BUDGET MODULE: GETTING IT,
MANAGING IT AND SHEDDING
IT
Andrew Graham
School of Policy Studies
Queens University
MPA 827 2015
Define
Today: Budgets and
Budget Process
Budget Architecture
Budget Success
Business Cases
Tomorrow: Planning
and Budgeting Tools
Capital Development
Cost Benefit Tools
Reallocation
Friday: Budget
Reduction and
Reallocation
Reduction Processes
Strategic Reviews
2
Budgets Module
Budget Process
3
“ Every agency wants more money;
the urge to survive and expand is
built in.”
Aron Wildavsky
An
Allocation
A Limit
A Plan
What is a
Budget?
A
Schedule
A Reality
Check
ANOTHER DEFINITION
A budget process is a system of rules governing the decisionmaking that leads to a budget, from its formulation, through its
legislative approval, to its execution.
Karl-Martin, Ehrhart, Roy Gardner, Jürgen von Hagen, and Claudia Keser
Processes: Theory and Experimental Evidence, November 2000
Budget
THE BUDGET AS AN INSTRUMENT OF
PUBLIC POLICY AND MANAGEMENT
• Planning Instrument
• Political Instrument
• Social Instrument
• Economic Instrument
• Legal Instrument
6
Source: Jerome B. McKinney and Lawrence C. Howard, Public
Administration: Balancing Power and Accountability (Oak park, IL: Moore
Publishing, 1979)
Need
Want
Can
Budget
A budget is a financial
plan for achieving the financial and
operational goals of an organization.
It expresses what is to be undertaken
in the defined period and authorizes
the financial authorities needed.
Developing
objectives for
acquisition
and use of resources.
Control
Steps taken by
management to
ensure that objectives
are attained.
8
Planning
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
Legal instrument to allow spending = Appropriations
9
•
BUDGET PERSPECTIVES
• Budget applies differently at different levels
• Government-level: broad, policy-driven, focus on change and
announcements, combines revenue with expenditure
• Department: will focus on overall results, generalized
allocation to program pockets, more detail
• Unit: budget is tightly defined, focus on inputs, highly specific,
focus on defining resources available
10
Our focus is departmental and
unit-based.
BUDGETING IN TIME CONTEXT
Plus Effects of
Outside
Environment
Historic
Information
Forecasting
&
Planning
Evaluating
Performance
Controlling
operations
Current
Operating
Data
12
Budget Architecture
Types of Budgets
•
Operating Budget:
– also called recurrent budget
– funds designated to continuing operations
“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
“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
Characteristics
General Use
Line Item
Expenditures and
revenues are related to
commodities
Control
Performance
Expenditures and
revenues are related to
workload
Management
efficiency
Program/Result Expenditures and
s
revenues are related to
public goals
Based
Planning and
Impact
Not mutually exclusive.
14
Budget Type
TYPES OF OPERATING BUDGETS
Responsibility
Centre/Program
Performance/ResultsBased
Flexible
• Input Oriented
• Control
: Expenditures related to inputs.
• Goals/Unit Oriented
• Activity Based: Expenditures related to workload.
• Mix of Financial and Program Control
• Linked to Planning
• Outputs/Outcome Orientation: Expenditures related to outputs.
• Less Control-Oriented
• Adaptive
• Market Oriented
Not mutually exclusive.
15
Line
•
Simplest form of budgeting
•
Budget information organized according to types of expenses,
expenditure or cost categories
•
Often detailed in object codes – little detail.
•
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
16
LINE ITEM OPERATING BUDGET
LINE ITEM OPERATING BUDGET EXAMPLE
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
17
Budget of the Killaloe General Hospital for Fiscal Year 200X
LINE ITEM BUDGETING
Limitations:
• Rigid, unable to cope with
• rapidly changing priorities and circumstances
• creation of new government services
• Budget evaluation mechanism difficult without mechanism to
link things to be bought with things to be done.
• New budgets based on previous budget with increments for
price increases
• No evaluation of whether objectives are still met or costeffective
LINE ITEM BUDGETING
Advantages:
• Easy to make
• Micro-level expense control
• Where the rubber hits the road: this is the details that bedevil
19
• Reliance on past data
Responsibility Centre/ Program Budget
•
Distributes budget to internal units: Responsibility
Centre
•
Program could involve several responsibility centres
•
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
•
Designed to follow the money.
20
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
responsibility for its proper use.
