Budgets
Andrew Graham
School of Policy Studies
Queens University
Logic Model
• First, define budgets, their form and
some technical elements
• Then, look at planning and budgetary
processes
• Issues of capital budgeting
2
What is a Budget?
• The Budget process allows the Government to:
– plan for the period ahead
– allocate resources in line with policy priorities
– seek authority from Parliament for spending.
• For a not-for-profit organization in the public
sector a budget:
– Presents a financial plan for the period ahead
– Assigns resources to projects, line items or programs
– Sets out budgetary revenue and expenditure
requirements
3
What is a Budget?
• Not primarily financial documents but basis from
which finances are settled
• Future perspective: projection of future revenues
and expenditures
• Important benchmark to control the fiscal
operations of a departments, unit or municipality
or hospital
• Assigns resources to objectives
• Deals with both revenues and expenditures: on
annual or multi-year basis
4
The Budget as an Instrument of Public Policy and
Management
• Planning Instrument:: Sets goals, priorities,
and strategies and coordinates the
government/agency resources into an
expenditure plan identifying what program or
activities will take place and at what levels.
• Political Instrument: Involves competing
interests attempting to influence a
government or agency to form policy
favourable to them.
• Social Instrument: Provides a vehicle to grant
and deny privileges and disburse burdens and
benefits to individuals and businesses.
• Economic Instrument: Offers powerful
potential for affecting the growth and
productive capacity of the community and its
citizens.
5
The Budget as an Instrument of Public Policy and
Management
• Legal Instrument: Grants authoritatively the
rights, responsibilities, power, and guidelines
that regulate the budget format, timing and
process.
Source: Jerome B. McKinney and Lawrence C.
Howard, Public Administration: Balancing Power
and Accountability (Oak park, IL: Moore
Publishing, 1979)
6
The Legal Basis of Budgets
• The law or collection of laws authorizing
expenditures, and/or the incurrence of
obligations to make expenditures, to be
financed from taxes or levies, as well as the
specification of the sources of revenue from
which expenditures are to be financed
• The laws authorizing the expenditures or
the incurrence of financial obligations are
called appropriations laws
7
Functions of a Budget
• Planning
• Choosing goals
• Reviewing options and predicting results
• Deciding on options
• Communicating and coordinating
• Defines both objectives and spending
limits
• Produces benchmarks for monitoring
compliance and progress
• Evaluating performance
8
What is a Public Sector Budget?
•
Term is used for many different kinds of ‘budgets’:
government-wide, departmental, branches, units
–
–
–
•
•
•
The budget as an organization-wide policy and planning
statement – legislative or organizational budget
Budget as a specific spending plan – legislative,
organizational and managerial budget
Budget as a manager’s allocation of resources – managerial
b budget
Both a financial and a policy document as well as a
management tool
Legislative or organizational budget focuses on
changes in spending, taxation, debt and regulations
Best seen as a fiscal plan not just a spending plan
since all spending is not it in and impacts go well
beyond government operations, e.g. tax changes
9
What is a Public Sector Budget?
•
•
Result of intense planning process, short-term
decisions, roles of the dice and political nuance
Budgets from Ministers of Finance, i.e. high level
political documents not the sole source of
program funding:
– Statutory funding
– Self-funded programs
• Management budget sets limits, targets
and authorities to get on with the work.
10
What is an Appropriation?
An appropriation is a Parliamentary authorization
for the allocation of resources to a Minister for a
specified purpose.
In the Estimates, Ministers specify how much they
need to purchase particular outputs.
The Government requests an appropriation for each
class of outputs (whether to be supplied by a
department or other organization), capital
investment (capital contributions to departments,
investments in other organizations and purchase or
development of Crown capital assets), and other
expenses.
Appropriations are also made for benefits or other
unrequited expenses, borrowing
New
Zealand
Definition
11
What is an Appropriation?
Definition: Appropriation: Approval by a
legislative body of an organization’s
budget. Appropriations create the
authorization for spending the
amount in the budget.
