Budget Methods and Practices

Troy University

PA6650- Governmental Budgeting

Chapter 4

Preparation ofAgency 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:

– 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

• 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

• 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

• 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– 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:– 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 StealFrom 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

• How to prepare a budget

• How to review a budget

• How to execute a budget

• How to audit a budget

• Some special issues