NOTES ON BUDGETING EXAM
NOTES ON BUDGETING EXAM
GFOA – CHICAGO, IL JUNE 9, 2000
A. SOURCE: LOCAL GOVERNMENT FINANCE – CONCEPTS & PRACTICES
Chapter 4 – Operating Budgets:
A budget can be a process, a document, an accounting ledger, a plan, or a system.
Local gov’t budgeting process unique – product of geographical, historical, economic, political and social factors peculiar to that jurisdiction.
Budgeting is a unified series of steps to line and implement four functions:
❑ policy development – as policy instrument, CEO and legislative body need to articulate the goals, objectives and strategies that underline the budget – the flip side of proposing policy changes is accountability
❑ financial planning – includes gov’t financial condition; current/past-year trend financial act. by dept or program; formal revenue estimate; look to the future to anticipate events/conditions; ensure debt service remains under control (while debt service receives first draw on municipal expenditure, financial plan set a rational debt service level for multi-year period
❑ service/operations planning – blueprint that governs the amount of service provided
❑ communications – way for decision makers to communicate changes in priorities, rationale for decisions and changes to vision in the future
The final step in securing a framework w/in w/c the needs of policy setting, financial planning, service planning and communications can work is the development of quantitative performance measures.
Environment/actors dictate the extent to which the linkage occurs and the form of linkage.
Four phases of local budget cycle:
❑ planning/preparation – key that encourages integration of policy, financial and operation aspects of budgeting – planning is the process of preparing a set of decisions for action in the future, directed at achieving goals by preferable means
❑ integration
❑ selling passage
❑ execution/feedback
As service plans, budget could be organized by programs or discrete services – then officials agree on specific objectives of these programs w/c s/b:
❑ results-oriented
❑ measurable within a given time
❑ related to the overall dept goal
Actors in the budget process:
a) CEO – generally the main change agent in local decision making
b) dept. officials – focus on serving their constituents
c) legislative body – ultimate holder of the purse strings
d) citizen committees – help focus the decision makers on an issue not on policy agenda before
e) media – key ingredient in utilizing budget as communications device
f) CBO – CEO’s main tool in coordinating and controlling the conflict inherent in resource allocation process – play important role during the integration stage of the budget process
Four types of measures:
1) demand – indicate the scope of the prog or the need for service – do not directly assist in the choice among competing policy or funding priorities but provide backdrop for budgeters to put in perspective the gross budget numbers being requested
2) workload – go one step further than demand measure – indicate amount of work actually performed on a particular activity
3) efficiency – relate the workload measures to resources required and results obtained
4) effectiveness – build on efficiency measurers and tell how well activity meets objective
Budgets based on objectives and service plans generally allow the decision makers an opportunity to play “what-if” games.
Before the budget can be used as a policy instrument or a political vision, the financial and operation foundation needs to be laid.
CEO categorizes the electoral constituency into four groups (for selling/passage):
1) those who will have not place to go no matter what
2) mobile constituents who need to be kept happy
3) potential new constituents who are marginally in the other groups’ camp
4) those who are not and never will be constituents
Traditional budget control serves to:
1) prevent budget deficits and embarrassing situations
2) ensure that administrative actions produce desired policy and prog. accomplishments
Values of unappropriated surplus:
1. avoid short-term borrowing or going back to taxpayer for additional revenue
2. help balance following year’s budget
The budget/process will depend on: environment, issues and actors in the locality.
Chapter 5 – Capital Planning and Budgeting
CIP – a multi-year plan that forecasts spending for all anticipated capital projects – s/b a logical extension of a jurisdiction’s comprehensive land use plan
Capital budget – first year of the CIP – primary difference between cap budget and CIP is that the capital budget is a legal document that authorizes specific projects during the ensuing fiscal period
The best capital planning process encompasses the ff:
✓ considers all proposed projects simultaneously
✓ produces planning doc that considers available financing and feasible timing
✓ measure the impact of capital spending on overall financial position
✓ relates a community’s perception of itself and its goals to a coherent program
The cap budget and cap plan are closely associated w/ long term operating prog and budget since the reason for each cap proj is to facilitate the accomplishments of an operating objective.
Infrastructure or capital facilities’ characteristics that justify their inclusion and analysis in a special cap budget:
✓ essential public purpose
✓ long useful life
✓ infrequent and expensive
✓ related to other govt function
✓ local govt’s responsibility to provide them
Advantages of capital planning and budgeting:
✓ as a reporting document
✓ as a financial management tool
✓ contributes to long-range policy development
✓ as a positive credit rating consideration
As a general rule, items in a local govt’s budget are classified as capital or operating by cost and frequency.
Rating categories for projects:
❑ urgent projects – meet emergency; required by state of federal law
❑ necessary projects – eliminate safety hazards; meet contractual obligations; required renovation/repair
❑ desired projects – replace equip; extend/enhance service; match state/federal funds
❑ ongoing projects – continue work in progress
❑ deferrable projects – nonessential/questionable timing or need
Frequently general criteria for evaluating projects:
❑ fiscal and budgetary impacts
❑ health and safety effects
❑ community economic effects
❑ extent of facility use
❑ environmental, esthetic and social effects
❑ disruption and inconvenience caused
❑ distributional effects
❑ prior commitments and feasibility
❑ implications of deferring projects
❑ amount of uncertainty and risk
❑ effects on interjurisdictions’ relationship
❑ advantages accruing from relation to other capital projects
Cost benefit analysis: a stream of benefits compared to the project cost
NPVb = - I + Bi + …+ Bn
(1 + r) (1 + r)n
NPVb = net present value of benefits
I = investment (capital cost)
B = benefits in each future year
r = rate of interest (social cost of capital)
n = number of years
Problems w/ quantitative benefits analysis:
❑ difficult to quantify benefits of public spending
❑ relating NPV to social cost of capital and rate of discount to employ
Financial analysis:
❑ economics of project financing
❑ feasibility of the project
❑ impact of cost on the jurisdiction
❑ effect of future maintenance and operational expenses on the operating budget
Revenue growth depends on several key variables including demographic trends, tax policy and general business cycle. To forecast revenues, need to understand nature of local tax and user charge structure.
Major sources of funding:
❑ pay as you go – paid from current income
❑ grants – from other govt
❑ debt
❑ public/private ventures
There are no hard and fast rules for determining a good mix of financing methods – every jurisdiction must develop its own criteria that recognize legal and practical limits of each approach based on cost, location and timing and its fiscal capacity, etc.
Urgency and feasibility will likely dictate the initial field of candidates for CIP.
Chapter 6 – Property Taxes
Property tax – major tax source for state and local govt; only tax w/ an unobservable base – valuation is inherently subjective.
Valuation approaches:
1. cost approach – current cost of reproducing a property minus depreciation – used frequently in the appraisal of new construction and special purposed properties
2. income approach – potential net earning power will support based on a capitalization of net income – used to value investment properties (commercial/industrial)
3. market data approach – indicated by recent sales of comparable properties in the marketplace
One of the primary objectives in property tax administration is the assessment of property in a uniform manner. Consequence of non-uniform is unwarranted shift of burden elsewhere to the benefit of some.
Property valuation serves as a basis for:
❑ tax levies by overlapping govts
❑ determination of net bonded indebtedness
❑ determination of authorized levies restricted by statutory tax rate limits
❑ apportionment of state assistance to local govt
A. assessment/sales ratio – the technique most commonly used to measure the degree of assessment in relationship to the market value or sales price of property sold
Use of averages:
❑ mean – derived by computing the assessment/sales ratio for each parcel sold, adding those ratios and dividing the total by the number of items
❑ median – measure of central tendency used to describe a group of individual assessment/ sales ratio – arrange the individual assessment/sales ratio in order of magnitude from highest to lowest then selecting the middle ratio in the series
❑ aggregate or weighted average – divide total assessor’s market value of properties sold
B. assessment/sales dispersion – degree to which actual assessment ratios are dispersed around the measure of central tendency.
Revenue stability – the absolute amount produced by the property tax in any single year is calculated as the product of the property tax rate and the property tax base – the nominal tax rate is determined by legislative process – the tax base or assessed value changes as a result of a change in the level of assessment – given a constant assessment ratio, the base would increase in direct proportion to the growth in market values.
Approaches to property tax relief:
a) Direct relief ( can be broad or targeted):
❑ partial exemption
❑ credit
❑ refund or rebate
❑ freeze
❑ use-value assessment
❑ classification
❑ circuit breaker
❑ deferral
b) indirect – works outside the property tax system; may or may not affect the total property tax levy
Chapter 7 – Nonproperty Taxes
MVIL – most widely used although not the most productive in terms of revenue
Sales tax – the most important single local nonproperty tax – followed by income tax
A diversified tax base promotes equity b/c it can capture revenues from individuals who can escape some taxes but not others. Also promotes efficiency b/c it reduces distortion of economic decisions resulting from over-reliance on any particular tax. Diversification keeps all tax rates lower than they would otherwise be. Offers local govt the same advantages that a diversified portfolio of financial assets offers investors.
Drawbacks to diversification: nonproperty taxes often cause greater distortion of economic decisions than the property tax; and, additional local taxes create additional costs of administration and compliance.
Rationale for nonproperty tax: important evaluation criteria is incidence – who actually bears the burden of the tax – incidence merely tells who does pay – it does not tell who should pay.
Economists suggest two principles who should pay:
1. benefit principle – a citizen’s share of the tax burden is proportional to the benefit he receives
2. ability to pay principle – widely interpreted to imply a proportional or progressive tax – tax burden rises in proportion to or faster than income as income rises
Horizontal inequity (i.e., sales tax) – households w/ the same incomes can pay vastly different percentages depending on how much of their income they spend rather than save and how their spending is allocated between non taxed or taxed purchases
Basic characteristics of local personal income tax (most require state authorization):
❑ payroll tax – has no exemptions, deductions or filing of tax returns
❑ piggyback tax – local income tax linked directly to federal or state tax
❑ broad-based tax – graduated income tax w/ locally set exemptions and deductions
An income tax is usually more responsive to both inflation and to real economic growth than property tax esp. if it is broad based. However, this tax is difficult to justify based on benefit principle but has stronger case on the ability to pay principle.
