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Surpluses & Deficits: What Do They Really Mean?

“A California budget surplus that is already expected to be massive could end up being billions of dollars more than initial estimates,” reported KTLA Morning News’s website in February.

We mention this, not because we want to write about fiscal conditions in California, but because we want to carp a little bit about one of the most widely misused and misunderstood words in all of state and local government finance: “surplus.” This is of particular significance right now, because thanks to the money that’s been flowing into state and local coffers this last year, we’re seeing the word used quite frequently, and not only in California.

As Chris Hoene, executive director of the California Budget & Policy Center explained in an interview we did with him for the Government Finance Research Center, “I wouldn’t use that term, because a surplus is the money that’s left over at the end of a fiscal year. This is unanticipated revenue that state leaders are authorized to allocate as part of the annual budget process.”

In fact, when you see mentions of surpluses in the press right now, it’s more than likely that the word is being misused. By definition, a state or locality can only have a surplus at the end of the fiscal year, and since that doesn’t come until the end of June for most of these governments, the extra money they have on hand now is decidedly not a surplus.

The same kind of confusion is also found in the popular use of the word “deficit.” The mangled use of that word has been bothering us for a long time, and we wrote about it in Governing Magazine in 2011.

We addressed this when we wrote a glossary for the Volcker Alliance’s Truth and Integrity in State Budgeting reports. Here’s how we explained it there: According to Generally Accepted Accounting Principles (GAAP), deficits “reflect expenses outstripping revenues at the end of the year. It is not to be confused with a shortfall, which represents revenue shortages that accumulate during the year and may be eliminated by spending cuts, tax or fee hikes, or one-time actions to avoid a year-end deficit.”

This isn’t all just a matter of semantics and we don’t want to come across as sounding like somebody’s eighth grade English teacher. We’re always happy when elected officials talk about the need for transparency in government. But when the language of finance is badly miscommunicated to the general public, all the transparency in the world doesn’t mean that voters will really understand what’s going on. And that’s important.


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