Week # 4

1. Week # 4 Implementing The Budget

2. Budget Implementation --- The Third Phase of the Budget Cycle • We have covered the first two phases of the budget cycle (i.e., Executive Preparation and Legislative Approval) • The third phase --- Budget Implementation --- occurs after the chief executive’s proposed budget is reviewed and approved by the legislative body. • In effect, during this phase the legislature gives the chief executive the legal authorization to implement the approved budget plan.

3. Budget Implementation • Budget implementation means executing the budget plan by implementing all of the actions (i.e., programs and services) the government intended to take during the fiscal year. • In addition, it also means collecting the anticipated revenues identified in the budget to pay for the programs and services during the fiscal year. • Both service delivery and revenue collection require a well conceived and comprehensive system of financial control to monitor all financial transactions and provide a system of accounting and financial reporting.

4. Financial Controls in Local Government • There are 3 levels of financial control: > Budget Implementation > Accounting > Reporting • Budget implementation will involve entering into contracts, paying salaries, and making many other disbursements. An accounting system must therefore be established to record all financial transactions. And finally, a system of financial reporting must also be put in place to ensure the integrity of the financial system is maintained.

5. Financial Controls • The budget office is primarily concerned with procedural matters • The accounting office is primarily responsible for maintaining records on all financial transactions. • The comptroller’s office, works closely with both the budgeting and accounting, and prepares a year-end financial report.

6. Financial controls Q4-1: Identify a few common methods used by the below listed participants in the budget process to bring about financial control in local government budgeting. > Budget Office > Accounting Office > Comptroller’s Office

7. Budget Implementation The text describes Budget implementation as involving the following four broad functions… • Communicating budget information • Maintaining budget compliance • Altering budget authority during the year and making corrections • Putting into place budget policies for times of fiscal crisis

8. Communicating Budget Information

9. Communicating Budget Information Financial accountability is at the heart of democratic governance. Those responsible for implementing the budget have an obligation to keep citizens informed of budget decisions.

10. Communicating the Budget Q4-2: Identify two occasions when the budget is typically made available or revealed to the public. Q4-3: Identify and briefly describe at least two ways the budget is communicated to either internal or external stakeholders.

11. Communicating the Budget • Since 1984, the Government Finance Officers Association (GFOA) promulgated better budget communication. • The GFOA sponsors an annual awards program and invites state and local government to submit their budget for rating by independent raters. • You can access the GFOA recommended budget practices using the below link: http://www.gfoa.org/services/dfl/budget/RecommendedBudgetPractices.pdf

12. GFOA Criteria The GFOA evaluates budgets documents using the 4 evaluation areas listed below: • The budget as a policy document • The budget as a financial plan • The budget as an operations guide • The budget as a communication device

13. The budget as a policy document • The GFOA acknowledges the role budgets play in shaping policy choices. • The GFOA evaluates the extent to which the budget document includes statements reflecting budget and financial policies.

14. The budget as a policy document Q4-4: Briefly describe at least two types of statement that might be included in a budget document that would satisfy the GFOA criteria regarding the inclusion of budget and financial policies.

15. The budget as a Financial Plan • The GFOA acknowledges the historic role of the budget as a tool for financial management. • An extensive amount of very detailed financial information must be included in the budget document to satisfy the criteria within this particular GFOA rating area. • In fact, this particular rating area might be considered the most important because communicating data related to the financial plan lies at the very heart of the budget process.

16. The budget as a Financial Plan Q4-5: List at least six types of financial information described in the text that should be included in the budget document to satisfy the GFOA criteria relating to the budget as a financial plan.

17. The budget as an Operations Guide • To provide a suitable frame of reference for anyone reviewing the budget, the GFOA prescribes the inclusion of information that describes the unit of government and its major organizational components. • Information relating to basic mission, function and operations of the various organizational components should also be provided to link basic government operations to the appropriated funds included in the budget.

18. The budget as an Operations Guide Q4-6:List at least four types of information described in the text that might be included in the budget document to satisfy the GFOA criteria relating to the budget as an operations guide.

19. The budget as a communication device • The final GFOA evaluation area demonstrates the relative importance the GFOA attributes to communicating budget information, particularly to stakeholders outside government. • The GFOA prescribes including information in the budget document to help people to get an understanding of the process undertaken to prepare and approve the budget. The budget should include non-technical and user-friendly information relating to economic trends; short-term and long-term planning assumptions; and other issues that may have affected budgetary decisions.

