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LOGIC OF THE BUDGET PROCESS
Governing is Budgeting: Budgets are the Primary Instruments through which Governments Announce their Purposes, Priorities, and Intentions.
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Overview
Government Budgets are Spending Plans
Traditional Budgets focus on OE
Functions of Traditional Budgets
The Budget Cycle
The Incrementalist Insight
Executive Budget Preparation and Execution
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Government Budgets
Are SPENDING PLANS
for administrative units for a specified time, that are enacted into law
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Class Exercise
Federal Budget ChallengeNational Budget SimulationFederal Budget Simulation
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Budget Formats Alternative Budget Formats and Associated Features
Format Object of Expenditure Primary Organization
Feature
Orientation
Line item Commodity or resource purchased
Resources purchased
Control
Performance Workload or activity
Presentation of unit cost by activity
Tasks, activities accomplished
Management
Program Public goals
Cost data cross organization lines
Achievements, final products, outcomes, or consumer outputs
Planning
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Line-Item Budgets are Spending Plans
• Expressed in terms of objects of expenditure categories like:• Personal services• Supplies• Other Services and Charges• Capital Outlays
for each administrative unit for a specified time (grouped a variety of different ways)
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Traditional Budget Principles
• Comprehensiveness (the budget should include all revenue and expenditure);
• Annularity (each budget should span a single fiscal year);
• Balance (expenditures should reflect the revenues available);
• Transparency (the government should publish timely information on receipts and expenditures);
• Accuracy (the budget should accurately specify purchases -- purpose, amount, timing);
• Authoritativeness (public funds should be spent as authorized in law).
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Functions of OE or Line-item Budget
• Fiscal Discipline and Control• Restraining expenditure• Insuring that budgets are executed as enacted
• TREASURY role • Post audit vs. preaudit: purpose, execution• Audit trail -- invoices, receipts, cancelled
checks• Provide information used in formulation of
new budgets• Management, efficiency, & planning for service
requirements
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The Budget Cycle
Preparation & Enactment
Execution
Audit and Financial Reporting
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Phases of the Budget Cycle
• Executive PreparationA. Budget Guidance/Call for estimatesB. Preliminary EstimatesC. Consolidation
• Legislative consideration & enactment
• Execution (conduct of fiscal operations)
• Post-audit & evaluation & Reporting
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Budget Cycles
Last Period (t-1) This Period (t) Next Period (t+1)Next Period's Budget
Budget Preparation and Enactment Budget Execution
This Period's Budget
Budget Preparation and Enactment Budget Execution Audit and Evaluation
Last Period's budget Budget Execution Audit and Evaluation
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Budget Cycles
This Period (t) Next Period (t+1) Period after Next (t+2)
Next Period's Budget
Budget Preparation and Enactment Budget Execution Audit and Evaluation
This Period's Budget Budget Execution Audit and Evaluation
Last Period's budget
Audit and Evaluation
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Budget Formulation
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Descriptive Analysis of Budget Preparation & Enactment ProcessRoles, Visions, Incentives
Operating agencies – make requests
Executive – issues guidance, negotiates and consolidates budget
Legislature – approves budget
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Incrementalism IThe predominant strategy in
budgeting is governance by precedent.
To obtain this year’s solution (next year’s budget)
take last years solution (current budget/baseline)
modify it in light of the change in available resources and the changes in problems and available solutions,
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Incrementalism IIBudgets tend to evolve slowly as small
marginal changes occur from year to year (with periodic dramatic changes). • once an item is in the budget it remains
in the budget.
Another reason for governance by precedent is the openness of public decision making: it is completely defensible to make decisions based on ‘proven decisions from past years.
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ENACTMENT: RULE INDUCED EQUILIBRIA
Division of labor and jurisdiction not only greatly increases the productivity of American Legislatures, it also greatly increases the power of individual legislator to block legislation adverse to her constituents.
1. The committee system as a super-majority system/proliferation of committees
2. The committee system as a source of equilibrium
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RULE INDUCED EQUILIBRIA
Norm of reciprocity/log rolling-vote trading
OVERSIGHT AND THE BUDGET• Authorization/appropriation• Compliance with Legislative intent• Authorizing committee is also
usually oversight committee
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EXECUTIVE BUDGET METHODS AND PRACTICEPreparation of Agency Budget Requests
Review of Budgets
Balancing the Overall Spending Plan
Managing Budget Execution
Audit & Evaluation
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PREPARATION OF REQUESTS I
• Budget Instructions or Guidance• Main Goals of the Executive• Forecasts of Critical Operating
Conditions and Prescribed BASELINE
• A Prescribed FORMAT• A Time Schedule• MAXIMUM Increase
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PREPARATION OF REQUESTS II• Agency Proposals
• Narrative -- Current Commitments and Expected Results from New Initiatives
• Detail Schedules establishing Baselines• Cumulative Schedules Showing Effects of
New Initiatives (up or down) on Details and Revised Totals
Description dominates numbers. Budgeting is logic, justification, and politics -- not accounting.
