INST 275 – Administrative Processes in Government Lecture 12 – Public Financial Management I

The Importance of Public Financial Management The flow and management of funds is the lifeblood of our system of public administration. Many aspects of the design of the American system of public financial management go back to our deepest political traditions and compacts. Others, like the idea of the welfare state, go back only a few generations. Still others, such as the concept of “user pays,” are at their height.

The Importance of Public Financial Management Think of the system as rather like a huge irrigation system, one which gathers rainfall in large dams, and distributes the flow of water through large and small pipes to many disparate communities, to commercial users, schools and hospitals, to parklands and charities, to businesses and individuals, to seaside areas and deserts.

Six Principles Boston Tea Party. – No taxation without representation. Principles. – Democratic consent. – Equity. – Transparency. – Probity. – Prudence. – Accountability.

Balanced Budgets A balanced budget is a budget in which receipts are equal to or greater than outlays. A government that has one is financially healthy. There are advantages to an unbalanced budget. – Extra spending can stimulate the economy. – But large deficits can devalue the currency, kindle inflation and crowd out capital markets. All states have balanced budget requirements. The federal government does not.

The Fiscal Year “Fiscal” deals with taxation, public revenues, or public debt. The fiscal year is a 12-month accounting period without regard to a calendar year. The federal government’s fiscal year starts on October 1 and ends September 30. The current federal fiscal year is FY California’s fiscal year starts on July 1 and ends June 30. The current state fiscal year is FY 2008.

The Budget Game In the United States, the budget game is a major preoccupation in politics, occupying the time and energies of thousands of lobbyists, politicians, and officials in the national capital, and fewer but similarly motivated categories of people in state capitals. Why? The budget is the biggest game in town.

The Politics of the Budgetary Process The emphasis on the “horse trading” nature of the budgetary process is the counterpart of Lindblom’s emphasis on the incremental nature of decision-making.

The Politics of the Budgetary Process A process that concentrates on the increment is preferable to one that attempts to review the whole budget because it moderates conflict, reduces search costs, stabilizes budgetary roles and expectations, reduces the amount of time that busy officials must spend on budgeting, and increases the likelihood that important political values will be taken into account. – Allen Schick.

The Politics of the Budgetary Process Table S–1. U.S. Budget Totals (Dollar amounts in billions) Budget Totals: Receipts2,1542,2852,4162,5902,7142,8783,035 Outlays2,4722,7092,7702,8142,9223,0613,240 Deficit−318−423−354−223−208−183−205 Gross Domestic Product (GDP)12,29013,03013,76114,52115,29616,10216,955 Budget Totals as a Percent of GDP: Receipts17.5% 17.6%17.8%17.7%17.9% Outlays20.1%20.8%20.1%19.4%19.1%19.0%19.1% Deficit−2.6%−3.2%−2.6%−1.5%−1.4%−1.1%−1.2%

The Politics of the Budgetary Process (California)

The Politics of the Budgetary Process The danger in elevating horse trading to an art and a science is the loss of direction. Three conditions are essential for incremental policy- making to be adequate: – The results of present policies must in the mean be adequate. – There must be a high degree of continuity in the nature of problems. – There must be a high degree of continuity in the available means for dealing with problems.

The Politics of the Budgetary Process Developing countries cannot pursue incremental policies, nor should the U.S. when changes in values make formerly acceptable policies untenable. Washington gridlock is certainly one outcome.

The Politics of the Budgetary Process Budget process resembles riverboat poker game. – Administrative agencies at one table pursuing zero-sum game. – Congress people at another table watching the other table and their backs. – Lobbyists linger in background signing up members of Congress for persuasion and deals. – Press corps at the bar. – Think tanks outside on the deck. – Academic theorists in steerage.

Budget Maximizing Bureaucrat Bluff and overstatement are key tactical tools of departments and spending advocates during budget processes. Aware that their bids will be subject to some degree of cutback, bidders build in a protect buffer to allow for it. There are rules in budget preparation including allowable inflation indices, appropriate cost estimates, and appropriate program documentation.