12
Types of Budgets
•
Operating Budget:
–
–
–
•
also called recurrent budget
funds designated to continuing operations
Finkler: “Plan for the day-in and day-out operations of the
organization. It is generally prepared for one year.”
Capital Budget:
–
–
–
–
budget for permanent works: defining permanent
tends to combine current year and future year plans
current year often transferred into Operating Budget
Finkler: “Plan for the acquisition of buildings and equipment
that will be used by the organization in one or more years
beyond the year of acquisition.”
13
Types of Operating Budgets
Budget Type
Characteristics
General Use
Line Item
Expenditures and revenues Control
are related to commodities
Performance
Expenditures and revenues Management
are related to workload
efficiency
Program
Expenditures and revenues Planning and
are related to public goals Impact
14
Line Item Operating Budget
•
•
•
•
•
•
•
Budget information organized according to types of
expenses, expenditure or cost categories
Generally on a cash basis
Often detailed in object codes
Cost category of capital outlay includes office equipment,
furniture and vehicles
Primary orientation is expenditure control and
accountability: permits inter-budget cost comparisons,
creates common reference points
Relatively easy to prepare
Does not provide any information regarding activities and
functions of a program
15
Line Item Operating Budget - Example
Budget of the Killaloe General Hospital for Fiscal Year 200X
Object Code
100. Salaries
200. Supplies
300. Rentals
400. Professional Fees
Budget
8,000,000
2,000,000
250,000
750,000
Total
11,000,000
16
Line Item Operating Budget - Example
Revenue
Net revenue
Gift shop revenue
Investment revenue
Endowment
Total revenue
Expenses
Salaries
Supplies
Bad debts
Interest
Rent
Total expenses
Surplus/Deficit
$ 97,980,000
120,000
50,000
98,150,000
$ 78,900,000
15,400,000
2,200,000
400,000
3,100,000
$100,000,000
$ (1,850,000)
17
Responsibility Centre Budget
•
•
•
•
Distributes budget to internal units: Responsibility
Centre
Important means of assigning resources to
program objectives, specific offices and specific
locations
Seldom see this on its own for operational
purposes
Usually in combination with a line item approach
A responsibility centre is part of the organization, such as a
department or unit, for which a manager is assigned responsibility,
usually with spending authority for the assigned budget as well as
18
responsibility for its proper use.
Responsibility Center Budget - Example
Budget of the Killaloe General Hospital for Fiscal Year 2005
Responsibility Centre
Budget
01. Operating Room
4,000,000
02. Laboratory
1,000,000
03. Radiology
1,000,000
04. Patient Care
2,500,000
05. Outpatient Care
1,500,000
06. Administration
1,000,000
Total
11,000,000
19
Functional Budgets
•
•
•
•
.
Functional
Budgets focus on the major functions
performed by an organization.
Combine elements of Line-Item and
Responsibility Centered budgets
This format is often used for external reporting
Note the line item detail
20
Functional Budgets - Example
Budget of the Killaloe General Hospital for Fiscal Year 2005
Responsibility
Centre
01. Operating
Room
100. Salaries
200. Supplies
300. Rentals
400.
Professional
Fees
Total
3,250,000
250,000
50,000
450,000
4,000,000
02. Laboratory
550,000
350,000
25,000
75,000
1,000,000
03. Radiology
450,000
450,000
0
100,000
1,000,000
04. Patient
Care
2,000,000
400,000
0
100,000
2,500,000
05. Outpatient
Care
1,050,000
125,000
25,000
50,000
1,250,000
06.
Administration
700,000
425,000
50,000
100,000
1,250,000
Total
8,000,00
2,000,000
150,000
850,000
11,000,00
21
Flexible Budget





Organizations often experience more or less volume
than
budgeted.
Flexible budgets look at expected revenues, expenses,
and net income under different volume assumptions.
The key to flexible budgeting is the identification of:
Fixed Costs - which do not change with volume.
