LOGIC OF THE
BUDGET PROCESS
Governing is Budgeting: Budgets are
the Primary Instruments through which
Governments Announce their Purposes,
Priorities, and Intentions.
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Overview
Government Budgets are Spending Plans
Traditional Budgets focus on OE
Functions of Traditional Budgets
The Budget Cycle
The Incrementalist Insight
Executive Budget Preparation and Execution
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Government Budgets
Are SPENDING PLANS
for administrative units for a
specified time, that are enacted
into law
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Class Exercise
Federal Budget Challenge
National Budget Simulation
Federal Budget Simulation
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Budget Formats
Alternative Budget Formats and Associated Features
Format
Object of Expenditure
Primary
Organization
Feature
Line item
Commodity or resource
purchased
Resources
purchased
Control
Performance
Workload or activity
Presentation of unit cost
by activity
Tasks, activities
accomplished
Management
Program
Public goals
Cost data cross
organization lines
Achievements, final
products, outcomes,
or consumer outputs
Planning
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Orientation
Line-Item Budgets are
Spending Plans
• Expressed in terms of objects of
expenditure categories like:
•
•
•
•
Personal services
Supplies
Other Services and Charges
Capital Outlays
for each administrative unit for a
specified time (grouped a variety of
different ways)
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Traditional Budget
Principles
• Comprehensiveness (the budget should include all
revenue and expenditure);
• Annularity (each budget should span a single fiscal
year);
• Balance (expenditures should reflect the revenues
available);
• Transparency (the government should publish timely
information on receipts and expenditures);
• Accuracy (the budget should accurately specify
purchases -- purpose, amount, timing);
• Authoritativeness (public funds should be spent as
authorized in law).
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Functions of OE or Lineitem Budget
• Fiscal Discipline and Control
• Restraining expenditure
• Insuring that budgets are executed as enacted
• TREASURY role
• Post audit vs. preaudit: purpose, execution
• Audit trail -- invoices, receipts, cancelled
checks
• Provide information used in formulation of
new budgets
• Management, efficiency, & planning for service
requirements
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The Budget
Cycle
Preparation & Enactment
Execution
Audit and Financial Reporting
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Phases of the Budget
Cycle
• Executive Preparation
A. Budget Guidance/Call for estimates
B. Preliminary Estimates
C. Consolidation
• Legislative consideration &
enactment
• Execution (conduct of fiscal
operations)
• Post-audit & evaluation & Reporting
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Budget Cycles
Last Period (t-1)This Period (t)
Next Period's
Budget
This Period's
Budget
Last Period's
budget
Next Period (t+1)
Budget P reparation and
E nac tment
Budget E xec ution
Budget P reparation
and E nac tment
Budget E xec ution
Budget E xec ution
A udit and E valuation
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A udit and E valuation
Budget Cycles
This Period (t)Next Period (t+1)Period after Next (t+2)
Next Period's
Budget
This Period's
Budget
Last Period's
budget
Budget P reparation
and E nac tment
Budget E xec ution
Budget E xec ution A udit and E valuation
A udit and
E valuation
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A udit and E valuation
Budget
Formulation
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Descriptive Analysis of Budget
Preparation & Enactment
Process
Roles, Visions, Incentives
Operating agencies –
make requests
Executive – issues
guidance, negotiates and
consolidates budget
Legislature – approves
budget
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Incrementalism I
The predominant strategy in
budgeting is governance by
precedent.
To obtain this year’s solution (next
year’s budget)
 take last years solution
(current budget/baseline)
 modify it in light of the change
in available resources and the
changes in problems and
available solutions,
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Incrementalism II
Budgets tend to evolve slowly as small
marginal changes occur from year to
year (with periodic dramatic
changes).
• once an item is in the budget it
remains in the budget.
Another reason for governance by
precedent is the openness of public
decision making: it is completely
defensible to make decisions based
on ‘proven decisions from past years.
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ENACTMENT: RULE INDUCED
EQUILIBRIA
Division of labor and jurisdiction not only
greatly increases the productivity of
American Legislatures, it also greatly
increases the power of individual
legislator to block legislation adverse to
her constituents.
1. The committee system as a super-majority
system/proliferation of committees
2. The committee system as a source of
equilibrium
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RULE INDUCED EQUILIBRIA
Norm of reciprocity/log rolling-vote
trading
OVERSIGHT AND THE BUDGET
• Authorization/appropriation
• Compliance with Legislative intent
• Authorizing committee is also
usually oversight committee
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EXECUTIVE
BUDGET METHODS
AND PRACTICE
Preparation of Agency Budget Requests
Review of Budgets
Balancing the Overall Spending Plan
Managing Budget Execution
Audit & Evaluation
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PREPARATION OF
REQUESTS I
• Budget Instructions or Guidance
• Main Goals of the Executive
• Forecasts of Critical Operating
Conditions and Prescribed
BASELINE
• A Prescribed FORMAT
• A Time Schedule
• MAXIMUM Increase
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PREPARATION OF
REQUESTS II
• Agency Proposals
• Narrative -- Current Commitments and
Expected Results from New Initiatives
• Detail Schedules establishing Baselines
• Cumulative Schedules Showing Effects of
New Initiatives (up or down) on Details and
Revised Totals
Description dominates numbers. Budgeting is
logic, justification, and politics -- not
accounting.
