EASTERN MICHIGAN UNIVERSITY
DEPARTMENT OF POLITICAL SCIENCE
PUBLIC/NONPROFIT FINANCIAL MANAGEMENT
PLSC 615, WINTER 2014
Dr. Joe Ohren, 601-K Pray-Harrold
Phone: 734.487.1452 (Faculty Office);
Office Hours: M and W: 11am-Noon;
Email: Johren@emich.edu
734.487.3113 (PLSC);
734.487.3340 (Fax)
T and R: 8-9am;
Wednesday: 4-5pm
OBJECTIVES
This is the second of a two-course sequence in budgeting and financial management required in
the graduate program. It builds on the first course, PLSC 540, a prerequisite, and presumes a familiarity
with the governmental institutions, actors and processes involved in preparing and approving budgets at
national, state and local levels and in nonprofit organizations, macroeconomics and public finance, and
the politics of budgeting. Our focus will be on two primary themes: 1) budget execution/financial
management (including accounting, reporting and auditing), and 2) budget analysis, performance
management and decision-making.
Specific course objectives include:
1. To examine the process of budget implementation from an administrator’s perspective;
2. To describe the internal control procedures used in budget execution that protect the integrity
of and insure the fiduciary responsibility for organizational resources;
3. To understand the nature and role of the accounting system in providing information for
management decisions during budget execution;
4. To be able to read and interpret financial reports and audits;
5. To understand the role and impact of analysis in budget decisions;
6. To be able to use selected "analytic techniques" appropriate for budget planning,
performance management and evaluation;
7. To identify and employ performance measures and management in program operations in
both the public and nonprofit sectors to improve organization performance.
FORMAT
The class will follow the outline below, recognizing the need for flexibility; indeed for the last
two segment of the class I have provided a more detailed outline to help you spread out your reading.
Assigned readings should be completed prior to class since a lecture/discussion format will be used,
including liberal use of discussion questions (see Study Questions in Outline) and in-class exercises
designed to stimulate thinking about and understanding of the budget process. Handouts following the
course outline have been prepared for distribution to help you organize your reading and thinking, and
PowerPoint slides will be uploaded in advance of class to the course website for your use.
GRADING
Grading will be based on three take-home examinations (weighted 30%, 30% and 40%
respectively). Exams are intended to measure mastery of terminology and concepts as well as ability to
analyze, integrate, develop and apply ideas drawn from course materials (lectures and readings). Class
attendance is expected since we will be doing/discussing a number of exercises throughout the term; note
that there are several exercises in the outline and while not graded they will be collected and returned with
feedback. Exams are due as noted in the outline; late papers will be accepted only for "cause" and must be
cleared with me in advance.
REQUIRED READING
The primary text was used in the 540 class and there may be used copies available at one of the
local bookstores if you do not have one.
Lee, Johnson and Joyce, Public Budgeting Systems, 9th Edition
I have also ordered a supplementary text to replace a number of articles that I have used in the past for the
third segment of the course. It is available in local bookstores and there may be used copies available.
Kelly and Rivenbark, Performance Budgeting for State and Local Government, 2nd Edition
In addition, I have posted selected readings (title and author’s last name used in outline below) on
the class website. I will also provide a number of handouts to take advantage of current specialized
literature. For those interested in additional readings, I will be happy to suggest some.
To help you organize your readings and our discussions, I have also inserted in the outline below
some tentative “exam” questions associated with the readings. We will discuss this more in class.
You will also find it valuable to read a daily newspaper to keep abreast of budget issues—many are
covered regularly and address the particular issues facing the state and local governments and nonprofit
organizations around us—and they will be used as a springboard for class discussion. And, while I am not
asking you to do a term paper, it will be useful for you to review the budget from your own local
government or nonprofit (most are easily accessible from websites and offer a glimpse of the issues facing
your unit). Feel free to share your perspectives on those issues during the term (hint, participation credit).