Variable Costs - which do change with volume.
Flexible budget results are normally shown in a sideby-side columnar format.
A flexible budget is a form of "What if?" analysis.
22
Fixed and Variable Costs
• Fixed costs are
costs that do not
change with
volume changes
with a normal
range.
• Variable costs will
change as volume
or use changes.
23
A ‘What If’ Flexible Budget - Example
Revenue
Camp tuition
Church subsidy
Total revenue
Less expenses
Campground rental
Bus transportation
Equipment rental
Meals
Total expenses
Surplus/loss
Budget
40 campers
$5,200
500
$5,700
10% Increase
44 campers
$5,720
500
$6,220
$ 350
1,225
1,600
2,600
$5,775
$ (75)
$ 350
1,225
1,760
2,860
$6,195
$ 25
24
A ‘What If’ Flexible Budget - Example
Hot Meals for School
Flexible Operating Budget for 2006
300
Volume of Breakfast Provided[1]
450
600
Expenses
Salaries
50,000
50,000
50,000
Supplies[2]
180,000
270,000
360,000
Rent
14,400
14,400
14,400
Other
5,000
5,000
5,000
249,400
339,400
429,400
Municipality
200,000
200,000
200,000
Fund raising
75,000
125,000
125,000
Total Revenue
275,000
325,000
325,000
Surplus/(Deficit)
75,000
(14,400)
(104,400)
Total Expense
Revenues
[1] Assuming that the service is provided 200 days a year
[2] Assume the cost per meal is $3.00 with little flexibility for economies of scale.
25
Program Budgets
•
•
•
•
Program budgets move closer to the realm of
‘telling a story’ and a greater linkage to the ‘what’
of expenditures
More of a focus on expected results of services
and activities to be carried out
Usually organized around broad areas of
expenditure and also overall financial
performance
But greater emphasis on results, especially in the
further variation Performance Budgeting
26
Program Budgets
Program budgets include both revenue and expenses
for the major activities of an organization.
Helps managers focus on sources of profits and losses
(surpluses and deficits) of programs that could be
discontinued.
($000’s)
Oncology Rhinoplasty Cardiac
Revenues
$40,000
$ 8,150
Expenses
37,000
17,000
$ 3,000
$(8,850)
Surplus/Defic
it
Total
$50,000 $ 98,150
46,000
100,000
$ 4,000 $(1,850)
27
Program Budget - Example
Bureau of Public Safety and Leisure Services FY
2003-04
Program
Program
Element
05 -Public
Safety
0501-Fire
Protection
3,500,000
0502 - Police
5,000,000
Subtotal
06 – Leisure
Service
Amount
8,500,000
0601 – Parks
2,000,000
0602 –
Library
1,000,000
Subtotal
3,000,000
Total
11,500,000
28
Program and Line Item Budget - Example
Bureau of Public Safety and Leisure Services
Detailed Budget Information FY 2003-2004
Program
05- Public Safety
Program
Element
0501 – Fire
Protection
Responsibility
Centre
050101- Central
Office
050102 – Upper
Level Station
Line
Expenditure
Staffing
250,000
Supplies
500,000
Staffing
Supplies
050103 – River
Street Station
Amount
Staffing
Supplies
Total
1,250,000
150,000
1,200,000
150,000
3,500,000
29
Performance Budget
• Focuses on work that it to be
accomplished
• Can be extensive, covering a full range
of objectives and outcomes
• Or, can be input oriented, i.e. how
many units will be produces
30
Performance Budget - Example
Road Maintenance Budget FY 2006-2007
Activity
Cost Formula
Amount
Paving Roads
Miles to be paved: 10
Cost per mile: $400K
4,000,000
Resurfacing Roads
Miles: 5
Cost per mile: $150K
750,00
Total Road
Maintenance Costs
4,750,000
31
Off-Budget Expenditures
• Budget as a comprehensive document
is a recent phenomenon
• Seen as positive and useful in getting
a government’s financial house in
order
• Not all spending authorizations within
the budget
32
Off-Budget Expenditures
• Introduction of accrual also highlights financial
obligations of a non-cash nature that create
potential liabilities for the government, e.g. loan
guarantees
• The main forms of off-budget expenditures are:
–
–
–
–
off-budget funds;
direct loans;
guarantees;
Public Private Partnerships (PPPs).