B. SOURCE: THE OPERATING BUDGET – A GUIDE FOR SMALLER GOVERNMENTS
Chapter 1 – Organizing the Budget Function
To achieve the best results in the planning and delivery of community services, key programmatic and financial decisions related those services must be made explicitly and under a single umbrella. The process of a local govt is the forum to:
✓ accumulate financial and performance info about all local services into a common format
✓ analyze and debate the merits of each service
✓ set priorities w/c services govt can or can’t afford
✓ make decision on the level and cost of services
Legal basis for budgeting:
✓ responsibilities of various officials
✓ legal actions required to establish official budget
✓ details of budget enactments
✓ general schedule to be followed
✓ changes to enacted budget
✓ restrictions of undesignated fund balance to balance budget
✓ budget deficits – impact on service levels or capital improvements
Budget preparation manual should contain:
✓ legal foundation of budget process
✓ organizational responsibilities
✓ budget calendar
✓ procedures for preparing/implementing budget
✓ policies on expenditure categories
✓ standard forms
structural balance concept – seeks to ensure that stable and reliable delivery of public services is the goal of the budget process: requires two principles – a) budget office responsible for building reserves; b) anticipate cyclical growth
2 broad categories of responsibilities in budget prep, adoption and implementation:
✓ executive or administrative
✓ legislative or policy making – overall concern w/ budgetary and programmatic policy; prerogative to set our a growth or no growth budget; must be careful not to give up its policy making role entirely to the executive; to fulfill its budgetary role should:
❑ become involved in development of policies and guidelines
❑ should be sure to receive all the materials it needs to give full and effective consideration of proposals
❑ should not concern itself extensively w/ administrative and financial details
Budget officer roles:
❑ coordination – in this role, BO does not evaluate dept requests or make recommendations or seek to balance proposed expenditures w/ revenues
❑ policy guidance – becomes involved in all programmatic and financial issues relating to the budget – guidelines on acceptable levels of service increases/decreases and evaluate requests based on policy; develop objectives; ensure consistency; balance exp w/ rev; recommend budget action to legislative body
❑ direct supervision – ensure dept don’t exceed budget limits; review budget transfer requests; performance reports; etc.
Advantages of “centralized” budget office:
✓ best determine priorities for services
✓ budget prep standardized
✓ effective control of resources’ in and outflow
✓ fiscal problems can be detected sooner
It is recommended that all executive budget functions be administered by a single budget officer – works best when budget officer has full responsibility for managing the coordination and administration of the budget process.
budget classification structure – forms the framework around w/c budget requests are prepared and presented; structure w/in w/c actual rev and exp are classified and reported – components are:
1. fund – s/b discussed w/ accounting personnel and analysis of the accounting system and legal requirements
2. organizational unit – identify the responsibility – where significant managerial responsibility lies
3. program – include broad categories of services
4. activity – specific function w/in a dept
5. object of expenditure – types of goods and services – enable govt to develop more precise estimates – tools for planning and control, not the end product of local services
6. source of revenue – similar function as object of expenditures
7. project
A good coding structure permits a locality to: a)classify info and detailed levels and b) easily summarize financial data at all necessary levels above the detailed level – s/b based on most complex case. Coding structure in budgeting s/ be same in accounting. The budget classification structure s/b a part of a locality’s chart of accounts and the coding structures develop should facilitate this linkage.
2 major steps in developing structure:
✓ decide what components are needed and how they should be organized
✓ develop a coding structure w/c can be used in the existing accounting system
Chapter 2 – Initiating the Annual Budget Preparation Cycle
2 principal steps of developing guidelines at beginning of preparation cycle:
✓ develop overall fiscal and programmatic policy
✓ prepare and disseminate to each dept detailed instructions for preparing requests
2 important steps in preparing annual operating budget (adequate attention to long term costs and revenue projections can prevent many of the less severe budgetary consequences of shifts in the economy):
✓ analyze revenue prospects
✓ determine current service costs
Objective of developing policy guidelines: develop a rough framework of the financial constraints that will be faced in the budget year.
Chapter 3 – Estimating Available Resources
2 steps in determining reasonable estimate of available resources:
✓ determine estimated undesignated fund balance in current fiscal year
✓ estimate expected revenue to be collected in budget year – s/b reviewed when requests are formally submitted to legislative body and immediately prior to the final opportunity for change for budget is adopted
Integrating grants funds into the overall budget request can be:
❑ identified as a completely separate activity w/in the dept’s request – this approach facilitates clearer accountability
❑ combined into an activity along w/ other funds – this approach encourages more unified planning and budgeting
Thorough analysis s/b made of grant requirements before approving its acceptance – official do address this will better understand long term potential financial risks – possible solution to use grant funds to nonrecurring costs.
2 essential components for each revenue source:
✓ revenue base – economic entity to be taxed
✓ revenue rate – percent of the value of the base to extracted from the economy
8 steps to revenue forecasting (important to develop conservative estimates esp. for large revenue sources):
✓ set framework to promote realistic estimate
✓ select revenues for special analysis
✓ define acceptable level of variances
✓ collect initial dept estimates or “drivers”
✓ identify business changes and indirect impacts
✓ document date, assumptions/projection methods
✓ apply analytical techniques for projections
✓ monitor closely actual revenues versus budget during the year
trend analysis – involves using historical (5-6 years) collection pattern of each source to predict revenues for coming year – when identifying trend, best variable measure is change in revenue base, then average change and rate of change over the period
Chapter 4 – Planning & Developing Budget Requests
Good budgets should be based directly on service needs - (admin officials should think):
✓ level of service is needed
✓ minimum and maximum level that can be provided
✓ how many resources are needed (inputs) to deliver service (outputs)
✓ efficient use of resources
✓ if service more effectively and/or efficiently provided by private sector
Budgetary process as an effective program planning instrument:
✓ people who manage local activities s/b involved in the budgeting process
✓ conscious effort must be made to determine what residents think about current services
✓ budget classification structure should identify service or function performed
✓ requests should determine what the service is
✓ performance s/b monitored in relation to service levels
✓ use benchmarking to identify, understand and adapt good practices and processes
✓ legislative and CEO must support the program planning process
Roles or the program planning leader:
❑ catalyst – stimulate thinking on the part of the operating dept on how they would plan for measures and develop service effectiveness and cost estimates for services to be provided
❑ coordinator – pull together all participants to meet deadlines and provide info in a common format
❑ critic – evaluate and strengthen the info provided by operating officials
department goal – broad statement of that dept’s mission – pinpoints the reason for their existence and establish its direction
3 steps in developing annual objectives and performance measures:
✓ develop dept objectives w/c are results-oriented; specific, measurable, attainable w/in a specified time frame and related to dept’s goal
✓ develop quantitative measures of performance – include demand (need for service), workload (amount of work), efficiency (relation between cost and results) and effectiveness(how well it meets the objectives) measures
✓ develop budget requests based on objectives and performance plans (requires relating resources or costs to outputs or services) – workplan w/c becomes a device to debate service and costs
budgeting for contractual services (cost should not exceed community standards):
✓ specify task to be done
✓ identify outputs if any
✓ specify length of time to perform service
✓ indicate total cost of service
Non departmental expenditures, such as utilities, debt service and salary increases not budgeted in depts based on policies should be prepared by the budget officer.
Chapter 5 – Reviewing and Adopting the Budget
A central budget review is best performed by the central budget officer and the chief executive. If delegated by the CEO, the CBO is responsible for weeding out unnecessary, ineffective and inefficient activities.
Completed budget document should include: message, planning processes, summary of revenues, dept and other expenditures including changes, summary of capital info, dept goals and objectives and performance measures, prior year actual, current estimate and budget year figures for revenue/expenditures and detailed justifications of budget recommendations.
steps leading to budget adoption:
✓ informal briefings
✓ formal presentation of CEO’s recommendations
✓ adjustments to CEO’s recommendations
✓ adopting appropriation ordinance – s/b in a form that allows best control of funds and enables fiscal policy and legislative intent to be carried out while allowing dept operations
✓ adopting applicable taxing ordinances
Chapter 6 – Implementing and Monitoring the Budget
Developing expenditure plan:
✓ CBO prepares baseline plan
✓ adjust for major anticipated deviations
formal allotment systems – specific portions of the dept’s appropriation are made available, say on a quarterly basis – overly stringent allotment can hamper agency’s flexibility and ability to be efficient
position control consists of: – list of jobs for all depts; standard rates of pay, budget for approved positions, hiring for approved positions and modifying positions and pay plans in an orderly manner
major issues to determine in reviewing personnel actions:
✓ if position is authorized by legislative body
✓ if personnel change is justified for dept’s work program and current demands for service
✓ fiscal impact
4 themes of budget presentation: as a policy document, as a financial plan, as an operations guide, and as a communications device
C. SOURCE: CAPITAL IMPROVEMENT PROGRAMMING – A GUIDE FOR SMALLER GOVERNMENTS
Chapter 1 – Overview of Capital Improvement Programming
capital asset – new or rehabilitated physical asset that is nonrecurring, has a useful life of more than 3 to 5 years and is expensive to purchase; a capital project is undertaken to acquire a capital asset
capital program – identifies each proposed cap proj, the year it will be started or acquired, the amount expected to be expended on the proj each year and the proposed method of financing the expenditure – cap prog not to be confused w/ cap budget w/c represents the first year of the cap prog
Purpose of CIP:
❑ formal mechanism for decision making – orderly process for planning and budgeting for cap needs
❑ link to long-range plan – s/b developed in concert w/ comprehensive land use, strategic plan or other long range plans
❑ financial management tool – prioritize current and future needs w/in anticipated financial resources
❑ reporting document – describes proposed projects
Advantages of CIP:
❑ focus on community goals, needs and financial capability - an impt aspect of developing CIP is balancing community needs w/ its ability to pay
❑ build public consensus for proj and improves community awareness
❑ improve inter-intragov’tl cooperation and communication
❑ avoid waste of resources
❑ help ensure financial stability
Steps in CIP process:
1. establish administrative structure – organizational framework – who’s involved
2. establish policy framework – financial or programmatic
3. formulate evaluation criteria - prioritizing
4. prepare capital needs assessment – existing and future needs
5. determine status of previously approved proj/identify new ones – add’tl funds required
6. assess financial capacity – examine past, present and future revenue trends, expenditures and other variables
7. evaluate funding options – pay as you go or issuing debt – legal authority to do so, political acceptability and administrative complexity
8. compile, evaluate and rank proj requests
9. adopt CIP and capital budget
10. implement and monitor the cap budget and proj – outflows
11. evaluate CIP process – what changes to be made
Chapter 2 – The Administrative Structure
CIP coordinator – coordination, cooperation, communications are critical: (2 approaches – individual or committee)
✓ prepare calendar, form, instructions
✓ assist dept in submitting proposals
✓ create opportunities for citizens’ involvement
✓ coordinate w/ other govt units
✓ evaluate funding options
✓ review and prioritize CIP submission
✓ submit proposals to legislature for approval
✓ monitor proj implementation
cost and useful life – criteria for classification of assets
calendar – prepare early in the process to determine who does what and when
Citizen ideas can help assure most desirable proj receive the highest priority – gain support for CIP and budget and for funding options esp. when issuing debt. An orderly CIP process depends on the establishment of an administrative structure and procedures to organize CIP activities – identifying a committee, department or individual to lead the process is critical.
