Budgeting, Accounting & Financial Management
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Types of Budgets & the Budget Process
57.508-201
The Budget as a Policy, Planning and Information ToolWeek 3 - Spring 2011
Budget
budg et ⋅ [buhj-it] noun
1. An estimate of expected income and expense for a given period
2. A plan of operations based on such an estimate
3. An itemized allotment of resources for a given period
4. The total sum of money set aside or needed for a purpose
Why Public Budgets?
• Financial Control• Management Improvement• Planning • Prioritization • Accountability
When Public Budgets?
“At the turn of the century the United States was the only great nation without a budget system.”
Arthur Buck (1929)
Budgeting History
Congress, state legislatures, city councils, etc., voted on the money needed to operate their governments in an ad hoc and haphazard manner
Budgeting, to the extent that it existed at all, was the responsibility of the legislative branch
Budgeting History
It was the larger cities in the 19th Century that inspired budget reform because of the patronage-based political machines of the time
Urbanization, industrialization, immigration, etc., drove the growth of cities and their need to spend on a range of public facilities services
Budgeting History
The professional public administration movement was born in the 1880s with an emphasis on efficiency and objective analysis of administrative practices to find the best way to perform a task
Woodrow Wilson , 28th President of the U.S.
PhD in political science
President of Princeton University
Budgeting History
Very influential in promoting municipal finance reform was the New York Bureau of Municipal Research created in 1907
Early Budgeting
• Requests were lump sum
• Little or no supporting data
• Overall spending not related to revenue projections
• Little standardization accounting practices
• Departments bargained with legislators directly
• Little central oversight existed
Early Budgeting
First budgets were “object-of-expenditure”
• Had estimated revenues and expenses• Some accompanying support information• Line-item identifying expenditures
– Personnel– Supplies– Capital Items
Early Budgeting
As early as 1924, there was recognition of the limits of line-item budgeting
“The average city official confronted with the budget finds nothing in it that enables him to determine in a large way the value of the activities that are rendered the public; or in lesser way the degree of efficiency with which such activities are conducted.”
Lent D. Upson
Origins of Performance Budgeting
In the 1930s, NY Bureau of Municipal Research had recommended that city budgets be on a unit cost basis and show work done as well as work, but it took nearly 40 years for it to catch on
See: Commission on Organization of the Executive Branch of Government
&
Municipal Finance Officers Association Model
Origins of Performance Budgeting
1940s
Government program expansion during the New Deal and WW II led to wider interest in performance budgeting in order to more efficiently use financial resources by focusing on activities and outputs
Origins of Performance Budgeting
• Criticized even by reformers
• No more useful than line-item budgets
• Work measurement presented problems
• Inputs could be easily measured, but not outputs
• Focused only on what had been accomplished
• Lacked the tools to support long-range planning
Origins of Program Budgeting
1960s
More forward looking while performance budgeting tended to focus on past accomplishments…
Its key elements:
• Long-range planning• Goal setting• Program identification• Quantitative cost-benefit analysis • Performance analysis
Origins of PPBS
1960sAttempt to merge planning processes, programming efforts,
and the budget system • Planning was to be used to determine goals and programs to
help achieve them
• Programming would assist in administering efforts to efficiently accomplish goals
• Budgeting would come up with financial estimates of resources needed by agencies to execute the plans
Origins of Zero-Based Budgeting
1970s
• Peter Pyhrr of Texas Instruments in Harvard Business Review• Jimmy Carter as GA Governor & US President• Required that programs be annually justified • Managers provided estimates of different levels of funding
– Below current levels– At the current levels– Above the current levels
• A few cities experimented with it, no other states• No panacea against cost increases and anti-tax militancy
Budget Reform
“Budget reform is a continuous, on-going process which is not a destination but a pilgrimage – never perfect, but being perfected – as the light of experience and careful research point the way to greater improvements in the management of public affairs”
Catheryn Seckler-Hudson
Dean of the School of Government
American University 1953
Budget Reform
“Historically, state and local governments have often innovated first successfully and then the innovation has spread to the federal government. Budget innovations have been, and continue to be much more widely adopted and implemented at state and local levels.”
Irene S. Rubin
“Budget Theory and Budget Practice: How Good the Fit?”
