LEWIS UNIVERISTY

DEPARTMENT OF JUSTICE, LAW AND PUBLIC SAFETY

FISCAL PREPARATIONFOR

PUBLIC SAFETY AGENCIES

COURSE 91-523

Week # 1

The Context

of

Local Government

Budgeting

Learning Objectives

Identify the four phases of the budget cycle.

Describe the role of budgeting in local government.

Describe the economic nature of government services.

Describe the manner in which budgeting is influenced by thepolitical, economic, social and legal environment.

Describe the evolution of budgeting in the public sector byrelating several innovative approaches introduced over the lastcentury to improve financial management, control andaccountability.

Explain how budgeting is linked to various intended andunintended consequences and outcomes.

The preparation and adoption of a budget…

>Reflects the basic political values of a jurisdiction

>Defines, limits and sanctions the economic and political role of government

>Provides a process to plan, manage and control financial operations

>Establishes the means to maintain accountability in the use of public funds

The Four Phases of the Budget Cycle

The 4 phases of the budget cycle can be

easily recalled using the acronym “PLEA”

Preparation

Legislative approvalExecutive implementation

Accounting and financial reporting

Q1-1: In your own words, describe a few of the

routine activities that occur during each phase.

For most local governments,the budget is comprised of 2 documents

an “Operating Budget” and a “Capital Budget”

Q1-2: Briefly describe an “operating budget” and a “capital budget” and include in your answer (1)

the type of expenditure requests that might be included

in each type of budget and (2) the source of funds typically used to pay for those expenditures.

Why Two Budgets ?Operating Budget

Spending plan for ongoing and continuing government services (e.g., police, fire, etc)

Funding for the operating budget comes from current revenues such as taxes, fines, fees, etc.

Capital Budget Spending plan for the acquisition of fixed assets with a serviceable life of several years (e.g., buildings, water/sewer system, etc).

Usually part of a more comprehensive capital improvement plan (CIP).

Funding for the capital budget comes from sale of bonds or other long-term obligations and may be supplemented by grants and current revenues

Role of Budgeting in Local Government

A budgeting system helps manage the amazingly complexgovernment bureaucracy.

Budgets are primarily used to allocate resources, invest in localinfrastructure and promote economic development.

Budgets perform social and political functions by giving interestgroups and other stakeholders a forum to express their needs andgiving government an opportunity whether to choose to fund thoseneeds.

The budget process shapes and is shaped by the values andpreferences of the community.

Why can’t government be run like a business?

In Chapter 1 the author explores the Economic Nature of Governmentby posing the above question and making the observation that thebudget process serves as a “surrogate for the private marketplace”where the levels of supply and demand are established.

To fully appreciate the author’s assertion review pages 6 through 9 and thenanswer the below listed questions.

Q1-3: What is the difference between private goods and public goods?

Q1-4 What is meant by the expression “private goods are divisible andexcludable”.

Q1-5: Certain public services are divisible and excludable (e.g., public transit,water service, sewer service). Can you identify at least three reasons why the government produce these services?

Factors Influencing Local Budgets

Local budgets are extremely sensitive to political, economic, social and legal environments.

An astute public sector manager remains constantly aware of these factors and their potential influence.

The next few slides will briefly explore each of these of these factors.

Political InfluenceIt is important to recognize that citizen involvement, input and feedback is

a hallmark of our democratic form of government.

The proximity of local government to citizens has always allowed publicopinion to play a key role in shaping decisions.

New technology has expanded and facilitated the capacity of citizeninvolvement (e.g., web-based blog, internet surveys, cable TV, etc).

Astute public sector managers constantly monitor these various sourcesof information to assess the needs/concerns of community residents andincorporate this vital information into all decision making.

Citizen involvement in the budget process is a “best practice”recommended by several highly regarded authors and some jurisdictionsenacted legislation requiring some form of citizen involvement.

Economic Influence

Few would argue that local government budgeting is directlyaffected by the economic environment.

It is therefore essential for public sector managers to becomeaware of the potential influence of certain economic factors and to monitor available forecasts and trend data.

Q1-6: Briefly describe and provide at least one example of how each

of the below listed economic factors can influence local government budgeting.

>economic cycles >inflation >interest rates >competition among local governments

Competition Among Local GovernmentsCompetition among local governments basically involvesattracting either new residents and/or business investment to the jurisdiction.

At stake is the economic growth, development and expansion of the tax base.

To remain competitive local governments must offer an attractive array of public services while maintaining a system of taxes/fees perceived as fair and equitable.

The budget process provides both an appropriate forum and a highly organized and rational system to make decisions relating to the level/mix of taxes and fees and the level/mix of services offered by a jurisdiction.

Social and Demographic Change

In Chapter 1 the author asserts certain social and

demographic factors have significant and lasting

effects on local budgets.