Means for providing citizens input to the CIP process:
✓ public hearing
✓ advisory committee
✓ planning commission
✓ opinion surveys
✓ communications to elected officials
Chapter 3 – The Policy Framework
CIP policies set parameters w/in w/c capital planning and spending decisions are made – building blocks to construct CIP – 2 kinds:
❑ programmatic – govt strategic goals and community values ( can be formal, or comprehensive plans or informal by setting goals) – tend to be broadly stated
❑ financial – communicate to legislative body preference for certain types and amounts of revenues, expenditures and debt (include capital funding, capital reserves, evaluation of asset condition and maintenance needs)
Essentials of CIP policy development
✓ integrate policies w/ other financial policies
✓ involve all interested parties
✓ disseminate policies early in the process
Chapter 4 – Capital Project Evaluation Criteria
CIP evaluation criteria – support the policy goals but provide means to measure the relative value of each proposed project – include:
✓ legal mandates
✓ fiscal and budget impacts
✓ health and safety impacts
✓ economic development impacts
✓ environmental, aesthetic and social effects
✓ project feasibility
✓ distributional effects – disruption or inconvenience caused
✓ impact of deferral
✓ uncertainty of risk
✓ interjurisdictional effects
✓ relationship to other projects
Advantages to developing/using criteria: (by relying on criteria rather than selected judgment, govt can reduce charges of favoritism or political influence) types will depend on govt specific goals and policies
✓ help encourage agreement or priorities
✓ provide objective basis for assessing cap projects
✓ facilitate comparison among diverse types of projects
Principles for developing in evaluation criteria: (sometimes necessary to test outcomes before accepting criteria)
✓ clear and understandable guidelines
✓ aspects or consequences of a project
✓ relevant and accurate information about project
✓ result in selecting projects that meet critical needs and rejection of projects than don’t
✓ practical in terms of cost, time and available personnel
Chapter 5 – Preparing the Capital Needs Assessment
Infrastructure decisions must be made w/ regard to existing and new facilities – for existing, need to address appropriate maintenance strategies, renewal versus abandonment and repair versus replacement.
Capital inventory – identifies govt owned facilities and equipment; age and condition of assets and cost to replace them – used to systematically plan for repair and replacement -–can be used as a communications device to sell CIP
Checklist for developing capital inventory:
✓ definition or categorization of asset
✓ location
✓ quantity
✓ age – when purchased
✓ condition
✓ repairs made/when/cost
✓ initial purchase price
✓ replacement value
Assessing future demands: the first step in determining future needs is to review comprehensive land use, transportation or other plans. Another way is to set level of service standards w/c are quantifiable indicators of the amount service that will be provided.
GIS – systems that are integrated databases that link geographic info w/ other types of info for planning purposes; e.g., population, employment, land uses and govt owned infrastructure – valuable tool for CIP as its mapping capabilities enhance ability to illustrate where proj proposals are located to ensure consistency w/ land use plans or zoning ordinance.
Chapter 6 – Identifying Projects for the CIP
Project identification usually starts w/ a review of the status of previously approved projects – serves two purposes: a) provide systematic means to monitor and report on progress toward completion; b) aid in updating CIP and new capital budget
Project status report: completed; expected to be continued into coming fiscal year; to be deleted
Identifying projects – stems from land use, strategic or service plans – capital asset inventories and condition assessments provide basis for proposals
Info needed to evaluate new projects:
✓ title of asset
✓ description and scope
✓ justification – addresses policy goals, consistency w/ land use, service or other plans, criteria that are relevant
✓ schedule of major milestones – helps govt for construction activities – relationship to annual budget w/c is basis to pay vendors – keep project on track
✓ estimated cost – baseline estimate; contingency; escalation – consider project characteristics such as site, scope and market or labor condition
✓ impact on revenues – e.g., negative (if project takes property of tax rolls); positive if project provides new or additional user fees
✓ project cash flows
formula for escalation: = C x (1+r)n = C (Cost); r (escalation rate); n(time in years from date of estimate)
alternative analysis – process of comparing different approaches to providing a service – key objective is to provide decision makers w/ impt info need to evaluate each alternative – planning tool to consider to determine best way of providing particular service – used to assess the costs and benefits associated w/ constructing and operating a facility in house vs. private sector contract – addresses the ff:
✓ descriptions of options considered
✓ effect of each option
✓ analysis of full cost of each option
✓ identification of uncertainty associated w/ various cost estimates
✓ consideration of funding alternatives
life cycle cost – all costs associated w/ cap proj over life of the asset including engineering and design, construction, installation, day to day operations, maintenance and rehabilitation
objective of a value engineering assessment – identify any parts of the project that add cost to the project but do not add any functional value
Chapter 7 – Evaluating the Ability to Fund Capital Projects
financial plan – essential component of preparing CIP
financial capacity analysis – evaluate jurisdiction’s financial condition (revenue, expenditure trends, debt levels, current operation position) and assess likelihood that historical trends will continue
Measures of financial condition (assessment encompasses 5-10 years review of past trends) – objective is to determine what factors have been impt in shaping these trends:
✓ trends in revenue – changes in assessed valuation, tax base, collection rates, employment, retail sales and business activity; changes in socioeconomic and demographics; use of one-time revenue raising mechanisms
✓ trends in expenditures – normal recurring or operating; pay-as-you-go capital expenditures and long term debt – determinants include number of employees; changes in cost structure of public service either due to internal productivity or labor agreements; state or federal mandates; increases maintenance costs due to failure to adequately maintain aging infrastructure
✓ debt position
✓ unfunded liabilities
✓ operating position – surplus/deficit; fund balance; liquidity measures
key variables (including national, state or local development):
✓ CPI
✓ interest rates
✓ unemployment rates
✓ local business location decisions
✓ characteristics of community population
ratios used by rating agencies or credit analysts to determine debt levels:
✓ debt per full or equalized assessed value of property
✓ debt per capita
✓ debt as percentage of personal income
✓ overlapping or underlying debt from all jurisdictions supported by same tax base
✓ debt as % of operating revenues or expenditures
other relevant financial indicators to decide CIP expenditures for particular year:
✓ level of unfunded liabilities (pension or retire health coverage)
✓ level of undesignated reserves
✓ liquidity to withstand a short-term financial cash flow (high quick asset ratio: cash and short term investments/current liabilities)
sensitivity analysis – how variations in forecasting revenues/expenditures affect forecasted results and the likelihood scenarios (optimistic or pessimistic) will occur
Chapter 8 – Evaluating Funding Options
As a rule no capital funding decision should proceed w/o developing an understanding of the long term financial consequences.
potential resources: grants; revolving loans; current receipts/fund balance from prior year; private contributions; impact fees; service contracts; public-private partnerships; leasing
guiding principles in selecting funding sources:
✓ equity – who will pay
✓ effectiveness – will money be there when needed
✓ efficiency – relative cost of financing method – staff resources/monetary
when assessing capital financing mechanisms consider:
✓ legally available?
✓ politically acceptable?
✓ administratively feasible?
advantages of pay as you go financing:
✓ savings in interest and other issuance costs
✓ preservation of financial flexibility
✓ protection of borrowing capacity
✓ enhanced perception of credit quality
disadvantages:
❑ insufficient funding for capital needs
❑ discourages intergenerational equity
❑ “lumpy” capital expenditures (unevenness in capital expenditures)
debt and other financing include:
✓ GO bonds – secured by unlimited tax pledge; lower interest rates
✓ revenue bonds – usually enterprises; specific revenue source
✓ special assessment bonds – particular geographic area
✓ tax increment – projects w/in an area (check if permitted by law and legal requirements are met
✓ lease purchase – agreement w/ vendor or financial institution to lease asset over period and may have option at end to purchase assets – may be obtained w/o voter approval
✓ COPs – lessor will identify group of investors who are willing to provide funding for asses in return for share of the lease payments made by gov’t – carry lower credit rating than GO bonds, ergo, higher interest rates
✓ grants – advantage don’t need to be paid back
✓ impact fees and exactions – contributed by developers
✓ revolving loan
✓ bond banks
✓ public private partnerships
✓ private contributions
Chapter 9 – Evaluating and Programming Capital Projects
Ultimately, the job of the CIP coordinator is to decided on the best mix of projects and funding sources for the planning period.
tasks:
✓ reviewing project applications – compile, assign project reference, completeness and accuracy
✓ prioritizing – based on relative need and cost
✓ selecting and scheduling and assigning funding source (most essential, feasibility)
objectives of financing programming:
✓ identify most appropriate sources of funding (what alternatives are available? eligible for grants? project can be phased?)
✓ balance objective of meeting capital needs w/ maintaining tax rates/user fees at acceptable levels
✓ maintain debt service at affordable level to preserve budgetary flexibility and credit quality
✓ maximize the use of intergovernmental aid
The use of capital evaluation criteria can be a useful tool in making difficult choices. Regardless of the form used, it is essential that the overall program reflect the govt priorities established through its goals and policies.
