Module/Week 6 -- Financial Management

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CHAPTER 5

Budgeting and Financial Management

 LEARNING OBJECTIVES

1. Understanding the role of the budget as an instrument of fiscal policy and public policy

2. Exploring where resources come from and how they are expended

3. Understanding the steps in the budgeting process

4. Learning about the various types of budgets

5. Understanding the importance of financial management in the public sector

 SUMMARY OVERVIEW

This chapter provides an overview of public budgeting and financial management. While

budgeting and financial management in public organizations have a great deal in common with

those activities in the private sector, there are important differences that come from the need for

public agencies to account to elected officials and citizens for their activities, including raising

revenue and spending money. In modern society, the way in which government at all levels

spends money affects the overall economy, meaning that the budget is an instrument of fiscal

policy. More importantly, the budget is a primary expression of government priorities, meaning

that the budget documents the decisions that governments make concerning public policies.

Chapter 5 examines the budget both as an instrument of fiscal policy and of public policy. The

budget as a device for government accountability is emphasized throughout the chapter.

The authors first address the budget as an instrument of fiscal policy, which they define as being

concerned with the impact of government taxation and spending on the economy. This section

covers the ways in which government spending can affect the economy along with theories

behind various approaches to fiscal policy. The discussion moves to the budget as an instrument

of public policy, noting that while the overall pattern of government spending defined by a budget

has an effect on the overall economy, the individual entries in a budget represent the measure of

support, or lack thereof, for specific policy choices. This discussion includes an exploration of

government revenue sources and the processes of choosing how to spend the government’s

money. This section also provides a review of the budget policies of recent presidential

administrations and offers insight into revenue and spending issues at the state and local level.

After examining the fiscal and public policy dimensions of public budgeting, the chapter turns to

a review of the budget as a tool of management. The budget process is critical to public

administrators as it establishes the level of funding for an agency and its programs. Thus, an

administrator should be familiar with the steps involved that enable an agency to spend money,

including budget formulation, approval, execution, and auditing. This is followed by a look at

budgeting strategies—line-item budgeting, performance budgeting, program budgeting, and

outcome-based budgeting—along with a discussion about the political nature of the budgeting

process. This section also addresses a variety of budgetary strategies and strategies for program

development.

58 Chapter 5: Budgeting and Financial Management

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The chapter then moves to an exploration of various aspects of the financial management of

public-sector resources. Included in this are capital budgeting, which addresses outlays for

infrastructure, facilities, and other items intended for long-term use; debt management, which is

concerned with various methods of borrowing funds; risk management, which is the ways in

which public organizations anticipate and cope with the variety of risks to which they are subject;

and purchasing, which involves considerations about how governmental organizations buy goods

and services. The final section of the chapter covers accounting and related information systems

in the public sector. Because keeping track of public revenues and expenditures has become an

enormously complex undertaking, an understanding of the requirements and practices involved in

government accounting is important to public managers. As the authors note, knowing the

technical side of the budget process—being able to follow the budget process and clearly

understand preparation, administration, and review—is extremely helpful as managers attempt to

influence the operations of their organizations.

 CHAPTER OUTLINE

I. THE BUDGET AS AN INSTRUMENT OF FISCAL POLICY

II. THE BUDGET AS AN INSTRUMENT OF PUBLIC POLICY

A. Where the Money Comes From 1. Individual Income Tax 2. Corporation Income Tax 3. Payroll Taxes 4. Sales and Excise Taxes 5. Property Taxes 6. Other Revenue Sources

B. Where the Money Goes

C. From Deficits to Surplus and Back 1. The Bush Tax Plan 2. Obama and Economic Recovery

 Exploring Concepts: ISSUES IN BUDGETING

D. State and Local Expenditures

III. THE BUDGET AS A MANAGERIAL TOOL

A. Budget Formulation

 Take Action: FINANCIAL MANAGEMENT: THE PROGRAM

MANAGER’S ROLE

B. Budget Approval

C. Budget Execution

D. Audit Phase

IV. APPROACHES TO PUBLIC BUDGETING

A. The Line-Item Budget

B. The Performance Budget

C. Program Budgeting

Chapter 5: Budgeting and Financial Management 59

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D. Outcome-Based Budgeting

E. Budgetary Strategies and Political Games

F. Strategies for Program Development

V. ASPECTS OF FINANCIAL MANAGEMENT

A. Capital Budgeting

B. Debt Management

C. Risk Management

D. Purchasing

VI. ACCOUNTING AND RELATED INFORMATION SYSTEMS

A. Government Accounting

B. Computer-Based Information Systems

VII. SUMMARY AND ACTION IMPLICATIONS

 KEY TERMS

Accounting The process of identifying, measuring, and communicating economic information to

permit informed judgment and decision making.