Public Administration Review 1990
Budget Reform
“At the municipal level in the United States, many proposed budget reforms have been adopted in whole or in part and have been adapted to the needs and capacities of the local communities. Sometimes it has taken cities many years to implement the changes because they did not have the necessary information base, accounting system or staff time. Sometimes the reform has been interrupted or delayed, or even lost, but budget changes can and do occur gradually.”
Irene S. Rubin
“Budget Theory and Budget Practice: How Good the Fit?”
Public Administration Review 1990
Budget Reform
“The age of budgetary reform has passed… the cupboard of budgeting innovation appears to be bare; little on the horizon is comparable in scope and ambition to the major reforms that dominated budgeting in previous decades.”
Allen Schick
“Macro Budgetary Adaptations”
Public Administration Review 1986
Budget Reform
1982 ICMA Survey
• 65% of the sample reported using program budgeting
• Performance monitoring was at 68%
• Use of program, ZBB or target budgeting at 77%
• Use of MBO increased at 59%
Budget Reform
“While many reformers were concerned to limit the growth of government and the access of special interests, it mattered to them how it was to be done.”
Irene S. Rubin
“Budget Theory and Budget Practice: How Good the Fit?”
Public Administration Review 1990
Budget Reform
“Current models of budgeting for outcomes perfectly express the activist, efficiency, and accountability goals of the early reformers”
Irene S. Rubin
“Budget Theory and Budget Practice: How Good the Fit?”
Public Administration Review 1990
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
Budgets: More Than Numbers
Greater Efficiencies&
Program Effectivenessthrough
Performance Measurement&
Results Accountability
Sunnyvale, CA
Unique in its application of performance measurement and budgeting at the local government level
• “General Plan” projects 5 to 20 years into the future • The plan comprises seven elements and 20 sub-
elements that set goals and policies for the city • “Resource Allocation Plan” is a 10-year budget to
implement the General Plan• Annual budget is a performance budget that targets
specific service objectives and productivity measures
Sunnyvale, CA
Their budget is an output program and service oriented document rather than the traditional line-item, object of expenditure input oriented budget
Reinventing Government by Osborne &Gaebler 1992
Rock Hill, SC
• “Strategic Budgeting”
• Very different from Sunnyvale
• Declining economic base vs. Silicon Valley
• 1/3 size, blue collar population
• GFOA Distinguished Budget Award
Rock Hill, SC• Budget process built on comprehensive strategic plan
• Budget is a policy guide, a financial plan, an operational guide, and a communications device
• Budget includes all funds and addresses all organizational needs through goals and objectives
• No expenditure line-items in the budget
• Expenditures are summarized in terms of program goals, objectives and performance measures
• Uses multi-year time horizons
Rock Hill, SC & Sunnyvale, CAhttp://www.cityofrockhill.com/dynSubPage.aspx?deptID=7&pLinkID=144
http://sunnyvale.ca.gov/Departments/Finance/BudgetDocuments.aspx
Public Budgeting Evolution
Five Emphases
• Control at the turn of the century
• Management in the New Deal and post WW II
• Planning in the 1960s
• Prioritization in the 1970s &1980s
• Accountability in the 1990s
FrameworkSet Goals to Guide Decision Making
• Assess community needs, priorities, challenges and opportunities
• Identify opportunities and challenges for services & assets
• Develop and disseminate broad goals
Develop Approaches to Achieve Goals
• Develop financial policies
• Develop programmatic, operating and capital plans
• Develop programs & services consistent with policies and plans
• Develop management strategies
Framework
Develop Budgets Consistent with Approaches
• Develop a process for preparing and adopting a budget
• Develop and evaluate financial options
• Make choices necessary to adopt a budget
Assess Performance & Make Adjustments
• Monitor, measure, and assess performance
• Make adjustments as needed
GAAP
The Governmental Accounting Standards Board (GASB) is the source of the generally accepted accounting principles (GAAP) used by state and local governments, publicly-traded and privately-held companies and not-for-profit organizations
GAAP• Regularity: Conformity to enforced rules and laws• Consistency: All entries in exactly the same way• Sincerity: Done in good faith• Permanence of methods: Allow for comparison• Non-compensation: Not seek to compensate a debt with an
asset or a revenue with an expense• Prudence: Not make things look better than they are. • Continuity: Assume that the business will not be interrupted • Periodicity: Each entry should be allocated to a given period • Full Disclosure/Materiality: All information must be disclosed
Fund Accounting
Governments & NGOs practice fund accounting
Rule: All revenues are designated to be deposited in a particular fund and every item of expenditure comes from some particular fund
Principle: An obligation for reporting to financial statements users to show how money is spent
Fund Structure
• General Fund• Special Revenue Fund• Capital Projects Fund• Debt Service Fund• Enterprise Fund• Internal Service Fund• Special Assessment• Trust and Agency (3rd party)
Auditing
Government Auditing Standards
Generally Accepted Government Auditing Standards (GAGAS)
Standards for audits of “government organizations, programs, activities, and functions, and of government assistance received by contractors, nonprofit organizations, and other nongovernment organizations.”
