Budget Battles: Floyd, the budget and baselines

This is not about the emergency spending bill that may be enacted as a result of the damage caused last week by Hurricane Floyd-although that disaster could provide Congress and the White House with a way out of the appropriations mess they face little more than a week before the start of fiscal 2000.

Instead, it is an opportunity to show how one of the most controversial aspects of federal budgeting-the use of baselines-is not something that, contrary to popular opinion, is just indigenous to Washington.

As I listened to the reports of the large number of flights being cancelled because of Floyd and the estimates of the revenues lost as a result, it occurred to me that we might not be getting a completely accurate picture of the true impact on the airlines because the baseline being used did not tell the full story.

The question that needed to be asked was revenues lost "compared to what?"

There certainly were lost revenues compared to the assumption that no flights would have been cancelled for any reason during this period-that is, if 100 percent of all scheduled flights flew as planned.

But airlines know before the year begins that some flights will be cancelled because of mechanical problems, so they probably have a baseline projection that shows what the reduced total expected revenues would be after this is taken into account. If these previously assumed cancelled flights and the resulting lost revenues are taken out of the comparison, the revenues lost as a result of the Hurricane Floyd cancellations are not as large as they would be if the "100 percent" baseline were used.

Airlines also know the weather will not always be perfect, and so probably adjust expected revenues to take this into account as well. This third baseline means that some percentage of the flights cancelled because of Floyd had already been assumed to be cancelled. Therefore, the total revenues lost specifically as a result of the hurricane may not have been as great as reported.

A fourth airline baseline deals with the number of seats expected to be filled with fare-paying passengers. Some seats might not have been sold even if Floyd had never occurred. Others might have been occupied by passengers using frequent flyer miles, and so would have produced no revenues (other than perhaps a purchased alcoholic beverage or movie) anyway. Some passengers might have made their reservations weeks in advance and were staying over a Saturday and so would have qualified for a less expensive fare than those paying full price. All this means the revenues lost as a result of Floyd might be much less when compared to an average flight that, for example, had been assumed to be three-quarters full, had ten percent frequent flyers, and had an average fare that was only fifty-five percent of the full fare charged for the flight.

So how much revenue was lost by an airline as a result of the Hurricane Floyd cancellations? The answer depends on which baseline is used. The biggest loss will result from a baseline that assumes all scheduled flights would have flown with all seats occupied by full-fare paying passengers. The smallest loss will be from a baseline that subtracts the percentage of flights already assumed to be cancelled because of weather and mechanical problems and uses an average amount of revenues per flight based on the number of unsold seats, frequent flyers, and discounted fares as well as lower sales of liquor and headsets.

Each of these baselines can be a correct comparison, and will provide important information when used properly.

The same thing is true of the many comparisons used in the federal budget process. Even though a spending increase or revenue reduction can be made to look larger or smaller depending on which baseline is used, they can all be accurate and useful.

For example, former Office of Management and Budget Director Richard Darman frequently complained that congressional Democrats were wrongly characterizing a Bush administration proposal for Medicare as a cut, when he said it was an increase. Darman was using one baseline-the actual amount spent the previous year-to justify his assertion, while House and Senate Democrats were using a different baseline-what was required to be spent that year under current law-to justify their claim.

Both comparisons were correct, but neither one told the whole story. Darman was indeed right; the Bush proposal was an increase compared to the previous year. But he was also wrong; it was a proposed reduction compared to the amount that would be spent if existing law were not changed.

This is virtually the same as an airline claiming a big Hurricane Floyd-related loss using a baseline that assumed all flights would have flown as scheduled, completely filled with passengers paying full fares, while someone else reduced the loss significantly to account for the average number of cancelled flights and the average number of passengers paying the average fare.

So the next time someone says that "only in Washington" could an increase in spending be characterized as a cut or a decrease in revenues be called a tax hike, just smile and ask whether you will arrive on time and if you may have another bag of peanuts.

Budget Battles Fiscal 2000 Countdown

As of today there are only six legislative days left before the start of fiscal 2000. If Congress decides to meet over the weekend as it sometimes does this time of year, there are only nine legislative days remaining.

Question Of The Week

Last Week's Question. Gotcha! There was only one correct answer to last week's question and that was provided by someone who, because of the Blum Rule (named for former Congressional Budget Office Deputy Director Jim Blum who won the Question of the Week for three consecutive weeks), is ineligible to win another "I Won A Budget Battle" T-shirt until six months from his last win has passed. Congratulations anyway to Joe Luchok of the American Accreditation HealthCare Commission/URAC, who knew that the president's budget is required to be sent to Congress by the first week in February and that the U.S. Constitution requires the new president to be sworn in on Jan. 20th. Therefore, the outgoing president may decide that he or she does not have to submit a budget before leaving office at the same time the incoming president decides that it was his or her predecessor's responsibility to do so.

This Week's Question. Everyone is assuming that when fiscal 2000 gets underway next week there will be a continuing resolution to fund those agencies and departments whose regular appropriation has not yet been enacted. Continuing resolutions are almost always in effect for a specific period of time and if another CR is not enacted by the time it expires, those agencies that are still not funded shut down. The question: When will the first continuing resolution for fiscal 2000 expire? Send your response to scollender@njdc.com. If there is more than one right answer the winner of the "I Won A Budget Battle" T-shirt will be selected at random from the correct responses.