The Purposes of Budgets

1. The Purposes of Budgets • Budgets provide governments with a mechanism to allocate resources for the pursuit of goals that are consistent with community preferences and needs. • Wildavsky (author of The New Politics of the Budgetary Process) writes that a budget is: 1) A prediction(providing predictability)2) Translates financial resources into human purposes 3) A contractin which the public provides money to government and government spends that money to benefit the public. As a contract a budget represents: 1) A commitment on both sides to this fiscal relationship 2) Mutual agreement of parties on priorities 3) Sanctions for both sides if their terms go unmet

2. Local Government Budgeting • Setting a local government budget involves three key decisions:1) Allocation: What services will be provided? 2) Distribution: Who will get the benefits and bear the burdens? 3) Stabilization/Growth: What levels of growth in income and prices are desirable/acceptable? • The Allocation Decision is based in three criteria: 1) Economic efficiency: Government should provide services desired by the local citizenry 2) Technical efficiency: Government should provide services at the least cost 3) Net social benefits/costs: Benefits should be maximized, costs minimized, and externalities should be considered

3. Local Government Budgeting II • The Distribution Decisionusually considers: 1) Where to provide services 2) How to provide services 3) How to pay for servicesThe mix of services provided, how they are provided (to locations or to people), and how they are paid for (property taxes vs. user fees, for example) have great implications on the distribution decision. • Stabilizationof the local economy is desirable, but not easily undertaken at the local level. Why? (“City Limits”) Consequently, local governments invest a great deal in economic development efforts to improve the local economy (URP 5540).

4. Local Government Expenditures • How do local governments actually spend their money? This question can be answered many ways. Expenditures are often organized by: 1) Function or Purpose (Fire, Water, Sewer, Planning) 2) Object (Wages, Supplies, Debt) 3) Term (Current vs. Long-lived) see tables on pps. 82, 83 • What factors influence the level of local expenditures? Demand Factors(What services do citizens want?) --Population shifts --National economic performance --Relative price of services --Changes in local income levels Supply Factors (What services does/can a government provide?) --Cost of labor/capital --Economies of scale --Indexation (welfare) --Long-term costs of Cap Imp’s --Employee productivity External Factors Local, Regional, National “shocks to the system” (9-11-01)

5. Local Government Revenues • Traditionally local governments receive income from four major sources: --User charges --Intergovernmental transfers --Property taxes --Borrowing • General principles for choosing a local tax structures are: --User charges are best for those services where benefits accrue to users (Utilities) --Local property taxes are best where the benefits accrue to the entire population and individual pricing cannot be applied (General Admin, Police, Fire) --Intergovernmental transfers are best for systems where substantial spillovers occur (Health Care, Education, Welfare) --Borrowing is best for long-term capital investments • Criteria used for determining the utility of a potential revenue stream include: --Yield --Equity --Neutrality --Administrative Ease --Political Feasibility

6. Budgeting: Context and Characteristics • Current (Operating) vs Capital Budget vs Consolidated Budget • Types of Budgeting Periods Years: • State Fiscal Year (July 1 - June 30) • City Fiscal Year (October 1 – Sept 30) • Calendar Year (Jan 1 - Dec 31) • Biennial (every two years) • Fund: An independent fiscal entity with assets, liabilities, reserves, and revenues and expenditures • ExpendableFunds vs Nonexpendable (Revolving) Funds • Government Funds 1) General Fund 2) Special Revenue Fund (Earmarked funds) 3) Capital Project Fund (Long-term project specific debt) 4) Debt Service Fund (General Obligation (GO) debt) 5) Enterprise Fund (Proprietary) 6) Internal Service Fund (Proprietary) 7) Fiduciary Fund (Custodial)

7. The Capital Budget (Year 1, CIP) Years 2-5 “The Rolling Spending Plan” The Operating Budget The CIP The Consolidated Budget Consolidated Budget vs The Capital Budget

8. Budgeting: Addressing Community Goals • The Rational Model in Budgeting: Means (incremental inputs) are explicitly tied to certain Ends (outcomes) • Budget Structure (Usually one of two approaches) 1) By department 2) By program • A Familiar “Rational Planning” Process: • Identify Needs • Identify Goals, Objectives, and Targets • Identify clientele/Assess demand • Assign each objective a monetary value • Determine/Evaluate alternatives for each objective • Award Financing • Work Plan • Feedback Loop

9. The Budget Cycle • Step 1: Preparation • Revenues and Expenditures are estimated by separate units and by the primary budget official. A Proposed Budget is prepared. • Step 2: Adoption • Review of the chief administrator’s (Mayor or City Manager) proposed budget by the governing body (City Council). The Budget is Adopted. • Step 3: Implementation • The carrying out of the Budget. Money is collected, depts/programs are financed, money is spent, and government conducts its business. • Step 4: Evaluation • Usually undertaken through audits. 1) Financial audit: Detecting fraud 2) Efficiency audit: Detecting waste 3) Program results audit: Detect whether objectives were achieved 4) Performance audit: Combination of #1 thru #3

10. Budgetary Control • Detecting Fraud and Waste is a major emphasis in budgeting. • Fraud: Intentional deception for the purpose of misappropriating funds • Waste: The diversion of funds from their intended purposes • Financial Control: Limit expenditures to the items specified in the appropriations • Controlled internally, usually by the executive branch • Close monitoring of expenditures and programs • Management Control: Insure linkages between expenditures and objectives • Controlled internally and externally • Close monitoring of programs and results • Control carries significant costs (see local government fiscal organization, p. 26)

11. Budgetary Approaches