Government Budgeting

Denhardt - Chapter 5

Government budgetsand the economy

When economy grows, tax revenues increase– Personal income, sales tax– Tax rates can be lowered

As the economy shrinks, tax revenues will fall

– Should taxes be raised to make up for the shortfall?– Raising taxes can further decrease personal incomes, thus

increasing economic instability

Keynesian economics

Rapid economic growth high inflation

Inflation decreases buying power– Worst for those on fixed incomes

Less buying power high unemployment– Hurts individuals and government– Increases welfare burden

Federal Government

Federal spending decisions play a major role in the economy

– Accounts for over one-third of the GNP– Federal government by far the largest corporation in the

world – ten times size of GM

Budget is an instrument of public policy

– Programs that are “in” get funded

Deficit spending: Federal government can spend regardless of revenues

State Governments

State and local expenditures account for 15 % of GNP

State budgets limited as most States cannot engage in deficit spending (can’t spend more than they take in during each budget cycle)

Sources of funds

Taxes

– Proportional – everyone taxed at same rate– Progressive – higher rates on higher incomes– Regressive – flat tax

Automobile registration and license fees - persons with lower incomes pay a proportionately higher rate of their income

Taxes

Types of taxes

– Personal income

Largest single source of Federal income (41 %)

progressive – higher rates for higher incomes

– Corporate income

also progressive (10 % of Federal income)

Frequently avoided through tax shelters and credits

Taxes

Social insurance payroll taxes (34 % - 2nd. largest source)

– Social security, health care, etc. (flat rate, regressive)

Sales and excise

– Sales tax is a state and local form of revenue– Excise tax is Federal (3 % of Fed. income)

applies to sales of commodities such as gas, liquor

– Both are regressive (poor consume a greater proportion of their income than the rich)

Taxes

Property taxes

– Provide about half of local government revenues– Evenly split between residence and business– Progressive (higher tax on more exp. homes)– Limitations on assessment increases

Calif Prop 13 (1978)– limited to one percent of assessed valuation– cannot increase more than two percent per year

Other revenue sources

Fee for services

– Regressive – all pay the same regardless of income

Lotteries

– Can be very regressive - poor play more– Other costs

Welfare Crime Burden on local services

Government spending:Mandatory

Two-thirds of the Federal Budget is mandatory spending

Entitlement programs take fifty percent of the Federal budget– Provide specified benefits to those who meet requirements

(Social Security, Medicare, Veteran benefits)– Spending can vary year to year as size of group changes– Usually indexed to the cost of living

Interest on national debt (fourteen percent of the Fed. Budget)

Farm price supports

Government spending: Discretionary

Accounts for one-third of the Federal budget

Defense (15 percent of Federal budget)

Domestic programs (17 percent of the Federal budget)

October-October budget cycle is seldom met

– Federal government usually winds up on a “continuing resolution” (CR) for several months into the fiscal year

– CR’s limit spending to previous fiscal year’s levels

Deficit spending

Large deficits may limit economic recovery– Govt. money not available for buying new goods & services– Govt. borrowing uses up available funds, drives up interest rates,

makes it tougher for businesses to borrow and limits private expansion

Clinton’s last budget was balanced & projected a modest surplus Current budget is seriously out of whack

– Actual 2003 deficit was 375 billion dollars– Projected 2004 deficit is 477 billion dollars

National debt is a different issue from the deficit Sum total of outstanding Government securities and financial

obligations Huge – almost 8 trillion dollars

Debt reduction strategies

Goals– spur economy– lower interest rates– calm financial markets

Clinton plan – reduce outlays & find new sources of revenue– Increase corporate tax rate– Increase personal tax rate for higher earning families– Freeze defense spending and reduce Medicare increases

Bush administration reversed course– Tax reductions to spur the economy– Final measure was a $1.3 trillion cut over 10 years

State spending

Intergovernmental transfers: States and local governments pass through a lot of money from the Fed. Govt.

