the differences between cash-flow accounting and accrual accounting. They could also benefit from reminders about the differences between income statements and cash flow statements, on the one hand, and balance sheets, on the other hand.
Consider a family running a current cash flow surplus, but it has two daughters about to head off to college for the fall semester. They just took out large student loans to help the girls get to their launch pads. Should this family go out to dinner every night this week, and celebrate their departure?
That’s an unfair comparison, of course. Cities looking at states ‘swimming in cash’ assert they have pressing requirements for their citizens.
But maybe some of those states and their city children need to pay more attention to the longer-term consequences of past and current financial practices, buckle their belts, and get more efficient.
Another distinction between the family example and the state/city comparison has to do with mobility. What if that family is in a state asserting ‘balanced budgets,’ and ‘current surpluses,’ but has accumulated massive long-term debts that have to paid down the road?
Families can move. States and cities can’t.