Q1-7: Briefly describe and provide at least one example

of how each of the below listed social/demographic

factors can influence local government budgets.

>Population

>Age Distribution

>Personal Income

Legal and Intergovernmental Matters

Chapter 1 discussed three principal factors in which thelegal and intergovernmental factors shape local budgets:

>Budgetary balance>Tax and expenditure limitation>Mandates

These concepts will be presented individually in thefollowing slides because it is essential for public sectormanagers to have a fundamental knowledge of eachconcept and how they significantly influence localgovernment finance and the budget process.

Budgetary Balance A balanced budget is a legal requirement for most state and local governments - that is - current revenues must equal current expenditures (CR = CE).

The demand for a balanced budget shapes the entirebudget process and tends to make local government“revenue driven” (i.e., spending is determined by the level of available revenues).

A budget deficit (CR<CE) can result from many factors. For example, an economic downturn can reduce anticipatedtax revenue and simultaneously increase the anticipatedcost of the labor or goods purchased by a local government.

Budgetary Balance

Review Pages 15-16 and answer the following questions.

Q1-8: Describe a few different ways the “balanced budget” requirement is interpreted in different

jurisdictions.

Q1-9: How many states have either a constitutional or statutory amendment requiring a balanced

budget?

Tax & Expenditure Limitations (TELs)

States have always imposed limitations on local government taxing (e.g., capping the maximum property tax rate).

In 1978, during a very poor economic period, Californiavoters ratified Proposition 13 to roll back property tax rates.

Following the introduction of Proposition 13 a “tax revolt movement”began sweeping across the nation that prompted a groundswell ofmeasures limiting the revenue-raising capacity of many localgovernments.

Q1-10: Review page 16 and briefly describe at least two Tax &Expenditure Limitation (TELs) initiatives that have beenestablished to limit taxation.

Mandates

A mandate can be defined as a requirement froma higher level of government that a lower level ofgovernment perform a task, perform a task in acertain way, or perform a task to meet a particularstandard, often without compensation from thehigher level of government.

Q1-11: Describe the impact of mandates on local government and cite at least one measure that

has been taken to curtail “unfunded mandates”.

The Evolution of Budget Innovations

The advent of modern budgeting systems in the public sector began inNew York in 1906.

In 1921 the federal government passed the Budgeting and AccountingAct. This act required Federal departments to submit funding requeststo the President rather than submitting them directly to Congress.

The President would then compile the Executive Budget which wouldbe presented to Congress for review, approval and passage of anappropriation bill.

The line-item budget was used by the federal government to list andcategorically define the funding requests of each department.

Budget Innovations and Reforms

In Chapter I the author asserts budget reformfalls into one of two general categories.

(1) Budget Focus - Innovations designed to improve budget data – that is, the content and presentation of budget information.

(2) Budget Locus - Innovations designed to improve the budget process.

The Stages of Budget Reform

Allen Schick (1966) authored an article entitled “The Road to PPB: The Stages of Budget Reform”.

Schick traced the evolution of the budgeting function in government and demonstrated how it moved from a method designed to (1) impose control to one that was designed to (2) improve management of operations and finally to a method designed to (3) improve the prioritization of government programs.

Line-Item BudgetingThis format is most often is most often associated with budgeting.

The Line-Item budget collects and reports information on inputs(resources) used in the production of government goods and services.

Lists goods or services in categorical groupings – labor – supplies –utilities – capital items.

The focus is the “objects of expenditure” requested by government departments.

Departmental requests are submitted to the Chief Executive whopresents the budget to the legislative body for approval and passageof an appropriation bill or ordinance.

Through the appropriation bill departments are given the authorizationto acquire the resources needed for operation but spending is limitedto only those items or objects included in the approved budget.

Line-Item Budgeting

Line-Item budgeting format is designed to provide a control orientation.

Itemized funding requests must receive prior approvaland then spending is limited to those items.

The categorical grouping of expenditure items (i.e., well-defined account groupings) fits well with most accountingsystems and allows spending to be closely monitored during the year.

The more detailed the objects of expenditure (i.e., list of budget accounts), the greater the governing body’s control over budget requests and spending.

Line-Item Budgeting

Q1-12: Briefly describe the line-item budget

format and explain what is meant by

an “object of expenditure” format.

Q1-13: Briefly explain why the line-item

budget format is commonly known as

a “control-oriented” budget process.

Zero-Base Budgeting (ZBB)Emerged in the 1970’s in response to pressure to limit government spending when the nation’s economy was hard hit by very poor economic performance.

The text described ZBB as an adaptation of the line-item budget because it relied on existing accounting information to develop decisions packages at various levels of funding:

>A base-level package 90 - 95% of current funding

>A current services package 100% of current funding

>An enhanced package 105 -110% of current funding

Zero-Base Budgeting (ZBB)Through the use of decisions packages ZBB reasserted the value of accounting information to budget deliberations by requiring:

>Managers of lower level units to fully evaluate their operations and provide information relating to production and performance that would

be attained if funding would be decreased, maintained, increased.

