Transcript Denhardt_chp._5

Government Budgeting
Denhardt - Chapter 5
Government budgets
and the economy

When economy grows, tax revenues increase
– Personal income, sales tax
– Tax rates can be lowered

As the economy shrinks, tax revenues will fall
–
–
Should taxes be raised to make up for the shortfall?
Raising taxes can further decrease personal incomes, thus
increasing economic instability
Keynesian economics

Rapid economic growth  high inflation

Inflation decreases buying power
– Worst for those on fixed incomes

Less buying power  high unemployment
– Hurts individuals and government
– Increases welfare burden
Federal Government

Federal spending decisions play a major role in the economy
–
–

Budget is an instrument of public policy
–

Accounts for over one-third of the GNP
Federal government by far the largest corporation in the
world – ten times size of GM
Programs that are “in” get funded
Deficit spending: Federal government can spend regardless of
revenues
State Governments

State and local expenditures account for 15 % of GNP

State budgets limited as most States cannot engage in
deficit spending (can’t spend more than they take in
during each budget cycle)
Sources of funds

Taxes
–
–
–
Proportional – everyone taxed at same rate
Progressive – higher rates on higher incomes
Regressive – flat tax

Automobile registration and license fees - persons with
lower incomes pay a proportionately higher rate of their
income
Taxes

Types of taxes
–
–
Personal income

Largest single source of Federal income (41 %)

progressive – higher rates for higher incomes
Corporate income

also progressive (10 % of Federal income)

Frequently avoided through tax shelters and credits
Taxes

Social insurance payroll taxes (34 % - 2nd. largest source)
–

Social security, health care, etc. (flat rate, regressive)
Sales and excise
–
–
Sales tax is a state and local form of revenue
Excise tax is Federal (3 % of Fed. income)

–
applies to sales of commodities such as gas, liquor
Both are regressive (poor consume a greater proportion of
their income than the rich)
Taxes

Property taxes
–
–
–
–
Provide about half of local government revenues
Evenly split between residence and business
Progressive (higher tax on more exp. homes)
Limitations on assessment increases

Calif Prop 13 (1978)
– limited to one percent of assessed valuation
– cannot increase more than two percent per year
Other revenue sources

Fee for services
–

Regressive – all pay the same regardless of income
Lotteries
–
–
Can be very regressive - poor play more
Other costs



Welfare
Crime
Burden on local services
Government spending:
Mandatory

Two-thirds of the Federal Budget is mandatory spending

Entitlement programs take fifty percent of the Federal budget
– Provide specified benefits to those who meet requirements
(Social Security, Medicare, Veteran benefits)
– Spending can vary year to year as size of group changes
– Usually indexed to the cost of living

Interest on national debt (fourteen percent of the Fed. Budget)

Farm price supports
Government spending:
Discretionary

Accounts for one-third of the Federal budget

Defense (15 percent of Federal budget)

Domestic programs (17 percent of the Federal budget)

October-October budget cycle is seldom met
–
Federal government usually winds up on a “continuing
resolution” (CR) for several months into the fiscal year
–
CR’s limit spending to previous fiscal year’s levels
Deficit spending




Large deficits may limit economic recovery
– Govt. money not available for buying new goods & services
– Govt. borrowing uses up available funds, drives up interest rates,
makes it tougher for businesses to borrow and limits private
expansion
Clinton’s last budget was balanced & projected a modest surplus
Current budget is seriously out of whack
– Actual 2003 deficit was 375 billion dollars
– Projected 2004 deficit is 477 billion dollars
National debt is a different issue from the deficit
 Sum total of outstanding Government securities and financial
obligations
 Huge – almost 8 trillion dollars
Debt reduction strategies



Goals
– spur economy
– lower interest rates
– calm financial markets
Clinton plan – reduce outlays & find new sources of revenue
– Increase corporate tax rate
– Increase personal tax rate for higher earning families
– Freeze defense spending and reduce Medicare increases
Bush administration reversed course
– Tax reductions to spur the economy
– Final measure was a $1.3 trillion cut over 10 years
State spending


Intergovernmental transfers: States and local governments
pass through a lot of money from the Fed. Govt.
– States control a lot more spending than just their own funds
– Thirty percent of education money is State & local
– Including pass-through Federal $, States control 70 percent
of all money spent on education in the U.S.
Including pass-through Federal $, State & local governments
spend money in this order:
– Education
– Public welfare
– Highways
Budget cycle:
Step 1 - Formulation




