A confession: I’m letting myself get sucked into Nextdoor arguments again. I know it’s not necessarily the most productive use of my time, but I sometimes I can’t resist. It reminds me of this classic xkcd comic, Duty Calls.
I want to share a (relatively) quick note on budgeting, reflecting on some of the back-and-forth I’m seeing (my next planned post, on pension liabilities, is taking longer to finalize than intended—it’s a complex topic).
A lot of the “debate” about whether El Cerrito is engaging in responsible budgeting seems to revolve around questions of deficit spending. One of my neighbors posted a reaction to the budget update in the upcoming city council meeting agenda package, decrying the difference between revenues and expenditures in the past fiscal year, and alluding to a longer term trend of “surprise” expenses coming in mid-year to drive El Cerrito into the red. This post (and other neighbors’ responses to it) highlighted a basic misconception for me: the “balanced budget” is a myth.
I want to tell a simple story in order to illuminate this point. A city budget isn’t really fundamentally different from a personal budget, if you disregard scale and complexity factors. We all have some sense of how we handle our own personal budgets, for better or for worse: some of us are highly methodical, some prefer a more intuitive approach. Some take more risks and others are more conservative. Some of us have more money and a robust safety net, whereas others may be living paycheck-to-paycheck. But however you manage your finances, you probably understand that it’s a dynamic thing. Money comes in, money goes out, and the key is to understand whether you’re living within your means.
Let’s take a very basic example. Say you’re on the more methodical side, so you have developed an actual formal budgeting process for yourself. (This is not me: I tend to be fine following “intuitive” practices without getting into trouble. I use the very basic spending analysis capabilities of my bank, to keep an eye on things, but I’m lucky enough to not have to budget every dollar in advance at this point in my life.) You have a source of income—let’s say you earn a salary, so that income comes in very predictably, paychecks hitting your bank account twice a month. And you have taken that income and broken it down to match all your normal spending categories: 25% for rent, 5% on utilities, 15% on food, 10% on transportation, 5% on medical, 10% on insurance, 15% miscellaneous/personal, and 15% to savings. That’s a great practice.
So the ideal scenario is one in which your budget matches your actual spending patterns over time. Of course, you could always try to budget a little conservatively, and then—if you’re right—you might typically have some leftover for discretionary spending, say, to save up for a vacation. That sort of thing may be helpful for you to incentivize frugality. But say you’re a stickler for rules, and you’re trying to just make sure your budget is as accurate as possible, so you even have a bucket for discretionary spending.
Well, your paychecks are coming in steadily, but surprise! Your boss likes your performance, so you just got a bonus. Sounds like great news, but—oh no, now your budget is less accurate!
Not to put too fine a point on it, but can you see why being obsessed with forecast accuracy might not be the most sensible thing, here?
Or you might be going for your usual grocery run, and you have a $200 budget for this month, but you spot your favorite whiskey is being sold at a deep discount. Well, you still have some whiskey left in your cabinet, but you can’t resist a good deal; you know you would be buying that bottle later anyway at its usual price, so it’s actually fiscally prudent to snap up the deal when it becomes available. Even though whiskey is a treat, and you wouldn’t buy it if, say, you knew you were about to lose your job. But you think that’s a tolerable risk, even though it runs you over your grocery budget for the month. Hmm, maybe that means you should actually break out your whiskey purchases into a different category, to account for the fact that they’re a luxury, not a necessity like other groceries.
So you can see, there’s a whole thought process for making a decision in real-time to adjust your budgeting process based on risk, timing, and opportunity. It’s not really any different for a city, except in terms of scale and complexity. Cities differ from each other in terms of how they manage their budgeting process, and they all—ideally—strive for balance, but they also weigh the real pros and cons of their spending decisions in real time. The purpose of a budget is to be methodical and thoughtful about where your resources are allocated, not to get every last dollar predicted perfectly up front. You won’t arrive at balance through that process, because life will always throw curveballs. The goal is to understand your own spending and resources, make adjustments as you go, and course-correct if you start to see you’re on a bad trajectory.
The myth of the balanced budget is alluring, but it doesn’t hold up to real life. It’s an idealized goal to strive for, but not to the detriment of your ability to adapt. You wouldn’t reject that nice bonus just because it messes up your books, would you? Maybe you would ask if there should be a plan for how unexpected bonuses fit in, say, a policy that you put them directly into savings?
If this seems unnecessarily simplistic, well, I know full well that city finance is far more complex than this little example I’ve spelled out here. But at the end of the day, we need to be able to agree on these most basic, fundamental principles before we get into the weeds.