• Main forms of “back door” expenditures are
entitlements (financial obligations created by
substantive law) and tax expenditures (tax relief's
created by tax laws).
33
Off-Budget Expenditures
• Entitlements and tax expenditures do
not necessarily create a problem for
the proper functioning of the budget
as long as the budget procedure
provides for the opportunity to
change the substantive laws creating
the entitlements and tax
expenditures in the course of the
budget process.
34
Off-Budget Expenditures
• Off-budget funds are special funds owned by the
government, that are not part of the budget and
that receive revenues from earmarked levies,
possibly next to other sources such as fees and
contributions from the general tax fund.
• Loan guarantees are guarantees by the government
to non-governmental lenders in case of debtor
default. Loan guarantees are supposed to include
public insurance of loans by non-governmental
lenders against an insurance fee.
35
Challenges of Off-Budget Funding for Voluntary
Sector
• Getting ‘off-budget’ assistance ‘onbudget’, and trying to get donors and
NGOs to develop systems that
synchronize activities with
government systems, has become a
major challenge for governments (and
donors).
36
Challenges of Off-Budget Funding for
Voluntary Sector
• As project-driven systems become entrenched, so
too do the incentives to remain separate, both for
donors and for those involved in projects, within
and outside of government.
• Bringing financial flows ‘on-budget’ becomes
increasingly difficult – one code for this is the lack
of ‘sustainable funding’
• As a result, fiscal discipline is limited, policymaking remains ad hoc and driven by external
resource flows, and it is difficult to set up any
systematic planning and implementation across
government.The longer this continues, the harder
it is to change.
37
Funds in Budget Architecture
A fund is defined as a fiscal accounting
entity with a self-balancing set of
accounts recording cash and other
financial resources, together with all
related liabilities and residual equity
or balances, and charges, which are
segregated of the purpose of carrying
on specific activities or attain certain
objectives for which special
regulations, restriction or limitations
38
apply.
Funds in Budget Architecture
•
•
Budgets will become more complex as the
organization becomes more complex and the
purposes for the funds become more diverse
Often, special funds are created to segregate
monies for programs for special purposes or as a
result of unique designated revenue sources
39
Funds in Budget Architecture
•
•
Often funds are managed and reported separately
– leading to a separate set of financial statements
The use of funds restricts budgetary flexibility but
displays allocation for specialized purposes in a
transparent way – funds are often mandated in
accounting standards or law, e.g. for municipal
governments
40
Funds in Budget Architecture
• Use of funds varies with governments
• Municipal governments tend to be built
almost entirely around funds.
• The federal government and provinces will
create special funds for a variety of
purposes, some that are linked to unique
sources of funds through fees or special
taxes, some of which are administered at
arms length from normal practice.
41
Revolving Funds
• A revolving fund is an authority, in the case
of government usually a statutory one, to
use the revenues generated from an
activity to finance it.
• This authority generally continues on a
permanent basis from one year to the next
without further authority being needed.
42
Revolving Funds
• Always created through budgetary
expenditure means, but then those funds
move off-budget.
• Although surpluses or deficits may occur
from year to year, they are generally
expected to balance out over time.
• Many arrangements exist for the use of
retained earnings, with the principle being
that the fund retains its earnings unless
some form of gain sharing is put in place.
43
Revolving Funds
• Further, governments can “top-up” such
funds through the budget if they have
resource needs
• Also called an Enterprise Fund
• A revolving fund should support increased
cost effectiveness, optimal use of resources,
responsiveness to clients and good business
practices, when used in conjunction with
other appropriate arrangements.