20. Maintaining Budget Compliance

21. Maintaining budget compliance The chief executive is charged with ultimate responsibility for maintaining budgetary compliance. Although most stakeholders do not expect everything will go as planned, there is an expectation that all government officials involved in the process will comply with budget policies and procedures. There is also an expectation that all financial transactions will be closely monitored; the approved budget plan will be followed unless adjustments are deemed necessary; and a forthright effort will be made to record, report and disclose information regarding budget implementation.

22. Maintaining budget compliance The text describes the four budget practices listed below methods of maintaining budget compliance: > Encumbrance control > Position control > Apportionment and allotment control > Termination of budgetary authority

23. Encumbrances • An encumbrance can be viewed as setting aside a portion of budgeted funds once a purchase or contract is approved. • It is a contingent liability in that the funds will be disbursed once the government receives the goods or services. • For this reason, an encumbrance is also known as an “obligation” in that the monies are set aside for that one purpose or purchase. • An encumbrance provides assurance to suppliers that sufficient funds will be available once the order is fulfilled.

24. Encumbrances • Encumbrances link budgeting with the purchasing and accounting systems. • A purchase requisition begins the process of encumbering funds. • The purchase requisition must be submitted for approval by the purchasing department to ensure compliance with all requisite purchasing laws and policies. • Once approved by the purchasing department the purchase requisition goes to the budget office to verify funds are available and consistent with the original budget plan as approved by the legislative body.

25. Encumbrances • Once approved by the purchasing department the purchase requisition goes to the budget office. The budget office verifies sufficient funds are available and to ensure the request is consistent with the original budget plan as approved by the legislature. • The purchase requisition is next sent to the accounting office where it becomes a purchase order and the funds are then recorded as encumbered. • The purchase order is often forwarded to the vendor at this point and serves as authorization to deliver the goods or services.

26. Encumbrances • Once the goods or services are delivered and receipted (i.e., a voucher issued) the accounting office removes the encumbrance status and records the purchase as an expenditure once a check is sent to the vendor. • Assigning an encumbrance status to a purchase order ensures funding is available from the current fiscal year’s budget to satisfy any outstanding purchases at the end of the fiscal year – and even after the current fiscal year.

27. Encumbrances Q4-7: Briefly explain how and when a “purchase requisition” becomes a “purchase order” and precisely identify the time during the purchasing process when the funds for the purchase are actually encumbered. Q4-8: Based on your reading briefly describe the reason an encumbrance is referred to as a “contingent liability”.

28. Position Controls • Position control refers to the authority of the budget office to approve new hires and reclassifying existing positions. • Although the appropriation ordinance may include funding for all positions authorized for each department and/or program, it is common for the budget office to have final approval for all new hires. • In other words – a department may win approval for a certain number of positions but departments must seek the approval of the budget office to fill all vacant positions.

29. Position Controls • The logic underlying position control involves the actual capacity to pay the salary cost for the new hire(s). • Many people who are new to budgeting tend to assume a position should be filled because it was included in the approved budget and the balanced budget requirement ensures matching revenue will be available. However, this logic is faulty because it presumes the anticipated revenue projection was accurate and sufficient funds are actually being collected to cover all on-going expenditures and also the cost of the new hire.

30. Position Controls • Only the budget office has the information necessary to make a determination, whether sufficient revenue is being collected to both pay –on-going costs and the added costs for new hires. • It is particularly important to recognize the inescapable logic that once a position is filled the salary must be paid and this means there must be adequate revenue being collected. • This is particularly true for personnel expenditures AND it is particularly common for local governments where personnel expenditures may represent as much as 80% of the budget.

31. Position Controls • It is also important to recognize that during the fiscal year positions are vacated due to retirements, etc. • When a position is vacant, revenue continues to be collected but not paid out. Unfilled vacant positions therefore allow surplus funds to accumulate. The salary savings can be substantial. • The salary savings will be treated as salvage, remain in the fund and re-appropriated for another purpose or treated as surplus funds to be used to fund the budget the following year.

32. Apportionment and Allotment • Apportionment and allotment are one of the oldest forms of budget control. • These two methods of control limit the rate at which funds may be spent (apportionment) and control the amount of funding to be used for specific programs or organizational units.

