Week # 4

Implementing The Budget

Budget Implementation --- The Third Phase of the Budget Cycle

We have covered the first two phases of the budget cycle (i.e., Executive Preparation and Legislative Approval)

The third phase --- Budget Implementation --- occurs afterthe chief executive’s proposed budget is reviewed andapproved by the legislative body.

In effect, during this phase the legislature gives the chiefexecutive the legal authorization to implement theapproved budget plan.

Budget ImplementationBudget implementation means executing the budget plan by implementing all of the actions (i.e., programsand services) the government intended to take duringthe fiscal year.

In addition, it also means collecting the anticipatedrevenues identified in the budget to pay for the programsand services during the fiscal year.

Both service delivery and revenue collection require a well conceived and comprehensive system of financial control to monitor all financial transactions and providea system of accounting and financial reporting.

Financial Controls in Local Government

There are 3 levels of financial control:> Budget Implementation

> Accounting > Reporting

Budget implementation will involve entering into contracts, paying salaries, and making many other disbursements.

An accounting system must therefore be established torecord all financial transactions.

And finally, a system of financial reporting must also be put in place to ensure the integrity of the financial system is maintained.

Financial Controls

The budget office is primarily concerned with procedural matters

The accounting office is primarily responsible for maintaining records on all financial transactions.

The comptroller’s office, works closely with both the budgeting and accounting, and prepares a year-end financial report.

Financial controlsQ4-1: Identify a few common methods

used by the below listed participants in the budget process to bring about

financial control in local government budgeting.

> Budget Office> Accounting Office> Comptroller’s Office

Budget ImplementationThe text describes Budget implementation as involving the following four broad functions…

– Communicating budget information – Maintaining budget compliance

– Altering budget authority during the year and making corrections

– Putting into place budget policies for times offiscal crisis

CommunicatingBudget

Information

Communicating Budget Information

Financial accountability is at the heart ofdemocratic governance.

Those responsible for implementing thebudget have an obligation to keep citizens

informed of budget decisions.

Communicating the Budget

Q4-2: Identify two occasions when the budget is typically made available or revealed to the public.

Q4-3: Identify and briefly describe at least two ways the budget is

communicated to either internal or external stakeholders.

Communicating the BudgetSince 1984, the Government Finance Officers Association (GFOA) promulgated better budget communication.

The GFOA sponsors an annual awards program andinvites state and local government to submit their budgetfor rating by independent raters.

You can access the GFOA recommended budget practices using the below link:

http://www.gfoa.org/services/dfl/budget/RecommendedBudgetPractices.pdf

GFOA Criteria

The GFOA evaluates budgets documentsusing the 4 evaluation areas listed below:

The budget as a policy documentThe budget as a financial planThe budget as an operations guideThe budget as a communication device

The budget as a policy document

The GFOA acknowledges the role budgets play in shaping policy choices.

The GFOA evaluates the extent to which the budget document includes statements reflecting budget and financial policies.

The budget as a policy document

Q4-4: Briefly describe at least two typesof statement that might be

included in a budget document that would

satisfy the GFOA criteria regarding

the inclusion of budget andfinancial policies.

The budget as a Financial Plan

The GFOA acknowledges the historic role of the budget as a tool for financial management.

An extensive amount of very detailed financial informationmust be included in the budget document to satisfy thecriteria within this particular GFOA rating area.

In fact, this particular rating area might be considered themost important because communicating data related to thefinancial plan lies at the very heart of the budget process.

The budget as a Financial Plan

Q4-5: List at least six types of financial information described in the text

that should be included in thebudget document to satisfy the

GFOA criteria relating to thebudget as a financial plan.

The budget as an Operations Guide

To provide a suitable frame of reference for anyonereviewing the budget, the GFOA prescribes the inclusion of information that describes the unit of government and its major organizational components.

Information relating to basic mission, function and operations of the various organizational components should also be provided to link basic governmentoperations to the appropriated funds included in thebudget.

The budget as an Operations Guide

Q4-6: List at least four types of information described in the

text that might be included in the

budget document to satisfy the GFOA criteria relating to the

budget as an operations guide.

The budget as a communication device

The final GFOA evaluation area demonstrates therelative importance the GFOA attributes to communicatingbudget information, particularly to stakeholders outside government.

The GFOA prescribes including information in the budget document to help people to get an understanding of theprocess undertaken to prepare and approve the budget.

The budget should include non-technical and user-friendlyinformation relating to economic trends; short-term and long-term planning assumptions; and other issues that mayhave affected budgetary decisions.

Maintaining Budget

Compliance

Maintaining budget complianceThe chief executive is charged with ultimate responsibility

for maintaining budgetary compliance.

Although most stakeholders do not expecteverything will go as planned, there is an expectation thatall government officials involved in the process will comply

with budget policies and procedures.

There is also an expectation that all financial transactionswill be closely monitored; the approved budget plan will be followed unless adjustments are deemed necessary;and a forthright effort will be made to record, report anddisclose information regarding budget implementation.

