Week # 3

1. Week # 3 Managing Budget Deliberations

2. Learning Objectives • Explain why conflict is an inevitable by-product created during the budget process. • Identify sources of conflict commonly encountered during different phases of the budget cycle. • Describe strategies managers can use to work through conflict during the budget process and achieve positive results. • Explain the importance of establishing budget policies and how they can be used to manage conflict. • Describe conditions and the formal and informal assumptions that govern budget deliberations.

3. Conflict in Budget Deliberations • Conflict is inevitable in the budget process because it brings together a large number of people with varying values and interests to compete for a limited amount of funding. • The chief executive, lawmakers, department heads and administrators must always demonstrate the capacity to get things done and serve the public’s interests if they are to be viewed as effective. • However, it is impossible to satisfy all interests AND there is only a limited amount of money available each year to satisfy interests approved for funding during the budget process. • Each year public sector managers face the challenge of recognizing and providing the right level and mix of services to the communities they serve without imposing burdensome taxes, user charges and fees.

4. Conflict in Budget Deliberations • Conflict becomes destructive and unproductive only when it is unmanaged. • Developing and maintaining policies to guide all phases of the budget cycle helps manage the conflict. • Policies establish boundaries that allow stakeholders to pursue their interests in an organized and rational manner.

5. Conflict in Budget Deliberations • Chapter 3 asserts budget conflict must be managed and points out that conflict commonly occurs between: >advocates and conservers >budget office and departments >accuracy and political expediency >bureaucracy and democracy >special interests collective interests >public will and public welfare

6. Conflict in Budget Deliberations Q3-1: What is the top priority for the person charged with managing budget deliberations? Q3-2: Who is charged with the responsibility for managing the conflict inherent in the budget deliberations?

7. Advocates and Conservers • Each agency has Advocates– that is - persons or groups who derive a benefit from the services provided by a particular agency. • Advocates may include (1) department heads, (2) clients or interest groups, (3) legislative oversight committees who oversee the agency. • Together these three groups form what political scientists refer to as the “Iron Triangle”. • Each group within the Iron Triangle needs each other and all clearly benefit from increased funding.

8. Advocates and Conservers • Conservers are those persons who must defend budgetary limits (e.g., budget office). • Budgetary limits are established by the available revenues for a given budget year. • Each agency (supported by its advocates) competes for a share of the limited resources available each year --- hoping some increase in their budget base will be realized. • One strategy used to manage the conflict is to inform agencies early in the budget preparation phase about the revenue forecast and implications for each department.

9. Advocates and Conservers Q3-3:Describe one strategy that executives use to moderate the conflict occurring between advocates and conservers.

10. Budget Office and Departments • Another source of conflict involves gathering information needed during budget deliberations. • Budgeting involves making decisions about the type and level of services that will be provided and the cost of those services to residents of the jurisdiction. • The budget office constantly scans for information regarding the efficiency and effectiveness of department operations. • Conflict may arise from this scrutiny if department heads view this scrutiny unfavorably and resist divulging a great deal of information about their department.

11. Accuracy versus political expediency • Budget realities often clash with the concern politicians have for public image. • While the concern for technical accuracy will always be important while making a budget, there is a constant concern among politicians that the budget picture be positive. • For example, budget offices usually prefer making conservative revenue forecasts, while legislators pressure forecasters to raise their estimates to ease the task of balancing the budget.

12. Accuracy versus political expediency Q3-4: The pressure to avoid tax increases or to make difficult spending reductions can tempt legislators to use deceptive measures to artificially manipulate budget totals. Identify the government official who must serve as the conscience of the organization by making certain budget accuracy is not sacrificed for political expediency? AND – provide a brief explanation for your answer.

13. Bureaucracy versus democracy At a more philosophical level the budget process also features conflict between… > The goals of democracy - equality and accountability AND > The goals of bureaucracy – centralization of power and control

14. Bureaucracy versus democracy The budget process provides a methodology to keep the bureaucracy (i.e., executive branch) accountable to the democracy (i.e., the people & their elected representatives). The budgeting methodology that has evolved in this nation requires the executive branch to prepare a budget and the legislative branch to examine and authorize the proposed budget plan – thus maintaining a balance of power.

15. Special Interest versus Collective Interests • Special interest groups, especially well-organized groups, have a decided advantage with respect to influencing spending decisions as compared to the larger but unorganized voting public. • Special interest groups rarely see their requests in terms of cost to the community. • Politicians may fear opposing special interest groups requests due to the risk of losing their support or incurring their opposition. • The majority – an unorganized collective – are normally indifferent but can become sufficiently irritated to react, as in the case of California voters who engaged in a tax revolt that brought about Proposition 13.