33. Apportionment and Allotment Q4-9: Define apportionment and briefly explain the benefit derived by this method of financial control. Q4-10: Define allotment and briefly explain the benefit derived by this method of financial control.

34. Termination of Budget Authority • The budget appropriation ordinance includes language stating the authority to enter into obligations terminates on the last day of the fiscal year. • All unencumbered account balances then revert to the general fund and become part of the fund balance for re-appropriation in the subsequent fiscal year.

35. Termination of Budget Authority • The lapse in budget authority (as it is called) compels managers to encumber the full amount of their budgeted funds. • It precludes departments from amassing large sums of unencumbered funds and allows unused collected funds to be put to use. • When available for re-appropriation, the surplus can help avoid a new or increased tax levy during the subsequent year.

36. Termination of Budget Authority Q4-11: While the lapse of budget authority has several advantages, there are also disadvantages. Briefly describe at least two disadvantages that may occur due to this budget policy.

37. Altering Budget Authority

38. Altering Budget Authority The financial controls previously described are the first line of defense and they are commonly used while implementing the budget. The second line of defense involves “altering the budget authority”. As the name implies, “altering the budget authority” literally means adjusting the budget and/or financial plan that has been formally reviewed and approved by the legislature and passed into law. Due to these circumstances, “altering the budget authority” should be viewed as a rather serious undertaking that is typically employed only when it is necessary to correct a serious problem.

39. Altering Budget Authority Altering the budget authority is usually accomplished in one of 3 ways: > Transferring budget authority (appropriations) across departments or among the eleven types of funds. > Amending a department’s budget authority during the fiscal year. > Requesting use of budget reserves during the fiscal year.

40. Budget Transfers • A budget transfer is defined as the shifting of budget authority from one account or fund to another after the council has approved the budget. • Authority to make such transfers is granted either explicitly in charter or law, or implicitly by agreement between the council and the manager.

41. Budget Transfers • A common type of fund transfer is known as the internal service fund transfer. • This type of transfer involves the transfer of funds from one department to reimburse another department for goods or services. • For example, transferring funds to the central warehouse unit to pay for office supplies ordered for another department or transferring funds to fleet management to pay for fuel consumed by other departments. • This type of transfer is somewhat common and may only require approval of the department heads.

42. Budget Transfers • Another form of budget transfer involves the city manager transferring funds from a discretionary account to pay for an unexpected expense incurred by a department. • The manager may be granted the authority to transfer the funds as routine policy but notification or explanation to the council may be required.

43. Budget Transfers • Inter-departmental transfers (between departments) are not nearly as common. • City managers may be granted authority in the charter or by ordinance. • It is far more common for the approval of the city council to be needed.

44. Budget Transfers • Intra-departmental transfers (within a department) are far more common than inter-departmental fund transfers. • The budget director or city manager can typically authorize the transfer of funds within a department. • These type of budget transfers provide managers with the capacity to respond to shifting demands.

45. Budget Amendments If the required budget correction is of sufficient magnitude, the council may amend the original budget and order: > redirecting existing budget authority > increasing total budget authority > reducing total budget authority

46. Budget Amendments • It is somewhat common for amendments to be made at mid-year, end-of-year and for a contingency for some unforeseen circumstance. • However, too many budget amendments may raise concerns by bond rating firms and other stakeholders.

47. Budget Amendments • Supplemental appropriations: > an name infers – this appropriation provides additional budgetary authority – granted by council > provide additional funding for a program or department(s) during the fiscal year for unexpected events (e.g., natural disasters) > more common at Federal level

48. Budget Amendments • Budget amendments may also reduce overall spending • Usually undertaken due to changing economic or political conditions. • At the federal level, the president, working with Office of Management and Budget, may order part of agency’s appropriation to be impounded.

49. Budget Amendments Q4-12: Making too many budget amendments tends to raise concerns about a defect in budget preparation or implementation. Briefly explain the basis for concern and list three possible defects suggested when too many budget amendments are made. Q4-13: Briefly describe what is meant by a “spending freeze” and cite a few examples of the types of spending that may be frozen when a spending freeze is ordered.

50. Budget Reserves • Another method of altering budget authority is to tap into the budget reserve during budget implementation. • Budget policy should contain a provision for creation of a reserve fund, use of reserve funds and describe conditions when reserve funds can be used.