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Introduction to Public Budgeting

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Title: Introduction to Public Budgeting


1
Introduction to Public Budgeting
  • November 17, 2012

2
What is budgeting?
  • Budgets link tasks to be performed with the
    amount of resources necessary to accomplish those
    tasks.
  • Budgets limit expenditures to the revenues
    available (projected).
  • Budget are not merely technical, managerial
    documents, they are intrinsically and
    appropriately political.

3
What is budgeting?
  • Budgets reflect choices about what government
    will and will not do.
  • Budgets reflect priorities
  • Budgets reflect the degree of importance that
    legislators place on satisfying their
    constituents.
  • Budgets provide a powerful tool of accountability
    for citizens.

4
What is budgeting?
  • Budgets reflect citizens preferences for
    different forms and different levels of taxation.
  • Budgets reflect the relative power of different
    individuals and organizations to influence
    outcomes.
  • It is a spending plan and sets spending limits.

5
What is budgeting?
  • The selection of ends and the best means to
    achieve those ends
  • Ends public policies that are deemed most worthy
    of receiving limited resources
  • Discretionary Mandatory
  • Fund Accounting
  • Means resources allocated to meet public policy
    priorities (taxes, user fees, other?)

6
What is budgeting?
  • The budget should be the centerpiece of a
    thoughtful, ongoing, decision- making process for
    allocating resources and setting priorities and
    direction. (Government Finance Officers
    Association GFOA) http//www.gfoa.org/services/nac
    slb/
  • Governmental Accounting Standards Board GASB
    http//www.gasb.org/ and
  • Financial Accounting Standards Board FASB
    http//www.fasb.org/

7
Separation of Payer Decider
  • Those who pay are not the ones who make the
    decisions on how the money is spent.

8
Budget Cycle
  • Executive Preparation
  • Legislative Consideration
  • Execution
  • Audit-Evaluation
  • Overlaps year to year

9
Standards
  • FASB Financial Accounting Standards Board
  • Private Sector
  • GASB Governmental Accounting Standards Board
  • Public Sector

10
Fund accounting
  • Governmental Funds
  • General, Special Revenue, Debt Service, Capital
    Projects, Permanent Funds
  • Proprietary Funds
  • Enterprise, and Internal Service Funds
  • Fiduciary Funds
  • Pensions, Investment Trust, and Agency Funds.

11
  • CAFR Comprehensive Annual Financial Report
  • GAAP General Accepted Accounting Principles
  • Accounting Basis
  • Cash
  • Revenue when received Expenditures when cash
    payment made.
  • Accrual
  • Revenue when earned Expenditures when goods or
    services used.
  • Modified Accrual
  • Revenues when measurable and available
    Expenditures when liability incurred.

12
Revenues
  • Appropriate amount of taxation is established by
    spending choices.
  • Structure of the tax system is very important.

13
Sources Revenues
  • For the most part from
  • Income
  • Purchases or sales
  • Property ownership or transfer

14
Federal Revenue
15
Federal Revenue
  • Income taxes 1.5 Trillion
  • Social Insurance Taxes 0.9 Trillion
  • All other .23 Trillion
  • Income tax
  • 14 Corporate 42 Individual

16
State Revenues
Source http//www.ebudget.ca.gov
17
State Revenues
  • Total 122,746 Million
  • Personal Income Tax 50,665 Million
  • Sale Tax 32,970 Million
  • Corporation Tax 10,966 Million
  • Highway Users Tax 5,495 Million
  • Motor Vehicle Fees 7,027 Million

Examples from FY 2011-2012
18
City Revenues
Source http//www.californiacityfinance.com/
19
City Revenues
  • Vary greatly depending on many factors
  • Character of the City
  • Residential or Commercial
  • Population (per capita subventions)
  • Types of Service Provided
  • Water and/or electric enterprises
  • General Law or Charter City
  • Contract or Full Service City
  • Prop 13 Property Tax Share

20
City Revenues Example from FY 2004-2005
  • Los Angeles
  • Total Revenues 10,743,389,655
  • Property Tax 937,913,506
  • Motor Veh In-Lieu 42,161,773
  • Sales Tax 322,099,865
  • Utility Users Tax 589,858,014
  • Bradbury
  • Total Revenues 754,188
  • Property Tax 238,551
  • Motor Veh In-Lieu 12,730
  • Sales Tax 0
  • Utility Users Tax 0

Source http//www.sco.ca.gov/ard/local/locrep/cit
ies/reports/0405cities.pdf
21
Summary of Revenues
  • Federal
  • Income Tax
  • State
  • Income Tax
  • Sales Tax
  • City
  • Property Tax
  • Sales Tax
  • State and Federal (Intergovernmental)
  • Fees
  • UUT

22
Tax Equity Collectability
  • Horizontal equal among capability to pay
  • Vertical comparison among unequals
  • Income Tax scores well on both.

23
Transparency
  • Adoption in a open legislative process.
  • Payment based on objective and explicit criteria.
  • Each taxpayer should understand how the tax is
    determined, can be effected, the filing
    responsibilities.
  • Each taxpayer should know how much tax is being
    paid.

24
RST Retail Sales Taxes
  • Are ad valorem taxes on sales
  • Are suspended on items purchased for resale
  • Are added at purchase rather than being included
    in the price

25
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26
Value Added Tax
  • Invented by Maurice Laure a French economist in
    1954.
  • European version of sales tax
  • Levied on goods and services
  • Consumption tax borne by the end user

27
Value Added Tax
  • A business includes the tax in the price charged
    for the goods or services at each stage of the
    economic chain.
  • VAT can help if tax evasion is a problem.

