Transcript INST 275 – Administrative Processes in Government

INST 275 – Administrative
Processes in Government
Lecture 12 – Public
Financial Management I
The Importance of Public Financial
Management




The flow and management of funds is the lifeblood of
our system of public administration.
Many aspects of the design of the American system
of public financial management go back to our
deepest political traditions and compacts.
Others, like the idea of the welfare state, go back
only a few generations.
Still others, such as the concept of “user pays,” are
at their height.
The Importance of Public Financial
Management

Think of the system as rather like a huge
irrigation system, one which gathers rainfall
in large dams, and distributes the flow of
water through large and small pipes to many
disparate communities, to commercial users,
schools and hospitals, to parklands and
charities, to businesses and individuals, to
seaside areas and deserts.
Six Principles

Boston Tea Party.
–

No taxation without representation.
Principles.
–
–
–
–
–
–
Democratic consent.
Equity.
Transparency.
Probity.
Prudence.
Accountability.
Balanced Budgets



A balanced budget is a budget in which receipts are
equal to or greater than outlays.
A government that has one is financially healthy.
There are advantages to an unbalanced budget.
–
–

Extra spending can stimulate the economy.
But large deficits can devalue the currency, kindle inflation
and crowd out capital markets.
All states have balanced budget requirements. The
federal government does not.
The Fiscal Year




“Fiscal” deals with taxation, public revenues, or
public debt.
The fiscal year is a 12-month accounting period
without regard to a calendar year.
The federal government’s fiscal year starts on
October 1 and ends September 30. The current
federal fiscal year is FY 2008.
California’s fiscal year starts on July 1 and ends
June 30. The current state fiscal year is FY 2008.
The Budget Game


In the United States, the budget game is a major
preoccupation in politics, occupying the time and
energies of thousands of lobbyists, politicians, and
officials in the national capital, and fewer but
similarly motivated categories of people in state
capitals.
Why? The budget is the biggest game in town.
The Politics of the Budgetary
Process

The emphasis on the “horse trading” nature
of the budgetary process is the counterpart
of Lindblom’s emphasis on the incremental
nature of decision-making.
The Politics of the Budgetary
Process

A process that concentrates on the increment is
preferable to one that attempts to review the whole
budget because it moderates conflict, reduces
search costs, stabilizes budgetary roles and
expectations, reduces the amount of time that busy
officials must spend on budgeting, and increases the
likelihood that important political values will be taken
into account.
–
Allen Schick.
The Politics of the Budgetary
Process
Table S–1. U.S. Budget Totals
(Dollar amounts in billions)
2005
2006
2007
2008
2009
2010
2011
Receipts
2,154
2,285
2,416
2,590
2,714
2,878
3,035
Outlays
2,472
2,709
2,770
2,814
2,922
3,061
3,240
−318
−423
−354
−223
−208
−183
−205
12,290
13,030
13,761
14,521
15,296
16,102
16,955
Receipts
17.5%
17.5%
17.6%
17.8%
17.7%
17.9%
17.9%
Outlays
20.1%
20.8%
20.1%
19.4%
19.1%
19.0%
19.1%
−2.6%
−3.2%
−2.6%
−1.5%
−1.4%
−1.1%
−1.2%
Budget Totals:
Deficit
Gross Domestic Product (GDP)
Budget Totals as a Percent of GDP:
Deficit
The Politics of the Budgetary Process
(California)
Figure-SUM-02
Figure-SUM-03
2007-08 Revenue Sources
2007-08 Total Expenditures by Agency
(Dollars in Millions)
General Special
Change
Fund Funds
Personal
Income Tax
Sales Tax
Corporation
Tax
Total
From
2006-07
$55,236
$1,589
$56,825
$3,160
28,820
5,757
34,577
1,572
11,055
-
11,055
338
(Dollars in Millions)
General
Fund
Legislative, Judicial,
Executive
State and Consumer
Services
Business, Transportation &
Housing
Motor Vehicle
Fees
Insurance
Tax
Liquor Tax
Tobacco
Taxes
Other
Total
-
26
3,546
5,506
3,546
5,532
60
278
2,181
-
2,181
15
324
-
324
3
120
3,477
981
9,437
1,101
12,914
11
2,052
$101,239
$26,816
$128,055
$7,489
Note: Numbers may not add due to rounding.
Totals
$3,792
$2,045
$427
$6,264
577
806
24
1,407
1,567
8,640
3,078
13,285
1,674
2,060
1,790
5,524
90
1,046
696
1,832
Health and Human Services
Corrections and
Rehabilitation
29,719
8,130
158
38,007
9,836
22
-
9,858
K-12 Education
41,341
93
3,990
45,424
Higher Education
Labor and Workforce
Development
General Government
11,980
42
2,957
14,979
103
1,579
321
6,008
952
424
8,539
$102,258
$29,213
$14,072
$145,543
Resources
Highway
Users Taxes
Special Bond
Funds Funds
Environmental Protection
Total
Note: Numbers may not add due to rounding.
The Politics of the Budgetary
Process


The danger in elevating horse trading to an art and a
science is the loss of direction.
Three conditions are essential for incremental policymaking to be adequate:
–
–
–
The results of present policies must in the mean be
adequate.
There must be a high degree of continuity in the nature of
problems.
There must be a high degree of continuity in the available
means for dealing with problems.
The Politics of the Budgetary
Process


Developing countries cannot pursue
incremental policies, nor should the U.S.
when changes in values make formerly
acceptable policies untenable.
Washington gridlock is certainly one
outcome.
The Politics of the Budgetary
Process