Chapter 10 – Adoption of the Capital Program and Budget
CIP coordinator:
✓ prepare CIP document
✓ submit prelim CIP to legislative body
✓ engage formal public hearings
✓ revise CIP if necessary and submit final CIP and budget
Components of CIP document:
✓ narrative statement of issues – framework for selecting CIP, definitions of key terms and CIP process, financial trends, etc
✓ overview of projects and funding
✓ summary list of projects
✓ project detail
✓ other info – such as planned bond issues, o/s debt service; impact of planned debt
In formally adopting the multi year CIP, legislative body commits to a tentative scheduling of capital projects over the planning period.
Chapter 11 – Monitoring the Capital Budget & Program
Responsibilities of project manager:
✓ develop project schedule
✓ develop/contribute RFP to solicit bids, including technical specs
✓ ensure prelim work for construction is completed
✓ coordinate w/ other depts/agencies involved in carrying out project
✓ coordinate/monitor in-house labor and contractors
CIP coordinator – should stay informed of changing conditions that affect magnitude and composition of CIP - communicate key info on the progress of capital project to legislative bodies – status report to include:
✓ problems encountered in progress reports/financing projects
✓ delays in implementing projects/causes
✓ status of funds available
✓ other developments affecting CIP implementation
Issuers permitted to retain arbitrage earnings if any of the ff. conditions apply (gov’t that fail to meet even of the spending milestones no longer qualify for the exception for that bond issue)
✓ expend all proceeds of tax-exempt w/in six months
✓ expend all proceeds over 18 month as follows: 6 mo 15%; 12 mo 60%; 18 months 100%
✓ expend at least 75% of proceeds as follows: 6 mo 10%; 12 mo 45%; 18 mo 75%; 24 mo 100%
Chapter 12 – Evaluating the CIP Process
Components of the evaluation (CIP coordinator to take lead):
✓ organizational/process issues – sufficient time? right individuals/depts involved? size for decision-makers right? citizens given opportunity to input? evaluation criteria relevant?
✓ forms and documents – effectiveness of forms/docs used
✓ financial issues/assumptions – assumptions valid? planned sources materialize? accuracy of info on project costs
D. SOURCE: RECOMMENDED BUDGET PRACTICES – A FRAMEWORK FOR STATE AND LOCAL GOVERNMENT BUDGETING
National Advisory Council on State & Local Budgeting recommended practices:
✓ advocate a goal-driven approach to budgeting that spans the planning, development, adoption and execution phases of the budget
✓ policies promote linkage of the budget process w/ other activities of the govt – scope/dimension: political, managerial, planning, communications and financial
✓ should have long range perspective and not simply an exercise in balancing revenues and expenditures one year at a time.
✓ enhance quality of decision making by encouraging practices that illuminate key issues and choices facing a community
The quality of decision resulting from the budget process and the level of their acceptance depend on the characteristics of the budget process that is used. Framework and compendium of good budget practices intend to serve as tools to improve budget process the benefits of w/c include:
✓ educate govt and budget participants about potential of budget systems
✓ help govt assess adequacy of their system
✓ provide guidance to govt who want to improve their process
✓ promote education, training and further experimentation
Good budgeting – process that has political, managerial, planning, communications and financial dimensions – consists of activities that encompass the development, implementation and evaluation of a plan for the provision of services and capital assets
Characteristics of good budget process:
✓ incorporate long term perspective
✓ establish linkages to broach organizational goals
✓ focus budget decisions on results and outcomes
✓ involve and promote effective communications w/ stakeholders
✓ provide incentives to govt management and employees
mission of the budget process: help decision makers make informed choices about the provision of services and capital assets and to promote stakeholder participation in the process
budget practice – a procedure that assists in accomplishing a principle and element of the budget process – do not identify specific time frame
budget tools and techniques – specific methods of accomplishing a practice – identify specific time frame
If there is unresolvable conflict between recommended practices and statute, statutory requirements should take precedence.
4 principles of budget process:
1. establish broad goals to guide govt decision making
2. develop approaches to achieve goals
3. develop budget consistent w/ approaches to achieve goals
4. evaluate performance and make adjustments
12 elements of the budget process:
in relationship to principle 1
1. assess community needs, priorities, challenges and opportunities – assess stakeholder satisfaction w/ programs and services and progress towards achieving goals; frequency and extensiveness of the evaluation s/b consistent w/ how frequently the info changes and the relative importance of the info being gathered – consider local, national and global factors in evaluating community condition including economic, financial, demographics, legal, social, cultural, physical, intergovernmental and technological issues/trends/factors
2. identify opportunities and challenges for govt services, capital assets and management – evaluate programs’ purpose, beneficiaries; impact of deferred maintenance; examine strengths and weaknesses of organizational structure; interdepartmental communications; policies and procedures
3. develop and disseminate broad goals – express goals in written forms followed by action plans – s/b proactive rather than reactive – conduct public forums
in relationship to principle 2
4. adopt financial policies – guide creation, maintenance and use of resources for financial stability – distinguish legally required reserves from discretionary reserves – how fees and charges are set – debt issuance and management – use of one-time or unpredictable revenues s/b explicitly defined – commitment to balanced budget – strive to use diversified revenues to extent possible – financial action during emergency or catastrophic events
5. develop programmatic, operating, and capital policies and plans – policies and plans that guide design of specific programs and services – which groups or population to be served – plans for capital acquisition, maintenance and replacement/retirement
6. develop programs and services that are consistent w/ policies and plans – evaluate delivery mechanism (what’s the best approach) – consider cost of service; service quality and control; management issues; financial issues; impact on stakeholders including employees; statutory or regulatory issues – identify functions, programs and/or activities of the organization to identify tasks/roles – develop and utilize performance measures (inputs, outputs, efficiency and effectiveness) w/c are relevant to goals – use benchmarks or standards of performance to help make improvements
7. develop management strategies – to facilitate attainment of program and financial goals – focus both on (emphasizing rewards to produce better results) rather than on penalties – mechanism to ensure compliance w/ adopted budget – choose the type (e.g., line item or program, etc.) the manner and time period of the budget
in relationship to principle 3
8. develop a process for preparing and adopting a budget – budget calendar, guidelines for preparing budget (consider role of stakeholders) – incorporate financial policies – responsibilities for overall coordination (not necessarily imply overall decision making authority) – making choices to adopt a budget -
9. develop and evaluate financial options – assess long term implications of current and proposed policies, programs and assumptions – financial plan is not a forecast of what is certain to happen but rather a device to highlight significant issues or problems that must be addressed if goals are to be achieved – revenue projections; analyses of major revenues (in-depth understanding); effect of changes to revenue rates and bases; tax and fee exemptions impact; consensus on revenue forecast; document revenue sources in a Revenue Manual – expenditure projections – evaluate revenue and expenditure options (determine if they maintain, erode or improve government’s financial condition); flexibility - CIP
10. make choices necessary to adopt a budget – recommended budget should address stakeholder issues – include all programs and funds – comply w/ statutory requirements – balance of resources and assigned uses – key programmatic and financial policies, plans and goals w/c influence the recommended budget are included in the document – highlight key issues to provide disclosure and analysis to determine that well-considered budgetary decisions are made – provide financial overview (short term and long term plan), operations guide; explanation on basis of accounting, budget summary (non-technical as much as possible and easy to read)
in relationship to principle 4
11. monitor, measure and evaluate performance – prepare regular reports – monitor and evaluate stakeholder satisfaction w/ programs and services and make adjustments including financial performance relative to the budget – evaluate financial condition (distinguished from budget performance w/c identifies explicit short term indicators, primarily revenue and expenditure status for the budget period) w/c considers broad array of factors that may have long term implications on the govt’s financial health – external factors w/c govt cannot control such as national or regional economy, demographics, statutory changes – CIP status -
12. make adjustments as needed – for unforeseen events that require budget changes – including changes to policies, plans, programs and management strategies (based n assessment of performance) – changes to goals if no longer appropriate – desirable to minimize number of adjustments to long term goals to maintain credibility
E. SOURCE – BUDGETING – A GUIDE FOR LOCAL GOVERNMENTS – ICMA
Chapter 2 – Designing the Budget Process
budget process – frames decisions and organizes decision making so that budgeteers can make timely choices w/ sufficient info – defines and monitors budgetary balance and influences the scope of govt services and the distribution of the tax burden – deal w/:
✓ timing decisions – budget calendar, manual
✓ training participants – including citizens and the press
✓ framing decisions – ask budget participants the right questions; executive to consider budget format and presentation of options that may affect decision; executive or mayor should ensure decisions are policy issues rather than managerial concerns
factors CEO needs to consider
✓ legal and historical constraints
✓ form of govt
✓ degree of centralization
✓ level of citizen participation
4 stages of budget cycle (and end products):
1. preparing budget requests (proposed budget)
2. legislative approval – sets legal spending (appropriations)
3. budget implementation (encumbrance and disbursement of funds)
4. summary of reporting on actual budget transactions (audited financial report)
openness of budget deliberation – key factor in the level and quality of participation (by interested parties) – depends on forum used and the design used
constraints on the design of the budget process
❑ state laws
❑ local charters
❑ form of government – while this influences the location of budgetary power, it does not lock it in
broad policy issues whether CEO designs from scratch or alters existing budget process (and basic values that budget process addresses):
1. relationship between executive and governing body – (roles of executive and legislative branches reflect the larger issues of accountability, managerial effectiveness, democratic participation and representativeness)
2. level of centralization – avoid extremes and s/b appropriate to the problems currently facing the govt – overcentralization carries number of risk including micromanaging, employees evading controls – (reflects the need to balance fiscal control w/ managerial expertise and initiative)
3. role of citizens and interested groups – (reflects the trade off between being vulnerable to demands and judiciously responsive to public interest)
one advantage of outcome-oriented budgeting – maintains sufficient level of managerial autonomy while increasing level of accountability – however, if jurisdiction is under fiscal stress and wants to encourage efficiency, it may be wise to substitute incentives for rigid rules.