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Spenders’ Budget Tactics: Ubiquitous I• Cultivation of an active and
influential (well-organized) clientele• Media
• Demonstrate competence• Deliver• Explain -- show understanding and
mastery of cost estimates• Honesty
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Spenders’ Budget Tactics: Ubiquitous II
• Price Changes• Workload Changes• Methods
Improvement• New Services• Full Financing
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Spenders’ Budget Tactics: Contingent IAvoiding Cuts:• Propose a study• Cut Popular
programs• Dire consequences• All or nothing• You pick• We are the experts
Seeking Bucks for the Base
• Round up• Sprinkling• Physical units• Workload and
backlog
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Spenders’ Budget Tactics: Contingent IISeeking New
Bucks:• Old stuff• Initial
commitment• It pays for itself• Spend to save• Crisis• Mislabeling
• What they did makes us do it
• Mandates• Matching the
competition• It’s so small
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Budget Justification -- Or, Why the Numbers in Next Year’s Budget are Different from this Year’s• Major Programmatic Changes/New Services --
Major Cutbacks of Service levels• Price/Wage Changes• Workload Changes• Methods Improvements• Full Financing of Activities Initiated in the
Current Year• Deferred maintenance and/or replacement of
equipment
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Estimates: Grouped by Organization; Task, Purpose, Function, or Activity, AND OE or Account Code• Wages and Salaries• Non-Wage Personnel Costs• Non-personnel Costs (Cost Drivers)
• Volume or activity level x Unit Price• Ratios to another OE• Adjustments to Prior Year’s Costs
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EXECUTIVE REVIEW I
• Policy Rationale/Conformity with Executive Priorities
• Conformity with Budget Guidance/Including all Required Supplemental Documents
• Arithmetic
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EXECUTIVE REVIEW II
• Linkages• Program Changes• Omissions• Ratios, Shares, Trends• Clear Tradeoffs
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BALANCING THE CONSOLIDATED BUDGET• Budget Message• Summary Schedules• Detail Schedules
• Performance Targets• Supplemental Data
• Many on the Assumptions Presented in the Budget Guidance and Trends
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Budget Execution
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EXECUTION• Budget Authority (specifies by
agency, timing, and account code the authority to spend)
• Obligations (enforced by anti-deficiency act)
• Inventory recorded• Outlay• Expense or Cost
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BUDGET EXECUTION I• Preventive Controls
• Procurement• Personnel • Pre-audit• Allotments
• Feed-forward Controls -- Diagnostic Tools, e.g. variance measures
• Feedback Controls -- affect Next Year’s Budget, Fig. 3.1
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BUDGET EXECUTION II• Internal Controls
• Personal Responsibility• Personnel Qualifications & Rotation• Segregate Responsibilities• Separate Operations and Accounting• Maintain Controlled Proofs and
Security• Record Transactions -- complete
journal and general ledger
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Mismatch between Budget Focus and Financial Statements
• Agencies, of course, spend money to acquire and use assets, i.e., they generate expenses.
• They generate expenses to provide services and create capacities -- the capacity to achieve our foreign-policy objectives and to meet our overseas commitments.
• Expenses measure the cost of the assets actually consumed in the production of a good or service.
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Mismatch between Budget Focus and Financial Statements
• Expense measurement, or accrual accounting, is one of the fundamental ideas of modern managerial accounting. And, assets consumed and services rendered are the focus of private sector accounting.
• Spending plans could be expressed in terms of obligations, outlays, purchases, or consumption. Note, however, that while the government accounts for outlays and tracks obligations, it does not account for expenses.
• Hence estimates of expenses are statistical in nature, i.e., they are not tied to the basic debit-and-credit accounting records of the government.
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Looking Forward
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Thought Questions• Some programs have an explicit
revenue component and policy makers make decisions about revenues and program characteristics with the long term sustainability of the program in mind. For instance, unemployment insurance or Social Security and there are actuarial studies that give us an idea of where we need to be in 5, 10, 20, etc years both from a revenue and an expense perspective if the program is to be in balance. Why don’t we look at all program commitments this way?
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Thought Questions
• Someone once told me the problem with government is that it is easy to spend someone else’s money. Do you think that is true?
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Modern Budget Principles*• Conditional, Approximate Balance;• Decisional Efficiency (a good budgetary decision
process minimizes conflict specifically and transaction costs generally where the conflict and costs contribute nothing to the substantive quality of the decisions);
• Feasible Comparisons (a good budgetary decision process will stimulate feasible comparisons by promoting competition or cooperation, as appropriate, among agencies for solving particular problems);
*P.D. Larkey and Eric Devereux “GoodBudgetary Decisions,”1999.
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Modern Budget Principles*
• Uncertainty and Flexibility (a good budgetary decision process will give sufficient discretion to managers to respond to new information and circumstances);
• Stability (a good budgetary decision process will balance the frequency and intensity of program reviews with the need for stability);
• Multiple Budgets (a good budgetary decision process will explicitly recognize the need for different budgets for different purposes).
*P.D. Larkey and Eric Devereux “GoodBudgetary Decisions,”1999.
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Class Exercise
Minnesota Budget BalancerCut the Massachusetts Budget