Chapter 1The Context of Public Sector Budgets

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Chapter One Overview

The purpose of a budget

The different types of budgets

Sources of revenue and expenditures

Government accounting techniques

Audits

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What Is a Budget?

A budget is a fiscal policy document

that outlines revenues and

expenditures an organize needs to

carry out some specific functions

during the fiscal year.

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Fiscal Year

Fiscal year (FY), a twelve-month

period where funds are collected and

spent.

◦ For example, FY 2017 for most states

begins on July 1, 2016 and ends June 30,

2017.

◦ At the end of this period the budget must

be balanced

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What Is a Budget?

State and local governments should not carry deficits over to the next fiscal year.

Three Roles originate from budgets:◦ Allocation-What services will result from

allocation?

◦ Distribution-Who will benefit from the distribution and who will pay for the services?

◦ Economic Development-What level of income and job growth are required to maintain stability?

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Functions of a Budget

Accountability-used to determine if an

organization has accomplished its

objectives.

Control-legislators appropriate the

money strategically, but, they have the

legal right to withhold funds.

Plan-by organizing costs around some

function or activity, agencies have some

estimates of what their tasks will cost

and how to go about carrying out those

tasks. 6

Budget Formats

Budgets generally come in three formats:

◦ Line-item (traditional budget)-allocates funds

to specific commodities or objects of cost

(e.g., personnel, supplies, equipment,

utilities, capital outlays, etc.).

easiest of the three to prepare, but it’s major

shortcoming is its inability to describe the activities

that will be performed by the agency. (see example,

p.14)

used for accountability and control

Given this detail, line-item budgets should always

be placed in a spreadsheet program to ensure

fewer mathematical errors.7

Program Budget

◦ Program-this budget allocates funds to programs or activities within an organization. allows programs of a similar nature to be

combined rather than split into separate budgets. It allows legislators to not only plan for the current fiscal year, but also for future years.

lists the goals and objectives of an agency along with the funds that are allocated to achieving those objectives.

allow for the use of analytical tools to measure costs and benefits. (see p.15 for example)

focus is on the program’s expenditure rather than the object of expenditure 8

Performance Budget

• Performance budget-classifies funds based

on some activity and the direct output

created by the activity.

This type of budget relies on :

Strategic planning-It closely monitors an agency’s

mission, capacity, and the environment in whit it

exists.

Operational planning-monitors the allocation of

resources on a task-by-task basis in order to ensure

that goals and objectives are met.

Performance accountability-measures progress by

results

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Performance Budget

An advantage to using a performance based budget is the direct correlation between spending and services provided.

This type of budget is advantages to both agency heads and legislators, but it can also be a double-edged sward.◦ Agency heads must be very specific in detailing their

operations.

◦ Legislators must appropriate funds based on performance rather than the normal line-item format.

◦ The main benefits of a performance budget is that it allows for the outcomes of spending to be monitored every fiscal year (see, p. 17).

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Other Approaches

Zero-Based Budgeting-(rarely used)

each unit submitting a budget has to

justify all of their budget requests from

beginning to end without assuming a

guaranteed allocation

Incremental approach- simply adding

or subtract from the previous years

spending

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Reading a Budget

A good budget is user friendly. The

lay reader should be able to determine

how much the government intends to

collect (revenues) and what it plants to

spend the money on (expenditures).

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Reading a Budget (common

features) Budget Message/Budget

Highlights/Executive Summary

(Budget Letter)

Budget Summary

Source of Revenues

Department/Agency Budget

Information

Supplemental Budgeting Information

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Public Versus Private Budgets 1. Decision Making-Public budgeting often involves the

interaction of many actors involved with a variety of different agendas.

2. Funds-funds that are spent and collected in the public sector are collected from tax payers who may or may not want the monies to be collected and spent and may not receive any direct services as a result of paying the tax. On the other hand, monies collected in the private sector are not compulsory (enforced or required) and services are directed accordingly.

3. Flexibility-public budgets are well designed documents that are written to last an entire fiscal year (or two). They are not very flexible. When crisis or other unplanned events occur, it can be catastrophic to budget analysts as well as elected officials. Private budgets are very flexible and can be changed at a moments notice in order to move with changes in the economy, budget shortfalls, etc.

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Public Versus Private Budgets

5. Rules and Actors-the number of

rules and actors involved in public

budgeting far surpasses that in the

private sector. The process can be

overly bureaucratized when compared

to the private sector.

◦ appropriation acts and ordinances are

legal documents that place limits on

spending.

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Overview of Revenues and

Expenditures Revenues-are the monies collected by all levels of government to

pay for the operation of government.

Expenditures-are financial obligations that flow from the operation of government.

The major source of revenue for state and local governments is taxes. For some states, income taxes make up the greater proportion of taxes collected. Unlike state governments, some local governments have the option of collecting payroll taxes (income taxes).

Income taxes are progressive taxes-the more money an individual makes, the more they pay in taxes.