Responsibility Center Budget - Example
Budget of the Killaloe General Hospital for Fiscal Year 200X
Responsibility Centre Budget
01. Operating Room
02. Laboratory
03. Radiology
4,000,000
1,000,000
1,000,000
04. Patient Care
05. Outpatient Care
06. Administration
2,500,000
1,500,000
1,000,000
11,000,000
21
Total
PROGRAM BUDGET - EXAMPLE
Bureau of Public Safety and Leisure Services FY 200x-0y
05 -Public Safety
Program Element
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
22
Program
PROGRAM AND LINE ITEM BUDGET - EXAMPLE
Bureau of Public Safety and Leisure Services
Detailed Budget Information FY 200x-200y
05- Public
Safety
Program
Element
0501 – Fire
Protection
Responsibility
Centre
050101Central 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
23
Program
•
Result of combining a line item (input) and program approach
•
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
24
FUNCTIONAL BUDGETS
FUNCTIONAL BUDGETS - EXAMPLE
Budget of the Killaloe General Hospital for Fiscal Year 2011
100.
Salaries
200.
Supplies
300.
Rentals
400.
Professional
Fees
Total
01. Operating
Room
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. Admin
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
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RC
PROGRAM BUDGETS/ RESULTS-BASED BUDGETS
•Budgets meant to link funding to expected results
•Program formulation and resources justification
involve a set of predefined objectives, expected
results, outputs, inputs and performance indicators
which constitute a logic framework
26
•Performance in achieving results is measured by
predefined performance indicators.
Performance Budget – small and
unpretentious Example
Road Maintenance Budget FY 2006-2007
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
27
Activity
PERFORMANCE
BUDGETS/RESULTS BASED
BUDGETS
Strengths:
•
•
•
•
•
28
Budget based on outputs
Emphasis on performance and results
Greater autonomy and flexibility meant to follow
Greater accountability and reporting
Departments more aware of outputs and cost of producing
outputs
• Puts decisions on deployment of resources in the hands of
people at operations
PERFORMANCE
BUDGETS/RESULTS BASED
BUDGETS
Shortcomings:
29
• No clear link to desired outcomes – the attribution issue
• Lack of focus on key internal processes
• Generally poor costing of inputs to results – the path is not
clear
• With tighter fiscal position, need for greater emphasis on interministry allocations
• Diminishes need for cost control and basic probity.
FLEXIBLE BUDGET
n
Organizations often experience more or less volume than
budgeted.
n
n
Flexible budgets look at expected revenues, expenses, and net
income under different volume assumptions.
The key to flexible budgeting is the identification of:
è Fixed Costs - which do not change with volume.
è Variable Costs - which do change with volume.
n
Flexible budget results are normally shown in a side-by-side
columnar format.
A flexible budget is a form of "What if?" analysis.
30
n
Hot Meals for School Flexible Operating Budget for 200X
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
[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.
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Revenues
OFF-BUDGET EXPENDITURES
• Off-budget expenditures refer to financial transaction that are
not accounted for in the budget
• Most public budgets exclude certain governmental activities
• Generally (but not always) refers to activities of public
enterprises, credit provided or guaranteed by government or
subsidies channelled through the tax system
• Increasing trend to include them in the financial statements of
government
32
• Weaker control of these, but there is control nonetheless
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)
Public sector entities that are commercial and legally
excluded from the budget, e.g. Post Office.
33
•
•
•
•
•
Funds in Budget Architecture
34
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 apply.
•
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.
•
Often, special funds are created to segregate monies for
programs for special purposes or as a result of unique
designated revenue sources
35
FUNDS IN BUDGET ARCHITECTURE
FUNDS IN BUDGET ARCHITECTURE
• Use of funds varies with governments
• Municipal governments tend to be built almost
entirely around funds.
36
• 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.
FUND TYPES
Government Funds
Proprietary Funds
Fiduciary Funds
General Fund
Enterprise Funds
Special Revenue
Fund
Internal Service
Funds
Expendable Trust
Funds
Capital Projects
Fund
Debt Service Funds
Special Assessment
Funds
Provides for
ongoing activities
of a selfsustaining
operation
Nonexpendable
Trust Funds
Agency Funds
Assets held in
Trust by the
Organization
REVOLVING FUNDS
38
• 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.
• 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.
ZERO BASE BUDGETING
• Objective to “reset the clock” each year.
• Traditional incremental budgeting assumes that there is a
guaranteed budgetary base-the previous year’ level of
appropriations -and the only question is how much of an
increment will be given.
• Zero Based Budgeting implies that managers need to
build a budget from the ground up, building a case for
their spending as if no baseline existed- to start at zero.
• Resources are not necessarily allocated in accordance
with previous patterns and consequently each existing
item of expenditure has to be annually re-justified.
The purpose of ZBB is to reevaluate and
reexamine all programs and expenditures
for each budgeting cycle by analyzing
workload and efficiency measures to
determine priorities or alternative levels of
funding for each program or expenditure.
