Budget module: getting it, managing it and shedding it

1. Budget module: getting it, managing it and shedding it Andrew Graham School of Policy Studies Queens University MPA 827 2015

3. “ Every agency wants more money; the urge to survive and expand is built in.” Aron Wildavsky

5. Another definition A budget process is a system of rules governing the decision-making that leads to a budget, from its formulation, through its legislative approval, to its execution. Karl-Martin, Ehrhart, Roy Gardner, Jürgen von Hagen, and Claudia Keser Budget Processes: Theory and Experimental Evidence, November 2000

6. The Budget as an Instrument of Public Policy and Management • Planning Instrument • Political Instrument • Social Instrument • Economic Instrument • Legal Instrument Source: Jerome B. McKinney and Lawrence C. Howard, Public Administration: Balancing Power and Accountability (Oak park, IL: Moore Publishing, 1979)

8. Control Steps taken by management to ensure that objectives are attained. Planning Developing objectives for acquisitionand use of resources. A budget is a financialplan for achieving the financial andoperational goals of an organization. It expresses what is to be undertaken in the defined period and authorizes the financial authorities needed.

9. What is a Public Sector Budget? • Result of intense planning process, short-term decisions, roles of the dice and political nuance • Budgets from Ministers of Finance, i.e. high level political documents not the sole source of program funding: • Statutory funding • Self-funded programs Management budget sets limits, targets and authorities to get on with the work Legal instrument to allow spending = Appropriations

10. Budget Perspectives • Budget applies differently at different levels • Government-level: broad, policy-driven, focus on change and announcements, combines revenue with expenditure • Department: will focus on overall results, generalized allocation to program pockets, more detail • Unit: budget is tightly defined, focus on inputs, highly specific, focus on defining resources available Our focus is departmental and unit-based.

11. Budgeting in time Context Historic Information Plus Effects of Outside Environment Forecasting & Planning Evaluating Performance Current Information Future Information Current Operating Data Controlling operations

12. Budget Architecture

13. Types of Budgets • Operating Budget: • also called recurrent budget • funds designated to continuing operations • “Plan for the day-in and day-out operations of the organization. It is generally prepared for one year.” • Capital Budget: • budget for permanent works: defining permanent • tends to combine current year and future year plans • current year often transferred into Operating Budget • “Plan for the acquisition of buildings and equipment that will be used by the organization in one or more years beyond the year of acquisition.”

14. Types of Operating Budgets Not mutually exclusive.

15. Types of operating budgets Not mutually exclusive.

16. Line Item Operating Budget • Simplest form of budgeting • Budget information organized according to types of expenses, expenditure or cost categories • Often detailed in object codes – little detail. • Primary orientation is expenditure control and accountability: permits inter-budget cost comparisons, creates common reference points • Relatively easy to prepare • Does not provide any information regarding activities and functions of a program

17. Line Item Operating Budget Example • Budget of the Killaloe General Hospital for Fiscal Year 200X • Object Code Budget • 100. Salaries 8,000,000 • 200. Supplies 2,000,000 • 300. Rentals 250,000 • 400. Professional Fees 750,000 • Total 11,000,000

18. Line Item Budgeting Limitations: • Rigid, unable to cope with • rapidly changing priorities and circumstances • creation of new government services • Budget evaluation mechanism difficult without mechanism to link things to be bought with things to be done. • New budgets based on previous budget with increments for price increases • No evaluation of whether objectives are still met or cost-effective

19. Line Item Budgeting • Advantages: • Easy to make • Micro-level expense control • Where the rubber hits the road: this is the details that bedevil • Reliance on past data

20. Responsibility Centre/ Program Budget • Distributes budget to internal units: Responsibility Centre • Program could involve several responsibility centres • Important means of assigning resources to program objectives, specific offices and specific locations • Seldom see this on its own for operational purposes • Usually in combination with a line item approach • Designed to follow the money. A responsibility centre is part of the organization, such as a department or unit, for which a manager is assigned responsibility, usually with spending authority for the assigned budget as well as responsibility for its proper use.

