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LOGIC%20OF%20THE%20BUDGET%20PROCESS

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Traditional Budget Principles. Comprehensiveness (the budget should include all revenue and expenditure) ... take last years solution (current budget/baseline) ... – PowerPoint PPT presentation

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Title: LOGIC%20OF%20THE%20BUDGET%20PROCESS


1
LOGIC OF THE BUDGET PROCESS
Governing is Budgeting Budgets are the Primary
Instruments through which Governments Announce
their Purposes, Priorities, and Intentions.
2
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
3
Government Budgets
  • Are SPENDING PLANS
  • for administrative units for a specified time,
    that are enacted into law

4
Class Exercise
Federal Budget Challenge National Budget
Simulation Federal Budget Simulation
5
Budget Formats
6
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)

7
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).

8
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

9
The Budget Cycle
  • Preparation Enactment
  • Execution
  • Audit and Financial Reporting

10
Phases of the Budget Cycle
  • Executive Preparation
  • A. Budget Guidance/Call for estimates
  • B. Preliminary Estimates
  • C. Consolidation
  • Legislative consideration enactment
  • Execution (conduct of fiscal operations)
  • Post-audit evaluation Reporting

11
Budget Cycles
12
Budget Cycles
13
Budget Formulation
14
Descriptive Analysis of Budget Preparation
Enactment Process
  • Roles, Visions, Incentives
  • Operating agencies make requests
  • Executive issues guidance, negotiates and
    consolidates budget
  • Legislature approves budget

15
Incrementalism I
  • The predominant strategy in budgeting is
    governance by precedent.
  • To obtain this years solution (next years
    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,

16
Incrementalism II
  • Budgets 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.

17
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.
  • The committee system as a super-majority
    system/proliferation of committees
  • The committee system as a source of equilibrium

18
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19
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

20
EXECUTIVE BUDGET METHODS AND PRACTICE
  • Preparation of Agency Budget Requests
  • Review of Budgets
  • Balancing the Overall Spending Plan
  • Managing Budget Execution
  • Audit Evaluation

21
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

22
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.

23
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

24
Spenders Budget Tactics Ubiquitous II
  • Price Changes
  • Workload Changes
  • Methods Improvement
  • New Services
  • Full Financing

25
Spenders Budget Tactics Contingent I
  • Avoiding 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

26
Spenders Budget Tactics Contingent II
  • Seeking 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
  • Its so small

27
Budget Justification -- Or, Why the Numbers in
Next Years Budget are Different from this Years
  • 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

28
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 Years Costs

29
EXECUTIVE REVIEW I
  • Policy Rationale/Conformity with Executive
    Priorities
  • Conformity with Budget Guidance/Including all
    Required Supplemental Documents
  • Arithmetic

30
EXECUTIVE REVIEW II
  • Linkages
  • Program Changes
  • Omissions
  • Ratios, Shares, Trends
  • Clear Tradeoffs

31
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

32
Budget Execution
33
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

34
BUDGET EXECUTION I
  • Preventive Controls
  • Procurement
  • Personnel
  • Pre-audit
  • Allotments
  • Feed-forward Controls -- Diagnostic Tools, e.g.
    variance measures
  • Feedback Controls -- affect Next Years Budget,
    Fig. 3.1

35
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

36
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.

37
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.

38
Looking Forward
39
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 dont we look at all program commitments
    this way?

40
Thought Questions
  • Someone once told me the problem with government
    is that it is easy to spend someone elses money.
    Do you think that is true?

41
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 Good Budgetary
Decisions,1999.
42
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 Good Budgetary
Decisions,1999.
43
Class Exercise
Minnesota Budget Balancer Cut the Massachusetts
Budget
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