Fiscal year
Agencies prepare proposals and forward to central office
Chief executive may share decision-making with other elected
officials and legislators
Federal formulation
–
Cycle begins with OMB (works for President)
 Projects Government income and expenses
 Analyses agency programs, performance, needs and
priorities
 Special attention to President’s policy concerns
Federal formulation (cont’d)
–
–
–
–
–
Agencies negotiate requests with OMB
Final decisions made by President
Budget document presented to Congress
Committees in House and Senate hold hearings
 Agencies, interested parties, lobbyists and interest
groups have their say
House and Senate vote on funding bills
 Usually need to be reconciled by a “conference
committee”
 Congress aided by Congressional Budget Office, their
equivalent of the OMB
State formulation

State practices vary
–
Deficits usually prohibited
–
Governors generally have line-item veto power (President
does not)
Budget cycle:
Step 2 - Execution







Apportionment – funds generally allocated to agencies by
quarter
Preaudit – review before spending to insure that funds will
suffice and that expenditures are proper
Supplemental appropriation
Reprogramming – diverting moneys to other projects
Impoundment – withholding of funds by chief executive in case
revenue projections fall low or goals of program already
reached
Deferrals – temporary, either house of Congress can veto
Recissions – permanent – must be approved by both houses of
Congress
Budget cycle:
Step 3 - Audit

Post audit
– After fiscal year ends, to verify expenditures are proper

Performance audit
– Reviews of agency operations (not just financial)

Who conducts audits?
– Federal
 GAO
 GAO Performance Audits
– State
 California State Controller
Budgeting approaches:
Line-item budget

Each budget modeled on the previous

Based on experience and projected change

Organized by functional units or departments

Within departments, organized by expense categories

Pluses: allows close control and tracking of expenditures

Minuses: poor management tool (ignores performance)
Budgeting approaches:
Performance budget

Organized around programs or activities, not departments

Focus is on work processes – not mission or goals

Performance measures reflect accomplishments and costs
– Program: Highway safety
– Subprogram: School visitations
– Cost: 27 visits @ $250

Issues
– Emphasizes what is measurable - quantity rather than quality
– Programs cut across organization structure, difficult to assess
responsibility
Budgeting approaches:
Program budget




Unifies planning, systems analysis and budgeting
Each agency has a mission statement that identifies goals
Budget sets out objectives that must be met to accomplish
these goals
Agencies evaluated on meeting their goals and objectives
–
–


Performance budget – focus on process – measure success
of sanitation department by # of garbage collections
Program budget – focus on purpose – measure success of
sanitation department by rate of infectious disease
Advantages: Focus on benefits of govt. activity
Disadvantages: Cost and complexity
Practical
exercise
Budgeting approaches:
Zero-based budget

Basis: Identify “decision units” – the lowest point in the org. at
which significant program decisions are made

Managers of decision units prepare packages
–
–
–
–

Describe programs
Estimate costs and benefits
Identify alternatives & justify proposed approach
Specify required funding for minimum, current and optimal
operations
Decision packages ranked by top management and legislators
Budgeting
politics

Agency managers typically seek to expand
– Try to classify as many activities as possible as part of their
program’s “base” – elements that are continuously funded
without opposition year after year
– Try to get a larger share of agency resources

Tactics
– Look for support inside and outside their agencies
– Padding
– “Camel’s nose” – getting a foot in the door, then expanding
Financial management –
Fund-based accounting


Government budgets are deposited into specific “funds” to
assure overall agency accountability for expenditures
Funds represent functional areas
–
–


General funds for routine agency activities
Restricted funds for specific uses (separate fund for gas tax
revenue)
Proprietary funds hold profits (e.g., transit systems)
Fiduciary funds hold individual assets (pension funds) and
moneys collected for other governments (property taxes
collected by a county for the State)
Financial management –
Risk Management and Purchasing

Risk management
–
–

Identify potential areas of loss
Try to reduce probability or mitigate losses
Purchasing
–
–
Centralized purchasing by experts
Cooperative purchasing
PROGRAM BUDGETING PRACTICAL EXERCISE
You are developing a program budget for a public agency. For your assigned
agency:
1. List three to five goals
2. For each goal, list three to five objectives
3. For each objective, give three to five examples of a specific expenditure
Team 1 - City streets department
Team 2 - Fire department
Team 3 - Police department
Team 4 – School district
Team 5 – Parks and recreation department
Return to
slide show