21. Responsibility Center Budget - Example Budget of the Killaloe General Hospital for Fiscal Year 200X Responsibility Centre Budget

22. Program Budget - Example

23. Program and Line Item Budget - Example

24. Functional Budgets • Result of combining a line item (input) and program approach • Functional Budgets focus on the major functions performed by an organization. • Combine elements of Line-Item and Responsibility Centered budgets • This format is often used for external reporting • Note the line item detail

25. Budget of the Killaloe General Hospital for Fiscal Year 2011 Functional Budgets - Example

26. Program Budgets/ Results-Based Budgets • Budgets meant to link funding to expected results • Program formulation and resources justification involve a set of predefined objectives, expected results, outputs, inputs and performance indicators which constitute a logic framework • Performance in achieving results is measured by predefined performance indicators.

27. Performance Budget – small and unpretentious Example

28. Performance budgets/results based budgets • Strengths: • Budget based on outputs • Emphasis on performance and results • Greater autonomy and flexibility meant to follow • Greater accountability and reporting • Departments more aware of outputs and cost of producing outputs • Puts decisions on deployment of resources in the hands of people at operations

29. Performance budgets/results based budgets • Shortcomings: • No clear link to desired outcomes – the attribution issue • Lack of focus on key internal processes • Generally poor costing of inputs to results – the path is not clear • With tighter fiscal position, need for greater emphasis on inter-ministry allocations • Diminishes need for cost control and basic probity.

30. Flexible budget • Organizations often experience more or less volume than budgeted. • Flexible budgets look at expected revenues, expenses, and net income under different volume assumptions. • The key to flexible budgeting is the identification of: • Fixed Costs - which do not change with volume. • Variable Costs - which do change with volume. • Flexible budget results are normally shown in a side-by-side columnar format. • A flexible budget is a form of "What if?" analysis.

31. Hot Meals for SchoolFlexible Operating Budget for 200X [1] Assuming that the service is provided 200 days a year [2] Assume the cost per meal is $3.00 with little flexibility for economies of scale.

32. Off-Budget Expenditures • Off-budget expenditures refer to financial transaction that are not accounted for in the budget • Most public budgets exclude certain governmental activities • Generally (but not always) refers to activities of public enterprises, credit provided or guaranteed by government or subsidies channelled through the tax system • Increasing trend to include them in the financial statements of government • Weaker control of these, but there is control nonetheless

33. Off-Budget Expenditures • Introduction of accrual also highlights financial obligations of a non-cash nature that create potential liabilities for the government, e.g. loan guarantees • The main forms of off-budget expenditures are: • off-budget funds; • direct loans; • guarantees; • Public Private Partnerships (PPPs) • Public sector entities that are commercial and legally excluded from the budget, e.g. Post Office.

34. Funds in Budget Architecture A fund is defined as a fiscal accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equity or balances, and charges, which are segregated of the purpose of carrying on specific activities or attain certain objectives for which special regulations, restriction or limitations apply.

35. Funds in Budget Architecture • Often funds are managed and reported separately – leading to a separate set of financial statements. • The use of funds restricts budgetary flexibility but displays allocation for specialized purposes in a transparent way – funds are often mandated in accounting standards or law, e.g. for municipal governments. • Often, special funds are created to segregate monies for programs for special purposes or as a result of unique designated revenue sources

36. Funds in Budget Architecture • Use of funds varies with governments • Municipal governments tend to be built almost entirely around funds. • The federal government and provinces will create special funds for a variety of purposes, some that are linked to unique sources of funds through fees or special taxes, some of which are administered at arms length from normal practice.

