When the Numbers Don’t Just Add Up: Budgeting Justice

 

A couple of weeks ago I stepped into the office of an accounting faculty member at Seattle University. We were talking March Madness brackets, when suddenly I noticed a print out of the Journal of Accountancy on his desk with the headline “Pope Francis on the role of accountants in Society.”

He looked at me with a grin “Do you guys in finance have that? The Pope is talking to accountants, man!”

Accountants? Who cares? I left accounting behind when I left soccer behind – a third of a lifetime ago, and I am glad for the new loves I found in return: finance and baseball. So why bother with accounting again, ever? I mean, sure, it was tax season., and we’ve already heard from our national accountants about  next year’s national deficit, I mean, national budget. Sorry. After all, yeah, it’s budget season.

In no small part, it’s government news that throws us into budget season. Remember the “sequester” a couple years back, the government shutdown that followed, and the constant tax break vs. government spending fights? The government, at the federal, state and local systems fund the justice system, law enforcement and correctional facilities. The federal government also handles unemployment and disability benefits as well as social security. Government spending of various kinds connects to the different facets of what we call “justice”: the law, crime and punishment, as well as social justice and social safety-nets.

Every budget has two sides: revenues and expenses. Most of the time, investors, auditors and commentators worry about expenses: how efficient a company is at managing what it costs to produce, how well compensated employees are (from top executives to the lower paid workers), what sort of investments does an organization engage in, etc.

So, what is the Pope telling accountants, then?

“[E]veryone—but especially those in a profession that deals with the proper functioning of the economic life of a country—is required to play a positive, constructive role in the course of their daily work, bearing in mind that behind every document, there is a story, there are faces.

“Those who work in various positions in the economy and finance are called on to make choices in favor of the social and economic wellness of humanity as a whole, giving everybody the opportunity to realize their own development.”

Well, actually, Francis kind of has a point. The past couple of years have also reminded us that business spending has something to do with justice. In previous decades, a large part of the conversation was about major investments: build factories abroad or at home? Invest in new products or improve what you are doing right now? More recently, one hot button topic has been what people are paid. Whether they are baseball players, company executives or business “foot soldiers” gets us excited… or rattled up. The news that Gravity Payment’s CEO cut his own salary to raise the minimum salary in his organization to $70 000 has created a loud buzz over the last days. Gravity Payment, located in Seattle, may have been inspired by the city’s new minimum wage laws, which gradually increase minimum pay to $15.

This sounds like a good idea in a city where rents are on fire and cost of living is rising steadily. But the actual outcome is less clear: raising the minimum wage more than 50% above Washington State’s early 2015 levels will likely hurt small businesses by significantly increasing their expenses. Think of your wallet. Tomorrow, the price of coffee rises by 50%, and you don’t get paid anything more than you used to. What do you do? Buy less coffee? Drink fewer cups? Your coffee drinking habits have got to change, unless you find a way to  put extra dough in your wallet?

When you are company, the latter is a tad easier than when you are an employee: you could charge more. But the change of habits caused by higher expenses (such as wages paid to workers) still hurts. Will businesses impacted by greater wage costs hire less, cut workers’  hours or raise prices for their customers to pay the bill? Either way, someone’s budget will suffer. The distributive justice of higher minimum wages may hurt workers who will be given less hours or customers who will have to pay more for products and services. The economy is pretty much a closed circle: someone’s cash inflow is someone else’s cash outflow. Seattle University, the Jesuit university where I currently teach, has just announced that they will raise student workers’ wages to the $15 city minimum. There is little question this will be a costly move. Where will revenue come from?

That question of revenue has been the issue at many not-for-profit institutions and in particular at universities, public or private, over the past few years. Even with skyrocketing tuition increases (in both public and private universities over the past dozen years), many universities are often struggling to make ends meet. And there is more pressure on both sides of the income statement: the expense side with a wave of  adjunct faculty members organizing around the country asking for better pay; also, with the expansion of student services at most campuses: security, Information Technology costs booming (you think that Blackboard site is free of charge?) of all kinds; and the revenue side – the competition for incoming students based on discounted tuition/ financial aid and, for public universities, the melting away of state subsidies to the university.

The threat on companies’ revenues has also hit the private sector. An accounting professor I had once said that firms can always generate more revenue, all they need to do is take more risk. We’ve seen that this policy can lead to: just ask the shareholders and employees of Enron and Lehman Brothers, two companies whose risk-fuelled financial creativity that was kept unchecked and toppled the mightiest.

Some will argue that increased downside risk (read “huge losses”) is a problem intrinsic to financial innovation itself: new financial products are bound to create new problems. As Princeton economist Alan Blinder concluded in his book on the financial crisis: be careful not to put all financial innovation in the same bag. Paul Volker, former Fed chairman turned financial firm critic, reminded  people that there is good in financial innovation: think of the ATM—and hey, Brendan Busse, how do you like those European chip-endowed debit cards and no SSN-tied bank accounts ;=) The anti-innovation  (of any kind) argument  is our version of the quarrel between Les Anciens et les Modernes, when 17th century France was torn apart not yet by a people’s revolution but certainly over the value of new literary and scientific tools as opposed to the wisdom of the thinkers of Antiquity.