Individual income taxes make up about one-third of all taxes collected in a state.

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Overview of Revenues and

Expenditures The second major source of revenue in a

state (and in some localities) comes from sales and use taxes.

Sales taxes are considered regressive taxes. Citizens pay the same rate regardless of their income level.

Each state sets its own sales tax rate. States and localities also have some discretion as to what items will be assessed sales taxes.

Other sources of revenue for the state include: tobacco, alcohol, petroleum product taxes, inheritance taxes, automobile taxes, and public utility taxes.

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Overview of Revenues and

Expenditures States also get a large amount of

revenue from the federal government in the form of grants.

Grants come in two major forms: categorical and block.◦ Categorical grants- used for a specific

program and has very strict guidelines for the activities to be carried out within a specific time period.

◦ Block grant-used for broad policy areas.

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Overview of Revenues and

Expenditures (Local

Governments) A major source of revenue for local

government is property taxes.

Other sources:

◦ sales taxes

◦ license fees on motor vehicles.

◦ licenses and permits, franchise fees and user charges.

◦ proceeds from public utilities. Public utilities are government owned business (e.g. water utilities, gas utilities, electric utilities, sewers, and intercity transit).

◦ revenues collected from casinos, lotteries, and other forms of gambling.

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Expenditures

Bonds-they are not considered to be a source of revenue, but are used by governments to borrow money for construction of public buildings, schools and other big ticket items.

Taxes and other sources of revenues are used to pay for government expenditures-an expenditure is the disbursement of money to cover the costs of governmental agency’s operation.

The majority of revenues collected by local governments are used towards the payment of salaries and fringe benefits to employees. ◦ In addition to personnel cost, supplies, equipment,

contractual services and capital outlays make up the vast amount of the budget.

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Expenditures

Capital outlays are monies allocated

for big ticket items that cannot be

completed in a single fiscal year.

Normally, personnel cost will range

from 65%-75% of a local budget. (see

p.22 and 23 for example of revenues

and expenditures)

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Governmental Accounting

Governments receive revenues monthly, quarterly, annually, and daily. So they must allocate and manage funds in order to cover expenditures.

State and local governments typically use a fund accounting system. The Governmental Accounting Standards Board (GASB) establishes accounting and reporting standards for state and local governments.

The GASB created the Generally Accepted Accounting Principles (GAAP). Audits of state and local governments are performed based on GAAP and an opinion is rendered by an auditor. 22

Accounting The GASB provides standards for reporting but not budgeting.

There are no standards for budgeting unless they are established by state law.

Government accounting normally takes three forms:

◦ Cash basis-comparable to your checking account system. Budget officials basically add the revenue to an account when they literally receive the funds in their hands. On the expenditure side of the equation, funds are subtracted from an account as soon as they are spent.

◦ Modified accrual-records revenues when they are received (measurable and available). Expenditure are recorded when a fund liability is incurred. (the goal is to match revenues to expenses)

◦ Full accrual-records revenues as it is earned regardless to whether the revenue has been received. For example, property taxes are recorded when the bill is mailed (earned) rather than when the bill is paid. This system records expenses when a financial obligation is incurred. (see table on pg.24)

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Governments tend to be financially

conservative when it comes to

estimating or forecasting revenue.

Most governments use the cash basis

for budgeting taxes in general,

although some use the modified

accrual method.

Some use a hybrid system-modified

accrual for some sources and cash for

others.24

Class of Funds

As revenue comes in, it is placed into separate funds. GAAP sets up three class of funds:

◦ Governmental- these funds are those that are used to carry out basic government services and are primarily supported through taxes and shared revenues

◦ Proprietary-these are business-type in nature and are similar to those used in the private sector.

◦ Fiduciary-these funds are used to account for assets that are held by the government as an agent or trust. They are not used to carry out government activities.

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Within each class of funds, there are several types of funds.

The largest classes of funds are governmental funds. There are five types of funds within this class: ◦ General

◦ Special

◦ Debt Service

◦ Capital Project

◦ Permanent

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Proprietary funds are for public service activities that resemble those of the private sector, proprietary or businesses like activities.

◦ Enterprise Funds-contains revenues collected from individuals external to governments (e.g., user fees for public transportation)

◦ Internal Service Funds-contains revenue from agencies within the government for services rendered. They are used within the government and provide a service to other government agencies rather than the public at large (i.e., when a car needs to be repaired, the city garage repairs it).

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Fiduciary funds are revenues held for

other individuals or government

organizations.

There are four types of fiduciary funds:

◦ Pension Funds

◦ Investment Funds

◦ Private-purpose Funds

◦ Agency Funds

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Summary

Elected officials can use the budget as a tool to control the bureaucracy, as a plan of action, and to create accountability.

The type of budget used plays a significant role in the information that is conveyed.

Elected officials frequently do not have in dept knowledge of all the agencies that they ultimately govern. As a result, the type of budget used can serve several purposes.

The type of accounting methods used can affect how the monies can be spent.

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