Maintaining budget compliance

The text describes the four budget practiceslisted below methods of maintaining budgetcompliance:

> Encumbrance control> Position control> Apportionment and allotment control > Termination of budgetary authority

EncumbrancesAn encumbrance can be viewed as setting aside a portion of budgeted funds once a purchase or contract is approved.

It is a contingent liability in that the funds will be disbursedonce the government receives the goods or services.

For this reason, an encumbrance is also known as an“obligation” in that the monies are set aside for that onepurpose or purchase.

An encumbrance provides assurance to suppliers thatsufficient funds will be available once the order is fulfilled.

EncumbrancesEncumbrances link budgeting with the purchasing and accounting systems.

A purchase requisition begins the process ofencumbering funds.

The purchase requisition must be submitted for approvalby the purchasing department to ensure compliance withall requisite purchasing laws and policies.

Once approved by the purchasing department thepurchase requisition goes to the budget office to verifyfunds are available and consistent with the originalbudget plan as approved by the legislative body.

Encumbrances Once approved by the purchasing department thepurchase requisition goes to the budget office.

The budget office verifies sufficient funds are available and to ensure the request is consistent with the original budget plan as approved by the legislature.

The purchase requisition is next sent to the accountingoffice where it becomes a purchase order and the fundsare then recorded as encumbered.

The purchase order is often forwarded to the vendor at this point and serves as authorization to deliver the goodsor services.

Encumbrances Once the goods or services are delivered and receipted(i.e., a voucher issued) the accounting office removesthe encumbrance status and records the purchase asan expenditure once a check is sent to the vendor.

Assigning an encumbrance status to a purchase orderensures funding is available from the current fiscalyear’s budget to satisfy any outstanding purchases atthe end of the fiscal year – and even after the currentfiscal year.

EncumbrancesQ4-7: Briefly explain how and when a

“purchase requisition” becomes a“purchase order” and precisely

identify the time during the purchasing

processwhen the funds for the purchase areactually encumbered.

Q4-8: Based on your reading briefly describe

the reason an encumbrance is referred

to as a “contingent liability”.

Position ControlsPosition control refers to the authority of the budget officeto approve new hires and reclassifying existing positions.

Although the appropriation ordinance may include fundingfor all positions authorized for each department and/orprogram, it is common for the budget office to have final approval for all new hires.

In other words – a department may win approval for acertain number of positions but departments must seek theapproval of the budget office to fill all vacant positions.

Position ControlsThe logic underlying position control involves the actual capacity to pay the salary cost for the new hire(s).

Many people who are new to budgeting tend to assume aposition should be filled because it was included in the approved budget and the balanced budget requirementensures matching revenue will be available.

However, this logic is faulty because it presumes theanticipated revenue projection was accurate and sufficientfunds are actually being collected to cover all on-goingexpenditures and also the cost of the new hire.

Position ControlsOnly the budget office has the information necessary to make a determination, whether sufficient revenue is beingcollected to both pay –on-going costs and the added costsfor new hires.

It is particularly important to recognize the inescapablelogic that once a position is filled the salary must be paidand this means there must be adequate revenue beingcollected.

This is particularly true for personnel expenditures AND it is particularly common for local governments wherepersonnel expenditures may represent as much as 80% of the budget.

Position ControlsIt is also important to recognize that during the fiscalyear positions are vacated due to retirements, etc.

When a position is vacant, revenue continues to becollected but not paid out. Unfilled vacant positionstherefore allow surplus funds to accumulate. The salarysavings can be substantial.

The salary savings will be treated as salvage, remain inthe fund and re-appropriated for another purpose ortreated as surplus funds to be used to fund the budgetthe following year.

Apportionment and AllotmentApportionment and allotment are one of the oldest forms of budget control.

These two methods of control limit the rate at which funds may be spent (apportionment) and control the amount of funding to be used for specific programs or organizational units.

Apportionment and AllotmentQ4-9: Define apportionment and briefly

explain the benefit derived by this method of financial

control.

Q4-10:Define allotment and briefly explainthe benefit derived by this

method of financial control.

Termination of Budget Authority

The budget appropriation ordinance includes language stating the authority to enter into obligations terminates on the last day of the fiscal year.

All unencumbered account balances then revert to the general fund and become part of the fund balance for re-appropriation in the subsequent fiscal year.

Termination of Budget AuthorityThe lapse in budget authority (as it is called) compels managers to encumber the full amount of their budgeted funds.

It precludes departments from amassing large sums of unencumbered funds and allows unused collected funds to be put to use.

When available for re-appropriation, the surplus can help avoid a new or increased tax levy during the subsequent year.

Termination of Budget Authority

Q4-11:While the lapse of budget authority has several advantages, there are also disadvantages.

Briefly describe at least twodisadvantages that may occur

due to this budget policy.