Through this system, each program is
justified in its entirety each time a new
budget is developed.
STRENGTHS OF ZBB
• ZBB does not assume that last year’s allocation of
resources is necessarily appropriate for the current year.
• The systematic nature of such a fundamental review
imposes a discipline on the organization which has
produced in practice secondary advantages.
• It produces in a readily accessible form more and better
management information.
• If implemented well, ZBB can eliminate a sense of
“entitlement” to cost increases.
• Improved discipline in developing budgets.
• More meaningful budget discussions during plan review
sessions.
WEAKNESSES OF ZBB
• ZBB vastly overestimates people’s ability to calculate.
• Multiple impacts often ignored
• The ranking process is difficult
• The implementation of a ZBB system requires a great
deal of time.
• Attempts by agencies to manipulate priority listings
by ranking popular items lower than items that would
have little chance of funding – the Musical Ride.
• Established programs have political support and they
will continue to receive their share of the budget
regardless of any analysis produced.
THE BUDGET PROCESS
THE BUDGET PROCESS
A process of planning and control.
A look ahead at what an organization can and can't do
A process of allocating scarce resources to unlimited demands
The Budget Cycle
44
- Preparation
– based on guidelines
– normally done by responsibility center managers
- Review and Adoption
- Implementation and Control
- Evaluation of Results and Feedback
BUDGET PROCESS: KNOW IT AND USE IT
Every organization has a budgetary process of
some kind
Increasingly they attempt to be strategic for the
organization
Managers are not simply recipients of budgets:
they are players in the budget process
45
Sustaining programs, getting program changes,
resisting change or helping it all mean knowing
how the budget process works and using it to
your advantage
THE BUDGET CYCLE
Length of time required to
prepare, administer & close
out a single year budget.
Expenditure Management Cycle – Broader than Just the
Budget
Cycle
Financial management system boundaries
Planning
system
Project
appraisal
Medium term
plans, e.g. three
year rolling plans
Resource
allocation
Annual budgets
Development,
recurrent and
revenue
Expenditure
review
Public expenditure
review
Institutions
Fund release
procedure, e.g...
warranting
Accountability
Audit system
Source: Adapted from Integrated Financial Management. Michael Parry, International Management Consultants
Limited. Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS.
December 1997.
47
Reports and
financial statements
Accounting for
revenue and
expenditure
BUDGET CALENDAR
ELEMENTS OF AN EFFECTIVE BUDGET CYCLE
•
•
•
•
•
•
•
•
49
Basic framework exists and is used
Desired outcomes known
Linkage to strategic plans
Common format, readily understood
Timetable for preparation clear and reasonable
Set of directions – rules of the game
Budgetary and program limits known
Established methodologies for costing and forecasting
where needed
• Directions on availability of new funds, use of current
funds and reallocation rules
Start/Restart
Budget Execution
Budget Review and
Approval – Legislative
Simple
Budget
Cycle
Strategic Planning Phase
Budget Preparation Phase
Budget Review Internal
Executive
50
Results Feedback
Auditing for Compliance and for
Results
WHAT TO LOOK FOR IN A
STRATEGIC BUDGET LINKAGE
Does this organization know
its Mission?
Does this organization have an
end state or vision?
What are the ground rules or basic operating
assumptions and principles?
Strategic Plan
Does it have a grip on reality – what is its
situation analysis including risks.
Does it have goals and objectives that
make sense?
What’s it going to
cost?
Does what it is going to do this year
mesh with its goals and mission?
51
Is it sustainable?
Are there targets with measures that
we can understand.
BUDGET PROCESSES AS A PLANNING TOOL
52
• Budgets are where the rubber hits the
policy road
• Budgets clear permissions to move
ahead on plans
• Delivery capacity on plans directly
linked to resources available
BUDGETS AS A CONTROL TOOL
When a budget is approved, the expenditure estimates
become appropriations
An appropriation both authorizes expenditures and
limits expenditures
Both defines and limits managerial discretion
53
Can be used to limit uses to specific allotments or funds
BUILDING THE BUDGET
• This is the process of micro-budgeting
• Building the budget logic but also the budget story
• Within organizations, tends to be a two-way process: direction
from above and input from below
• Often costs are driven by variables outside the control of line
managers, e.g. collective bargaining
• No guarantee that funds will be allocated to cover costs
54
Pluses and minuses of top-down and
bottom-up approaches to budgeting.