16. Public will versus public welfare • Public budgeting involves an ongoing struggle between what the public wants and what is in its long-term best interest. • While difficult – it is critically important for administrators to be able to discern public attitudes relating to vital issues. • Public administrators must be able to both lead and follow while never being too far ahead nor to far behind public opinion.

17. Managing conflict through a budget policy Putting in place a comprehensive and well-defined budget policy is perhaps the best way to institutionalize responsible dialogue as part of government’s decision making framework.

18. Managing conflict through a budget policy A budget policy statement establishes: > Financial standards to guide budget deliberations > Provides budgetary performance standards for everyone participating in the budget process > Provides continuity in budget decision making > Helps to reduce the number of issues open to debate

19. Elements of a budget policy statement The following four main policy areas that should be addressed in a budget policy statement include: > Operating budget policies > Revenue policies > Budget implementation policies > Debt policies

20. Operating Budget Policies The operating policies should address “who does what” in the budget process, including: • How comprehensive is the budget (i.e., the budget coverage or scope)? • What constitutes a balanced budget? • What types of budget reserves should be maintained? • What general guidelines should govern budget preparation and amendment? • Who are responsible for budget preparation, and what are their duties?

21. Budget coverage Budget coverage typically involves two issues which have been posed below in the form of questions --- > To what extent should the operating budget and capital budget be integrated? > What activities should be reported in the operating budgets?

22. Coordinating operating and capital budgets • Municipalities usually prepare an operating budget separate from the capital budget • They do so because the planning and financing sources for each are different. • Capital budgets typically involve large and long-lived assets and therefore require longer planning periods. • Capital improvements, such as the construction of roads or buildings, are financed with long-term debt from the sale of general obligation (GO) bonds or revenue bonds. • However – it is still quite common for operating budgets and capital budgets to be prepared concurrently. • In either case – operating budget policy should state whether the two budget cycles will proceed concurrently or separately.

23. Coordinating operating and capital budgets Q3-4: Briefly describe at least two benefits local governments derive from preparing the operating budget and capital budget concurrently. Q3-5: Briefly describe why some local governments choose to not prepare the operating budget and capital budget concurrently.

24. Budgetary balance • Operating budget policies should define budgetary balance and precisely state the requirements to achieve a balanced budget and expectation regarding the money to be retained in the fund balance as reserves or contingency fund. • While commonly understood to mean current revenues equal current expenditures – operating budget policies should clearly define what is meant by balanced budget. • The reason this is so was discussed in a previous chapter when it was noted there can be a significant difference if balanced budget refers to achieving balance with the executive’s proposed budget, the budget adopted by the legislature, or the year-end balance.

25. Budget Reserves • Although not always clearly articulated, many governments have adopted explicit policy guidelines for budget reserves. • These governments establish reserve accounts in various funds and then earmark the money for that purpose.

26. Budget Reserves Q3-6: Identify and briefly describe the six types of reserve funds identified in the text. Q3-7: With regard to revenue stabilization reserve funds, identify and briefly describe the two policy issues that governments must resolve when creating such a fund.

27. Budget preparation and amendment • A budget policy statement should make clear certain critical aspects of budget preparation, such as: - when appropriation authority ends - the process for amending the budget - the type & frequency of budget performance reports - what funds will be self-supporting • In addition, a budget policy statement should specify and broadly outline/define the key duties related to budget preparation and adoption.

28. Appropriation lapse… • A policy should clearly state the appropriation authority lapses for the operating budget at the end of the fiscal year. • In addition – the policy should indicate any unspent or unencumbered money will then lapse into the fund balance and be available for the next fiscal year. • Any exceptions should also be stated in the policy (e.g., continuing appropriations for any multi-year or on-going capital projects.

29. Amending the budget • A budget policy statement should also specify the procedures for amending the budget during the fiscal year. • The policy should state the circumstances under which the legislative body may amend the budget.

30. Amending the budget Q3-8: Identify which branch of government is charged with authorizing a budget amendment . Q3-9: Identify and briefly describe three circumstances that may require the budget to be amended.

31. Revenue Policies • Revenue polices provide continuity in the procedures and assumptions guiding the funding decisions made by government. • Revenue policies also increase the efficiency of deliberations on taxes and service charges. • At a minimum, revenue policies should cover… - acceptable changes in property tax rates - the use of one-time revenues - the frequency of service charge review - the collection of delinquent taxes and charges.

