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

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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 Challenge National Budget
Simulation Federal Budget Simulation
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Budget Formats
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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 Preparation
• A. Budget Guidance/Call for estimates
• B. Preliminary Estimates
• C. Consolidation
• Legislative consideration enactment
• Execution (conduct of fiscal operations)
• Post-audit evaluation Reporting

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Budget Cycles
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Budget Cycles
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Budget Formulation
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Descriptive Analysis of Budget Preparation
Enactment Process

• Roles, Visions, Incentives
• Operating agencies make requests
• Executive issues guidance, negotiates and
  consolidates budget
• Legislature approves budget

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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,

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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.

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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.
• The committee system as a super-majority
  system/proliferation of committees
• 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 PRACTICE

• Preparation 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 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

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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

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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

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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 Years 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 Years 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 dont 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 elses 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 Good Budgetary
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 Good Budgetary
Decisions,1999.
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Class Exercise
Minnesota Budget Balancer Cut the Massachusetts
Budget