ACADEMIC INTEGRITY
Academic dishonesty, including all forms of cheating and/or plagiarism, will not be tolerated in
this class. Penalties for an act of academic dishonesty may range from receiving a failing grade for a
particular assignment to receiving a failing grade for the entire course. In addition, you may be referred
to the Office of Student Judicial Services for discipline that can result in either a suspension or
permanent dismissal. The Student Conduct Code contains detailed definitions of what constitutes
academic dishonesty, and it can be accessed online at www.emich.edu/sjs
CLASSROOM MANAGEMENT ISSUES
Students are expected to abide by the Student Conduct Code and assist in creating an environment
that is conductive to learning and protects the rights of all members of the University community.
Incivility and disruptive behavior will not be tolerated and may result in a request to leave class and
referral to the Office of Student Services (SJS) for discipline. Examples of inappropriate classroom
conduct include repeatedly arriving late to class, using a cell phone, or talking while others are speaking.
STUDENTS WITH DISABILITIES
If you wish to be accommodated for your disability, EMU Board of Regents policy #8.3 requires
that you first register with the Access Services Office (ASO) in room 203 King Hall. You may contact
ASO by telephone at (734) 487-2470. Students with disabilities are encouraged to register with ASO
promptly as you will only be accommodated from the date you register with them forward. No
retroactive accommodations are possible.
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OUTLINE
Week of
1/6
Topic and Assignment
Instructor and student introductions; course requirements for PLSC 615—a quick review
of the outline; a local government budget simulation. Readings for the simulation will be
distributed a week in advance of class.
Exercise 1: Adopting a budget in Ohrensburg—roles will be assigned for members of the Ohrensburg
City Council and a description of the simulation and the Finance Director’s Budget Memo will be
distributed prior to the start of the term. All students are expected to participate.
1/13
An overview of the budget process, linking the first course to the second. Joyce; Berman;
Berner and Smith; Making Common Sense of Federal Budgeting; Ohren’s Rules.
A Transitional Note: While the Joyce article focuses on the use of performance data in the budget
process—a topic that we discuss later in the term—it also provides a straightforward description of the
stages of the budget process at the national level. The article by White, Making Common Sense, also
provides a review of key questions related to public sector budgeting, an important point of review. The
Berman essay addresses the role of the legislature under the Nerd Governor. We will use these to review
your discussions in the 540 class—recognizing that your emphasis has been more on local government
processes—and indicate the primary concerns to be covered in 615. The third article addresses a topic
“near and dear” to my heart. As some of you know, I have been working over a number of years with the
city of Ypsilanti and other communities to engage citizens in local decision-making. We will use the
article as a basis for a critique of present public participation requirements and explore more effective
strategies for engaging residents in budget processes.
Finally, we will devote some time to “Ohren’s” approach to the teaching-learning process (see Ohren’s
Rules for Essays). As you will note in the material below, I have identified course objectives, expectations
and assignments for the term. I have also provided detailed outlines of and sets of discussion questions on
the several major topics to be covered this term, and will do so as well with my PowerPoint presentations.
They are intended to guide your reading and preparation for class and facilitate your note taking in class.
We will not necessarily be following a specific outline in any given class session, but over the term you will
see that we have touched on just about every item. And, the discussion questions preview exam
questions—you know what you have to do, now go ahead and do it.
Exercise 2, due 1/20: Prepare a memo for the Ohrensburg City Council, addressed to the Mayor, no
more than two pages, recommending the best strategies for engaging citizens in the budget process.
1/20-2/3
Budget execution; purposes, processes, discretion; cash management; financial reporting.
Who is involved? What are the problems and issues? Exercises in financial management. Handout 1.
Lee, Johnson and Joyce, 11. Berman; Special Report: The line item debate; Office of Technology
Assistance, Trade Adjustment Assistance, Special Report; Hertik, Improving Budgetary Management;
Hale/Douglass, The Politics of Budget Execution; Michigan appropriations by agency for FY 12;
Excerpts from an appropriations Act. Budget Execution 1 and Budget Execution 2—ppt.
Study Questions
1. What are the purposes of budget execution? How are they in conflict?
2. How does the legislative body insure that agencies are “doing what was intended” during the course of the
fiscal year? What does Berman suggest about the role of the legislature in budget execution? How can the
legislature enforce its will? What is in an appropriation act—what does it look like?