>Higher level managers to rank or prioritize the decision packages according to their relative importance to the organization and the anticipated level of funding available.

In theory, the rigorous annual evaluation of each programs’ purpose andpriority and weighing the program against all other spending priorities

made it possible to identify programs or activities that could beeliminated and it was therefore perfect for the type of cut-back decision making needed at the time.

Zero-Base Budgeting (ZBB)

Q1-14: Although the ZBB format provided both an

abundance of information to decisions makers and a well-defined process to cut-back costs, chief

executives found ZBB difficult to implement. Briefly

explain a few reasons why you think ZBB did not

yield the type of information and/or results it was

intended to provide and all but disappeared from

the scene.

Target-Base Budgeting (TBB)

Emerged as a budget methodology in the 1980s.

Reversed the trend toward increasingly complex budget innovations.

TBB was also intended to reduce interdepartmental conflict, competition and gamesmenship.

Target-Base Budgeting (TBB)

The budget office assigned each department a maximum dollar figure for its budget.

Budget targets were based on revenue estimates for the coming year and any anticipated or necessary changes in department operations.

Once current services had been established the target was set much like ZBB and a percentageof current funding was identified for the coming year (e.g., 95% or 105%).

Performance Budgeting Performance budgeting was actually introduced in the 1930s, a short timeafter the introduction of Line-Item budgeting.

Performance budgeting gained popularity in the 1950s following thepublication of the second Hoover Commissions Report.

The focus of Performance budgeting was to collect and report moremeaningful information to decision makers by requiring agencies to report the typeand amount of work an agency would perform during a budget year.

For example, a highway department requesting funds for road repairs would also report the number of miles of road resurfacing that would be completed during the year.

Performance Budgeting

The focus of LINE-ITEM budgeting was to provideinformation and the means to control expenditures; while effective - it was limited to providing information

on INPUTS.

The focus of Performance budgeting was to collect andreport information relating to the work actually beingperformed by agencies (OUTPUTS).

In effect, Performance budgeting tied inputs to outputsand provided decisions makers with a means to assessthe efficiency of budget requests.

Performance Budgeting

During the 1960s, Performance Budgeting was replaced when Program Budgeting was introduced.

During the 1990s Performance Budgeting achieved renewed prominence when the Clinton Administration required federal agencies to collect and report performancedata with their budget requests.

Performance Budgeting

Q1-15: The text asserts budgeting became

a management tool when Performance

Budgeting was introduced. Review the

passage on Performance Budgeting and

briefly explain how this method of

budgeting could support or improve the

management of a government agency.

Program BudgetingProgram budgeting was introduced in the 1960s and the most common form was PPBS (Planning, Programming, Budgeting System).

The focus of PPBS was to interject policy analysis into fundamentalbudgetary decision making by identifying high priority activities andservices that government should undertake and allocating funding tothose agencies best suited to achieve specified program goals.

The primary focus of PPBS was not so much the work being performed(like Performance Budgeting) but the extent to which governmentachieved important and highly desirable OUTCOMES.

For example, the War on Poverty was a broad policy issue addressed inthe 1960s by the federal government funding various activities and services (e.g., job training programs, subsidized housing, etc.) with theultimate outcome being a reduction in the number of citizens living inpoverty.

Planning/Programming/Budgeting System As the name infers, planning was an essential first step to PPBS.

PLANNING with a long-term, strategic focus was used to identifyhigh-priority policy issues and establish specific program goals to beachieved.

PROGRAMMING was used to identify the government agencies thatwere best suited to perform activities and services that would lead tothe achievement of program goals.

BUDGETING was employed to make decisions as to the fundingthat could be made available for the agencies selected to performthe activities and services contributing to the achievement of theprogram goals.

Entrepreneurial Budgeting The increased acceptance of strategic planning among governmentmanagers prompted the emergence of an “entrepreneurial spirit” in thepublic sector during the1990s and a movement to manage public sectoragencies more like their private sector counterparts.

Two forms of Entrepreneurial Budgeting have been gaining attention in recent years:

> Balanced scorecard> Budgeting for outcomes

Review the passage in Chapter 1 relating to these two approaches tobudgeting and answer the below listed questions:

Q1-16: Briefly list and describe the six steps involved in using a Balanced

Scorecard approach.

Q1-17: Provide a brief description of Budgeting for Outcomes.

Role Players in the Budget Drama

The text identifies 3 groups of participants in the budget process:

>Lawmakers >City or County Manager>Department or Program Managers

Q1-18: Briefly describe the role played by each group of participants.

Q1-19: Identify other groups of participants that play a role in the budget drama.