In an extremely complicated situation involving many interests, putting forward one alternative may the best solution – number of alternative w/c may favor some interests over others may be simply overwhelming.
budget policy statements – it is much easier to formulate a policy and come to agreement when a local govt is not facing a financial emergency – having a policy in place will not always prevent unwise decisions but it may eliminate particularly poor options or make them look less attractive b/c consequences would have already been discussed and prudent financial practice will have become more institutionalized in the decision making framework
budget policies include:
✓ operating budget – scope, balance, maintenance of reserves, roles of various actors
✓ revenues – stability of tax rates, use of one-time revenues, review of service charges
✓ budget implementation – balancing flexibility w/ need for accountability
✓ debt – limits (% of operating revenues or amount of o/s debt)
In creating budget reserves, govt must resolve two policy issues: 1) size of the reserve; 2) conditions that must be met before reserves can be tapped
types of budget reserves:
✓ cash flow – inflow of revenues never precisely coincide w/ outflow of payments
✓ revenue stabilization
✓ unforeseen contingencies – protect govt from issuing short term debt
✓ equipment replacement – able to replace when obsolete
✓ building repairs or other improvements
✓ debt service
Summary: in designing budget process, local govt officials are constrained by laws, charters, precedent but there is considerable latitude w/in these constraints to shape a process that matches the management style of the CEO and fits the political conditions of the community. In addition to helping resolve specific problems, the design of the budget process can influence the level of governmental accountability and the level of citizen control over govt and taxation.
Chapter 3 - Budget Preparation & Adoption
Complex process that requires communication and cooperation among diff. parties including CEO, budget office, dept heads, governing body and the public.
Role of budget office varies depending on location, e.g., housed under the CEO or finance department (advantage being budget director’s role broader – provide advice and info to CEO – buffer budget office from political and policy concerns of CEO enabling budget office to play more technical role and to have less direct involvement in public policy)
target based budgeting – budget office assigns maximum funding levels to each dept; enables budget office to limit total budget requests to expected revenue levels
modern budget office – assumes more supportive role – tasks remain the same: estimate revenues, assemble budget requests into proposal, ensure total request do not exceed estimated revenues - assumes number of roles including: educate participants, adjudicates among participants, manage computing facilities, represent the values of accuracy and fiscal conservatism and provide public accountability (most important role)
4 techniques of projecting revenues (in practice, budget offices combine several methodology depending on the revenue source):
1. informed judgment – professional guess – comes w/ experience and careful observation
2. deterministic techniques – formula based (e.g., assessed value x taxable rate)
3. time series techniques – based on trends from prior years’ data – for revenues not particularly elastic w/ respect to economic growth, trend analysis provides useful and accurate estimate – not advisable to use for high volatile revenues
4. econometric models – causal modeling or statistical modeling – using from simple correlations to most complex input-output matrixes (e.g., rise in building permits or decline in unemployment rate correlates or predicts sales or income tax yields) – close correlation predict how revenues will behave in the coming year
problems w/ routine underestimates of revenues
✓ create general mistrust of the budget office
✓ may cause unnecessary reductions in dept staffing or delay capital purchase
✓ may create pool of unallocated revenue that can be spend at the discretion of CEO or legislative body (may hold down budgeted expenditures without limiting actual expenditures)
advantages of long term projections:
✓ early, small corrective action can avert a relatively large problem several years down the road
✓ can give sufficient lead time for implementing tax increase or averting ill-timed revenue reduction
✓ giver jurisdiction flexibility to reduce staff through hiring freezes and attrition rather than disrupted and expensive reductions in force
disadvantages:
❑ everything being equal, the longer the period covered by the projection, the lower its accuracy
❑ credibility – depends on variety of underlying assumptions of w/c must be clearly identified, valid and defensible
common elements in a budget manual:
✓ budget prep calendar
✓ list/samples of forms
✓ list of definitions
✓ instructions for filling out each form
✓ assumptions – e.g., inflation rates
✓ chart of accounts
✓ forms for enumerating objectives/performance measures (for those govt that use program or performance budget)
✓ explanation on what is to be excluded from the target budget (for target-based budget)
under target based budgeting – depts give budget office 2 lists: one of continuing programs funded w/in the target and a second prioritized requests that can’t be funded w/in the target
formats for executive budget hearings
✓ dept heads meet one on one w/ budget director or CEO
✓ executive may form committee to review requests – advantage is that it gives dept heads an opportunity to see requests from other units in the context of overall revenue limits
2 types of legislative budget hearings
✓ executive w/ technical support from dept heads present proposals to council (presentation to the council s/b made by the manager)
✓ formal public hearing
Legislative work sessions to analyze budget proposals are esp. impt. in communities that do not have an executive budget and executive budget hearings. Budget work sessions tend to run more smoothly when there is a professional manager to recommend what s/b in the budget and ensure that council do not have to resolve technical issues themselves and call attention to legal and policy constraints at the beginning of the budget process. Legislative examination of the budget is more effective if it is not concurrent w/ a public hearing.
Formally amending the budget during the year has the advantage of bringing requested changes back to the council for discussion and public airing. However, making too many budget amendments conveys the impression that the CEO and the governing body have done a poor job of estimating revenues and planning expenditures.
Summary: Although the precise roles and responsibilities of the budget office may vary somewhat, depending on its location w/in the org. structure and size and form of govt, the budget office generally takes revenue projections, assists in the development of budget guidelines, collects and reviews dept. requests and participates in the executive budget hearings. A successful budget process depends in part on the participants’ fulfilling their roles: CEO and CBO must present a balanced budget proposal and educate the governing body about legal and financial constraints; elected officials and the public must present their opinion to staff; and staff must incorporate these policy statements that respond to the preferences of the council and the community.
CHAPTER 4 IS NOT A REQUIRED READING
Chapter 5 – The Budget as a Management Tool
Local govt often use budgets to improve management: budgets help official identify impending problems, improve productivity, maintain service quality and achieve performance targets. Increasingly, budgets are used not only to improve internal management but also to increase accountability to citizens and elected officials who represent them.
Although line item budgets are simple in comparison to program or performance budgets, they still have a number of potential uses as management tools if managers know w/c line items to watch and how to use the information. By examining trends, managers can track exp. patterns and ratios and obtain warning of emerging problems.
Unless the budget is organized by program and provides info on the output quantity and quality for each program, questions about productivity cannot be addressed thru the budget.
advantages of program/performance budgets:
✓ ability to monitor and improve productivity - productivity – ratio of input to output – often geared to make employees work harder, longer, smarter and can be used to protect quality
✓ link performance to budget allocations – a performance budget provides info on how well public sector activities are carried out – would address cost per unit and would ask whether services are being provided at an agreed upon level of quality and whether programs are achieving their goals. Performance measures are more meaningful and useful when combined w/ a program format.
✓ improve accountability – permits decentralization of decision making w/c reduces or eliminates micro-management – lower level managers likely to be more innovative
Performance reports are likely to be useful only if dept heads and prog managers feel the info will be used to help them, not hurt them.
4 stages of performance budget implementation:
✓ creating performance measures – tend to measure quantity first; begin w/ few measures that capture the essential activities of a unit
✓ linking performance measures to budget allocations – s/b both respectful of depts and more responsive to their needs
✓ reporting performance accomplishments
✓ institutionalizing the process
Summary: Although program and performance budgets have a lot of advantages, they can be difficult to implement and institutionalize – common problems: poorly or hastily designed measures, difficulty w/ data collection, dept resistance (may set defensibly low targets or turn in unreliable or unusable reports) and elected officials fail to maintain their implicit contracts w/ depts. Program and performance budgets s/b designed to serve both policy and managerial goals.
Chapter 6 – Budgeting & Financial Control
Control is the first requisite of budgeting. Control must take precedence because a govt’s budget cannot be reliably applied to upgrading the efficiency and effectiveness of public services if it does not accurately account for the expenditure of funds. Financial controls help prevent overspending, ensure budgetary balance and guarantee that money is spent in accordance with the approved budget.
Elements of financial control that budget document incorporates:
✓ comparison of budgeted figures for the coming year to actual of preceding year
✓ set of accounting categories to easily track spending/compare w/ budgeted amounts
✓ line items
✓ fund structures that underlie the budget
Financial control measures commonly used by govt: (SEE PRINTED EXHIBIT)
✓ budget implementation – begins when budget office interprets the new budget; financial transactions, numbers are accurate; and aggregates the details into report that match the budget – involves fine tuning the financial plan to fit reality – this is a politically sensitive but fiscally critical task
✓ accounting
✓ financial reporting – one purpose is to ensure funds were spent in compliance w/ the budget and the law; second purpose was to ensure revenues did indeed cover expenditures
Budget controls prevent overspending by allowing dept to make purchases only after budget office scrutiny and approval; financial reports allow the budget office to monitor inappropriate choices or patterns that emerge during the year.
Budgets at the local level are generally revenue driven meaning that the amount of approved spending must be less or equal to the amount of expected revenues.
In the U.S. the origins for legislative approval for financial commitment are in the Constitution.
An appropriation does not grant agencies money – grants budget authority to enter into binding agreements.
Program managers who incur obligations greater than the amount authorized by the appropriation act may be personally liable for such excesses unless the council acts to amend the budget.
Permanent appropriations are more likely to be found at the federal level – e.g., social security benefits and interest on federal debt.
The governing body’s most direct means of maintaining control over the budget is thru the level of detail in the appropriation legislation. At local level, governing body may also adopt separate riders that restrict depts’ spending discretion. States may create additional layer for review e.g., Local Finance Board.
Types of budget control
✓ Apportionment – disbursement of actual monies at the federal level; state and local is allotment
✓ Encumbrance – another device that prevent overspending – a way of marking off part of the budget that has not been spent but already obligated – an accounting control device but also a budgetary control measure
✓ Position controls – altho’ it will follow insofar as possible, the budget office must always balance permission that is in the budget against actual funding availability – w/ the latter taking priority.
✓ Budget amendments – a formal process that requires legislative approval
✓ Rescissions – at the federal, this is a practice of midyear spending reduction – can be initiated by Congress or the President and must pass both house – less formal at local level
✓ Closing accounts at year end
✓ Line item control – transfers (shifting funds/account) and discretionary accounts (set aside for unanticipated contingencies) are two techniques
✓ Budget transfers – one type is reimbursement; the other is between funds – most effective control is to require legislative approval
✓ Budget reserves – some formal, some informal – the more unstable govt’s revenue base, the larger the reserves s/b (3 methods of setting up reserves – by formula, specified % of operating surplus or dedication of revenues from a particular source)
Local govt are forbidden to run deficits.
