LOGIC OF THE BUDGET PROCESS

1. LOGIC OF THE BUDGET PROCESS Governing is Budgeting: Budgets are the Primary Instruments through which Governments Announce their Purposes, Priorities, and Intentions.

2. 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

3. Government Budgets Are SPENDING PLANS for administrative units for a specified time, that are enacted into law

4. Class Exercise Federal Budget Challenge National Budget Simulation Federal Budget Simulation

5. Budget Formats

6. 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)

7. 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).

8. 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

9. Preparation & Enactment Execution Audit and Financial Reporting The Budget Cycle

10. 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

11. Budget Cycles

12. Budget Cycles

13. Budget Formulation

14. Descriptive Analysis of Budget Preparation & Enactment Process Roles, Visions, Incentives • Operating agencies – make requests • Executive – issues guidance, negotiates and consolidates budget • Legislature – approves budget

15. Incrementalism I The predominant strategy in budgeting is governance by precedent. To obtain this year’s solution (next year’s 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,

16. 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.

17. 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

19. 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

20. Preparation of Agency Budget Requests Review of Budgets Balancing the Overall Spending Plan Managing Budget Execution Audit & Evaluation EXECUTIVE BUDGET METHODS AND PRACTICE

21. 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

22. 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.

23. 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

24. Spenders’ Budget Tactics: Ubiquitous II • Price Changes • Workload Changes • Methods Improvement • New Services • Full Financing

25. 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 Spenders’ Budget Tactics: Contingent I

26. 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 It’s so small Spenders’ Budget Tactics: Contingent II

27. Budget Justification -- Or, Why the Numbers in Next Year’s Budget are Different from this Year’s • 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

28. 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 Year’s Costs

29. EXECUTIVE REVIEW I • Policy Rationale/Conformity with Executive Priorities • Conformity with Budget Guidance/Including all Required Supplemental Documents • Arithmetic

30. EXECUTIVE REVIEW II • Linkages • Program Changes • Omissions • Ratios, Shares, Trends • Clear Tradeoffs

31. 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

32. Budget Execution

33. 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

34. BUDGET EXECUTION I • Preventive Controls • Procurement • Personnel • Pre-audit • Allotments • Feed-forward Controls -- Diagnostic Tools, e.g. variance measures • Feedback Controls -- affect Next Year’s Budget, Fig. 3.1

35. 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

36. 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.

37. 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.

38. Looking Forward

39. 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 don’t we look at all program commitments this way?

40. Thought Questions • Someone once told me the problem with government is that it is easy to spend someone else’s money. Do you think that is true?

41. 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.

42. 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.

43. Class Exercise Minnesota Budget Balancer Cut the Massachusetts Budget