Change in Accounting in Brown’s Budget Costs Public Schools

Public schools receive $1.5 billion less because of an accounting change employed by Gov. Jerry Brown in his January budget proposal, according to the Legislative Analyst.

In a January 31 briefing, the analyst chided the Brown administration for “not describing the new approach and its implications in its public budget documents” but said, “while imperfectly executed” the new method has “some merit.”

The Brown administration says itwhat the analyst dubs a “change” is just complying with a law changing state accounting practices eneacted in 2008.

“We didn’t highlight it because we were simply applying the law that’s been in effect for the past two years,” said H.D. Palmer, a spokesman for Brown’s Department of Finance.

Through the accounting change, which would be applied to only four of Brown’s revenue proposals, a large amount of the money collected in the fiscal year beginning July 1 would be counted in the current fiscal year.

That has the effect of increasing revenues in the next fiscal year by $719 million.

But by counting a portion of the proceeds this year, the amount of money flowing into the general fund in the next fiscal year is reduced, from an accounting standpoint anyway.

Less money received by the state means less money it owes to schools.

In this case, $1.5 billion.

Brown’s proposed budget keeps state spending on public schools at the $49.6 billion they receive this year. At least on paper. More than $1.7 billion in state payments due this year to schools are deferred into the next year. Brown proposes to postpone $2.1 billion in payments due next year until the following fiscal year.

Because a series of temporary taxes Brown wants to extend are set to expire this year, state revenue will fall, triggering a drop in the minimum owed to schools. Use of the new accounting method pegs that lower number at $47.3 billion.

If Brown hadn’t changed the accounting method, the minimum would be $1.5 billion higher, according to the analyst.

The Brown administration says this new method of accounting moves the state closer to “generally accepted accounting principles.”

But it only applies the new method to revenues from eliminating enterprise zones, keeping the tax credit for dependants at $99, a .25 percent surcharge on income taxes and tightening how California taxes are calculated by companies doing business in multiple states.

Other revenues are calculated using “different” and “inconsistent” accrual methods, the analyst says.

Brown’s father, Pat, switched the state from cash accounting to accrual in the budget for the fiscal year beginning July 1, 1966. Brown the elder said it was to modernize accounting practices but, like most subsequent state accounting shifts, there was a one-time budget benefit: Counting $99 million from future years in that cash-strapped budget year.

Cash basis accounting counts money when it’s received and expenditures when they’re paid.

Accrual counts revenue when it’s earned – not necessarily received – and expenses when they are obligated, not necessarily paid.

Reagan took the state back to cash accounting in 1973. GOP Gov. Pete Wilson switched back to accrual in 1991 to get a one-time $1.7 billion budget benefit.

Gov. Arnold Schwarzenegger and lawmakers tinkered with the accrual method again in 2008 to get $2 billion in one-time budget savings.

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