37. Fund Types Government Funds Proprietary Funds Fiduciary Funds Enterprise Funds Internal Service Funds Expendable Trust Funds Nonexpendable Trust Funds Agency Funds General Fund Special Revenue Fund Capital Projects Fund Debt Service Funds Special Assessment Funds Provides for ongoing activities of a self-sustaining operation Assets held in Trust by the Organization

38. Revolving Funds • An authority, in the case of government usually a statutory one, to use the revenues generated from an activity to finance it. • This authority generally continues on a permanent basis from one year to the next without further authority being needed. • Always created through budgetary expenditure means, but then those funds move off-budget. • Although surpluses or deficits may occur from year to year, they are generally expected to balance out over time. • Many arrangements exist for the use of retained earnings, with the principle being that the fund retains its earnings unless some form of gain sharing is put in place.

39. Zero Base Budgeting • Objective to “reset the clock” each year. • Traditional incremental budgeting assumes that there is a guaranteed budgetary base-the previous year’ level of appropriations -and the only question is how much of an increment will be given. • Zero Based Budgeting implies that managers need to build a budget from the ground up, building a case for their spending as if no baseline existed- to start at zero. • Resources are not necessarily allocated in accordance with previous patterns and consequently each existing item of expenditure has to be annually re-justified.

40. The purpose of ZBB is to reevaluate and reexamine all programs and expenditures for each budgeting cycle by analyzing workload and efficiency measures to determine priorities or alternative levels of funding for each program or expenditure. Through this system, each program is justified in its entirety each time a new budget is developed.

41. Strengths of ZBB • ZBB does not assume that last year’s allocation of resources is necessarily appropriate for the current year. • The systematic nature of such a fundamental review imposes a discipline on the organization which has produced in practice secondary advantages. • It produces in a readily accessible form more and better management information. • If implemented well, ZBB can eliminate a sense of “entitlement” to cost increases. • Improved discipline in developing budgets. • More meaningful budget discussions during plan review sessions.

42. Weaknesses of ZBB • ZBB vastly overestimates people’s ability to calculate. • Multiple impacts often ignored • The ranking process is difficult • The implementation of a ZBB system requires a great deal of time. • Attempts by agencies to manipulate priority listings by ranking popular items lower than items that would have little chance of funding – the Musical Ride. • Established programs have political support and they will continue to receive their share of the budget regardless of any analysis produced.

43. The Budget Process

44. The budget process • A process of planning and control. • A look ahead at what an organization can and can't do • A process of allocating scarce resources to unlimited demands • The Budget Cycle - Preparation • based on guidelines • normally done by responsibility center managers - Review and Adoption - Implementation and Control - Evaluation of Results and Feedback

45. Budget Process: Know it and Use it • Every organization has a budgetary process of some kind • Increasingly they attempt to be strategic for the organization • Managers are not simply recipients of budgets: they are players in the budget process • Sustaining programs, getting program changes, resisting change or helping it all mean knowing how the budget process works and using it to your advantage

46. The Budget Cycle Length of time required to prepare, administer & close out a single year budget.

47. Expenditure Management Cycle – Broader than Just the Budget Cycle Financial management system boundaries Project Resource Annual budgets Medium term appraisal allocation Development, Planning plans, e.g. three recurrent and system year rolling plans revenue Expenditure Liquidity management review Public expenditure Institutions review Fund release procedure, e.g... warranting Accountability Expenditure Project monitoring control Audit system Post event Accounting for Monitoring review revenue and & controlling expenditure Reports and financial statements Source: Adapted from Integrated Financial Management.Michael Parry, International Management Consultants Limited.Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December 1997.

48. Budget Calendar

49. Elements of an Effective Budget Cycle • Basic framework exists and is used • Desired outcomes known • Linkage to strategic plans • Common format, readily understood • Timetable for preparation clear and reasonable • Set of directions – rules of the game • Budgetary and program limits known • Established methodologies for costing and forecasting where needed • Directions on availability of new funds, use of current funds and reallocation rules

50. Start/Restart Results Feedback Auditing for Compliance and for Results Strategic Planning Phase Simple Budget Cycle Budget Execution Budget Preparation Phase Budget Review and Approval – Legislative Budget Review Internal Executive