Budgeting Interrelationship• Both budgeting and accounting are fiscal systems or processes
that involve the allocating, and disbursing of resources
• This results in an interrelationship and a need for coordination between these two fiscal disciplines
• Budgeting is regarded more in terms of planning, preparing and executing a fiscal plan for a period of time
• Budgeting processes are dependent upon the accounting of past-year and current-year expenditures/revenues
• Accounting focuses on the recording, classifying, and interpreting of financial transactions
Budgeting Interrelationship
• Budget and accounting systems function independently
• Each supports the other
• They represent two independent cycles that intersect
• Information produced by one is input for the other
3 Rs of Accounting
• Recording– Each transaction entered into journal– Each has one debit entry and one credit entry– Fund balance = Assets - Liabilities
• Reconciling– Journal entries to a ledger (spreadsheet) – Reorganizes the journal information by accounts (funds)
• Reporting– Financial reports: interim & CAFR– Subject to examination by an external auditor
Budgeting Interrelationship
While each government / nonprofit develops its own processes and rules for budgeting, accounting relies on a common set of rules – GAAP & GAGAS
Types of Budgets & the Budget Process
57.508-201
The Budget as a Policy, Planning and Information ToolWeek 3 - Spring 2011
Line-Item Budget
• 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• Manager not encouraged to question priorities
Line-Item Budget
• Used by all types of entities
• Survived in the face of reform efforts
• Users feel comfortable
• Easiest for year-to-year comparisons
• Minimizes policy debate
• Limits administrative liberties
• Framework for accountability
Line-Item BudgetA number of appealing features
• Relatively easy to use and understand
• Attractive to untrained legislative officials
• Did not focus attention on substantive policy issues
• Allowed central control over $$ before it was spent
• Provided multiple opportunities for control to occur
• Uniform, comprehensive and exact
• Allowed for easier budget cutting
Line-Item Budget
“The average city official confronted with the budget finds nothing in it that enables him to determine in a large way the value of the activities that are rendered the public; or in lesser way the degree of efficiency with which such activities are conducted.”
Lent D. Upson
Public Administration Review 1924
The Budget as a Plan
“One of the main themes running through budgetary literature has been the need to use the budgetary process as a vehicle for planning”
Lee Johnson & Joyce
Public Budgeting Systems
Program Budget
• Outcome or result oriented
• Focus on policy and program effectiveness
• Less concerned with expenditure control
• Very top down
• Requires regular affirmation of the mission
• Requires evaluation of programmatic activity
• Functions cut across agencies
Performance Budget
• 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
• Public Works:– X miles of streets cleaned per Y dollars– X tons of waste collected per Y dollars
• Libraries– X number of books circulated per Y dollars– X number of reference questions answered
• Police? Planning? Finance? Education?
Zero-Based Budget
• 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
• Results Oriented Budgeting
• Target Based Budgeting
• Functional Budgeting
• Planning-Programming-Budgeting System
• Management by Objectives (MBO)
• Formula Budgeting
Optimum Format?
• Control and Comfort of Line-Item• Policy Focus of Program• Efficiency Focus of Performance• Anti-incrementalism of Zero-Based
• Reality:– Managers inherit their entity’s budget– Professional administration vs. organization’s politics
Budget ProcessSeven Steps
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
• Mayor, manager, executive sends out memo
• Departments and agencies submit requests
• Budget office receives and reviews requests
• May make initial cuts if requests unjustified
• Each agency or program head biased
• Executive makes the tough calls
• Executive prepares budget message
Revenue Forecasting
• Each revenue source analyzed• Investment opportunities and rates• Previous year results plus trend projections• Techniques:
– Regression & multiple regression analysis – General Adaptive Filtering– Econometric modeling– Box-Jenkins
2. Submission
• Draft budget with message sent to policy body
• City council, county legislature, town board, etc.
