The Logic of the Budget Process

Troy University

PA6650- Governmental Budgeting

Chapter 2

A Budget is a Spending PLAN

The Size and Growth of Government Expenditure

• Government purchases (stuff)

• Transfer payments (Social Security)

• Government spending (all governments) is about a third of the GDP

• Not too bad compared with other countries

Budget Process & Logic

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

The Parts of the Public Expenditure/Public Revenue Process

• Who should pay for things?

• How much should be borrowed?

• The budget:– Elaborates executive-branch intentions– Provides for legislative review and approval– Provides control of implementation

Multiple Budgets

• The budget year– The plan for the next budget year

• The progress-report year– Current budget in execution

• The final report year– The most recently fully-completed budget

• Outyears– Future budgets beyond the one being

requested

Fiscal Year

• Pronounced “FISS-KUL” (NOT physical)

• Federal FY runs from 1 Oct thru 30 Sep

• Some states and cities different

• Named by the year in which the FY ENDS (FY 2009 goes from Oct 2008-Sep 2009)

Functions of the Budget Process

• Fiscal discipline and control

• Response to strategic priorities

• Efficient implementation of the budget

4 Phases of the Budget Cycle

• Executive Preparation• Agency requests, ceilings, forecasts, justification, strategy,

promises

• Legislative Consideration• Subcommittees, appropriations, bi-cameral approval,

conference, veto

• Execution• Appropriations spent, services delivered, spend-down, carry-

over, budget base

• Audit and Evaluation• GAO, financial or performance audits

Authorization v Appropriation

• Authorization - what the executive is allowed to spend

• Appropriation – what the executive is actually given to spend

Governmental Accounting & Financial Reporting

• Standards– Financial Accounting Standards Board

(FASB-private)– Government Accounting Standards Board

(GASB-govt)

Governmental Accounting & Financial Reporting

• Elements of an accounting system– Source documents

• Receipts, invoices

– Journals• Chronological summary of transactions

– Ledgers• Reports of revenue, expense, or balance in an

account

– Procedures & controls• Forms, instructions, policies

Governmental Accounting & Financial Reporting

• Funds– Governmental Funds

• General fund (e.g., treasury)• Special revenue funds (e.g., transportation trust fund)• Debt service funds (e.g., bond repayment)• Capital projects funds (e.g., new tunnel)• Permanent fund (e.g. a trust fund)

– Proprietary Funds• Enterprise fund (e.g., water, utilities)• Internal service fund (e.g., motor vehicle maintenance, GSA)

– Fiduciary Funds (e.g., pension funds)

Governmental Accounting & Financial Reporting

• Accounting basis (the method of matching revenues and expenditures over time)– CASH BASIS

• Records money inflow when received, expenditure when cash payment completed

– FULL ACCRUAL BASIS• Revenue recorded when earned, expenses recorded when

liability incurred

– MODIFIED ACCRUAL• Expenditure recorded when liability incurred, revenue

recorded when cash received

Governmental Accounting & Financial Reporting

• Comprehensive Annual Report (CAFR)– Introductory section, financial section,

statistical section

Budgets & Political Strategies

• The Incremental Insight (reality)– Importance of the budget base– Politics and compromise

• The Comprehensive Insight (abstract)– Bottom up review, annual analysis

Roles, Visions, and Incentives

• Operating agency’s view

• Chief executive’s view

• Legislature’s view

Strategies

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

Strategies

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

Strategies

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

Politics, Representation, and Government Finance

• Some people are more politically important than others

• Specialists appear

• Imperfect information results in bribery

• Voters make uninformed choices

Conclusion

• Budgets are reality…everything else is just talk!

• Budgets allocate public resources

• Four phases of the budget cycle (executive preparation, legislative, execution, audit and evaluation

• Political and incremental