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  1. Budgets Andrew Graham School of Policy Studies Queens University

  2. Logic Model • First, define budgets, their form and some technical elements • Then, look at planning and budgetary processes • Issues of capital budgeting

  3. What is a Budget? • The Budget process allows the Government to: • plan for the period ahead • allocate resources in line with policy priorities • seek authority from Parliament for spending. • For a not-for-profit organization in the public sector a budget: • Presents a financial plan for the period ahead • Assigns resources to projects, line items or programs • Sets out budgetary revenue and expenditure requirements

  4. What is a Budget? • Not primarily financial documents but basis from which finances are settled • Future perspective: projection of future revenues and expenditures • Important benchmark to control the fiscal operations of a departments, unit or municipality or hospital • Assigns resources to objectives • Deals with both revenues and expenditures: on annual or multi-year basis

  5. The Budget as an Instrument of Public Policy and Management • Planning Instrument:: Sets goals, priorities, and strategies and coordinates the government/agency resources into an expenditure plan identifying what program or activities will take place and at what levels. • Political Instrument: Involves competing interests attempting to influence a government or agency to form policy favourable to them. • Social Instrument: Provides a vehicle to grant and deny privileges and disburse burdens and benefits to individuals and businesses. • Economic Instrument: Offers powerful potential for affecting the growth and productive capacity of the community and its citizens.

  6. The Budget as an Instrument of Public Policy and Management • Legal Instrument: Grants authoritatively the rights, responsibilities, power, and guidelines that regulate the budget format, timing and process. Source: Jerome B. McKinney and Lawrence C. Howard, Public Administration: Balancing Power and Accountability (Oak park, IL: Moore Publishing, 1979)

  7. The Legal Basis of Budgets • The law or collection of laws authorizing expenditures, and/or the incurrence of obligations to make expenditures, to be financed from taxes or levies, as well as the specification of the sources of revenue from which expenditures are to be financed • The laws authorizing the expenditures or the incurrence of financial obligations are called appropriations laws

  8. Functions of a Budget • Planning • Choosing goals • Reviewing options and predicting results • Deciding on options • Communicating and coordinating • Defines both objectives and spending limits • Produces benchmarks for monitoring compliance and progress • Evaluating performance

  9. What is a Public Sector Budget? • Term is used for many different kinds of ‘budgets’: government-wide, departmental, branches, units • The budget as an organization-wide policy and planning statement – legislative or organizational budget • Budget as a specific spending plan – legislative, organizational and managerial budget • Budget as a manager’s allocation of resources – managerial b budget • Both a financial and a policy document as well as a management tool • Legislative or organizational budget focuses on changes in spending, taxation, debt and regulations • Best seen as a fiscal plan not just a spending plan since all spending is not it in and impacts go well beyond government operations, e.g. tax changes

  10. What is a Public Sector Budget? • Result of intense planning process, short-term decisions, roles of the dice and political nuance • Budgets from Ministers of Finance, i.e. high level political documents not the sole source of program funding: • Statutory funding • Self-funded programs • Management budget sets limits, targets and authorities to get on with the work.

  11. What is an Appropriation? New Zealand Definition An appropriation is a Parliamentary authorization for the allocation of resources to a Minister for a specified purpose. In the Estimates, Ministers specify how much they need to purchase particular outputs. The Government requests an appropriation for each class of outputs (whether to be supplied by a department or other organization), capital investment (capital contributions to departments, investments in other organizations and purchase or development of Crown capital assets), and other expenses. Appropriations are also made for benefits or other unrequited expenses, borrowing

  12. What is an Appropriation? Definition: Appropriation: Approval by a legislative body of an organization’s budget. Appropriations create the authorization for spending the amount in the budget.

  13. Types of Budgets • Operating Budget: • also called recurrent budget • funds designated to continuing operations • Finkler: “Plan for the day-in and day-out operations of the organization. It is generally prepared for one year.” • Capital Budget: • budget for permanent works: defining permanent • tends to combine current year and future year plans • current year often transferred into Operating Budget • Finkler: “Plan for the acquisition of buildings and equipment that will be used by the organization in one or more years beyond the year of acquisition.”