• Finance committee reviews budget requests– Sometimes invites in all department heads– Sometimes executive represents all requests– Sometimes conflicts between executive & departments– Politics and reality at play
3. Policy Deliberations
• City council or board of aldermen
• Town council or board of selectmen
• County legislature or board of supervisors
• School board
• Regional council or COG governing board
• NGO Board of directors
4. Adoption
• “Ways & Means” looks at expected revenues
• Public hearings held
• Fixed costs & entitlements vs. discretionary
• Council or board members propose changes
• Changes voted on individually
• Consensus achieved on bottom lines
• Full council or board adopts with amendments
5. Execution
• 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
• Management controls
• Accounting system operations
• Reviewing agency or department procedures
• Setting rules for consultants or travel
• Protecting against fraud & waste
• Overseeing agency or department compliance
• Reporting on organization performance
Subsystems of Budget Execution
• Revenue Administration
• Cash Management
• Procurement
• Risk Management
Revenue Administration
• Taxes– Determining the tax– Applying the tax– Collecting the tax– Enforcing the law
• Fees, sales, grants, gifts, loans, etc.
• Investment management
Cash Management
• Depositing revenue promptly
• Expenditure planning
• Paying bills promptly
• Short term borrowing
• Contingency funds
• Investment planning and management
Procurement• 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…
– MBEs & WBEs– Energy efficiency or environmental quality
Risk Management
• People, property and records to protect
• Liability, exposure to litigation
• Faulty equipment or hazardous location
• Identify probability of extreme events
• Insurance vs. self-insuring
• Premiums, awards, settlements, etc.
6. Evaluation
• The budget as a management tool
• Program efficiency and effectiveness
• Performance measures
• Budget office oversight
• Legislative or policy body oversight (budget committee)
7. Audit
• Compliance Audit– According to laws and regulations
• Management Audit– Review for economy and efficiency
• Program Audit– Are results being achieved
• Can be either internal or external
Budget Cycle
• Preparation begins months ahead
• One prepared while one being executed
• Fiscal years vary (calendar vs. quarter)
• Intergovernmental cycles overlap
• Local level most dependent upon others
• Mandates, local aid, grants, tax rates
Budget Overlap
• Cycles run into one another• Preparation for next fiscal year in last• Audits for last fiscal year in next• Carry-over from FY to FY
– Encumbrances– Contingency funds– Debt service
Fund Structure
• General Fund• Special Revenue Fund• Capital Projects Fund• Debt Service Fund• Enterprise Fund• Internal Service Fund• Special Assessment• Trust and Agency (3rd party)
Accounting and Controls• 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
• Formal and informal evaluations
• Data collected and analyzed
• Cost-benefit analysis
• Many problems with results measurement
• Many problems with activity costing
• Central vs. program analytical responsibilities
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
Intergovernmental Relations
Federal-state, interstate, state-local arrangements for the provision of services
• Multiple levels delivering services• Transferring responsibilities and priorities• Vertical imbalance
– Best level to deliver service?– Best level to pay for it?
• Inadequate funding to meet local needs• National standards equal unfunded mandates?
Whose Responsibility?• Greatest local autonomy, but…
– Federal revenue sharing– Block grants– Categorical aid (WIC, food stamps)
• National issues vs. state or local priorities• Differences in political philosophies• Differences in income and wealth
– U.S. per capita income = $38k– Mississippi per capita income = $27k– Connecticut per capita income = $51k
• Results in different levels of service
Whose Responsibility?
Q: Who is responsible for…
• National defense• Public education• Welfare / public assistance• Environmental protection• Land use and building regulation• Community development
Whose Responsibility?
Q: Who is responsible for adequate housing?
a) Local governments
b) State governments
c) Federal government
d) The free housing market
e) Evil greedy housing developers
Changing Roles & Relations
• Prior to the Great Depression – Grants to states of land & money for canals, railroads & roads
• During and following the Great Depression– National rescue– Federal aid continued and grew in complexity and scale
• 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• Reagan era: 1980s
– 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– The Fiscal Responsibility Act– The Personal Responsibility Act– The Family Reinforcement Act
• Clinton era: later 1990s– 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
• 1980 = 27%• 2007 = 17%
Devolution means shifting or transferring power
Devolution has meant reduction in federal aid