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3. Describe the nature of the conflict that arises between efforts by the legislature to impose its will and the need
for administrators to have some flexibility in program implementation.
4. Describe the role of central staff agencies in budget execution. How does this contribute to “tension”
between these staff units and line agencies/personnel. How do line officials perceive such units?
5. Are there strategies operating during budget execution as there were during preparation and appropriation?
Explain.
6. What is the “fraud/red tape” dilemma in budget implementation and how do we address it?
7. What is in a financial report? What does it tell us? How do we use them?
Exercise 3, due 2/3: Create a flow chart that identifies the process and the internal control procedures
that are utilized in a typical local government or nonprofit organization for the expenditure of funds.
Exam One Distributed 1/27, covering material to date; due 2/10, discussed in class 2/17 (see note at
end of outline (page six) regarding one of the exam questions)
2/10-3/10
Accounting and management information systems; fund accounting concepts; audits and
evaluation. What is accounting, why do we do it, what is involved, who does it serve?
What are funds? What does the audit tell us? Handout 2. Lee, Johnson and Joyce, 12.
Hayes, et. al., Linkages: Improving Financial Management in Local Government; Joyce;
Kelley, Cost Center Budgeting; Performance Audit—Audit Hits Glut of GSP Posts;
SEA—Plain Language. Accounting, Cost Accounting, Funds and Audit and
Evaluation—ppt.
Study Questions
1. How is accounting information used to support budget execution? To support the audit process?
2. What are funds and why do we use them in the public sector?
3. What does the term “basis of accounting” mean? What difference does it make which “basis” of accounting
is used? What “basis” of accounting does a local unit typically use and why?
4. Distinguish between financial and cost accounting and indicate why the latter has become more
important to local government operations.
5. Distinguish between financial, managerial/program and compliance audits. What kinds of questions are
asked and what kind of information is utilized in each?
6. What kinds of local government situations are appropriate for cost analysis/activity based costing? Describe
briefly the process of cost analysis, indicating the typical costs included in such an analysis and some of the
difficulties confronted in “doing” cost analysis.
7. Service efforts and accomplishments reports (SEA) have been recommended as an extension of the
accounting information provided to decision-makers. What is meant by the term? What is involved? What
are some of the complications and barriers that you see as local governments begin the process of developing
such information systems.
Exercise 4, due 3/10: Secure from the website of a local government or a nonprofit organization (the
latter are less likely to be available but if you work with a nonprofit you might be able to get access), a
recent audit and complete a brief two page memo for the governing board describing the auditor’s
findings in lay language (not all board members will have taken Ohren’s class).
2/24
Winter Break—no class
EXAM 2 – Distributed 3/3, due 3/17, discussed in class 3/24
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3/17-4/14
Rational analysis and reforms; performance measurement and budgeting systems; the
politics of analysis. Handout 3. Local Government Dashboard; Kelly and Rivenbark
(generally we will cover two chapters per evening). Citizen Reporting and Performance
Management – ppt.
Study Questions
1. What is the motivation for introducing performance measurement in resource allocation decisions and what
is involved in the process? What do you see as the biggest barriers to successful efforts?
2. How is this initiative in the last decade different than the heyday of PPBS/program budgeting in the 1960’ and
1970’s or of the ZBB movement about the same time?
3. Distinguish between measures of "input", "activity/workload" and "output/outcome" for use as criteria
in analyzing and reporting on the operation of governmental programs.
4. What is your assessment of the efforts in Phoenix to develop measurement systems?
5. What are some of the complications and barriers that you see as local governments begin the process of
developing such information systems.
6. From the perspective of one who has just completed the budget sequence in the MPA program, describe and
discuss what you consider to constitute an "ideal" budget process. Be sure to think about what you would
expect such a process to achieve, what information would be desirable, and who would be involved.