Allotments Amounts that agencies are authorized to spend within a given period.

Apportionment Process by which funds are allocated to agencies for specific portions of the

year.

Authorizing legislation Legislative action that permits establishment or continuation of a

particular program or agency.

Bond Promise to repay a certain amount (principal) at a certain time (maturity date) at a

particular rate of interest.

Budget padding Proposing a higher budget than is actually needed.

Business cycle Periods of economic growth featuring inflation and high employment followed

by periods of recession or depression and unemployment.

Capital expenditures Spending for items that will be used over a period of several years.

Continuing resolution Resolution permitting the government to continue operating until an

appropriations measure is passed.

Debt capacity Value of a city’s resources combined with the ability of the government to draw

on them to provide payment.

Deferral Decision by the president to withhold expenditure of funds for a brief period.

Discretionary spending That portion of the budget still open to changes by the president and

Congress.

Entitlement programs Programs that provide a specified set of benefits to those who meet

certain eligibility requirements.

Excise tax Tax applied to the sale of specific commodities.

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Fiduciary funds Funds used when government must hold assets for individuals or when

government holds resources to be transmitted to another organization.

Fiscal policy Public policy concerned with the impact of government taxation and spending on

the economy.

Fiscal year (FY) Government’s basic accounting period.

General fund Fund that handles “unrestricted” funds of government.

Impoundment Withholding of funds authorized and appropriated by law.

Item veto Allows a governor to veto specific items in an appropriations bill.

Line-item budget Budget format for listing categories of expenditures along with amounts

allocated to each.

Performance auditing Analysis and evaluation of the effective performance of agencies in

carrying out their objectives.

Performance budget Budget format organized around programs or activities; includes various

performance measurements that indicate the relationship between work actually done and

its cost.

Planning-programming-budgeting system (PPBS) Effort to connect planning, systems

analysis, and budgeting in a single exercise.

Preaudit Review in advance of an actual expenditure.

Progressive tax One that taxes those with higher incomes at a higher rate.

Proportional tax One that taxes everyone at the same rate.

Proprietary funds Used to account for government activities that more closely resemble private

business.

Reconciliation bill Legislative action that attempts to reconcile individual actions in taxes,

authorizations, or appropriations with the totals.

Regressive tax One that taxes those with lower incomes at a proportionally higher rate than

those with higher incomes.

Rescission Presidential decision to permanently withhold funds.

Risk management Ways that public organizations anticipate and cope with risks.

Supplemental appropriation Bill passed during the fiscal year, adding new money to an

agency’s budget for the same fiscal year.

Chapter 5: Budgeting and Financial Management 61

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 WEB LINKS

The following are links to general information on budgeting organizations and financial

management:

Governmental Accounting Standards Board: (http://www.gasb.org/).

National Association of State Budget Officers: (http://www.nasbo.org/).

American Association for Budget and Program Analysis: (http://www.aabpa.org/).

Association for Budgeting & Financial Management: (http://www.abfm.org/).

Government Finance Officers Association: (http://www.gfoa.org/).

The following are links to information about the budget of the United States and how to get

to the budgets of other governments:

Department of the Treasury: (http://www.treasury.gov).

U.S. Government Printing Office:

(http://www.gpo.gov/fdsys/browse/collectionGPO.action?collectionCode=BUDGET).

National Debt Clock: (http://brillig.com/debt_clock/).

Office of Management and Budget: (http://www.whitehouse.gov/omb).

Congressional Budget Office: (http://www.cbo.gov/).

General Accountability Office: (http://www.gao.gov/).