Government Budgeting Denhardt - Chapter 5 Government budgets and the economy When economy grows, tax revenues increase – Personal income, sales tax – Tax rates can be lowered As the economy shrinks, tax revenues will fall – – Should taxes be raised to make up for the shortfall? Raising taxes can further decrease personal incomes, thus increasing economic instability Keynesian economics Rapid economic growth high inflation Inflation decreases buying power – Worst for those on fixed incomes Less buying power high unemployment – Hurts individuals and government – Increases welfare burden Federal Government Federal spending decisions play a major role in the economy – – Budget is an instrument of public policy – Accounts for over one-third of the GNP Federal government by far the largest corporation in the world – ten times size of GM Programs that are “in” get funded Deficit spending: Federal government can spend regardless of revenues State Governments State and local expenditures account for 15 % of GNP State budgets limited as most States cannot engage in deficit spending (can’t spend more than they take in during each budget cycle) Sources of funds Taxes – – – Proportional – everyone taxed at same rate Progressive – higher rates on higher incomes Regressive – flat tax Automobile registration and license fees - persons with lower incomes pay a proportionately higher rate of their income Taxes Types of taxes – – Personal income Largest single source of Federal income (41 %) progressive – higher rates for higher incomes Corporate income also progressive (10 % of Federal income) Frequently avoided through tax shelters and credits Taxes Social insurance payroll taxes (34 % - 2nd. largest source) – Social security, health care, etc. (flat rate, regressive) Sales and excise – – Sales tax is a state and local form of revenue Excise tax is Federal (3 % of Fed. income) – applies to sales of commodities such as gas, liquor Both are regressive (poor consume a greater proportion of their income than the rich) Taxes Property taxes – – – – Provide about half of local government revenues Evenly split between residence and business Progressive (higher tax on more exp. homes) Limitations on assessment increases Calif Prop 13 (1978) – limited to one percent of assessed valuation – cannot increase more than two percent per year Other revenue sources Fee for services – Regressive – all pay the same regardless of income Lotteries – – Can be very regressive - poor play more Other costs Welfare Crime Burden on local services Government spending: Mandatory Two-thirds of the Federal Budget is mandatory spending Entitlement programs take fifty percent of the Federal budget – Provide specified benefits to those who meet requirements (Social Security, Medicare, Veteran benefits) – Spending can vary year to year as size of group changes – Usually indexed to the cost of living Interest on national debt (fourteen percent of the Fed. Budget) Farm price supports Government spending: Discretionary Accounts for one-third of the Federal budget Defense (15 percent of Federal budget) Domestic programs (17 percent of the Federal budget) October-October budget cycle is seldom met – Federal government usually winds up on a “continuing resolution” (CR) for several months into the fiscal year – CR’s limit spending to previous fiscal year’s levels Deficit spending Large deficits may limit economic recovery – Govt. money not available for buying new goods & services – Govt. borrowing uses up available funds, drives up interest rates, makes it tougher for businesses to borrow and limits private expansion Clinton’s last budget was balanced & projected a modest surplus Current budget is seriously out of whack – Actual 2003 deficit was 375 billion dollars – Projected 2004 deficit is 477 billion dollars National debt is a different issue from the deficit Sum total of outstanding Government securities and financial obligations Huge – almost 8 trillion dollars Debt reduction strategies Goals – spur economy – lower interest rates – calm financial markets Clinton plan – reduce outlays & find new sources of revenue – Increase corporate tax rate – Increase personal tax rate for higher earning families – Freeze defense spending and reduce Medicare increases Bush administration reversed course – Tax reductions to spur the economy – Final measure was a $1.3 trillion cut over 10 years State spending Intergovernmental transfers: States and local governments pass through a lot of money from the Fed. Govt. – States control a lot more spending than just their own funds – Thirty percent of education money is State & local – Including pass-through Federal $, States control 70 percent of all money spent on education in the U.S. Including pass-through Federal $, State & local governments spend money in this order: – Education – Public welfare – Highways Budget cycle: Step 1 - Formulation Fiscal year Agencies prepare proposals and forward to central office Chief executive may share