Transcript Fundamental Principles of Public Finance

Budget Methods and
Practices
Preparation of
Agency Budget Requests
• Three important pieces
– Narrative
• describes the agency and objectives
– Detail Schedules
• Translates managerial objectives into requests for
new appropriations
– Cumulative schedules
• Aggregate of NEW Initiatives into existing activities
Preparation of Agency Budgets
• The description dominates the numbers
• The request describes and justifies the
plan
• Budgeting is logic, justification, and politics
Preparation of Agency Budgets
• Different approaches to develop estimates
– Grouped by ORGANIZATION incurring costs
• Branch, section, division
• Follows organizational chart
– Grouped by TASK, PURPOSE, BUDGET ACTIVITY
• Cleaning streets, controlling traffic, collecting garbage
– Grouped by OBJECT CLASS
• Nature of goods and services
• Vehicles, Personnel, consumables, maintenance
Budget Justification
• Avoid jargon and acronyms
• Must be factual and documented
• Address the current situation, additional needs,
expected results from honoring request
• Reasons for requesting funds include:
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Higher/lower prices
Workload
Methods improvement
Full financing
New services
Elements of Cost Estimation
• Compensating personnel is a large cost
• Personnel services and benefits
– Wages, salaries, experience
– Non-wage-and-salary personnel costs
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Pensions
Insurance
Uniforms
Social Security
Many more
Elements of Cost Estimation
• Non-personnel costs
– Volume x unit price (automobiles, PC’s)
– Workload x average unit cost (300 people x $20)
– Workforce ratios (office supplies @ $30/person)
– Ratios to another object (3 alternators/15 trucks)
– Adjustment to prior year costs (4% increase)
Screening for Errors
• Instructions not followed (format,
regulations)
• Missing documentation
• Internal inconsistency
• Math
Review of Budgets
• Checklist for Budget Justification
√ COMPLETENESS
√ EXPLICITNESS
√ CONSISTENCY
√ BALANCE
√ QUANTITATIVE DATA
√ ORGANIZATION
How To Cut A Budget
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Cut all increases in personnel
Cut all luxury equipment
Use precedent – what has been cut before
Repair/renovate instead of replacement
Recommend a study
Cut a fixed percentage
Do not cut when safety or health is critical
Cut department with bad reputations
Ask another analyst
Identify dubious items for the manager’s attention
How To Review A Budget
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Policy rationale is sound (makes sense)
Check the arithmetic (no errors)
Check linkage between money and outcomes
Are program changes consistent with legislative
intent? (did we do what they told us to)
Look for omissions (shortfalls downstream)
Ratios, shares, and trends (comparisons)
Executive Policy (agrees with chief’s policy)
Choices within limits (acceptable tradeoffs)
Performance (does the program work?)
4 Basic Elements
of the Budget Document
• Budget Message (an introduction from the chief
executive)
• Summary schedules (major aggregates,
revenues & expenditures, object, unit, function)
• Detail schedules (detail by unit, by function, by
object of expenditure, by program)
• Supplemental data (tables, displays)
Phantom Balance and
Deficit Reductions
• How to “balance” a budget
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ROSY SCENARIOS (high revenue estimates)
ONE-SHOTS (Gov’t sale / privatization)
INTERBUDGET MANIPULATION (off-line)
BUBBLES & TIMING (accelerated collection)
DUCKING THE DECISION (artificial balance,
supplemental appropriation next year)
– PLAYING THE INTERGOVERNMENTAL SYSTEM
(moving money to other governmental levels)
– MAGIC ASTERISK (don’t know how but the low
bottom line will happen)
Managing Budget Execution
• Preventative controls (pre-auditing before
money spent)
• Feed-forward controls (diagnostic actions, like
variance reports)
• Feedback controls (compares budgeted to
actual expenditure)
Quarterly allotments – sometimes unequal
Managing Budget Execution
• REPROGRAMMING - changing use of funds
within an account
• TRANSFER – moving funds from one account to
another
• INTERNAL CONTROL – methods and
procedures to safeguard assets, check accuracy
and reliability of financial and other data,
promote operational efficiency, and encourage
adherence to policies and procedures
Internal Controls
• Provide qualified personnel, rotate duties, enforce
vacations
• Segregate responsibility
• Separate operations and accounting
• Assign responsibility
• Maintain controlled proofs and security (segregated bank
accounts, sequential numbering, bonding)
• Record transactions and safeguard assets
Intra-Year Cash Budget
• Cash Budget
– Forecasts flows of cash
– Based on known patterns
– Prevents you from running out of cash
– Warns you when you may need a loan
Audit and Evaluation
• Errors Auditors Look For:
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Year-end manipulations
Unrecorded liabilities
Overestimated revenues
Failure to adequately reserve
Miscalculation of bills
Unauthorized transfer of funds between accounts
Recording of grant receipts in wrong funds
Co-mingled cash accounts
Failure to observe legal requirements
Failure to compile and submit financial reports
Improper computation of state aid claims
How To Steal
From The Government
• GHOSTING – payment for resources not delivered.
Ghost employees, fake invoices.
• BID RIGGING – collusion on bidding
• HONEST GRAFT – insider information
• DIVERSION – public assets used privately
• SHODDY MATERIAL – low quality goods / services
• KICKBACKS – accepting money for favors
Conclusion
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How to prepare a budget
How to review a budget
How to execute a budget
How to audit a budget
Some special issues