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Budgets and Finance
Important Terms / Concepts
Authorization vs. appropriation
Fiscal vs. monetary policy, compensatory economics (Keynesian)
OMB, CBO, GAO
Budget and Accounting Act of 1921
Continuing Resolution
Budget Process: Roles of President and Congress
Forecasting: by who and difficulties in
Surplus, deficit, debt
Rational vs. incremental budgeting
Budgets: Operating vs. capital; annual vs. biennial
A budget is the
PRIMARY POLICY DOCUMENT
Of any government
“On what basis shall it be decided to allocate X dollars to activity A instead of activity B.”
V. O. Key, jr.
OR (paraphrasing)
“On what basis shall it be decided to extract X dollars from activity A instead of activity B.”
OR
Who wins and loses
Thomas Dye: Politics is who gets what, when, and how
Budgeting and Finance
Sooner or later nearly all governing issues
– political and administrative –
become budgeting issues.
Budget and Finance Areas
The economy
The federal budget process
Decisions and budget types
Economics: Monetary versus Fiscal
Monetary Policy
Amount of money in the system
Fiscal Policy
Government Taxation, spending, and the balance between them
Monetary Policy
Money supply
Total amount of money available in the economy
Difficulty in defining “money”
MB – monetary base = coin and currency
M1 – Base plus demand deposits
M2 – Money and “close substitutes”
M3, M4, M5, etc.
M2 is the most common measure used
Quantity Theory of Money
Strong empirical relationship between money supply and
Inflation
Economic Health
Primarily Regulated by Federal Reserve Board
Sets interest rate and bank reserve requirements
Reason FRB is “independent”
Fiscal Policy
National, state, and local budgets are tools of fiscal policy
Tools
Taxation
Expenditures
Tax expenditures
Fiscal policy largely based on Keynesian economics
Compensatory economics
Deficits to stimulate economy
Surplus to slow overheated economy
Some terms
Surplus and deficit are annual
Debt
Sum of accumulated deficits
Fiscal year
Accounting year versus calendar year
THE BUDGET PROCESS
Budgeting History
Before early 1900s
Collection of agency requests to Congress
Came at various times, not necessarily comprehensive
Budget and Accounting Act of 1921
Created Bureau of the Budget (later OMB)
Produced comprehensive executive budget
Presidential budget framed the debate
Enormous source of power
Government Budget Process
1. Preparation of the budget and submission by the executive to the legislature.
2. Review, modification, and approval by the legislature.
3. Policy execution by the executive branch.
4. Audit by a specialized agency
1. Presidential Budget Preparation
Primary agency is the OMB in the EOP
President sets broad policy goals
E.g., more funding for education
Fund through deficit or cutting defense
OMB collects estimates from agencies of budget needs
For current programs
And any significant changes
OMB collects agency estimates
Treasury develops revenue estimates
Broad pictures goes to president
Refines priorities
Budget is constantly iterative
Develops final package for submission to Congress
Similar process is followed in most states
Texas is an exception
1920 Budget reforms included executive budget
Began in Illinois
Spread to other states and to federal government
2. Review, modification, and approval by legislature
U.S. Congress
Budget Resolution Bill
Estimate of total revenues and expenditures
Parcels out ceilings to committees
Process followed by both House and Senate, but each does its own process
NOT a joint activity
House and Senate Budget Committees
The president’s budget is sent initially to the House and Senate Budget Committees, which rely on the
Congressional Budget Office for review.
Congressional Budget and Impoundment Control Act of 1974
Did much to reform the process.
Passed after Nixon Impoundments
A fixed budget calendar, congressional budget committees, and the CBO were created.
Budget was to be considered as a whole.
A budget resolution sets the bottom line for the budget.
Congressional Authorization vs. Appropriation
Authorization Act
Act of Congress that establishes a government program and defines the amount of money
it may spend.
Appropriations Act
Congressional bill that provides money for programs authorized by Congress
Continuing Resolutions
Budgeting by continuing resolution
Congress unable to meet deadline for budget
Without appropriation by Congress money cannot legally be spent
Continuing resolution to continue at current levels
Stopgap measure – may last hours, days, or weeks
3. Policy execution by the executive branch.
4. Audit by a specialized agency
Specialized means not controlled by executive spending the money
General Accountability Office
State Comptroller
Forecasting
Budgets require forecasting
How much revenue will taxes generate
How much will programs cost
Forecasting requires assumptions about economic growth or decline
Income, sales, and other taxes very sensitive to economy, unemployment, inflation, etc.
Costs of unemployment, Medicaid and others also sensitive to economic status
Forecasting done by:
Federal government:
OMB in EOP
Also by CBO
State Level
Comptroller or Treasurer
Professional legislatures may have separate budget office.
A government budget (proposed deficit or surplus) is the intersection of two wild guesses about what
revenues and expenditures will be a year from now.
