Public Budgets:
More Than a Set of Numbers
57.508-201
The Budget as a Policy, Planning and Information Tool
Week 1 - Spring 2011
Public Budgets
“Local government budgets are, however, more
than the numbers shown in budget documents.”
Jack Huddleston
Professor of Urban and Regional Planning
University of Wisconsin-Madison
Course Objective
Not Just Better Budgeters
but
Better Managers
Public Budgets
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Policy Statements
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Planning Documents
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Information Tools
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Management Tools
Public Budgets
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A work program summary
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A source of information
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An instrument coordination and integration
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An instrument of control
Public Budgets
Definition:
Representation of how much of a community’s (city,
town, school district, NGO, etc.) fiscal resources they
want to take from the private sector to use for
services and to address problems of public interest
Public Budgets
The public budget is the key instrument for the
expression and execution of government policy
All public budget are products of political processes by
which competing interests vie for resources
Principles of Public Budgeting
Comprehensiveness
The budget should include all receipts and outlays
Unity
All revenues & expenditures should be related to each other
Exclusiveness
Only financial matters should be in the budget
Specification
The budget should be executed as it is enacted
Principles of Public Budgeting
Annuality
The budget should be prepared every fiscal year for the next fiscal year
Accuracy
Forecasts should be reasonable and the contents should be consistent
Clarity
The budget should describe what is proposed in understandable fashion
Publicity
The budget contents should not be kept secret
Public vs. Private Sector
Need to maintain the economic health and
viability of the jurisdiction or organization
vs.
Need to make profit
“The Centrality of
Revenue Constraint”
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Public budgetary decision making must be conducted
within the constraints posed by available revenues
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Thus the critical importance of revenue forecasts
(U.S. federal budget a noted exception)
Federal v State/Local Budgeting
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Federal
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Economic and political perspectives
Expenditure driven
Entitlements
Defense
State/Local
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Organizational and administrative perspectives
Revenue driven
More executive control
More issues involving citizen input
Brief History of U.S. Budgets
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1789 – 1921 ~ Congressional Dominance
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No executive leadership
No “budgets” as we now know them
1921 – 1974 ~ Presidential Dominance
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Executive Budget Movement
Budget and Accounting Act of 1921
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President’s budget
Office of Management & Budget
1974 – Present ~ Stalemate
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Congressional Budget Act of 1974
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Budget committees
Congressional Budget Office
1921-1974
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Budget and Accounting Act of 1921 (Wilson)
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Bureau of Budget in Treasury
Formal budgeting mechanisms
GAO accountable to Congress
Executive Budget Movement
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Borrowed from business and Europe
Comprehensive
Defined period of time for a budget
Standardized expenditure categories
Developed by administration staffed by experts
Agency heads supported executive budget
California’s Executive Movement
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Preceded federal reform
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Prior to 1911, no schedule for budget preparation
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Reform movement under Governor Johnson
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Board of Control established to advise governor
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More reforms in 1922 after federal reform
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Amended state constitution
1927 Legislature created Department of Finance
Part I
Legal & Procedural
Framework of the Public
Budgeting Process
Budgets as Financial Plans
Common Operating Budget Formats
• Line-Item
emphasis on control
• Program
emphasis on policy
• Performance
emphasis on management
• Zero-Based
emphasis on fighting incrementalism
Line-Item Budget
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Input oriented & built from the bottom up
Optimizes the control function
Usually only three categories
– Personnel (salaries, benefits, retirement, etc.)
– Operating Expenses (materials & services consumed )
– Debt Service
Expenditures drive policy
Managers not encouraged to question priorities
Line-Item Budget
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Used by all types of entities
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Survived in the face of reform efforts
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Users feel comfortable
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Easiest for year-to-year comparisons
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Minimizes policy debate
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Limits administrative liberties
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Framework for accountability
Program Budget
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Outcome or result oriented
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Focus on policy and program effectiveness
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Less concerned with expenditure control
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Very top down
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Requires regular affirmation of the mission
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Requires evaluation of programmatic activity
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Functions cut across agencies
Performance Budget
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Can be input and/or outcome oriented
Activities are inputs to policy outcomes
Focus on enhancing economy and efficiency
More concerned with how than why
Success measured by work per unit cost
Difficult to apply to all agency types
Little or no insight into effectiveness or results
Rarely used alone at the local level
Performance Budget
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Public Works:
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Libraries
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X miles of streets cleaned per Y dollars
X tons of waste collected per Y dollars
X number of books circulated per Y dollars
X number of reference questions answered
Police? Planning? Finance? Education?
Zero-Based Budget
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Both input oriented and outcome oriented
Bottom up – Private sector origins
Discourages incrementalism
Encourages reallocation of resources
Requires considerable paperwork and time
Mandates pitted against new innovations
Often based on unrealistic assumptions
May be better applied to select programs
Other Budget Formats
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Results Oriented Budgeting
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Target Based Budgeting
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Functional Budgeting
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Planning-Programming-Budgeting System
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Management by Objectives (MBO)
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Formula Budgeting
Optimum Format?