Budget Maximizing Bureaucrat No limits on the ambitions of bureaucrats who wish to maximize their agency’s budgets and their program’s importance. – “Mine is bigger than yours.” The misrepresentation of budget estimates is a tool used by both program advocates and program opponents. That is why Congress prepares its own version of the budget.

Budget Maximizing Bureaucrat The budget game consists of two fields of play: – Defending your clientele against revenue hikes such as tax increases. – Seeking to attract government spending programs that will benefit your clientele. Game so skillful that sometimes difficult to categorize action as revenue or expenditure.

Budget Maximizing Bureaucrat Example: government housing assistance to low- paid workers is an expenditure. Housing assistance to high-paid workers is a revenue exemption or tax expenditure. The interplay between the President and the Congress represents the ultimate showdown in the budget game. The budget game should never be ignored or underestimated by public administrators.

Budgeting Theory and Practice Budgeting is the single most important decision making process in public institutions. The budget is a jurisdiction’s most important reference document. Budgets simultaneously record policy decision outcomes, cite policy priorities and program objectives, and delineate a government’s total service effort.

Budgeting Theory and Practice A public budget has four basic dimensions: – A political instrument that allocates scarce public resources among the social and economic needs of a jurisdiction. – A budget is a managerial or administrative instrument. It specifies the ways and means of providing public programs and services. It establishes the costs of programs and the criteria by which these programs are evaluated for efficiency and effectiveness. It ensures that programs will be reviewed or evaluated at least once during the budget year or budget cycle.

Budgeting Theory and Practice A public budget has four basic dimensions (contd.): – A budget is an economic instrument that can direct a jurisdiction’s economic growth and development. – A budget is an accounting instrument that holds government officials responsible for the expenditure of the funds with which they have been entrusted.

Budgeting Theory and Practice U.S. Budget, FY – California Budget, FY – Kern County Budget, FY – City of Bakersfield Budget, FY – udget/index.htm. udget/index.htm

The Taft Commission Prior to 1900, the processes of public financial management in America lacked overall objectives. In 1912, the Taft Commission recommended a national budgeting system to deal with the increasing complexity of the budget process.

The Taft Commission William F. Willoughby (1918) argued that budget reform at the state level would involve three trends. – How budgets would advance and provide for popular control. – How budgets would enhance legislative and executive cooperation. – How budgets would ensure administrative and management efficiency.

The Taft Commission The Budget and Accounting Act (1921). – Bureau of the Budget – In Treasury. – The General Accounting Office. Initially, budgetary and compliance procedures remained simple using line-item budgeting. Compliance focused on whether expenditures matched allocations. Budgetary theory remained inadequate.

The Influence of Keynes John Maynard Keynes ( ). – Demonstrated how government spending could be critical to managing the economy by stimulating demand when resources were underutilized and unemployment was high. – Created notion of budgetary policy as an instrument by which a nation could execute macroeconomic policy. – Justification for deficit spending to stimulate the economy.

The Influence of Keynes Aaron Wildavsky ( ) highlighted the extent to which budgeting was a political and economic rather than a mechanical process.

The Objectives of Budgeting and Revenue Generation Allocation – ensuring that an appropriate level of funding flows into sectors of the economy where it is required; Distribution – ensuring that the balance in public funding between regions, between classes of people in society, between public and private sectors, and between government and business reflects public policy;

The Objectives of Budgeting and Revenue Generation Stabilization – using public spending to stabilize the macroeconomy (or in some cases part of it) as prescribe by Keynes; and. Growth – using the power of government spending to facilitate economic growth and wealth creation.

The Objectives of Budgeting and Revenue Generation Of course, the objectives are often not clear or agree upon. – Supply side economics.

Two Types of Budget Most common – operating budget. – Short-term plan for managing the resources necessary to carry out a program. – Usually developed each fiscal year. Capital budget. – Planning for large expenditures for capital items. – Usually cover five- to ten-year periods. – Federal government has never used.

Waves of Innovation in Budget Making The structure and format of government budgets have been the subject of successive waves of innovation throughout the twentieth century. Why? The budget is the focal point of public administration.

Executive Budget The first conceptual breakthrough was the conception that there should be a government budget at all. Legislative budgeting largely ad hoc. A lot of room for incompetence and corruption. An executive budget is both a technical process and a physical thing.

Executive Budget