The budget as passed represents permission to spend up to the amount specified assuming that: a) revenues come in at the appropriate time in the expected amounts; b) unexpected expenditures do not intervene.
Interim financial reports help maintain budget balance during the year; the CAFR looks backward to determine how well govt maintained balance and how close actual figures were to the budget as amended.
Accounting system (the heart of the accounting system is the recording and reconciling of transactions)
✓ first requisite – s/b accurate and linked w/ the budget system to operate as a control system
✓ adhere to professional standards to ensure same types of transactions are recorded consistently
✓ should provide financial info that meets six goals of accounting: understandable, reliable, relevant, comparable, consistent and timely (these are the bases for GAAP – SEE EXHIBIT ON TWELVE STANDARDS FOR GAAP)
Chart of Accounts – groups transactions into meaningful categories – provides the framework that brings consistency to the way the budget and the accounting system classify transactions – organizes into categories all the items that might be purchased and all the transactions that might occur – altho each govt’s chart of accounts is unique, all such charts have one thing in common – they assign a unique identifier to each fund, dept, type of expenditure
Fund structure – fundamental purpose is fiscal control. (SEE EXHIBIT ON TYPES OF FUNDS)
GAAP 10 classifies interfund transactions into four types: equity (non-routine), reimbursements, quasi-external transactions (payment by one fund for a service provided by another fund) and operating transfers
The culmination of budget implementation is the preparation of interim and annual financial report (CAFR) – CAFR primarily used by external stakeholders and unlike the interim reports, CAFR is subject to external audit – b/c CAFR is concerned w/ legal compliance, it uses the budget as amended rather than the original budget as the basis for comparison between budget and actual.
Summary: The 3 categories of financial control measures – budget implementation, accounting and financial reporting- have their own financial control mechanisms. When excessive financial control renders it difficult to achieve balance, local govt often use operating transfers or contingency funds to increase budgetary flexibility; when state or local govt puts extreme limits on transfers, local govt may use a variety of reserve accounts. The annual report provides after the fact view of efforts to keep the budget in balance – also provides warning of problems that may evolve in the future including drawing down on reserve fund, excessive interfund transfers and excessive unfunded liability.
Chapter 7 – Planning & Budgeting for Capital Improvements
Operating budget covers routine costs for service delivery; capital budget covers nonroutine costs of the four types of public investments:
1) infrastructure – improves quality of life; creates many conditions businesses require to operate – this is the most important to the largest number of people
2) public buildings
3) equipment
4) land purchases/
Reasons state and local govt separate capital and operating spending:
✓ capital often paid from one-time earmarked resources – segregating cap items help ensure revenues earmarked for cap items are spent for that purpose
✓ decision making process differs
✓ time frame differs
✓ since cap projects often plagued by change orders and overspending, will require close monitoring
Advantages of thinking about policy decisions on capital budgeting in advance
✓ clarifying policy issues can help make conflict during budget deliberations more productive
✓ help decision makers see a variety of options
✓ gives CEO and legislative body opportunity to think about decisions they may not have viewed as policy laden
✓ formulating a policy statement and getting it approved may help gain community consensus
To ensure the integrity of the CIP, all proposals for capital investment should go thru the capital planning process – officials should avoid a two-track process in w/c some projects are subject to scrutiny and comparison while others esp. w/ political backing avoid such scrutiny.
The scope of the CIP may be also affected by the definition of capital items – e.g., capital items are fixed assets of considerable value; sorting out capital and operating as either routine or occasional. Assigning expenditures inappropriately to capital or operating is especially problematic if it results in the use of long-term debt to acquire short-lived assets.
Policy issues in organizing the capital budgeting process
oversight – most logical is the budget office b/c of the many skills required to put together a capital budget – also, if assigned somewhere else, impact of capital on operating budget may not be fully understood; planning is another option for oversight; another option is assign to another dept altho this will be problematic as other depts may resent it – also depends to some extent on govt’s circumstances
timing – preparing cap budget concurrently w/ operating has several advantages – attention of dept heads and council focused simultaneously on budget issues w/o prolonging budget process; impact of capital on operating budget will be clearer
assignment of priorities to projects – identity of participants influences the outcome – common approach is to create an interdepartmental capital allocation committee
Project selection is the heart of the capital planning process. Capital budgeting appropriately combines political and technical factors – the issue is to determine what proportion of the process s/b political and what proportion technical. No matter how priorities are ultimately described, each community should start the capital planning w/ a general statement of priorities that reflects both political and technical concerns.
2 competing policy procedures in capital decision making
formal – includes selection based on technical requirements and formal org. procedures
informal – takes the form of ad hoc deals bet. govt negotiators and private firms
The strength of the planning model in developing priorities is that it provides a comprehensive approach to capital needs as it places considerable emphasis on inventorying the current capital stock and determining its condition.
benefits in evaluating the condition of capital assets
✓ helps demonstrates to citizens and elected officials that previous investment in maintenance and repair is paying off
✓ comprehensive appraisal allows the relative merits of new proposals to be judged in relation to the condition of current assets
✓ needs assessment helps staff argue that those that need urgent need s/b repaired or replaced first
One of the most noticeable and fundamental differences between govt and business procedures for making cap impvt choices is that the private sector relies much more heavily on economic criteria – in public sector projects are chosen based on political, municipal need and extent of funding available.
Financing capital improvement (SEE EXHIBIT ATTACHED):
pay as you go – relies on current revenue; current taxpayers bear the burden of financing improvements and future residents reap the benefits
pay as you use – relies on debt issuance; – as long as repayment of debt does not exceed the life of the asset, this method is more equitable
Annual debt service payments for principal and interest must be met before all other obligations including payroll. If a jurisdiction is experiencing rapid growth, may issue debt beyond 20% limit temporarily; if there’s little or no population growth, should reduce debt service obligation to 15% or less of operating budget.
To keep debt w/in manageable bounds and to retain investors’ confidence, govt officials should adopt and implement policies that: a) specify when and the purpose of debt; and b) maximum amount of debt can be incurred.
Generally, impact of capital outlay is increase in operating costs.
3 methods of adopting capital budget
1) part of annual or biennial operating budget
2) separate capital budget
3) governing body approves bond referendum altho separate approval for each project is usually required by law
Summary: The foundation of capital budgeting process is the creation of a CIP. To successfully establish a market for its bonds, govt must assure investors of their security by: a) paying obligations promptly; b) creating a separate debt service fund to account for current year payments; c) restrict long term debt to long lived assets; d) adopt policy statements that clearly describe standards and procedures for issuing debt.
Chapter 8 – The Budget Document
Characteristics of a good budget document:
✓ meet legal requirements – e.g., charter – w/c may also require the date for transmission for proposal and date by w/c council must approve the budget
✓ include all necessary components – letter of transmittal, table of contents, introduction, summary tables, detailed section on exp by fund, section on capital outlays and debt and supporting material
✓ focus on information essential to decision making – explain to public how money is spent
✓ present information in a clear and accessible way
difference between budget message and transmittal letter – letter may be brief and informal; message likely to include list of major accomplishments, note on overall size of budget, tax levy, etc.
budget introduction – should include section on govt’s recent financial history
Clear descriptions of transfers may reduce the temptation to balance one fund at the expense of another w/o identifying and resolving underlying problem – reporting transfers help ensure that earmarked money is spent for designated purpose and that enterprise fees are set to cover expenses – any subsidies s/b matter of policy and not be the result of unreported interfund transfers during the year.
budget highlights – departments’ explanations for year to year changes
In a performance budget, each program has a series of measures to describe demand, workload, output, outcome and impact.
Advantages of developing short version (summary such as budget in brief) of adopted budget for citizens and press – can also be widely distributed:
✓ if budget is long and multi-volume, maybe difficult to understand
✓ less expensive
✓ easier to speak to one audience than multiple audiences
✓ can be lighter in tone w/o giving the impression that officials do not take governing seriously
line item budget was designed in the early 20th century to hold down departmental expenditures – have more disadvantages
✓ details often obscure the whole
✓ the more detail the less flexibility managers have – but do provide info that managers can use
program budget –designed to answer 2 principal questions: what are we trying to accomplish and how much does it cost us to provide this service – b/c it is the total cost and the performance levels that matter, allocations s/b lump sum – w/c gives managers flexibility as long as they stay w/in budget allocation – emphasizes quality and cost of services (as opposed to cost of things purchased) so program budgeting is often accompanied by performance measures
When program budget and performance measures are linked. a work plan is in effect incorporated into the budget.
Line item, program, and performance budgets necessarily affect what information is presented in the budget and the way it is presented, particularly in the details of expenditures section. On the otherhand, target and zero based budgets (w/c are essentially process rather than format reforms) need not affect the choice of information or manner of display used in the budget.
Describing target and zero based budgeting processes in the budget document creates an opportunity to make 2 impt points: a) budget was carefully scrutinized, proposals were assigned priorities, and lower priority items were eliminated; b) goals and objectives formulated by elected officials and the public were the criteria used to allocate funds among discretionary items – in other words, reporting on the target or zero based budgets helps demonstrates how resources are being allocated.
To a significant degree, budget format will determine what information is reported and how it is displayed.
To help focus discussions on policy issues, historical data can be presented in a program or performance format w/o reference to line items. A historical presentation is esp. impt. in performance budgets b/c it enables readers to compare promised and actual accomplishments w/ budget allocations over time.
A full program budget deemphasizes departmental lines – broken into functions. Local govt should do well to shift entirely to a program and performance format so council can focus on policy.
B/c council members can inquire only about what they see in the budget, the nature of the detailed support for budget requests is likely to frame any debate on the budget numbers.
Basic guidelines to help make budget more readable:
✓ Alternate charts, graphs and illustrations w/ solid text.
✓ Leave wide margins and a reasonable amount of white space around text.
✓ Keep the art simple.
✓ Use illustrations to underscore the main points.
✓ Coordinate the text and the graphics.
In developing graphics: a) ensure that graphics are useful and appropriate; b) identify impt. points and determine how best to display them visually. Most impt. principle: form follows function – meaning the point being illustrated should dictate the type of illustration.
