The Logic of the Budget Process Troy University PA6650- Governmental Budgeting Chapter 2

A Budget is a Spending PLAN

The Size and Growth of Government Expenditure Government purchases (stuff) Transfer payments (Social Security) Government spending (all governments) is about a third of the GDP Not too bad compared with other countries

Budget Process & Logic Different from the private sector No price or profit signals to go by Public goods are difficult to sell No profits/bottom line to measure Limited by resource constraints More customers is not necessarily better Mixed, sometimes competing motives

The Parts of the Public Expenditure/Public Revenue Process Who should pay for things? How much should be borrowed? The budget: Elaborates executive-branch intentions Provides for legislative review and approval Provides control of implementation

Multiple Budgets The budget year The progress-report year The plan for the next budget year The progress-report year Current budget in execution The final report year The most recently fully-completed budget Outyears Future budgets beyond the one being requested

Fiscal Year Pronounced “FISS-KUL” (NOT physical) Federal FY runs from 1 Oct thru 30 Sep Some states and cities different Named by the year in which the FY ENDS (FY 2009 goes from Oct 2008-Sep 2009)

Functions of the Budget Process Fiscal discipline and control Response to strategic priorities Efficient implementation of the budget

4 Phases of the Budget Cycle Executive Preparation Agency requests, ceilings, forecasts, justification, strategy, promises Legislative Consideration Subcommittees, appropriations, bi-cameral approval, conference, veto Execution Appropriations spent, services delivered, spend-down, carry-over, budget base Audit and Evaluation GAO, financial or performance audits

Authorization v Appropriation Authorization - what the executive is allowed to spend Appropriation – what the executive is actually given to spend

Governmental Accounting & Financial Reporting Standards Financial Accounting Standards Board (FASB-private) Government Accounting Standards Board (GASB-govt)

Governmental Accounting & Financial Reporting Elements of an accounting system Source documents Receipts, invoices Journals Chronological summary of transactions Ledgers Reports of revenue, expense, or balance in an account Procedures & controls Forms, instructions, policies

Governmental Accounting & Financial Reporting Funds Governmental Funds General fund (e.g., treasury) Special revenue funds (e.g., transportation trust fund) Debt service funds (e.g., bond repayment) Capital projects funds (e.g., new tunnel) Permanent fund (e.g. a trust fund) Proprietary Funds Enterprise fund (e.g., water, utilities) Internal service fund (e.g., motor vehicle maintenance, GSA) Fiduciary Funds (e.g., pension funds)

Governmental Accounting & Financial Reporting Accounting basis (the method of matching revenues and expenditures over time) CASH BASIS Records money inflow when received, expenditure when cash payment completed FULL ACCRUAL BASIS Revenue recorded when earned, expenses recorded when liability incurred MODIFIED ACCRUAL Expenditure recorded when liability incurred, revenue recorded when cash received

Governmental Accounting & Financial Reporting Comprehensive Annual Report (CAFR) Introductory section, financial section, statistical section

Budgets & Political Strategies The Incremental Insight (reality) Importance of the budget base Politics and compromise The Comprehensive Insight (abstract) Bottom up review, annual analysis

Roles, Visions, and Incentives Operating agency’s view Chief executive’s view Legislature’s view

Strategies Strategies for a proposed reduction in the base Propose a study Cut popular programs Dire consequences All or nothing You pick We are the experts

Strategies Strategies to continue an existing program Round up “if it don’t run, chrome it” Sprinkling Numbers game Workload and backlog The accounting trap

Strategies Strategies to propose a new program Old stuff Foot-in-the-door financing It pays for itself Spend to save Crisis Mislabeling What they did makes us do it Mandates Matching the competition It’s so small

Politics, Representation, and Government Finance Some people are more politically important than others Specialists appear Imperfect information results in bribery Voters make uninformed choices

Conclusion Budgets are reality…everything else is just talk! Budgets allocate public resources Four phases of the budget cycle (executive preparation, legislative, execution, audit and evaluation Political and incremental