Detailed Outline
3/17
Fiscal Guides, performance dashboards, SEA Reports, auditing, performance audits,
information system issues; we examine the guide/dashboard effort (what are we trying to
accomplish), and focus on SEA Reports (again, what are they, what’s involved, and what
is the goal?). This becomes a segue to performance measurement and management.
3/24
The Lineage of Performance Budgeting Kelly and Rivenbark, Chapter 1-2
Performance Measurement and Management ppt
Performance Management Intro—Background and Key Issues
3/31-4/7
Performance measures; Kelly and Rivenbark, Chapter 3-4, 6
Performance Measurement Challenges and Lessons ppt
Performance Measurement Exercise
4/14
Performance budgeting systems; the role of rationality in budget decision-making;
Handout 3. Kelly and Rivenbark, Chapters7-8.
A Model of the Performance Management Process
Exercise 5, due 4/7: In Handout 3 you will find the instructions for exercise 5; we will complete an
example of this in class to provide sufficient guidance for you to complete the exercise on your own.
Final exam distributed 4/7, final exam due week of 4/21
5
Selected Simulations (or pick your own)
FYI—one of the questions on the first test is indicated below, to give you some extra time to test one or
more of the online simulations, with suggestions below.
Test One: Describe what you see as the key differences between the in-class and online simulations
completed earlier in the course. What lessons have you learned from each that contribute to your
understanding of the budget process?
http://www.thecenterformichigan.net/you-balance-the-state-budget/
http://www.washingtonpost.com/wp-srv/metro/interactives/montgomery-budget/
http://www.gothamgazette.com/budgetgame/budgetgame.html
http://www.backseatbudgeter.com/
http://officeofstrategicinfluence.com/budget/
http://johnmerritt.wikidot.com/nubaceland
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PLSC 615 -- HANDOUT 1
BUDGET EXECUTION
I.
Budgeting cannot be understood apart from spending money.
A.
Tension between legislature and executive—where you stand depends on where you sit
B.
Tension within executive branch—multiple perspectives
Line versus staff agencies (budget, purchasing, accounting, personnel)
CEO versus department head versus frontline personnel
C.
The role of administrative discretion
D.
Budget planning gives way to budget decisions
II.
Purposes of budget execution; multiple and sometimes competing
A.
Preserve legislative intent--otherwise "power of the purse" has no meaning
B.
Insure fiscal control
C.
Achieve managerial flexibility
D.
Potential for conflict
Legislative intent may restrict management flexibility
Fiscal controls limit management flexibility
Chief Executive/Management and the legislature may disagree
III.
Legislative intent - Linking approval and execution
A.
Multiple expressions of intent - possibly conflicting
legislative "guidance" through hearings, kinds of questions asked
B.
IV.
Legislative "intrusions" - enforcing legislative intent
1. Oversight - OTA study as an example
extent - investigations committees, staff
limitations - responsibility diffused, little sex appeal,
agency/committee relationships
2. Appropriation language; e.g., mandating expenditures
3. Legislative veto; constitutional issue
4. Punitive action on future budgets
item appropriation, reductions
5. Role of GAO - review and audit program performance
Fiscal control - Linking approval, execution and accounting
A.
Predominantly negative orientation
1.
Limiting expenditures
2.
Avoiding illegal activities
3.
Fixing responsibility
4.
Developing systems or procedures
legality, propriety, accountability
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B.
Emerging positive view
1.
Expediting program concerns
2.
Most return on the investment - "bang for the buck"
C.
Role of central staff agencies
1.
Pre-audit; treasurer or fiscal officer clearance
2.
Purchasing; central approval, competitive bidding, typical purchasing process
centralized versus decentralized responsibility
3.
Personnel; special control due to cost
4.
Budget office; apportionment/allotment - exercise
Why?
a. emphasizes planning for work/activity and for time
b. allows cash management
c. provides for operating reserves
What?
a. controls rate and level of spending
b. by unit, object class, or activity
c. central clearance of transfers
The fraud/red tape dilemma
D.
Reporting requirements -- periodic financial reports
1.
Linking budget approval and budget execution
Reporting transactions; cumulative, comparative
2.
How produced? By whom? When?
3.
Who uses? Multiple uses, differing perspectives
Control and management purposes
4.