  14. Types of Operating Budgets

  15. Line Item Operating Budget • Budget information organized according to types of expenses, expenditure or cost categories • Generally on a cash basis • Often detailed in object codes • Cost category of capital outlay includes office equipment, furniture and vehicles • Primary orientation is expenditure control and accountability: permits inter-budget cost comparisons, creates common reference points • Relatively easy to prepare • Does not provide any information regarding activities and functions of a program

  16. Line Item Operating Budget - Example • Budget of the Killaloe General Hospital for Fiscal Year 200X • Object Code Budget • 100. Salaries 8,000,000 • 200. Supplies 2,000,000 • 300. Rentals 250,000 • 400. Professional Fees 750,000 • Total 11,000,000

  17. Line Item Operating Budget - Example Revenue Net revenue Gift shop revenue Investment revenue Endowment Total revenue Expenses Salaries Supplies Bad debts Interest Rent Total expenses Surplus/Deficit $ 97,980,000 120,000 50,000 98,150,000 $ 78,900,000 15,400,000 2,200,000 400,000 3,100,000 $100,000,000 $ (1,850,000)

  18. Responsibility Centre Budget • Distributes budget to internal units: Responsibility Centre • Important means of assigning resources to program objectives, specific offices and specific locations • Seldom see this on its own for operational purposes • Usually in combination with a line item approach A responsibility centre is part of the organization, such as a department or unit, for which a manager is assigned responsibility, usually with spending authority for the assigned budget as well as responsibility for its proper use.

  19. Responsibility Center Budget - Example Budget of the Killaloe General Hospital for Fiscal Year 2005 Responsibility Centre Budget

  20. Functional Budgets . • Functional Budgets focus on the major functions performed by an organization. • Combine elements of Line-Item and Responsibility Centered budgets • This format is often used for external reporting • Note the line item detail

  21. Functional Budgets - Example Budget of the Killaloe General Hospital for Fiscal Year 2005

  22. Flexible Budget • Organizations often experience more or less volume than budgeted. • Flexible budgets look at expected revenues, expenses, and net income under different volume assumptions. • The key to flexible budgeting is the identification of: • Fixed Costs - which do not change with volume. • Variable Costs - which do change with volume. • Flexible budget results are normally shown in a side-by-side columnar format. • A flexible budget is a form of "What if?" analysis.

  23. Fixed costs are costs that do not change with volume changes with a normal range. Variable costs will change as volume or use changes. Fixed and Variable Costs

  24. A ‘What If’ Flexible Budget - Example Budget10% Increase Revenue 40 campers44 campers Camp tuition $5,200 $5,720 Church subsidy 500 500 Total revenue $5,700$6,220 Less expenses Campground rental $ 350 $ 350 Bus transportation 1,225 1,225 Equipment rental 1,600 1,760 Meals 2,600 2,860 Total expenses $5,775$6,195 Surplus/loss $ (75)$ 25

  25. A ‘What If’ Flexible Budget - Example Hot Meals for School Flexible Operating Budget for 2006 [1] Assuming that the service is provided 200 days a year [2] Assume the cost per meal is $3.00 with little flexibility for economies of scale.

  26. Program Budgets • Program budgets move closer to the realm of ‘telling a story’ and a greater linkage to the ‘what’ of expenditures • More of a focus on expected results of services and activities to be carried out • Usually organized around broad areas of expenditure and also overall financial performance • But greater emphasis on results, especially in the further variation Performance Budgeting

  27. Program Budgets • Program budgets include both revenue and expenses for the major activities of an organization. • Helps managers focus on sources of profits and losses (surpluses and deficits) of programs that could be discontinued.

  28. Program Budget - Example

  29. Program and Line Item Budget - Example

  30. Performance Budget • Focuses on work that it to be accomplished • Can be extensive, covering a full range of objectives and outcomes • Or, can be input oriented, i.e. how many units will be produces

  31. Performance Budget - Example

  32. Off-Budget Expenditures • Budget as a comprehensive document is a recent phenomenon • Seen as positive and useful in getting a government’s financial house in order • Not all spending authorizations within the budget

  33. Off-Budget Expenditures • Introduction of accrual also highlights financial obligations of a non-cash nature that create potential liabilities for the government, e.g. loan guarantees • The main forms of off-budget expenditures are: • off-budget funds; • direct loans; • guarantees; • Public Private Partnerships (PPPs). • Main forms of “back door” expenditures are entitlements (financial obligations created by substantive law) and tax expenditures (tax relief's created by tax laws).