28
Property Taxes
  • Property tax is the lifeblood for fiscal
    independence of local governments.
  • During the Great Depression there was a shift
    toward retail sales tax motor-fuel excises but
    property tax remained important.

29
Property Taxes
  • Real Property real estate, realty, or land and
    improvements on that land.
  • Personal Property everything that can be owned
    that is not real property (machinery and
    equipment, jewelry, automobiles, inventory,
    stocks, and bonds, etc.

30
Property Taxes
  • Tangible Personal Property property held for
    its own sake (cars, machinery, inventories, etc.)
  • Intangible personal property property valued
    because it represents an ownership claim on
    something of value ( stocks, bonds, and other
    financial assets.)

31
Property Taxes
  • Advantages
  • Base is immobile
  • Tax is stable???
  • Tax can vary within small area
  • Services typically supported
  • Many decisions made by local government impact
    property value

32
Property Taxes
  • Disadvantages
  • Seen as regressive
  • Are horizontally inequitable
  • Local property taxes create a scattered pattern
    of fiscal affluence and fiscal poverty (disparity
    in the type and quality of public services that
    the localities can afford)

33
  • Disadvantages cont..
  • Property tax burdens can be shockingly high for
    people living in an area with increasing property
    values and can become difficult for people with
    low incomes.

34
Property Taxes
  • In California, property taxes are 1 of value
    with a 2 increase each year depending on CPI.

35
User Fees, Charges, and Fiscal Monopoly
  • When government services (parks, cultural events,
    garbage collection, etc.) are provided without
    direct charge for their use, those services are
    not free.
  • The choice is between users paying or paying with
    taxes.

36
User Fees, Charges, and Fiscal Monopoly
  • User Fees and Licenses
  • Motor vehicle, massage parlor, and hunting
    licenses
  • Imposed to regulate specific activities for the
    benefit of the general public

37
User Fees, Charges, and Fiscal Monopoly
  • User Charges
  • Are feasible when identifiable individuals or
    firms benefit from the service
  • Require an economical method for excluding from
    service benefits those who do not pay for the
    service
  • Turnpikes, toll bridges, etc.

38
User Fees, Charges, and Fiscal Monopoly
  • Public Monopoly
  • Utilities, liquor stores, and Gambling
    Enterprises
  • Government owning and operating a business
    enterprise to sell private goods

39
Federal Expenditures
Source http//www.gao.gov/cghome/2006/metlife403/
metlife.pdf
40
1,897,834 Social Security , Defense, Medicare
51
2,020,430 Social Security, Medicare,
Income Security Programs, Medicaid
and Unemployment Benefits 54
Sources http//www.heritage.org/research/reports/
2010/06/federal-spending-by-the-numbers-2010
41
Over 1.5 trillion deficit in 2010
Sources http//www.heritage.org/research/reports/
2010/06/federal-spending-by-the-numbers-2010
42
2011 Federal Budget
Sources http//www.washingtonpost.com/wp-srv/spec
ial/politics/budget-2010/
43
2011 Federal Budget
Sources http//www.usgovernmentspending.com/budge
t_pie_gs.php /
44
State Expenditures
Source http//www.ebudget.ca.gov/BudgetSummary/SU
M/1249561.html
45
City Expenditures
Average California City
Source http//www.californiacityfinance.com/
46
City Budgets
  • Expenditures vary a great deal from city to city
  • In the past there were not extreme changes in
    expenditures from year to year within a local
    government

47
Accountability and Acceptability
  • Accountability means transparency to the
    taxpayers about budget decisions.
  • Acceptability means gaining public support, or at
    least acquiescence.

Source Ruben
48
Politics of Balancing the Budget
  • Even if balanced at the beginning of a fiscal
    year, a budget may become unbalance.
  • Deficit is the fiscal year difference between
    receipts and outlays.
  • Debt is the accumulated deficits.

49
Politics of Balancing the Budget
  • Expectations of the public cannot be
    underestimated
  • There can be public pressure to eliminate a tax
    with no offsetting service cuts (example VLF)
  • Once a public program is started, it is hard to
    cut or eliminate the program.

50
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51
States Facing Deficits
  • Responsibility usually falls to the governor.
  • Raise revenues or cut expenditures
  • Gimmicks
  • Borrowing money expected Example tobacco
    lawsuits
  • Draw down on reserves
  • Borrow from pension funds

52
States Facing Deficits
  • Obscuring the Deficit
  • accelerate tax collections
  • delay expenditures
  • changing accounting methods
  • borrowing between funds
  • Buffering
  • underestimating revenues or holding back
    expenditures
  • using fund balance

53
States Facing Deficits
  • Passing the buck to local governments
  • Many states now prohibit unfunded state mandates
    on local government
  • In recent years California has passed two
    propositions to protect local government revenue

54
Cities Facing Deficits
  • Draw down reserves
  • Delay capital projects and equipment replacement
  • Hiring freezes
  • Eventually cities must pay the piper

55
Balancing Budgets
  • Budget balancing is more than a technical
    activity.
  • Politics
  • Policy decisions
  • ...Government has many valued outputs (James
    Wilson, 1989)

56
Final thoughts for the day
  • A budget is not a promise to pay.
  • Only the Federal Government can print money and
    that only goes so far.
  • To come back into balance you can either cut
    expenditures or raise revenue, everything else is
    smoke and mirrors.
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