Dollars and Jens
Saturday, July 25, 2009
cashflow vs. earnings
California passes a budget bill, demonstrating the distinction between earnings and cash flow (or, analogously, wealth and liquid cash). The easiest way to convert wealth to cash is to borrow money; this increases cash but not wealth, and is counted as cash flow but not earnings. California can't really borrow at this point, so they dissave by converting illiquid assets to cash
the state will be authorized to sell 17 state office buildings to raise cash, renting the space back from the new landlord. The Orange County Fairgrounds also will go on the market.


The state also will accelerate collection of 2010 personal income and corporate taxes to bring in revenue earlier than anticipated.
and borrow by accruing unpaid liabilities
One of those gimmicks was to defer state employee paychecks by one day, from June 30 to July 1, 2010, for a savings on paper of $1.2 billion.
Note that this last is only a one-day loan (or one day longer than usual, in any case); they're constrained by liquidity, but also by the timing of their liquidity, since certain rules apply to cash flow in certain time periods.

This one's more ambiguous:
Even state workers, long protected by powerful public employee unions, have been affected. Schwarzenegger has ordered them to take three days off a month without pay, equating to a 14 percent pay cut.
There have been situations in which the federal government in particular has gone back, after the fact, and provided back-pay for "unpaid" furloughs; if you suppose they're going to do that, this goes under accruing unpaid liabilities instead of an actual cut in expenditures. That was typically after a temporary budget impasse, though, after which money was again flowing freely; California is likely not to be in that position for a long time, and while I wouldn't be surprised if they eventually get paid for their unplanned days off, I wouldn't be surprised if they don't, either. In either case, it conserves cash now.

Most individuals, insofar as they budget, use cash-flow accounting, but, while public companies report cash flows, they also report earnings, and earnings are designed to give a more accurate long-term view of the company's financial health. Governments, especially as it relates to budget rules, tend to use cash-flow accounting, and entities on the verge of equitable insolvency tend de facto to move in that direction as well. California, of course, is both.

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