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Control and Comfort of Line-Item
Policy Focus of Program
Efficiency Focus of Performance
Anti-incrementalism of Zero-Based
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Reality:
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Managers inherit their entity’s budget
Professional administration vs. organization’s politics
Evolution in Public Budgeting
Traditional
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Focus on control
Centralized process
Private exercise of administration
Line item format
Formula driven
Minimal flexibility for managers
Accountability for inputs
Progressive
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Focus on policy/performance
Decentralized process
Public sharing of information
Program format
Policy priorities
Maximum flexibility for managers
Accountability for outcomes
Budget Process
1.
Executive and staff preparation
2.
Submission to policy body budget committee
3.
Policy deliberations, amendments and revisions
4.
Adoption
5.
Execution
6.
Evaluation
7.
Audit
1. Preparation
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Mayor, manager, executive sends out memo
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Departments and agencies submit requests
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Budget office receives and reviews requests
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May make initial cuts if requests unjustified
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Each agency or program head biased
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Executive makes the tough calls
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Executive prepares budget message
Revenue Forecasting
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Each revenue source analyzed
Investment opportunities and rates
Previous year results plus trend projections
Techniques:
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Regression & multiple regression analysis
General Adaptive Filtering
Econometric modeling
Box-Jenkins
2. Submission
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Draft budget with message sent to policy body
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City council, county legislature, town board, etc.
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Finance committee reviews budget requests
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Sometimes invites in all department heads
Sometimes executive represents all requests
Sometimes conflicts between executive & departments
Politics and reality at play
3. Policy Deliberations
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City council or board of aldermen
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Town council or board of selectmen
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County legislature or board of supervisors
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School board
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Regional council or COG governing board
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NGO Board of directors
4. Adoption
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“Ways & Means” looks at expected revenues
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Public hearings held
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Fixed costs & entitlements vs. discretionary
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Council or board members propose changes
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Changes voted on individually
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Consensus achieved on bottom lines
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Full council or board adopts with amendments
5. Execution
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Starts on the 1st day of the new fiscal year
Cash flow… spending rate based on receipts
Investing temporary surplus funds
Inter-department transfers approved by executive
Intra-department transfers approved by departments
Major changes handled by contingency budget
Sort term borrowing (vs. pension fund raids)
Encumbrances for future payments
Role of the Budget Office
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Management controls
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Accounting system operations
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Reviewing agency or department procedures
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Setting rules for consultants or travel
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Protecting against fraud & waste
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Overseeing agency or department compliance
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Reporting on organization performance
Subsystems of Budget Execution
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Revenue Administration
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Cash Management
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Procurement
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Risk Management
Revenue Administration
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Taxes
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Determining the tax
Applying the tax
Collecting the tax
Enforcing the law
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Fees, sales, grants, gifts, loans, etc.
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Investment management
Cash Management
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Depositing revenue promptly
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Expenditure planning
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Paying bills promptly
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Short term borrowing
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Contingency funds
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Investment planning and management
Procurement
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System with unambiguous and precise policies
Centralized vs. decentralized
Group or contract purchasing
Low cost, timely delivery, quality product
Bid procedures, RFPs
Purchase vs. lease
Outsourcing & privatizing
Contract management
Efforts to ensure competition, public notice, etc.
Can further policies like…
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MBEs & WBEs
Energy efficiency or environmental quality
Risk Management
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People, property and records to protect
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Liability, exposure to litigation
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Faulty equipment or hazardous location
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Identify probability of extreme events
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Insurance vs. self-insuring
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Premiums, awards, settlements, etc.
6. Evaluation
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The budget as a management tool
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Program efficiency and effectiveness
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Performance measures
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Budget office oversight
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Legislative or policy body oversight (budget committee)
7. Audit
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Compliance Audit
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Management Audit
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Review for economy and efficiency
Program Audit
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According to laws and regulations
Are results being achieved
Can be either internal or external
Budget Cycle
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Preparation begins months ahead
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One prepared while one being executed
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Fiscal years vary (calendar vs. quarter)
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Intergovernmental cycles overlap
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Local level most dependent upon others
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Mandates, local aid, grants, tax rates
Budget Overlap
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Cycles run into one another
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Preparation for next fiscal year in last
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Audits for last fiscal year in next
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Carry-over from FY to FY
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Encumbrances
Contingency funds
Debt service
Fund Structure
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General Fund
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Special Revenue Fund
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Capital Projects Fund
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Debt Service Fund
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Enterprise Fund
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Internal Service Fund
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Special Assessment
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Trust and Agency (3rd party)
Accounting and Controls
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Recording all financial transactions
Accrual or modified accrual basis accounting
GAAP & GASB (Governmental Accounting Standards Board)
Budget oversight and expenditure monitoring
Revenue monitoring
Program or outcome monitoring
Purchasing controls
Staffing changes
Supplemental appropriations
Program Audits
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Formal and informal evaluations
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Data collected and analyzed
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Cost-benefit analysis
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Many problems with results measurement
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Many problems with activity costing
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Central vs. program analytical responsibilities
Operating vs. Capital Budget
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Items and materials to be consumed
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Useful life 1-3 years
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Costs over $1000 - $5000
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Based on size and complexity of the entity
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Capital equipment, facilities, infrastructure
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Investments for economic development
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Should be based on strategic plan
Capital Projects
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Acquisition of a long lasting physical asset or facility.