32. Budget Implementation Policies • Budget policy should include policies relating to the following implementation issues… • Transferring money across accounts of funds • Inter-fund borrowing or payments • Budget impoundments • Assignment of responsibility for expenditures.

33. Transferring Money • The budget is a legal document based on legislative action and the spending of funds is approved for specific purposes. • Spending funds for programs or items other than that which the funds were initially approved by the legislative body is technically a misappropriation of funds. • Therefore, budget policies must be established to authorize the transfer of funds when it becomes necessary to use funds for a purpose that differs from that which was legislatively approved and enacted into law.

34. Transferring Money • Q3-10: The test cited the policy used by Olympia, Washington regarding the transfer of funding. Briefly describe the three types of transfers that are allowed and identify the type of authorization that is needed to transfer funds.

35. Inter-fund Borrowing and Payments • An issue related to transferring funds is inter-fund borrowing and payments. • Policies must be in place and strictly enforced to guide borrowing and payments made from one fund to another. • These policies can facilitate the legitimate transfer of monies when necessary and preclude unauthorized and perhaps unlawful use of public funds.

36. Inter-fund Borrowing and Payments • Q3-11: Cite one example of an inter-fund payment and one example of inter-fund borrowing.

37. Impoundments • Impoundment occurs when the chief executive delays or cancels budget resources (particularly those provided by appropriations). • The chief executive should have some authority to not spend all of the funds the legislature has seen fit to appropriate. • While not always the case – impoundments usually occur for reasons of efficiency or routine financial management).

38. Impoundments • The impoundment of funds - owing to political or policy differences between the chief executive and the legislature - has been held to be an abrogation of the intent of the authority granted to the legislature requiring the examination and approval of the budget. • For this reason, impoundment policies must be established (e.g., the Congressional Budget and Impoundment Control Act of 1974.

39. Impoundments • Q3-12: Identify and briefly describe two types of impoundments discussed in Chapter 3 that were included in the Congressional Budget and Impoundment Control Act of 1974.

40. Responsibility for Expenditures • A related issue concerns responsibility for expenditures that exceed appropriations. • An appropriation represents a legal limit on spending commitments for a fiscal period. • Formal budget policy should be written explicitly stating spending authorization is limited to the funding level approved in the budget appropriation bill. • Policies should clearly indicate that department heads are expected to limit their spending to only approved funding levels and that they will be held accountable.

41. Responsibility for Expenditures • Q3-13: Briefly describe the two methods of control (listed below) that are used by the budget office to exercise control over spending. >Apportionment >Line-item detail

42. Debt Policies • Budget policies should be established to address… • Maximum long-term debt that can be incurred • The mix of debt with current revenues in the finance of capital improvements • The use of bond proceeds • The conditions under which short-term debt will be issued

43. Debt Limits • Debt limits should address the following two issues: • Percentage of operating revenue spent for debt service (i.e., revenue set aside to repay debt each year) • A limit on the amount of outstanding debt as a percentage of the full value of assessed property (i.e., property tax base)

44. Debt Limits • Policies on debt limits help to enforce a sense of discipline on debt management by clearly stating the key principles --- such as: • a commitment that long-term borrowing only will be used for capital improvements, or • general obligation debt service must remain below 15% of the annual operating budget. • Codifying them reduces conflict by providing a framework for decision making relating to debt.

45. Debt Limits • Q3-14: Identify and briefly describe two dimensions that should be used to limit the amount of debt that a government can incur.

46. Capital Improvement Financing • Policies should be established to provide guidelines for financing for capital improvements. • Such policies tend to impose a discipline on government by limiting the manner and method of financing. • For example, limiting the amount (percentage) of the capital improvement project that may be financed.

47. Use of Bonds Proceeds • Budget policies should address the manner in which bond proceeds can be used. • For example, bond proceeds might only be used for major capital improvements or economic development projects. • Some jurisdictions limit the use of bonds in other ways – such as the life expectancy of the capital improvement must exceed the term of the financing.

48. Short-term Debt • Governments should carefully assess their need for short-term develop policy. • Short-term debt policies should be based on solid business practice that prescribe the limited circumstances under which short-term debt may be used and outline specific requirements for repayment.

49. Short-term Debt • Q3-15: To acquire funds to pay current expenditures governments will issue smaller short-term bonds known as bond anticipation notes knowing the debt can be paid from the future collection of taxes or fees. Although this practice is somewhat common, identify at least two limitations that might be included in a policy relating to short-term debt to prevent the possible abuse of short-term debt to pay routine operating expenses.