Yet, as we see small business fail and family finances eaten up by “teaser rate” mortgages and badly-incentivized mortgage brokers, our tradition of “hard work always pays off” is now questioned at various levels of society. Good American companies, good local not-for-profits, hard working families… so many struggle even as they work harder than they ever have. And yet, many are worse off than they were before. Francis is right, in light of all this, to remind accountants that budgets are about more than money:

“I encourage you to always act responsibly, fostering relationships based on loyalty, justice, and, where possible, fraternity, tackling with courage, above all, the problems of the weakest and the poorest.”

But how can companies do all this in a world marked by increased competition, thinner margins and (with the increased number of variables that come with a global market) ever-greater uncertainty? If charity begins at home (and maybe Francis is telling us that this proverb is misleading), how can companies do more for others as their ability to do something for themselves diminishes?

Company budget officers and organizations’ controllers feel the pain. Building a budget has become trickier-than-ever: gone are the days when one would simply add 3 to 5% on last’ year’s number. Indeed, the new budget fad is “zero based budgeting.” This technique where managers have to justify their budget from scratch every year rather than base it on previous years’ numbers has recently gathered media attention when 3G Capital—a firm that promotes ‘zero based budgeting – offered to merge two American icons: Kraft and Heinz. A key to 3G Capital’s success with Kraft, which 3G bought a few years ago, is credited to the practice of zero-based budgeting.

Gone is the Ancients’ practice of translating past statements’ numbers into the future. The new reality is that one creates a budget from the ground-up every year. This, of course, helps organizations get rid of financial cobwebs and “we’ve always done it this way.” It makes it easier to shrink budgets, cut cost, offer creative revenue streams and boost the “bottom line.” What room is there for justice, solidarity and the common good in zero-based budgeting? How can we carry a tradition of caring for our local community, employees, business partners when we start looking at those relationships as if they were brand new every year?

I’m not saying this to bash a new budget technique. I’m not an anti-innovation guy. In fact, I may have been categorized as an “early adopter” type of person: my Sony Mini-Disc player is a testimony to my technological enthusiasm – and a costly one at that. But tempered by the years and by the wisdom of reading both Ancient and Modern authors, this enthusiasm has now led the way to careful optimism about innovation in general and financial innovation in particular. The financial crisis has showed us that we need to be more careful in asking about potential consequences and less excited about the sheer prospect of raising revenue.

Another recent example shows that revenue-generation innovations, or at least non-traditional revenue streams can not only hurt an organization but also create a culture of fear and exclusion with most damaging consequences. Indeed, a few weeks ago we learned that a badly built budget can create an atmosphere of fear and promote social injustice. The Department of Justice’s investigation report on the Ferguson, MO Police department highlighted “law enforcement practices shaped by the City’s focus on revenue rather than by public safety needs.”

This early blurb of the DoJ’s report managed to get quite a bit of media attention. If we build our revenue from the wrong places, we can clearly run into more than financial trouble. Translating the “be careful where revenue comes from” principle to universities: would increasing our revenue by turning to more affluent students (students who rely less on tuition remission and discounts) sound like a good idea? I could think that a president or chancellor might like that idea. But universities have the responsibility and duty not to present the strongest income statement possible: they must enable the sharing of knowledge for students of all kinds—not just the affluent kind.

Jesuit universities have tried to fulfill this duty on many occasions—recently through the promotion of the so-called Dream Act, which offers greater access to higher education for undocumented students. Considering the cost of tuition, I doubt that many would call undocumented students “revenue generators” for universities. To stand for “dreamers” means taking a financial hit,but one that shows that there is more to higher education than conservative budgeting.

But the conservative, tuition-increase fuelled view practiced by most universities, Jesuit or otherwise, makes it more expensive for students to attend college and creates profound financial ripples in students’ lives, which in turn may lead to the self-destruction of one’s finances or the tendency to see college as a human-made self-selection process of “survival of the richest.” There too, university officials have an increased sense of responsibility,  not only to get creative about revenue-generation, but also to not let student take on unbearable amounts of student debt. In my (admittedly limited) experience, some universities have recognized this as a duty, while others adopt a much less guided approach. The sustainability of higher education as a whole requires a pro-active stance on this matter, like on sustainable and just revenue generation at large.

Budget has to do with organizational sustainability, for universities and for private businesses as well. In that, accountants have a key role to play.

Many would argue that the job of accountant, like the job of banker, is and should be boring. Recent news stories about the Ferguson Police Department, major American universities and iconic American corporations tells us otherwise. Accountants, budget officers, company controllers: your job is crucial any organization and to all those related to it. And so, as you guys fill in those Excel spreadsheets for your new fiscal year budget:  remember to budget for justice.