Budget Methods and Practices

1. Budget Methods and Practices Troy University PA6650- Governmental Budgeting Chapter 4

2. 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

3. Preparation of Agency Budgets • The description dominates the numbers • The request describes and justifies the plan • Budgeting is logic, justification, and politics

4. 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

5. 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

6. 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

7. 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)

8. Screening for Errors • Instructions not followed (format, regulations) • Missing documentation • Internal inconsistency • Math

9. Review of Budgets • Checklist for Budget Justification • COMPLETENESS • EXPLICITNESS • CONSISTENCY • BALANCE • QUANTITATIVE DATA • ORGANIZATION

10. 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

11. 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?)

12. 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)

13. 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)

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. Conclusion • How to prepare a budget • How to review a budget • How to execute a budget • How to audit a budget • Some special issues