Budget process resembles riverboat poker game.
–
–
–
–
–
–
Administrative agencies at one table pursuing zero-sum
game.
Congress people at another table watching the other table
and their backs.
Lobbyists linger in background signing up members of
Congress for persuasion and deals.
Press corps at the bar.
Think tanks outside on the deck.
Academic theorists in steerage.
Budget Maximizing Bureaucrat



Bluff and overstatement are key tactical tools of
departments and spending advocates during budget
processes.
Aware that their bids will be subject to some degree
of cutback, bidders build in a protect buffer to allow
for it.
There are rules in budget preparation including
allowable inflation indices, appropriate cost
estimates, and appropriate program documentation.
Budget Maximizing Bureaucrat

No limits on the ambitions of bureaucrats who wish
to maximize their agency’s budgets and their
program’s importance.
–

“Mine is bigger than yours.”
The misrepresentation of budget estimates is a tool
used by both program advocates and program
opponents. That is why Congress prepares its own
version of the budget.
Budget Maximizing Bureaucrat

The budget game consists of two fields of
play:
–
–

Defending your clientele against revenue hikes
such as tax increases.
Seeking to attract government spending programs
that will benefit your clientele.
Game so skillful that sometimes difficult to
categorize action as revenue or expenditure.
Budget Maximizing Bureaucrat




Example: government housing assistance to lowpaid workers is an expenditure.
Housing assistance to high-paid workers is a
revenue exemption or tax expenditure.
The interplay between the President and the
Congress represents the ultimate showdown in the
budget game.
The budget game should never be ignored or
underestimated by public administrators.
Budgeting Theory and Practice



Budgeting is the single most important decision
making process in public institutions.
The budget is a jurisdiction’s most important
reference document.
Budgets simultaneously record policy decision
outcomes, cite policy priorities and program
objectives, and delineate a government’s total
service effort.
Budgeting Theory and Practice

A public budget has four basic dimensions:
–
–
A political instrument that allocates scarce public resources
among the social and economic needs of a jurisdiction.
A budget is a managerial or administrative instrument.



It specifies the ways and means of providing public programs
and services.
It establishes the costs of programs and the criteria by which
these programs are evaluated for efficiency and effectiveness.
It ensures that programs will be reviewed or evaluated at least
once during the budget year or budget cycle.
Budgeting Theory and Practice

A public budget has four basic dimensions
(contd.):
–
–
A budget is an economic instrument that can
direct a jurisdiction’s economic growth and
development.
A budget is an accounting instrument that holds
government officials responsible for the
expenditure of the funds with which they have
been entrusted.
Budgeting Theory and Practice

U.S. Budget, FY 2008.
–


California Budget, FY 2008.
– http://www.ebudget.ca.gov/.
Kern County Budget, FY 2008.
–

http://www.whitehouse.gov/omb/budget/fy2008/.
http://www.co.kern.ca.us/cao/budget/fy0708/rec/.
City of Bakersfield Budget, FY 2008.
–
http://www.ci.bakersfield.ca.us/administration/citymanager/b
udget/index.htm.
The Taft Commission


Prior to 1900, the processes of public
financial management in America lacked
overall objectives.
In 1912, the Taft Commission recommended
a national budgeting system to deal with the
increasing complexity of the budget process.
The Taft Commission

William F. Willoughby (1918) argued that
budget reform at the state level would involve
three trends.
–
–
–
How budgets would advance and provide for
popular control.
How budgets would enhance legislative and
executive cooperation.
How budgets would ensure administrative and
management efficiency.
The Taft Commission

The Budget and Accounting Act (1921).
–
–


Bureau of the Budget – In Treasury.
The General Accounting Office.
Initially, budgetary and compliance
procedures remained simple using line-item
budgeting. Compliance focused on whether
expenditures matched allocations.
Budgetary theory remained inadequate.
The Influence of Keynes

John Maynard Keynes (1883-1946).
–
–
–
Demonstrated how government spending could be critical to
managing the economy by stimulating demand when
resources were underutilized and unemployment was high.
Created notion of budgetary policy as an instrument by
which a nation could execute macroeconomic policy.
Justification for deficit spending to stimulate the economy.
The Influence of Keynes

Aaron Wildavsky (1930-1993) highlighted the
extent to which budgeting was a political and
economic rather than a mechanical process.
The Objectives of Budgeting and
Revenue Generation


Allocation – ensuring that an appropriate level of
funding flows into sectors of the economy where it is
required;
Distribution – ensuring that the balance in public
funding between regions, between classes of people
in society, between public and private sectors, and
between government and business reflects public
policy;
The Objectives of Budgeting and
Revenue Generation


Stabilization – using public spending to
stabilize the macroeconomy (or in some
cases part of it) as prescribe by Keynes; and.
Growth – using the power of government
spending to facilitate economic growth and
wealth creation.
The Objectives of Budgeting and
Revenue Generation

Of course, the objectives are often not clear
or agree upon.
–
Supply side economics.
Two Types of Budget

Most common – operating budget.
–
–

Short-term plan for managing the resources necessary to
carry out a program.
Usually developed each fiscal year.
Capital budget.
–
–
–
Planning for large expenditures for capital items.
Usually cover five- to ten-year periods.
Federal government has never used.
Waves of Innovation in Budget
Making


The structure and format of government
budgets have been the subject of successive
waves of innovation throughout the twentieth
century.
Why? The budget is the focal point of public
administration.
Executive Budget




The first conceptual breakthrough was the
conception that there should be a
government budget at all.
Legislative budgeting largely ad hoc.
A lot of room for incompetence and
corruption.
An executive budget is both a technical
process and a physical thing.
Executive Budget