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 citizen’s 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/nacslb/ 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. 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 City RevenuesExample from FY 2004-2005 Source: http://www.sco.ca.gov/ard/local/locrep/cities/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

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/special/politics/budget-2010/

43. 2011 Federal Budget Sources: http://www.usgovernmentspending.com/budget_pie_gs.php /

44. State Expenditures Source: http://www.ebudget.ca.gov/BudgetSummary/SUM/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.