Intro to Public Budgetting and Finance FINAL EXAM

Golden Rule of Infrastructure Budget

Finance to support capital spending, maintaining the tax base of government entity

Why have a capital budget?

- Separate consideration of improving efficiency and equity of providing and financing non recurrent projects with long term service flows

- Long life projects
- Help stabilize tax rates
- Capital projects are permanent
- Capital Budgets are valuable tools for managing limited fiscal resources, especially plan activities that need long term drains on resources

Remember Federal Governments DON'T HAVE A CAPITAL BUDGET

3 Characteristics Define Infrastructure

1. Long life
2. Large-price tag
3. Non-reoccuring

Capital Implementation Plan (CID)

- Plan for capital projects
-Choices for plan are influenced by:
1. Consequences of facility failure
2. Recurring benefits from facility
3. Cost and financial impact of the project
4. Citizenry attitude
(CIP identifies capital expenditure projects for 6 years)

Debt ratings and interest rate are inversely related

Higher debt = lower interest rate
Lower debt = higher interest rate

Discounting

Process of converting returns or costs incurred overtime to a single present value. PV accounts for both absolute size and the timing of the impacts of proposed actions.

PV of project=

PV of projects = sum of discounted benefits- Sum of discounted costs= NPV

Present value formula

PVn= FV/(1+r)^n

PV= Present value
r= Rate
n= Year number

build or don't build?

NPV ≥ 0 Build project
NPV ≤ 0 Don't build project

Deficit and Surplus

Deficit = Expenditures > Revenues
Surplus = Expenditures < Revenues

Unfunded Liabilities

Unfunded Liabilities = UL
- A liability is a future debt or performance of a service. UL describes any liability that does not have savings set aside for it.

Two types of debt and how they're funded

Debt- funded by treasury bonds (federal government)
Municipal Debt = State and Local Government funding

Characteristics of debt?

1. Government debt results from covering deficits
2. Financing capital projects
3. Covering short periods within a fiscal period in which bills exceed the cash on hand

(Every year your debt rolls over, new bonds roll over) (Payoff principle and roll it over into a new bond)

Treasury Bills

1 month to 30 year maturities
.5%-4% longer time frame on any debt the higher the interest

Municipal Debt

...issued by states and cities for revenue-generating projects or general obligations to the citizenry.
- Sold through mutual funds, packaged together with multiple maturities and multiple debt ratings

General Obligation Bonds

a municipal bond that is backed by the issuer's full faith and credit or full taxing authority

Revenue Bonds

Issued for captial projects and infrastructure with a revenue source

Golden rule of debt issues

Fundemental Policy- Do not issue for maturity longer than the financed projects useful life

Mechanics of Bonds

coupon rate, par value, maturity

Coupon = % of par value (interest rate)
Par Value= Bond issue/principle
Maturity= How many years it will take to pay off the bond

Who has an inverse relationship

Bond yield and face value

Term Issues

would have all the bonds in the issue time to mature at the end of the determined maturity

Serial Issues

spreading the projects financing over the life of the bond. Contains multiple maturities in a single issue, say 10, 20, & 30 year maturities in a 30 year term. Portions of the overall cost would be retired through the overall term of the issue

What are ratings determined by?

The economy, debt/debt history/position, and financial analysis

Pension

a sum paid regularly to a person, usually after retirement

Defined contributions plan

Regular contribution to employees retirement, no guarentee on size of benefits, only an amount is guaranteed to be put in, no defined benefits at the end are guaranteed

Defined benefit plans

plans that provide for the payment of determinable retirement income benefits (What benefits will be paid by retirement)

Budgetting Format

Inputs- What agency purchases to us in delivery operations and purchases

Outputs: Taks and Activities
Results and outcome
Consequences

What percentage of bidgets are traditional line item

80%

Traditional Line item budget

-Defining Characteristics
-Economic or Line Item Classification. Still the prevalent theme in gov't. Focused on Cost Control and low cost to administrative units.
-Primary Features
-Inputs purchased
-Budgetary Focus
-Cost Control

Performance Budget

details what it costs to perform an activity

Program budget

funds are allocated for specific programs or projects
(focused on allocation)

Results based/New Performance Budget

- Most ideal (in a perfect world)
- Uses info for appropriate decisions
(Lets us go towards goals of society)

Federal Accounting Standards Advisory Board (FASAB)

Organization that sets standards nationally

Governmental A

An independent private organization that sets the accounting and financial reporting standards for state and local governments following GAAP.

Types of funds

General: Taxes/fines/fees
Special Revenue: Specific taxes/fees
Debt Service: For interest and principle
Capital: Funds projects
Permanent: Principle kept, interest = revenue

Accounting basis

•Cash Basis: Revenue when Cash Received, Expenditure when payment complete
•Full Accrual: Revenues when earned, expenditures when good or service used
•Modified Accrual: Revenues in period when measurable and available, expenditures when liability incurred (USED BY GOVNT)

Cash mobilization

getting the use of the money owed to the gov't as quickly as possible

Disbursment

funds paid out 4 types - Payrolls, Dent Sevice, Capital Outlays, and other purchases

Investment

spending on capital equipment, inventories, and structures, including household purchases of new housing

Pension Investments

Longterm, creditworthness, liquidity, market rate of return

Underwriter

A firm that purchases the entire issue. The borrower receives the entire issue's proceeds quickly without worrying about marketing and hopes to resell the issue at a profit through the spread, firm pays for the bonds and what it can receive from investors. Usually brokerage houses through mutual fund pools. Examples: JP Morgan Goldman Sachs

Types of Pensions

defined benefit plans and defined contribution plans

Federal Reserve

the central bank of the United States

- Created in 1913
- Intended to be the lender of last resort

Gold Standard

A monetary system in which paper money and coins are equal to the value of a certain amount of gold

Glass Stegall Act

Separated investment and commercial banking activities

How many reserve district banks are there?

12

Federal Reserve is...

a cartel of banks

Federal Open Market Committee

- 12 voting members - 7 Board of Governors + 5 District Bank Presidents
- Design Monetary Policy

- Dual mandate: Maintain price stability and maintain full employment and economic growth

3 tools of monetary policy

- Purchasing or sale of bonds to stimulate or slow the economy
- Changing interest rates