decision-making with other elected officials and legislators Federal formulation – Cycle begins with OMB (works for President) Projects Government income and expenses Analyses agency programs, performance, needs and priorities Special attention to President’s policy concerns Federal formulation (cont’d) – – – – – Agencies negotiate requests with OMB Final decisions made by President Budget document presented to Congress Committees in House and Senate hold hearings Agencies, interested parties, lobbyists and interest groups have their say House and Senate vote on funding bills Usually need to be reconciled by a “conference committee” Congress aided by Congressional Budget Office, their equivalent of the OMB State formulation State practices vary – Deficits usually prohibited – Governors generally have line-item veto power (President does not) Budget cycle: Step 2 - Execution Apportionment – funds generally allocated to agencies by quarter Preaudit – review before spending to insure that funds will suffice and that expenditures are proper Supplemental appropriation Reprogramming – diverting moneys to other projects Impoundment – withholding of funds by chief executive in case revenue projections fall low or goals of program already reached Deferrals – temporary, either house of Congress can veto Recissions – permanent – must be approved by both houses of Congress Budget cycle: Step 3 - Audit Post audit – After fiscal year ends, to verify expenditures are proper Performance audit – Reviews of agency operations (not just financial) Who conducts audits? – Federal GAO GAO Performance Audits – State California State Controller Budgeting approaches: Line-item budget Each budget modeled on the previous Based on experience and projected change Organized by functional units or departments Within departments, organized by expense categories Pluses: allows close control and tracking of expenditures Minuses: poor management tool (ignores performance) Budgeting approaches: Performance budget Organized around programs or activities, not departments Focus is on work processes – not mission or goals Performance measures reflect accomplishments and costs – Program: Highway safety – Subprogram: School visitations – Cost: 27 visits @ $250 Issues – Emphasizes what is measurable - quantity rather than quality – Programs cut across organization structure, difficult to assess responsibility Budgeting approaches: Program budget Unifies planning, systems analysis and budgeting Each agency has a mission statement that identifies goals Budget sets out objectives that must be met to accomplish these goals Agencies evaluated on meeting their goals and objectives – – Performance budget – focus on process – measure success of sanitation department by # of garbage collections Program budget – focus on purpose – measure success of sanitation department by rate of infectious disease Advantages: Focus on benefits of govt. activity Disadvantages: Cost and complexity Practical exercise Budgeting approaches: Zero-based budget Basis: Identify “decision units” – the lowest point in the org. at which significant program decisions are made Managers of decision units prepare packages – – – – Describe programs Estimate costs and benefits Identify alternatives & justify proposed approach Specify required funding for minimum, current and optimal operations Decision packages ranked by top management and legislators Budgeting politics Agency managers typically seek to expand – Try to classify as many activities as possible as part of their program’s “base” – elements that are continuously funded without opposition year after year – Try to get a larger share of agency resources Tactics – Look for support inside and outside their agencies – Padding – “Camel’s nose” – getting a foot in the door, then expanding Financial management – Fund-based accounting Government budgets are deposited into specific “funds” to assure overall agency accountability for expenditures Funds represent functional areas – – General funds for routine agency activities Restricted funds for specific uses (separate fund for gas tax revenue) Proprietary funds hold profits (e.g., transit systems) Fiduciary funds hold individual assets (pension funds) and moneys collected for other governments (property taxes collected by a county for the State) Financial management – Risk Management and Purchasing Risk management – – Identify potential areas of loss Try to reduce probability or mitigate losses Purchasing – – Centralized purchasing by experts Cooperative purchasing PROGRAM BUDGETING PRACTICAL EXERCISE You are developing a program budget for a public agency. For your assigned agency: 1. List three to five goals 2. For each goal, list three to five objectives 3. For each objective, give three to five examples of a specific expenditure Team 1 - City streets department Team 2 - Fire department Team 3 - Police department Team 4 – School district Team 5 – Parks and recreation department Return to slide show