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Spenders’ Budget
Tactics: Ubiquitous I
• Cultivation of an active and
influential (well-organized) clientele
• Media
• Demonstrate competence
• Deliver
• Explain -- show understanding and
mastery of cost estimates
• Honesty
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Spenders’ Budget
Tactics: Ubiquitous II
• Price Changes
• Workload Changes
• Methods
Improvement
• New Services
• Full Financing
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Spenders’ Budget
Tactics: Contingent I
Avoiding Cuts:
• Propose a study
• Cut Popular
programs
• Dire consequences
• All or nothing
• You pick
• We are the experts
Seeking Bucks for
the Base
• Round up
• Sprinkling
• Physical units
• Workload and
backlog
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Spenders’ Budget
Tactics: Contingent II
Seeking New
Bucks:
• Old stuff
• Initial
commitment
• It pays for itself
• Spend to save
• Crisis
• Mislabeling
• What they did
makes us do it
• Mandates
• Matching the
competition
• It’s so small
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Budget Justification -- Or, Why the
Numbers in Next Year’s Budget are
Different from this Year’s
• Major Programmatic Changes/New Services -Major Cutbacks of Service levels
• Price/Wage Changes
• Workload Changes
• Methods Improvements
• Full Financing of Activities Initiated in the
Current Year
• Deferred maintenance and/or replacement of
equipment
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Estimates: Grouped by
Organization; Task, Purpose,
Function, or Activity, AND OE or
Account Code
• Wages and Salaries
• Non-Wage Personnel Costs
• Non-personnel Costs (Cost Drivers)
• Volume or activity level x Unit Price
• Ratios to another OE
• Adjustments to Prior Year’s Costs
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EXECUTIVE
REVIEW I
• Policy Rationale/Conformity
with Executive Priorities
• Conformity with Budget
Guidance/Including all
Required Supplemental
Documents
• Arithmetic
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EXECUTIVE
REVIEW II
•
•
•
•
•
Linkages
Program Changes
Omissions
Ratios, Shares, Trends
Clear Tradeoffs
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BALANCING THE
CONSOLIDATED
BUDGET
• Budget Message
• Summary Schedules
• Detail Schedules
• Performance Targets
• Supplemental Data
• Many on the Assumptions
Presented in the Budget
Guidance and Trends
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Budget Execution
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EXECUTION
• Budget Authority (specifies by
agency, timing, and account code the
authority to spend)
• Obligations (enforced by antideficiency act)
• Inventory recorded
• Outlay
• Expense or Cost
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BUDGET EXECUTION I
• Preventive Controls
•
•
•
•
Procurement
Personnel
Pre-audit
Allotments
• Feed-forward Controls -- Diagnostic
Tools, e.g. variance measures
• Feedback Controls -- affect Next Year’s
Budget, Fig. 3.1
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BUDGET EXECUTION II
• Internal Controls
•
•
•
•
•
Personal Responsibility
Personnel Qualifications & Rotation
Segregate Responsibilities
Separate Operations and Accounting
Maintain Controlled Proofs and
Security
• Record Transactions -- complete
journal and general ledger
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Mismatch between Budget
Focus and Financial Statements
• Agencies, of course, spend money to
acquire and use assets, i.e., they generate
expenses.
• They generate expenses to provide services
and create capacities -- the capacity to
achieve our foreign-policy objectives and
to meet our overseas commitments.
• Expenses measure the cost of the assets
actually consumed in the production of a
good or service.
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Mismatch between Budget
Focus and Financial Statements
• Expense measurement, or accrual accounting, is
one of the fundamental ideas of modern
managerial accounting. And, assets consumed
and services rendered are the focus of private
sector accounting.
• Spending plans could be expressed in terms of
obligations, outlays, purchases, or consumption.
Note, however, that while the government
accounts for outlays and tracks obligations, it
does not account for expenses.
• Hence estimates of expenses are statistical in
nature, i.e., they are not tied to the basic debitand-credit accounting records of the government.
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Looking Forward
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Thought Questions
•
Some programs have an explicit revenue
component and policy makers make
decisions about revenues and program
characteristics with the long term
sustainability of the program in mind. For
instance, unemployment insurance or
Social Security and there are actuarial
studies that give us an idea of where we
need to be in 5, 10, 20, etc years both from
a revenue and an expense perspective if
the program is to be in balance.
Why don’t we look at all program
commitments this way?
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Thought Questions
•
Someone once told me the
problem with government is
that it is easy to spend
someone else’s money. Do
you think that is true?
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Modern Budget Principles*
• Conditional, Approximate Balance;
• Decisional Efficiency (a good budgetary decision
process minimizes conflict specifically and transaction
costs generally where the conflict and costs contribute
nothing to the substantive quality of the decisions);
• Feasible Comparisons (a good budgetary decision
process will stimulate feasible comparisons by
promoting competition or cooperation, as appropriate,
among agencies for solving particular problems);
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*P.D. Larkey and Eric Devereux “Good
Budgetary Decisions,”1999.
Modern Budget Principles*
• Uncertainty and Flexibility (a good budgetary decision
process will give sufficient discretion to managers to
respond to new information and circumstances);
• Stability (a good budgetary decision process will
balance the frequency and intensity of program reviews
with the need for stability);
• Multiple Budgets (a good budgetary decision process
will explicitly recognize the need for different budgets
for different purposes).
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*P.D. Larkey and Eric Devereux “Good
Budgetary Decisions,”1999.
Class Exercise
Minnesota Budget Balancer
Cut the Massachusetts Budget
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