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Expenditure on equipment or facility that will provide
benefit for many years.
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Investment for community, neighborhood or economic
development
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Real estate, infrastructure, roads, bridges, etc.
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Normally “stationary” in nature
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But may include large research or consulting projects
Types of Projects
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Assets for organization’s own use
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Investments in facilities that enhance development
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Office buildings, schools, libraries
Equipment, trucks, busses
Sewer & water systems
Downtown amenities
Convention centers or sports arenas
Intangibles
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Research projects
Consulting or engineering studies for major projects
Typical Issues
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Capital investing often deferred
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Combined infrastructure deficit > $2 trillion
$1 trillion estimated for sewer & water alone
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Pay now vs. pay later
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Short term political decision making
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Ruse to reduce operating budget
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Classification of purchases
Capital Improvement Program
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Should be based on a comprehensive plan
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Should have asset inventory data base
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Should have public input and review
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Should have 5 year, 10 year & 20 year ranges
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Should have evaluation criteria
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Should be ranked in priority order
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Should have financing strategy in place
Financial Components
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Fiscal feasibility of funding the projects
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Level of operating expenditures
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Potential for project to generate revenue
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Potential for project to reduce operating cost
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Grants or cost sharing possible
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Debt carrying capacity
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Bond rating
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Debt management
Bond Rating
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Bond ratings assign the credit risk
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While many factors go into the investment decision
making process, the bond rating is the single most
important factor affecting the interest cost on bonds
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Three major rating agencies for municipal bonds
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Moody's Investors Service
Standard & Poor's
Fitch Ratings
Debt Management
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Short-term borrowing
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Tax anticipation notes
Bond anticipation notes
Revenue anticipation notes
Long-term debt
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Bonding for capital equipment and facilities
G.O. bonds (general obligation)
Revenue bonds
Wide variety of debt vehicles
Philosophy of Public Debt
Borrowing is an alternative way of paying for projects and
facilities that will benefit residents in the long term. It is
nearly impossible to tax or charge future residents so it is
convenient to schedule those payments over time.
Debt is thus an important mechanism for future planning.
Government borrowing at the local level has become much
more complex over the past 30 years. Where governments
used to issue mostly general purpose bonds or simple revenue
bonds, they now rely on literally dozens of different financial
instruments and private equity financing.
Intergovernmental Relations
The body of activities and interactions occurring
between governmental units at the various levels
Most basic & significant: fiscal relations
Main instruments:
• Grants
– block grant
– categorical grants
• Revenue sharing
• Intergovernmental transfers
• Direct payment to individuals (SSI, TANF, WIC)
Intergovernmental Relations
Federal-state, interstate, state-local arrangements
for the provision of services
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Multiple levels delivering services
Transferring responsibilities and priorities
Vertical imbalance
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Best level to deliver service?
Best level to pay for it?
Inadequate funding to meet local needs
National standards equal unfunded mandates?
Whose Responsibility?
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Greatest local autonomy, but…
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National issues vs. state or local priorities
Differences in political philosophies
Differences in income and wealth
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Federal revenue sharing
Block grants
Categorical aid (WIC, food stamps)
U.S. per capita income = $38k
Mississippi per capita income = $27k
Connecticut per capita income = $51k
Results in different levels of service
Changing Roles & Relations
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Prior to the Great Depression
– Grants to states of land & money for canals, railroads & roads
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During and following the Great Depression
– National rescue
– Federal aid continued and grew in complexity and scale
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Nixon era: late 1960s – early 1970s
– Federal grant system was fragmented and uncoordinated
– Programs often duplicative or conflicting
– Revenue sharing and devolution of responsibilities
Changing Roles & Relations
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Reagan era: 1980s
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Consolidation of categorical grants into block grants
Further devolution of responsibilities downward
Massive federal deregulation – “New Federalism”
“Contract with America”: early-mid 1990s
“Block grants should be used to restore discretion to the states because
they are more knowledgeable about their own circumstances.” Gingrich
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The Fiscal Responsibility Act
The Personal Responsibility Act
The Family Reinforcement Act
Clinton era: later 1990s
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Welfare Reform of 1996
Major Issue with Devolution
While the gross dollar figure has risen each year,
federal aid as a percentage of state & local
revenues has declined since 1980
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1980 = 27%
2007 = 17%
Devolution means shifting or transferring power
Devolution has meant reduction in federal aid
Note: Republican House leaders propose cuts of another $32 B