Paraphrased from Walter Wriston, former CEO of Citicorp
Decision / Budget Strategies or Types
Rational Vs. Incremental
Rational / Comprehensive decision making
Clearly Identify Goals
Evaluate ALL alternatives
Select the one that maximized the goals
Similar to Scientific Management and search for the “One Best Way” to perform a task
Rational is Irrational?
Goals often mixed and hard to define
Health care – cover everybody? Reduce costs? Avoid a 100% government program?
Search for ALL possible alternatives is
Impossible
Expensive to try
But no clear goal and not reviewing all alternatives
Means no assurance of picking the best
Incremental / Incrementalism
A program or agency’s “base”
Continuation of existing programs at current levels
Existing programs are from past agreements
The “increment” is the small change from that base
Adding a new program or feature
Cutting part or all of a program
Incrementalism focuses on change
Easier to evaluate change
More rational to focus on small steps
Easier to evaluate impact
Better information on cost and benefit
BUT
Budget battles are fought at the margin
The huge base (90-95% of spending) is not re-evaluated
Incrementalism
Last year’s budget is the best predictor of this year’s budget, plus some.
Agencies can safely assume they will get at least what they got last year.
Focus & debate on the increase over last year.
The budgets tend to go up a little each year.
Up at agency or government level but varies widely at the program level
“Rational” Budgeting
Program Planning Budgeting System (PPBS)
Robert McNamara,
Secretary of Defense under Kennedy and Johnson
Zero Based Budgeting (ZBB)
Jimmy Carter used as governor of Georgia
Brought to federal government
Rational = Top Down
Hard for non-agency experts to identify value of
Hiring 5 new accountants
Buying longer-lasting widget A over cheaper widget B
E.g. $20,000 Chevy over $22,000 Ford
BUT . . .
Can evaluate goal contribution
Or impact of 5% cut
Other “rational” systems
Management by Objectives (MBO)
Program Assessment Rating Tool (PART)
Constant striving to improve process
Versus bottom up
Incremental system
Bargaining between political actors
Federal Expenditures and Suggested Reforms
Problem:
Controllable versus Uncontrollable Federal Expenditures
Proposals
Biennial versus annual budgets
Separate Operating and Capital Budgets
Mandated Balanced Budgets
Item Veto (not covered)
Uncontrollable Vs. Discretionary Spending
Uncontrollable
Executive and legislature cannot modify (at all or easily)
E.g., interest on national debt
Entitlement programs
“Uncontrollable” Expenditures
Spending determined by the number of recipients, not a fixed dollar figure.
E.g., unemployment, Medicare, Medicaid
Entitlement programs where the government pays known benefits to an unknown number of recipients Social Security.
Other legal requirements such as interest.
The only way to control the expenditures is to change the rules.
So Congress and the President battle each year only over about one-third of the federal budget.
Not even that. “Controllable” includes things you can’t really control
Electricity, gas for cars, jet fuel for planes
Everyday office supplies
Biennial Budgets
The federal government, 30 states, and most local governments use annual budgets
Anticipated revenues and expenditures during 12 months
20 states, including Texas, use biennial budgets
Suggested advantages of biennial budgeting
conducive to long-term planning
allows more time for program review and evaluation
is less expensive and time-consuming than that of annual budgeting.
NCSL and Texas A&M Studies
The arguments used to justify and refute both annual and biennial budgets remain essentially unchanged
-- and unproven – since 1972.
The success of a budget cycle seems to depend on the commitment of state officials to good
implementation rather than on the method itself.
Mandating a Federal Balanced Budget
What is it and lessons from the states
Balanced Budget
Contrary to Keynesian / Compensatory economics
Have to cut spending or raise taxes during recession instead of opposite
Usually proposed as a constitutional amendment
Revenues and expenditures must be in balance
Unless deficit approved by some super-majority (two-thirds or three-fourths)
State Balanced Budget Requirements
Most states have balanced budget requirements
Versus deficit financing used by the federal government
And state require balance budgets of their sub-state governments
What must be balanced?
The governor’s proposed budget must be balanced – 43 states
The legislatively passed budget must be balanced – 39 states
The budget must be balanced at the end of the fiscal year (no deficit carried forward) – 37 states.
States may have 1, 2, or more of these requirements, constitutional or statutory
Rigorous requirements – 36 states
Moderate requirements – 10 states
Weak requirements – 4 states
Separate Operating and Capital Budgets
Balanced budget requirements refer to operating budgets
Annual expenditures – completed in the year
Salaries, consumables such as energy, office supplies, etc.
Capital Expenditures
Items with a multi-year life
Often have a residual value
Parks, swimming pools, cars, tanks
States and local governments use separate operating and capital budgets
Capital budgets often financed by debt
Bond financing usually required public approval
Capital Expenditures
Bonds used at the local (and sometimes state) level
General Obligation Bonds
Revenue Bonds
Bonds, and some local taxes, the only ones citizens can vote on directly
Schools often suffer