Altering Budget

Authority

Altering Budget AuthorityThe financial controls previously described are the first line of defense and they are commonly used while implementingthe budget. The second line of defense involves “altering the budget authority”. As the name implies, “altering the budget authority” literallymeans adjusting the budget and/or financial plan that hasbeen formally reviewed and approved by the legislature andpassed into law.

Due to these circumstances, “altering the budget authority”should be viewed as a rather serious undertaking that istypically employed only when it is necessary to correct aserious problem.

Altering Budget Authority

Altering the budget authority is usually accomplished in one of 3 ways:

> Transferring budget authority (appropriations) across departments or among the eleven types of funds.

> Amending a department’s budget authority during the fiscal year.

> Requesting use of budget reserves during the fiscal year.

Budget Transfers

A budget transfer is defined as the shifting of budget authority from one account or fund to another after the council has approved the budget.

Authority to make such transfers is granted either explicitly in charter or law, or implicitly by agreement between the council and the manager.

Budget TransfersA common type of fund transfer is known as the internal service fund transfer.

This type of transfer involves the transfer of funds fromone department to reimburse another department forgoods or services.

For example, transferring funds to the central warehouseunit to pay for office supplies ordered for another department or transferring funds to fleet managementto pay for fuel consumed by other departments.

This type of transfer is somewhat common and may only require approval of the department heads.

Budget Transfers

Another form of budget transfer involves the city manager transferring funds from a discretionary account to pay for an unexpected expense incurred by a department.

The manager may be granted the authority to transfer the funds as routine policy but notification or explanation to the council may be required.

Budget Transfers

Inter-departmental transfers (between departments) are not nearly as common.

City managers may be granted authority in the charter or by ordinance.

It is far more common for the approval of the city council to be needed.

Budget Transfers

Intra-departmental transfers (within a department) are far more common than inter-departmental fund transfers.

The budget director or city manager can typically authorize the transfer of funds within a department.

These type of budget transfers provide managers with the capacity to respond to shifting demands.

Budget Amendments

If the required budget correction is of sufficient magnitude, the council may amend the original budget and order:

> redirecting existing budget authority > increasing total budget authority > reducing total budget authority

Budget Amendments

It is somewhat common for amendments to be made at mid-year, end-of-year and for a contingency for some unforeseen circumstance.

However, too many budget amendments may raise concerns by bond rating firms and other stakeholders.

Budget Amendments

Supplemental appropriations:

> an name infers – this appropriation provides additional budgetary authority – granted by council

> provide additional funding for a program or department(s) during the fiscal year for unexpected events (e.g., natural disasters)

> more common at Federal level

Budget Amendments

Budget amendments may also reduce overall spending

Usually undertaken due to changing economic or political conditions.

At the federal level, the president, working with Office of Management and Budget, may order part of agency’s appropriation to be impounded.

Budget AmendmentsQ4-12:Making too many budget amendments tends

to raise concerns about a defect in budgetpreparation or implementation. Briefly explain

the basis for concern and list three possibledefects suggested when too many budgetamendments are made.

Q4-13:Briefly describe what is meant by a “spendingfreeze” and cite a few examples of the types

of spending that may be frozen when a

spendingfreeze is ordered.

Budget Reserves

Another method of altering budget authority is to tap into the budget reserve during budget implementation.

Budget policy should contain a provision for creation of a reserve fund, use of reserve funds and describe conditions when reserve funds can be used.

Budget Reserves

Also known as “rainy day funds”

Ensure immediate availability of funding when facing extraordinary circumstances.

Provides some protection against revenue shortfalls during periods of instability in the economy.

Budget Reserves

Q4-14:Identify and give examples of three different methods that are

used by state or local government

to allocate resources to reserveaccounts.

Budgeting in times of fiscal crisis

A local government’s budget plan can be altered dramatically when a crisis occurs, such as:

– Economic shifts due to recessions, inflation or overexpansion

– Sectoral shifts due to changes in technology, economic development and market competition.

– Natural catastrophes resulting from weather events, terrorism and epidemics.

Crisis Budgeting Budgets are developed using long-term forecasts topredict revenues and expenditures.

The accuracy and reliability of a long-term forecast isnecessary but always a precarious situation due to thepotential for a crisis.

When revenues actually being collected fall below the projected revenue forecast a “response gap” is created.

The balanced budget requires a prompt response through reduced spending – increased revenues – or both.

Budget crunch / Budget crush Charles Levine, a noted public administration scholar, developed a helpful typology for dealing with fiscal crises. Budget crunch - short-term crisis / low intensity Budget crush - long-term crisis / high intensity

Levine suggested various response strategies depending on the term and intensity of the crisis.

Review Figure 4-4 on page 97

Budgeting in times of fiscal crisis

Q4-15:Using Charles Levine’s model, briefly describe three strategies

that might be used to respond to a “budget crunch” and three

strategies that might be used torespond to a “budget crush”.