Criteria for GFOA budget awards:
❑ policy document – e.g., describe criteria used to allocate resources – list community wide goals and line them to objectives and resource allocation
❑ financial plan – balance revenues and expenditures; note if balance is for short term and prospects for long term – debt outstanding – a financial plan takes on solidity and becomes more convincing when the budget proposal is put in historical context
❑ operations guide – a plan w/dollar signs – estimated amount of work and cost to each unit; include performance objectives – should include staffing levels to clarify relationship between resource allocation and performance expectations
❑ communications device – public accountability – depends to a large extent on physical appearance of the budget
Summary: A clear, well designed budget document can become the basis for improved decision making, better departmental management and greater public understanding and appreciation of local government operations.
F. SOURCE AN ELECTED OFFICIAL’S GUIDE TO REVENUE FORECASTING
Objective of revenue forecasting – utilize appropriate analytical tools and techniques to predict inflows of specific resources for one or more years – forecasting excludes borrowings, prior year balances, contributions in aid, and certain recoveries and rebates – forecasting involves establishing cause and effect relationship between one set of factors as independent variables likes tax rates and depending variables, like sales tax collected – objective is NOT to predict future fund balance levels
Revenue forecasting involves different individuals and agencies as follows:
legislators – may scrutinize forecasts in an effort to fund new programs or identify deficits
management – bases future tax policy and resource requirements on forecasts
unions – may question forecasts to improve bargaining position
rating agencies – analyze forecast to evaluate jurisdiction’s ability to pay its debt obligations both in the short and long term
media – may particularly pay attention to forecasts during election year to expose politically motivated practices
Major methods of forecasting revenues
qualitative – judgement driven (distinguished from random guessing) – weak method b/c there are no formal cause and effect relationships, assumptions may not be documented – accurate though for revenues w/ high stability – appropriate to use in govt where substantial changes are occurring in administrative, economic and political environment
quantitative – developed using statistical models and data-driven – e.g., trend analysis, multiple regression, time series analysis, econometric
6 revenue forecasting guidelines recommended by NACSLB
1) should prepare multi year projections of revenues and other sources
2) should maintain an in-dept understanding of major revenues
3) should evaluate and understand the effect of potential changes to revenues source rates and bases
4) should periodically estimate the impact and potential foregone revenues as a result of policies that exempt payment, provide discounts and credits or otherwise favor categories of taxpayers or service users
5) should develop process for achieving consensus on the forecast of revenues to est. available resources for a budget
6) should prepare and maintain revenue manual that documents revenue sources and factors relevant to present and projected levels of those revenues
Rationale for the above guidelines:
✓ achieving consensus likely to remove disputes
✓ revenue manual promotes better understanding of govt’s resources
✓ enhancing estimates of revenues will increase confidence of stakeholders
✓ understanding changes in revenue source rates and fees will increase knowledge about outcome, improve decision making and/or provide better opportunity to plan changes
Keys for successful revenue forecasting:
✓ document economic and policy assumptions
✓ maintain historical revenue data
✓ use most appropriate forecasting technique for the revenue data at hand
Like government fiscal policy, revenue forecasting is influenced by:
❑ administrative – organization of revenue forecasting function itself, including where it is coordinated and where it’s housed
❑ political – influenced if it’s election year
❑ economic – overall health of local, regional and national economies, e.g., tourism, retail sales, home purchases, etc.
❑ policy context in w/c it is conducted.
A more decentralized org. of the forecasting function can reduce fiscal discipline and lead to more conflict in the budget process if:
❑ there is no agreement on the underlying assumptions
❑ there is no agreement on the methods used
❑ there is no overall mechanism to evaluate the validity of the forecast
Planning to revenue forecast should:
✓ identify end users of the forecast
✓ identify specific, economic and financial variables and times horizon
✓ ascertain accuracy and specificity of forecast
✓ construct forecasting model that includes selection of techniques
✓ identify external factors that will drive forecast model and process by w/c external factors are projected
✓ illustrate methods of testing and monitoring of revenue forecast
Steps to revenue forecasting:
✓ establish base year, subsequent years and examine patterns of revenue course
✓ determine growth pattern/trend
✓ reach consensus about the rate of increase/decrease
✓ use a number of methods to estimate future years’ revenue collection
✓ assess reliability and validity of the estimates after projections are calculated (conduct sensitivity tests)
✓ monitor revenue collections against projections
✓ update forecast to take changing conditions when actual revenues greatly exceed or are far below projections
relationship between revenue forecasting and the budget – budgets are ordinarily revenue driven
relationship between revenue forecasting and the long term financial plan: used to project overall financial condition over three to five years; used to develop debt issuance targets
revenue forecasting is challenging b/c:
❑ can be intrinsically political
❑ all factors that affect revenue can never be fully identified and taken into account
❑ complex forecasting methods are difficult to understand
❑ govt’s administrative, economic and political environment always in flux
❑ no generally accepted forecasting principles
❑ no generally accepted forecasting assumptions
underlying methodological and technical assumptions of judgmental forecasting include:
✓ all relevant factors affecting revenue
✓ factors included have an equal effect on the revenue
✓ forecaster has produced an unbiased judgment of future revenue collection
✓ forecaster has substantial knowledge of historical event that have affected rev in the past
consensus forecasting – requires that projections of future rev based on previous collection patterns, experience and knowledge of historical events – useful also for revenues that have no historical background
underlying methodological and technical assumptions of consensus forecasting include that all group members have:
✓ an equal standing so no one dominates the process and biases
✓ substantial knowledge of historical events affecting rev in the past
✓ all factors included in the forecast have equal effect on the revenue
✓ reached consensus about the underlying assumptions and produced unbiased estimates
expert forecasting – based on informed opinions of experts such as economists, demographers, market researchers, etc – used when govt want to forecast rev that are affected by national, regional and/or local economic patters – most useful for projecting rev that are sensitive to changes in the economy and consumer demand
underlying methodological and technical assumptions of expert forecasting include:
✓ appropriate experts were identified
✓ experts have equal standing
✓ experts included all relevant factors
✓ experts reached consensus on underlying assumptions
✓ experts weighed the importance of the factors included
strengths of qualitative approach: accuracy, consensus, dependability, relevance, simplicity, and timelines
weaknesses of qualitative approach: anchoring events, availability of information, illusion of control, illusory correlation, inconsistency of methodology; lack of comparability over time, selective perception, wishful thinking, political pressure
quantitative revenue forecasting methods:
1. model – statement of cause and effect relationships between a set of variables (independent(factors) or dependent (yield) desirable characteristics are parsimony or simplicity
2. trend analysis – based on short historic trend – appropriate for rev that has a sufficient number of prior periods data – seldom used for ultimate forecasting – underlying methodological and statistical assumptions include:
❑ administrative, economic, and political environment will remain stable
❑ demand for service or prog will continue to increase or decrease depending on
❑ historical trend
❑ all things equal, rev will continue to grow at a consistent rate
❑ there is sufficient and accurate preexisting financial data
NOTE: STOPPED TAKING NOTES ON THIS PUBLICATION AS ALMOST ALL THE CONTENTS ARE WORTH NOTING.
G. SOURCE: GFOA RECOMMENDED PRACTICES (BUDGETING & FINANCIAL MANAGEMENT SECTION)
1. Economic development incentives: it’s recommended that the economic benefit as well as the cost of the incentive be measured and compared against the goals and criteria that have been previously established.
2. Performance measures assist govt officials and citizens in identifying financial and program results, evaluating past resource decisions, facilitating qualitative improvements in future decision regarding resource allocation and service delivery options & communicating service and prog results to the community and should:
✓ be based on prog goals and obj that tie to statement of prog mission or purpose
✓ measure prog results or accomplishments
✓ provide for comparison over time
✓ measure efficiency and effetiveness
✓ be reliable, verifiable, and understandable
✓ be reported internally and externally
✓ be monitored and used in decision making process
✓ be limited to a number of degree of complexity
At a minimum, perf measures should be used to report on the outputs of each prog and should be related to the obj of each dept – measures s/b linked to the obj of the prog and missions and priorities of org.
3. Providing concise summary of the budget:
✓ summarize major changes in priorities or service levels
✓ articulate priorities and key issues
✓ identify and summarize major financial factors and trends affecting budget
✓ provide financial summary data
✓ define a balanced budget/describe state and local requirements for balancing
5. Setting fees and charges - technically, fees are different from charges – fee is imposed as a result of a public need to regulate activities; result in purchase of a privilege or authorization – recommended practices:
✓ adopt formal policy regarding charges and fees
✓ calculate full cost of providing a service to provide basis for setting the charge or fee
✓ periodically review and update charges and fees based on factors such as inflation, cost increase, competitive rates, etc.
6. Financial forecasting – govt should have a financial planning process that assesses long term financial implications of current and proposed policies, prog and assumptions; forecast should extend 3 to 5 yrs – revenue and expenditure forecasting does the ff:
✓ provide an understanding of available funding
✓ evaluate financial risk
✓ assess likelihood that services can be sustained
✓ identifies future commitments and resources demands
✓ identifies key variables that cause change in the level of revenue
basis of accounting – the timing or recognition when the effects of transactions or events should be recognized
Some common differences bet. GAAP and budgetary basis of accounting:
✓ timing of revenue and expenditures
✓ treatment of encumbrances
✓ budgetary rev and exp may include other financing sources (uses)
✓ changes in the fair value of investments treated as adj to rev under GAAP
✓ exp recognized for net present value of minimum lease payments under GAAP
✓ difference in fiscal year reporting/budgeting
✓ fund structure use in GAAP financial statements
✓ budget may not include all component units
✓ treatment of receipt of long term debt proceeds
7. Use of financial status in the budget: recommended that a description of financial status of the govt entity include current financial condition, impact of proposed or actual budget and future outlook and trends.