– States control a lot more spending than just their own funds– Thirty percent of education money is State & local– Including pass-through Federal $, States control 70 percent

of all money spent on education in the U.S. Including pass-through Federal $, State & local governments

spend money in this order:– Education– Public welfare– Highways

Budget cycle:Step 1 - Formulation

Fiscal year Agencies prepare proposals and forward to central office Chief executive may share decision-making with other elected

officials and legislators Federal formulation

– Cycle begins with OMB (works for President) Projects Government income and expenses Analyses agency programs, performance, needs and

priorities Special attention to President’s policy concerns

Federal formulation (cont’d)

– Agencies negotiate requests with OMB– Final decisions made by President– Budget document presented to Congress– Committees in House and Senate hold hearings

Agencies, interested parties, lobbyists and interest groups have their say

– House and Senate vote on funding bills Usually need to be reconciled by a “conference

committee” Congress aided by Congressional Budget Office, their

equivalent of the OMB

State formulation

State practices vary

– Deficits usually prohibited

– Governors generally have line-item veto power (President does not)

Budget cycle:Step 2 - Execution

Apportionment – funds generally allocated to agencies by quarter

Preaudit – review before spending to insure that funds will suffice and that expenditures are proper

Supplemental appropriation Reprogramming – diverting moneys to other projects Impoundment – withholding of funds by chief executive in case

revenue projections fall low or goals of program already reached

Deferrals – temporary, either house of Congress can veto Recissions – permanent – must be approved by both houses of

Congress

Budget cycle:Step 3 - Audit

Post audit– After fiscal year ends, to verify expenditures are proper

Performance audit

– Reviews of agency operations (not just financial)

Who conducts audits?– Federal

GAO GAO Performance Audits

– State California State Controller

Budgeting approaches:Line-item budget

Each budget modeled on the previous

Based on experience and projected change

Organized by functional units or departments

Within departments, organized by expense categories

Pluses: allows close control and tracking of expenditures

Minuses: poor management tool (ignores performance)

Budgeting approaches:Performance budget

Organized around programs or activities, not departments

Focus is on work processes – not mission or goals

Performance measures reflect accomplishments and costs– Program: Highway safety– Subprogram: School visitations– Cost: 27 visits @ $250

Issues– Emphasizes what is measurable - quantity rather than quality– Programs cut across organization structure, difficult to assess

responsibility

Budgeting approaches:Program budget

Unifies planning, systems analysis and budgeting Each agency has a mission statement that identifies goals Budget sets out objectives that must be met to accomplish

these goals Agencies evaluated on meeting their goals and objectives

– Performance budget – focus on process – measure success of sanitation department by # of garbage collections

– Program budget – focus on purpose – measure success of sanitation department by rate of infectious disease

Advantages: Focus on benefits of govt. activity Disadvantages: Cost and complexity

Practical exercise

Budgeting approaches:Zero-based budget

Basis: Identify “decision units” – the lowest point in the org. at which significant program decisions are made

Managers of decision units prepare packages

– Describe programs– Estimate costs and benefits– Identify alternatives & justify proposed approach– Specify required funding for minimum, current and optimal

operations

Decision packages ranked by top management and legislators

Budgetingpolitics

Agency managers typically seek to expand– Try to classify as many activities as possible as part of their

program’s “base” – elements that are continuously funded without opposition year after year

– Try to get a larger share of agency resources

Tactics– Look for support inside and outside their agencies– Padding– “Camel’s nose” – getting a foot in the door, then expanding

Financial management –Fund-based accounting

Government budgets are deposited into specific “funds” to assure overall agency accountability for expenditures

Funds represent functional areas

– General funds for routine agency activities– Restricted funds for specific uses (separate fund for gas tax

revenue)

Proprietary funds hold profits (e.g., transit systems) Fiduciary funds hold individual assets (pension funds) and

moneys collected for other governments (property taxes collected by a county for the State)

Financial management –Risk Management and Purchasing

Risk management

– Identify potential areas of loss– Try to reduce probability or mitigate losses

Purchasing

– Centralized purchasing by experts– Cooperative purchasing

PROGRAM BUDGETING PRACTICAL EXERCISE

You are developing a program budget for a public agency. For your assigned agency:

1. List three to five goals

2. For each goal, list three to five objectives

3. For each objective, give three to five examples of a specific expenditure

Team 1 - City streets department

Team 2 - Fire department

Team 3 - Police department

Team 4 – School district

Team 5 – Parks and recreation department Return toslide show