  34. Off-Budget Expenditures • Entitlements and tax expenditures do not necessarily create a problem for the proper functioning of the budget as long as the budget procedure provides for the opportunity to change the substantive laws creating the entitlements and tax expenditures in the course of the budget process.

  35. Off-Budget Expenditures • Off-budget funds are special funds owned by the government, that are not part of the budget and that receive revenues from earmarked levies, possibly next to other sources such as fees and contributions from the general tax fund. • Loan guarantees are guarantees by the government to non-governmental lenders in case of debtor default. Loan guarantees are supposed to include public insurance of loans by non-governmental lenders against an insurance fee.

  36. Challenges of Off-Budget Funding for Voluntary Sector • Getting ‘off-budget’ assistance ‘on-budget’, and trying to get donors and NGOs to develop systems that synchronize activities with government systems, has become a major challenge for governments (and donors).

  37. Challenges of Off-Budget Funding for Voluntary Sector • As project-driven systems become entrenched, so too do the incentives to remain separate, both for donors and for those involved in projects, within and outside of government. • Bringing financial flows ‘on-budget’ becomes increasingly difficult – one code for this is the lack of ‘sustainable funding’ • As a result, fiscal discipline is limited, policy-making remains ad hoc and driven by external resource flows, and it is difficult to set up any systematic planning and implementation across government. The longer this continues, the harder it is to change.

  38. Funds in Budget Architecture A fund is defined as a fiscal accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equity or balances, and charges, which are segregated of the purpose of carrying on specific activities or attain certain objectives for which special regulations, restriction or limitations apply.

  39. Funds in Budget Architecture • Budgets will become more complex as the organization becomes more complex and the purposes for the funds become more diverse • Often, special funds are created to segregate monies for programs for special purposes or as a result of unique designated revenue sources

  40. Funds in Budget Architecture • Often funds are managed and reported separately – leading to a separate set of financial statements • The use of funds restricts budgetary flexibility but displays allocation for specialized purposes in a transparent way – funds are often mandated in accounting standards or law, e.g. for municipal governments

  41. Funds in Budget Architecture • Use of funds varies with governments • Municipal governments tend to be built almost entirely around funds. • The federal government and provinces will create special funds for a variety of purposes, some that are linked to unique sources of funds through fees or special taxes, some of which are administered at arms length from normal practice.

  42. Revolving Funds • A revolving fund is an authority, in the case of government usually a statutory one, to use the revenues generated from an activity to finance it. • This authority generally continues on a permanent basis from one year to the next without further authority being needed.

  43. Revolving Funds • Always created through budgetary expenditure means, but then those funds move off-budget. • Although surpluses or deficits may occur from year to year, they are generally expected to balance out over time. • Many arrangements exist for the use of retained earnings, with the principle being that the fund retains its earnings unless some form of gain sharing is put in place.

  44. Revolving Funds • Further, governments can “top-up” such funds through the budget if they have resource needs • Also called an Enterprise Fund • A revolving fund should support increased cost effectiveness, optimal use of resources, responsiveness to clients and good business practices, when used in conjunction with other appropriate arrangements.

  45. Use and Application of Funds Accounts for Budgeting and Accounting – Voluntary Sector • Restricted funds • Unrestricted funds • Endowment funds • General funds

  46. Municipal Fund Structures

  47. Municipal Fund Structures

  48. Funds • Debate about whether enhance or hinder accountability. • Generally held that they improve accountability as they provide specialized focus on one area. • On the other hand, they often are subject to different accounting rules (carry forward of funds, private banking), cannot be reallocated to priority areas, and increase the complexity of government accounting and reporting

  49. Non-Budgetary Expenditures • Non-budgetary transactions are transactions in loans, investments and advances, in liability for the administration of public money received and collected for special purposes, in unmatured debt • Difference from budgetary expenditures in that there is an expectation that the funds will be returned • Not expected to affect the budget or encumber funds • Has no impact on the calculation of the deficit

  50. Zero-Based Budgeting • As much of a process as a budget format • Attacks concept of the incremental nature of most budgets • Can provide the basis for reallocation of resources to priority areas or to reduce overall costs