BUILDING THE BUDGET: UNDERSTANDING
COSTS, NEED AND DEMAND
Role of past experience, especially in incremental situations
Types of measures:
• Need
• Demand
• Workload
Productivity assumptions and targets
Revenue assumptions
55
Budget Gaming
PROJECTIONS (FORE AND AFT)
AND FORECASTS
• Budgets often build on previous year’s base plus or minus
• Differing set of assumptions: optimistic and pessimistic
• Controllable and uncontrollable costs
• Fixed and variable costs
• Direct and indirect costs and the full cost principle
• Treatment of overhead
56
• Mandated standards
TENSIONS INHERENT IN PUBLIC
SECTOR BUDGETING
• Revenue versus expectations
• Central agency versus program organizations
• New versus old
57
• Complexity versus clarity
58
THE AUTHORIZING PROCESS: FROM THE
PERSPECTIVE OF THE LEGISLATURE
KEY ACTORS IN BUDGET PROCESS
Finance ministry or treasury: Coordinate & drive budget
process
Spending departments: Responsible for expenditures within
their jurisdiction.
Head of State & Cabinet: Make political decisions about
tradeoffs.
Legislature: Scrutinize & authorize revenues and expenditures.
Supreme audit institutions: Audit government accounts for
compliance and performance.
Others: Media, civil society organizations, donors &
international financial institutions.
Stages of the annual budget process
 Finance ministry or
treasury issues
guidelines to spending
departments or agencies
 Spending departments
submit draft budgets
 Negotiation and final
decisions by executive
Drafting
 Budget tabled in the
legislature
 Consideration by
parliamentary
committee(s)
 Parliament accepts,
amends or rejects the
budget
Legislative
Before beginning of relevant fiscal year
 Funds apportioned to
spending departments to
implement activities
 Finance ministry
monitors spending
 Request for legislative
approval of adjustment
budget if necessary
 Supreme audit institution
assesses departmental
accounts and
performance
 Audit reports published
and reviewed by
parliament
Implementation
Audit
Fiscal year starts and ends
Following end of fiscal year
DRAFTING STAGE
• A draft budget that can be submitted to legislature.
• Mostly internal to the executive, secretive.
• Sets fiscal policy & estimates revenues on projections to
establish total resources.
• Finance ministry or central office issues guidelines to
spending departments.
• Budget requests from spending departments.
• Negotiations at bureaucratic and political levels.
• In municipal governments, council will often get involved in
preliminary discussions or others will have staff draft the first
draft
LEGISLATIVE STAGE
•
•
•
•
Budget tabled in the legislature/council/board.
Considered by parliamentary committee(s).
Parliament votes on Supply. Council approves budget.
Municipal governments will often engage the public in consultations
at this stage
EXECUTION/IMPLEMENTA
TION STAGE
•
Funds apportioned to departments to implement
activities.
•
Central financial controller monitors spending –
more or less.
•
Request for legislative approval of adjustment
budget if necessary – Supplementary Bugets.
•
Fiscal risks are inherent in a changing economic
environment – purpose of contingency reserves.
•
In-year adjustment decisions should be transparent
and thoroughly scrutinized.
AUDIT STAGE
• Supreme audit institution assesses departmental accounts and
performance.
• Audit reports should be published promptly and submitted to
parliament.
• We will look at this stage in more detail in a later session.
Factors That Undermine Fiscal Discipline
Unrealistic
Constraints
When totals are selected for political reasons, without
regard to their achievability, they may weaken fiscal
discipline.
Unrealistic
Budgets
Some governments (especially in poor countries) adopt
budgets that that purport to show fiscal discipline but have
little to no possibility of being implemented.
Entitlements
When citizens have a legal right to payments from the
government regardless of budget conditions, it may be
difficult to stay within fiscal targets.
Contingent
Liabilities
The cost of contingent liabilities often is underestimated
when the government accepts the risk (such as
guaranteeing loans or the performance of enterprises).
When the cost comes due (because of default or other
contingency) it is not controllable through ordinary budget
means.
Factors that Degrade Operational
Efficiency
Perverse incentives
Spenders have incentive to use all the resources provided them; if they don’t, they
risk cuts in the next budget
Information asymmetry
Service providers know more about outputs and costs than do those who allocate
resources: To get more money, providers manipulate or withhold information from
superiors
Rigidity
Managers have no opportunity to use their skills and information to improve
efficiency
Compliance costs
Detailed, ex ante controls are costly and drive out initiative and variation
Budget maximizing behavior
Inasmuch as government must pay whatever it costs to operate its programs,
inefficient producers are rewarded with bigger budgets
Capture
Government is captured by service providers: it lacks independent information on
performance and must purchase services from them
Practices that Strengthen Fiscal Discipline
• Targets should reflect political commitments
made by government leaders.
• Targets must be realistic and achievable.
• Targets should be set and enforced within a
medium-term fiscal framework.
• Limits on aggregates should be supported by
sub-targets on sector/portfolios.
• Fiscal constraints should cover mandatory
spending.