Variance analysis - exercise
E.
Internal cash control
1.
Use of checks, vouchers, invoices--documentation
Checks linked with invoices, numbered checks, not signed in advance,
not drawn to cash, limited use of petty cash,
separate accounts for each fund
2.
Independently reconciled
3.
Cash receipts recorded and deposited daily
F.
Cash management as a related concern
1.
Cash flow problem; determining "extra" funds
Forecasts of monthly cash flow balance needed to meet obligations;
determining the timing streams of both revenues and expenditures
minimize borrowing, maximize investment return
2.
Choosing investment vehicles
3.
Borrowing when necessary; cash flow problems; TAN’s
8
V.
Managerial flexibility - expediting program concerns
Making adjustments during the fiscal year to accommodate new/changed needs
Whose flexibility? Differences between CEO and line department heads
A.
Impoundment/recission and deferral (1974)
1.
Rationale - appropriation language permissive
2.
Issues; policy deferral (OTA study), economy
3.
Procedures for reporting, overturning
B.
Reprogramming - moving funds from one program to another within an appropriation
account (e.g., R&D account, program elements)
1.
Rationale
2.
Oversight - movement toward prior approval
notification, thresholds, written concurrence
typically by Congressional committee
C.
Transfers - shifting funds between appropriation accounts
usually emergencies, special circumstances (CIA)
requires legislative approval
D.
Underestimating revenues; hedge against uncertainty, source of discretion later
E.
Supplemental requests
F.
Accounting gimmicks; coding expenditures to other programs
G.
Contingency accounts
H.
Black budgets
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PLSC 615 -- HANDOUT 2
ACCOUNTING AND AUDITING
I.
Information of Interest to Managers
A.
B.
C.
II.
Questions to be answered? Data needed?
Management Information Systems (MIS)
Accounting Systems—Origins, link to budgeting systems, limits
Financial Accounting fundamentals - recording, classifying, summarizing and reporting
financial transactions
A.
Recording transactions
1.
Kinds of transactions
2.
Timeliness
3.
Responsibility
B.
Budgetary accounting - linking budgeting and accounting
C.
Basis for recording transactions; timing of transaction and event recognition;
strengths/weaknesses
1.
Cash basis - money in, money out
2.
Accrual basis - revenue earned, obligation incurred
obligation - expenditure distinction, encumbrance
3.
Modified accrual - money in, obligation incurred
D.
Fund concept - source of money set aside for a particular purpose and
accounted for separately; separate fiscal entities
E.
1.
Purpose - segregating money
2.
Kinds
a.
Governmental
general, special revenue, debt service, etc.
b.
Proprietary
enterprise, internal service
c.
Fiduciary - trust and agency fund
3.
Number -- minimum consistent with legal requirements
and sound financial management
4.
Impact -- positive and negative
Reports and analysis; interim and final (samples)
10
Insert—outline detail and key questions
Information of Interest to Managers
A. Questions to be answered? Data needed?
B. Management Information Systems (MIS)
C. Accounting Systems—Origins, link to budgeting systems, limits
What kinds of information are needed by managers? Where do they get such data?
Financial Accounting fundamentals - recording, classifying, summarizing and reporting financial
transactions—what is accounting, how is different from budgeting, how are the two connected?
A.
Recording transactions
1.
Kinds of transactions
2.
Timeliness
3.
Responsibility
B.
Budgetary accounting - linking budgeting and accounting
What do we mean by the basis of accounting and why is important?
C.
Basis for recording transactions; timing of transaction and event recognition;
strengths/weaknesses
1.
2.
3.
Cash basis - money in, money out
Accrual basis - revenue earned, obligation incurred
obligation - expenditure distinction, encumbrance
Modified accrual - money in, obligation incurred
What are funds, why do we use them, why do we have so many, what are the consequences?
D.
Fund concept - source of money set aside for a particular purpose and
accounted for separately; separate fiscal entities
1.
Purpose - segregating money
2.
Kinds
a.
Governmental—general, special revenue, debt service, etc.
b.