I. SOURCE: IMPLEMENTING PERFORMANCE MEASUREMENT IN GOVERNMENT
Performance measures provide accountability to the citizenry by identifying results and evaluating past resource decisions; facilitate decision-making regarding resource allocation and service delivery options – can also provide excellent focus for identifying problems and effecting program and service improvements – periodic rather than episodic for of evaluation; measured in 3 dimensions: quantity, effectiveness & efficiency
4 key steps of performance measurement:
✓ identification and definition of indicators
✓ collection of appropriate data
✓ analysis or comparing performance to previous results or relevant norms
✓ reporting the results
Emphasis on efficiency at the expense of effectiveness can alienate public employees and create perverse incentives that worsen performance rather than improve it.
types of performance measures:
❑ input – measures volume of resources used in delivery program or service
❑ output – reports the quantity or volume of products and service provided by the prog
❑ effectiveness/outcome – measures results, accomplishments or quality of service
❑ efficiency – quantifies the relationship between input and output
valid unit of output should:
✓ be mutually exclusive
✓ be definable and countable
✓ be uniform over time
✓ be directly related to the mission of the prog
✓ possess dimensions of quality that can be defined
✓ be readily available for measurement
GFOA policy statement emphasizes the responsibility of govt to provide programs and services as efficiently and effectively as possible and the importance of communicating the results to the taxpayers.
benchmarking – refers to the search for and emulation of the best practices for performance or an operation or function; setting of long range societal goals
GASB’s equivalent of performance measures is service efforts and accomplishments and labels measures as follows:
❑ inputs – service efforts
❑ outputs/outcomes – service accomplishments
❑ efficiency – indicators that relate to service efforts to service accomplishments
4 major sources of data used in measuring performance:
✓ existing program records – e.g., complaint counts, workload counts, response times
✓ trained observer rating – assessing physical characteristics of infrastructure
✓ client surveys – perception regarding adequacy of service
✓ accounting reports – rev/exp that can report per unit costs of providing service
When designing a reporting system, govt must consider the audience of the report, level of detail and frequency of reporting – most outcome oriented and least detailed to the public; comparison of goals and objectives to effectiveness to upper management; most detailed to program managers
elements of successful performance measures:
✓ based on program goals and objectives that tie to mission or purpose
✓ should measure program results w/c provide comparisons over time
✓ s/b be reliable, verifiable and understandable
✓ s/b be monitored and used in decision making process
✓ s/b limited in number and complexity to be meaningful in assessing effectiveness and efficiency
uses of performance measures in budgeting:
✓ contribute to the formulation and justification of budget requests
✓ illustrate benefits that can be achieved s/ additional resources
✓ make case for budget reductions in cases of shrinking resources
✓ avoid micromanagement as budgetary control is moved from a focus on inputs to outputs
The most significant impact of performance measures may be to improve and strengthen internal managerial processes – also help govt improve program operations; useful for motivating employees in evaluating the performance of supervisory and managerial levels; provide accountability to elected officials and the public – most useful not as a score-keeping and reporting systems but as a tool for serving a variety of management processes.
GFOA recommended practices: performance measures – three levels of practices:
1. acceptable – report on the outputs of each program
✓ identify meaningful and relevant goals and objectives
✓ identify and track output measures that are useful and relevant
✓ identify and track measurers for a manageable number of financial objectives
✓ ongoing work to develop and refine performance indicators
2. current best practices – report on the achievements, impact and outcomes
✓ identify key goals and objectives and progress
✓ identify and compare output/efficiency over several years
✓ identify key financial indicators ver time
✓ active effort to develop additional and more meaningful indicators
3. developing practices – integration of planning, budgeting & management practices
✓ develop multi year series of input, output, efficiency & effectiveness measures
✓ develop database of statistics of common measures
✓ analysis of implications using particular measures
✓ use of customer or resident satisfaction measures
✓ develop common definitions of key performance measures
✓ develop common or improved approaches to utilization of financial and service performance measures
✓ use community condition measures to assess resident needs not addressed
J. SOURCE: AN ELECTED OFFICIAL’S GUIDE TO MULTI-YEAR BUDGETING
rationale for multi-year budgeting:
✓ greater emphasis on management and service delivery
✓ greater emphasis on program evaluation and monitoring
✓ improved long term planning
✓ redeployment of human resources to activities other than budget preparation
✓ reduction in staff time spent on budget development
Multi year budget process lends itself to meet NACSLB recommended practices such as:
✓ identify broad goals
✓ develop programs and evaluate delivery mechanisms; budget guidelines and instructions; mechanisms for coordinating budget preparation and review
✓ conduct long range financial planning; prepare revenue and expenditure projections
✓ monitor, measure and evaluate program performance
Multi year budgets differ from annual budgets in that appropriations and revenues are detailed for two or more separate budgetary periods. Common types:
1) rolling multi year – spending plan that details appropriations and anticipated revenues for 2 or more budgetary periods but each spending plan is approved individually each year
2) classic (traditional) multi year – spending plan that details appropriations and anticipated revenues for 2 or more budgetary periods and both spending plan and revenue plan are approved at the same time
Reasons govt implement multi year budgets:
✓ improve financial management
✓ improve long-range and strategic planning
✓ improve program monitoring and evaluation
✓ link operating and capital activities and spending
✓ reallocate and deploy staff to other functions and activities
✓ reduce “opportunism” to increase dept/division/unit’s budget appropriation from year to year
✓ reduce staff time dedicated to budget development
Potential disadvantages of multi year budgets:
❑ difficult to forecast rev/exp in unstable local economy (also by dept)
❑ legislative acts/resolutions may be needed to accommodate multi year budgeting
❑ legislative bodies may perceive loss of oversight
❑ audit function may need to be expanded
❑ budget process may need to incorporate new policies and processes
❑ may not take into account economic and environmental changes
❑ transitioning may foster staff turnover by increasing the workload of budget staff during first year of the multi year budget
4 basic expenditure assumptions in multi year budgets:
✓ exp will changed incrementally over time
✓ exp are manageable and easily controlled
✓ exp are predictable
✓ extraordinary event will not occur on a regular basis
underlying revenue assumptions in multi year budgets:
✓ revenues and user fees/charges are predictable
✓ local and regional economy is stable
✓ revenue structure and base are reliable
✓ there’s general consensus on revenue projections
Conditions necessary for successful implementation of multi year budgets:
✓ budgetary controls, policies and processes
✓ clearly defined long term priorities, goals and objectives
✓ clearly defined multi year projects and services
✓ long term strategic and financial planning
✓ revenue/expenditure forecasting methodolody
✓ reporting and monitoring policies and processes
Dept directors, managers & budget analysts s/b involved in redesigning budget manual:
✓ will ensure buy-in
✓ they are the people who have to execute the manual
✓ they have extensive knowledge of the budgetary process and the nuances
Effects/impacts/links of multi year budgets to:
✓ financial and planning documents – utilizes the various planning docs to make appropriations over an extended period of time
✓ existing processes – gauge the impact of multi year budget process on priority setting; long range planning; debt management policies and other financial management policies and processes
✓ long term financial planning – how govt utilize limited resources
✓ debt management – extent of debt service
✓ changes to revenue source rates (safeguard: establish reserves for future shortfalls)
✓ personnel management policies – assess dept personnel needs; project attrition rates, position vacancy rates, replacement rates and wage rates
✓ collective bargaining units – analyze and understand bargaining provisions and proposed changes in working conditions
✓ extraordinary emergency (provide for contingency events)
✓ annual audit - depending on type of multi year budget – audit could be done each year or at the end of the second year depending also on the legal spending authority
✓ debt issuance – if govt has good long term financial plan, should have no effect
✓ bond ratings – multi year budgets are looked at as positive
K. SOURCE – HANDBOOK OF GOVERNMENT BUDGETING (This book deals with budget at the federal level)
Chapter 1 – Features of the Budgetary Process
Four stages of budgetary process
1. executive preparation – begin w/ setting presidential priorities – then OMB; Council of Economic Advisers, Treasury Dept – various agencies involved
2. legislative review – to Congress who considers president’s proposals – congress focus on protecting the power of the purse (given by Article 1 of the Constitution) – begin w/ receiving president’s budget in early Feb. and concludes w/ passage of concurrent resolution in mid April (required by Congressional Budget Act of 1974) – resolution is congressional rule that does not go to the president for approval – becomes Congress’ spending plan – need to be approved in a separate appropriations bill – esol sets targets for social security revenues and outlays – House initiates appropriations bill – also initiates tax bill – House Ways & Means Committee and Senate Finance Committee have jurisdiction over the tax laws the normal budgetary process runs from the president’s budget to the Budget Resolution to the appropriations bills to the new fiscal year - final step in the legislative process occurs when president signs the appropriations bill into law – president may veto a bill and Congress may override veto w/ 2/3 majority
3. execution – management process – agencies obligate funds to accomplish program goals – two execution techniques: those concerned w/ financial controls and those concerned with administrative controls – goals s/b be to preserve legislative intent observing financial limitations and maintaining flexibility at all levels of administration
4. audit
deferrals – temporary withholdings, take effect immediately unless overturned by an act of Congress – control pace of spending and must be obligated at the end of the fiscal year – conversely, rescissions permanently cancel budget authority
Annual budget process compared to biennial: annual lead to review and enactment of a budget each year; biennial lead to new budget every two years and have a definite on and off cycle – some adopt two one-year budgets, others adopt a single budget for the two years – some believe biennial b/c they believe budget prep costs and budget exp are lower and more opportunity exists for long term planning – proponents to biennial believe it would decrease tremendous annual effort to developing and implementing the annual budget both I the executive and legislative branches of gov’t
agency budget process usually combine centralized and decentralized elements: decentralize spreads the organization’s goals and objectives (makes for a more complicated and lengthy process)
top down process – usually dominate jurisdictions under fiscal stress
baseline forecast useful for several reasons:
✓ warn of future problems for individual tax and spending programs
✓ provide starting point for formulating and evaluating president’s budget
✓ used as a policy neutral benchmark against alternative proposals
differences in budget process – federal/state: budget prep may be similar but pattern not universal – the ones that resemble federal: governors prepare unified budget as legislative agenda and deny legislature access to original agency requests
NOTE: There are no additional notes on this handbook as it is no longer a required reading for the exam.
NOTE: THESE NOTES DO NOT NECESSARILY COVER ALL THE IMPORTANT POINTS OF ALL THE READING MATERIALS REQUIRED FOR THE EXAM.
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related searches
- notes on strategic marketing
- notes on strategic management
- notes on principle of management
- us history notes on powerpoint
- notes on photosynthesis
- classes on budgeting your money
- notes on statistics
- notes on economics free pdf
- notes on digital marketing
- notes on books chapter summaries
- notes on financial management
- notes on algebra 1