Public Budgets: More Than a Set of Numbers

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The Budget as a Policy, Planning and Information ToolWeek 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

• Policy Statements

• Planning Documents

• Information Tools

• Management Tools

Public Budgets

• A work program summary

• A source of information

• An instrument coordination and integration

• 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

ComprehensivenessThe budget should include all receipts and outlays

UnityAll revenues & expenditures should be related to each other

ExclusivenessOnly financial matters should be in the budget

SpecificationThe budget should be executed as it is enacted

Principles of Public Budgeting

AnnualityThe budget should be prepared every fiscal year for the next fiscal year

AccuracyForecasts should be reasonable and the contents should be consistent

ClarityThe budget should describe what is proposed in understandable fashion

PublicityThe 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”

• Public budgetary decision making must be conducted within the constraints posed by available revenues

• Thus the critical importance of revenue forecasts

(U.S. federal budget a noted exception)

Federal v State/Local Budgeting• Federal

– Economic and political perspectives– Expenditure driven– Entitlements– Defense

• State/Local– Organizational and administrative perspectives– Revenue driven– More executive control– More issues involving citizen input

Brief History of U.S. Budgets• 1789 – 1921 ~ Congressional Dominance

– No executive leadership– No “budgets” as we now know them

• 1921 – 1974 ~ Presidential Dominance– Executive Budget Movement– Budget and Accounting Act of 1921

• President’s budget• Office of Management & Budget

• 1974 – Present ~ Stalemate– Congressional Budget Act of 1974

• Budget committees• Congressional Budget Office

1921-1974• Budget and Accounting Act of 1921 (Wilson)

– Bureau of Budget in Treasury– Formal budgeting mechanisms– GAO accountable to Congress

• Executive Budget Movement– 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

• Preceded federal reform

• Prior to 1911, no schedule for budget preparation

• Reform movement under Governor Johnson

• Board of Control established to advise governor

• More reforms in 1922 after federal reform– 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

• 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

• 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

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

Evolution in Public Budgeting

Traditional

• Focus on control• Centralized process• Private exercise of administration• Line item format• Formula driven• Minimal flexibility for managers• Accountability for inputs

Progressive

• 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

• 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

Operating vs. Capital Budget

• Items and materials to be consumed

• Useful life 1-3 years

• Costs over $1000 - $5000

• Based on size and complexity of the entity

• Capital equipment, facilities, infrastructure

• Investments for economic development

• Should be based on strategic plan

Capital Projects

• Acquisition of a long lasting physical asset or facility.• Expenditure on equipment or facility that will provide

benefit for many years.• Investment for community, neighborhood or economic

development• Real estate, infrastructure, roads, bridges, etc.• Normally “stationary” in nature• But may include large research or consulting projects

Types of Projects• Assets for organization’s own use

– Office buildings, schools, libraries– Equipment, trucks, busses

• Investments in facilities that enhance development– Sewer & water systems– Downtown amenities– Convention centers or sports arenas

• Intangibles– Research projects– Consulting or engineering studies for major projects

Typical Issues

• Capital investing often deferred– Combined infrastructure deficit > $2 trillion– $1 trillion estimated for sewer & water alone

• Pay now vs. pay later

• Short term political decision making

• Ruse to reduce operating budget

• Classification of purchases

Capital Improvement Program

• Should be based on a comprehensive plan

• Should have asset inventory data base

• Should have public input and review

• Should have 5 year, 10 year & 20 year ranges

• Should have evaluation criteria

• Should be ranked in priority order

• Should have financing strategy in place

Financial Components

• Fiscal feasibility of funding the projects

• Level of operating expenditures

• Potential for project to generate revenue

• Potential for project to reduce operating cost

• Grants or cost sharing possible

• Debt carrying capacity

• Bond rating

• Debt management

Bond Rating

• Bond ratings assign the credit risk

• 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

• Three major rating agencies for municipal bonds» Moody's Investors Service» Standard & Poor's» Fitch Ratings

Debt Management• Short-term borrowing

– Tax anticipation notes– Bond anticipation notes– Revenue anticipation notes

• Long-term debt– 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

• 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

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

Note: Republican House leaders propose cuts of another $32 B