Proprietary—enterprise, internal service
c.
Fiduciary—trust and agency fund
3.
Number -- minimum consistent with legal requirements
and sound financial management
4.
Impact -- positive and negative
Select a local government budget and count the number of different funds utilized
Who uses accounting data, when and for what purposes?
E.
Use of Accounting Information
1. Fiscal control by managers, legislators
2. Management discretion, adapting to changes during execution
3. Basis for financial audit
4. Citizens, bond-holders, others
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III.
Managerial or cost accounting; activity-based costing, cost center analysis
A.
Distinguished from financial accounting
1.
Descriptors for latter—budgetary accounting, fund accounting, expenditure
accounting—emphasis on control, describing what happens to money
2.
What about efficiency and effectiveness; linking the benefits and costs of
government services together
B.
Limited role in government presently
1.
Conceptual difficulties
defining services, exclusivity of services, non-routine or homogeneous services;
true economic costs
2.
Data problems; direct vs indirect costs; measuring quantity as well as quality
C.
Basic terms and concepts
1.
Cost and cost objective;
true economic costs of activities rather than expenditures
controlling money or improving productivity
2.
Responsibility centers
defining service, selecting units of service, identifying meaningful and readily
accessible measures of service
D.
Implementation issues
1.
Information system problem
2.
“Bite sized” pieces; e.g., focus on fee-based programs
3.
Enlist program managers
IV.
Service Efforts and Accomplishments reporting: new expectations—find an example of an SEA
report online to better understand the kind of information included
IV.
Auditing -- validating the operation of the accounting and internal control systems;
review of financial statements by an independent observer
A.
Purposes; accountability/legality, credibility/disclosure, management improvement
B.
Clients
C.
Responsibility
1.
Pre and post audits; pre may be budget staff function
2.
Internal and external audits; internal focuses on adequacy of internal controls and
performance/management issues
D.
Kinds
Financial audits, including:
audits of financial statements—determine whether statements present fairly the financial
position…, whether the entity has complied with laws and regulations for those transactions
financial related audits—whether the entity has adhered to specific financial compliance criteria
Performance audits, including:
economy and efficiency audits (managerial audits)—whether the entity is acquiring, protecting
and using its resources economically and efficiently
program audits—the extent to which the desired results or benefits are being achieved, the
effectiveness of organizations, programs, …
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PLSC 615 -- HANDOUT 3
BUDGET ANALYSIS AND PERFORMANCE MEASUREMENT
I.
Role of analysis
A.
provide information; shift from purely political values, make all relevant values explicit
B.
analysis will not make decision, but aims to help decision-makers; political decision
C.
reduce game playing?
II.
Systems view of budgeting -- budget models
A.
resources > activities > outcomes
Program Outcome or Logic Model
INPUTS support ACTIVITIES
that produce
OUTPUTS
that result in
B.
making causal connections explicit; program impact theory
C.
understanding how analysis fits into model
1. analysis devoted to each element of model
OUTCOMES
2. levels and types of analysis
a. alternative goals; health v defense
b. alternative programs; physical v mental health
c. alternative activities; prevention v treatment
d. alternative methods; in-patient v outpatient
e. alternative costs; in-house v contract
D.
fitting analysis to the kind of decision
III.
Data issues
A.
what's measured, how; what's not measured
B.
source and availability of information
IV.
Performance Measurement and Budgeting -- Bringing Everything Together
A. Lineage/roots
B. Elements
C. Challenges
V.
Making analysis useful
A.
Motivation for “doing analysis”, dealing with perceptions
B.
Demand and supply considerations, other technical issues
C.
Politics of analysis, link to decision process, who gets? who does?
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PLSC 615, Performance Measurement Exercise, Dr. Joe Ohren
Instructions: Using the Sample Chart describing a Building Inspection Program—work process, customers, and measures—identify a familiar example of a local
government or nonprofit program, task or activity and complete the information in the table.
Program, Task or Activity =
Work Process
Customers
INPUTS
Description
Measures/Quantity
Measures/Quality
ACTIVITIES
OUTPUTS
OUTCOMES