Section 1 - Ch3

Question 1

Purpose of Budgeting

Answer 1

*Purpose of Budgeting: estab. Legal authority for providing services, operating programs, and allocating resources

Requires the legislative and executive branches

There is no single approach; many are used across government.

Fiscal Policy: Budgeting is 1^st element of fiscal policy

Question 2

Phases in the Budget Process

Answer 2

*Phases in the Budget Process (3)

1. Budget Preparation Phase: executive agency responsible for initiating the process (due 1^st Mon in Feb). The CEO (president, mayor, governor) establishes priorities. The budget document is then submitted to legislative branch.
2. Legislative Phase: Public hearings on budget requests are held (public can provide input). Executive branch often has the power of “line item veto” on the approved legislative branch budget. However, the president can only veto the “entire” budget since it is unconstitutional to do a line item veto at that level. A supermajority vote is required to override the veto by the president. (FebàSept 30^th)
   
   • Continuing Resolution: if the budget is not signed into law by the start of the year (Oct 1^st), entities operate under CR. Continue to spend to support ops at current rate.
3. Budget Execution Phase: after the appropriation is signed into law, agencies obligate and spend money.
   
   • Day to day ops
   • 2 phases: (1) Distribute $ (2) Spend $
   • All approps 1yr
   • Congress (Appropriation)àOMB (Apportionment)àAgency (Allotment)àUnit (Commitment, Obligation)

Question 3

Budget Organization

Answer 3

*Budget Organization:

• Organizational Unit: Unit that carries out ops
• Function: service classification (i.e. public protection, public services, health)
• Program: specific activity w/in a function (police, fire, street maint)
• Category: type of rev (taxes, licenses, permits)
• Character: fiscal period of current expenditure, capital outlay
• Object class: type of items purchased
• Reprogramming: moving $ around buckets not budgeted for

Question 4

Budgetary Approaches

Answer 4

*Budgetary Approaches:

• Line Item Budgeting: traditional, used by most state and local gov’ts.
  
  • Pros: Easy to understand, facilitates cost containment by line item (salary, etc.)
  • Cons: Eliminates the ability for program managers to choose the best way to accomplish the mission of the unit. Manager is not able to easiliy shift spending among line items to address changing needs.
• Baseline Budgeting: (what we do in Fed gov’t) (continuation budget) facilitates the preparation of line item budgets. Based on the idea that currently provided programs will continue in the next budget period with changes in population.
  
  • Pros: requires little analysis, reduces time spent debating
  • Cons: assumes programs should continue as they are and negates overall impact of programs at times
• Program Budgeting: Considers the proposed expenditures in relation to the programs for which monies would be spent. Gives managers greatest degree of flexibility and focuses on budget reviews to accomplish desired missions.
• Zero-Based Budgeting: Each organizational unit begins with a zero budget and must justify even the continuation of existing programs. Extremely complicated, time consuming, and major downfall is that it assumes government programs can be reduced to zero each year. There is also no “reference point” because it is not based on the previous year’s budget.
• Performance Budgeting: (current trend) for a defined level of resources, it will provide a defined level of performance.

Question 5

Capital Budgeting and Financing

Answer 5

*Capital Budgeting and Financing

Capital Budgeting: a separate budget called a “Capital Improvement Plan, used for state and local gov’t only. Prepared in conjunction with the operating budget. Reflects the capital expenditures expected. Presented separately from operating budget because capital projects often span several years while the operating budget is prepared year by year. (usually 5yr period)

-> Fed gov’t doesn’t finance capital projects separately, but includes them in annual budgets.

Financing for capital budgets comes from: notes and bonds, intergovernmental grants, special assessments, current resources.

Bond Financing: most common method of financing capital projects is to issue notes and bonds. When possible, the maturity of bonds/notes should coincide with the useful life of the associated capital asset (matching).

• General Obligation Bonds (GO):most commonly issued, low IR, back by full faith and credit of gov’t.
• Revenue Bond:limited backing; payment is limited by revenue streams that back the bonds.IR is higher.
• Serial Bonds:a few bonds are paid off each year over a series of years.
• Level Debt Service bonds:amount paid for principal and interest each year is about the same. (gov’t preferred usually) (i.e. my mortgage)
• Term Bonds:came due at a certain time with interest payable annually.
  
  • Sinking fund: used to deposit Monday annually to be able to pay principal at term end
• Zero Coupon Bonds:no interest or principal payments are made until due.
  
  • Sinking fund: used to deposit Monday annually to be able to pay principal at term end

Grants: important source of revenue for capital projects.

Special Assessments (bonds): objective is to cause those who will benefit from a capital project to pay for it (water, sewer, etc.).

Current Resources: a portion of current revenues, taxes, are set aside each year to pay for capital projects.

Question 6

Budgetary Accounting and Reporting

Answer 6

*Budgetary Accounting and Reporting

Budgetary Accounts: estimated revenues, appropriations, obligations (federal level), encumbrances (state/local)

Budgetary accounting equation for state/local:

est. begin avail fund bal

+ estimated revenue

= amt avail for appropriation

- appropriations

= est ending avail fund bal

Federal government does NOT use “fund accounting”, but does have “funds”. Estimated surplus/deficit = est. revenue – appropriations

Agencies (Federal) Budgetary Equation:

BR = SBR

Budgetary resources = status of budgetary resources

“debits” “credits”

Appropriations (by Congress) Unapportioned

Apportioned (by OMB to agency)

Allotted (by Agency to unit)

Commitment (by Unit)

Obligation (by Unit)

Debt ceiling: specified/raised by law

Budgetary Reporting: based on the budget basis of accounting. A review of spending compared to appropriations is made. Revenue receipts vs. revenue estimates review as well.

• Budget status report: prepared during operations year on “the budget basis of accounting (cash basis=reog rev when received, expense when paid)

Expenditure Reporting: focus on avail balance (after subtract expenditures)

Review UDO’s/open encumbrances every year to free up funds

Question 7

Revenue Forecasting

Answer 7

Revenue Forecasting = statistical analysis, specific requests, trend analysis, cost-benefit analysis

Question 8

Expenditure Forecasting

Answer 8

Expenditure Forecasting

• Statistical analysis used to forecast spending level with adjustments for inflation, but program goals will have a stronger impact on the forecast of expenditures
• Performance based budgeting – using goals for budget and comparing them to costs for other entities to provide similar services

Question 9

Centralized Budgetary Control

Answer 9

Centralized Budgetary Control

• Monitoring the budget achieves 2 purposes:
  
  • Assessment of governmental program performance
  • Evaluation of the relevance of priorities for the delivery of services
• Apportionment and allotments are tools to ensure overspending does not occur (by quarter).
• Obligations and Encumbrances are used to ensure funds are available for specific agreements.
• Vacancy Controls = whena vacancy occurs, analyze the need for the position (results in savings called “vacancy credit”)

Only OMB apportions, agencies allot funds (hold a mgt reserve)