44
Use and Application of Funds Accounts for
Budgeting and Accounting – Voluntary Sector
•
•
•
•
Restricted funds
Unrestricted funds
Endowment funds
General funds
45
Municipal Fund Structures
Fund
Definition
General Fund
Consists of general revenue
sources such as taxes, fines,
licenses and fees.The general
fund is usually the largest
municipal fund.
Special Revenue Fund
Consists of resources that are
restricted for special purposes.
Examples would be special
funds from other governments
for special program funding, e.g.
infrastructure improvement.
Debt Service Fund
Consists of resources used to
repay long-term general
obligation debt.
46
Municipal Fund Structures
Capital Project Funds
Consists of resources restricted for
construction and acquisition of capital
facilities.
Fiduciary or Trust Fund
Account for assets held by a
governmental unit in a trustee
capacity.
Endowment Fund
Usually a donated amount for specific
purposes that is intended to earn
income for the organization or
university. Often government by
separate governing board.
Program Specific Fund
Special purpose program, e.g.
Millennium Fund, which manages its
own resources and does not have to
return those funds at the end of the
fiscal period. To be used for intended
purpose only.
47
Funds
•
•
•
Debate about whether enhance or hinder
accountability.
Generally held that they improve accountability
as they provide specialized focus on one area.
On the other hand, they often are subject to
different accounting rules (carry forward of funds,
private banking), cannot be reallocated to priority
areas, and increase the complexity of government
accounting and reporting
48
Non-Budgetary Expenditures
•
•
•
•
Non-budgetary transactions are transactions in
loans, investments and advances, in liability for the
administration of public money received and
collected for special purposes, in unmatured debt
Difference from budgetary expenditures in that
there is an expectation that the funds will be
returned
Not expected to affect the budget or encumber
funds
Has no impact on the calculation of the deficit
49
Zero-Based Budgeting
• As much of a process as a budget
format
• Attacks concept of the incremental
nature of most budgets
• Can provide the basis for reallocation
of resources to priority areas or to
reduce overall costs
50
Zero-Based Budgeting
Zero-Based Budgeting
Incremental Budgeting
1. Evaluation of current activities and
examination of alternatives leads to
operational budget.
1. Operating budget is subject to series
of incremental changes (increases or
decreases) on a line item basis often with
an overall budget increase set.
2. Ignores past behaviour and assumes a
clean slate of activities let alone budget
to support them
2. Accepts the existing base and
estimates costs of new activities or
changes including decrease
3. Creates cost/benefit analyses of all
alternatives including the status quo
3. Focuses analysis and alternatives on
changes to program and new activities
4. Point of departure is the program
architecture and need to continuing with
activities.
4. Focuses on costs and money rather
than program continuity
5. Examine new means of delivery for
continuing programs.
5. Budget process not used to reevaluate
existing programming.
6. Decision makers faced with options,
alternatives and different levels of
services decisions within the budget
package.
6. Little scope for examining alternatives.
51
Principles of Sound Budgeting
•
•
•
Universality Principle: all expenditures financed by
taxes or levies and all revenues collected through
taxes or levies should be in the budget
Unity Principle: all expenditures in the budget to be
made during a certain period of time (usually a year
or a few years) and all revenues in the budget to be
collected during that period should be presented to
the budgetary authorities for the purpose of
decision-making in a single document
Specificity Principle: expenditures and revenues should
be specified separately in the budget (“gross
recording”) and at a level of detail required by the
budgetary authorities
52
Source: OECD, Best Practice Guidelines, GOV/PGC/SBO (2004)6
Principles of Sound Budgeting
•
•
•
•
•
•
•
•
Accuracy
Comprehensiveness
Consistency
Honesty
Judgement
Legitimacy
Timeliness
Transparency
53
Factors Negatively Affecting Budgets
•
•
•
•
•
Unreliable Information
Excessively optimistic revenue claims
Excessive prudence
Unpredictability
Extra budgetary funds
54