intro to public budgeting and finance exam 3

debt

sum of deficits and if it exceeds surpluses over at least two years time frame

unfunded liabilities

liability that does not have savings set aside for it, doesn't account towards what we owe right now (future based) and cannot predict the future

Deficit and surplus

Deficit- Expenditures \> revenue
Surplus- Expenditures < revenue

How is debt funded? (2)

1) Treasury Bonds-Federal Gov't
2) Municipal Debt- State and Local Gov't

Three conditions that result from government debt

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

Rolled over

The cash to pay the principal comes from additional borrowing

This is how deficits become debt, and the only way to retire the debt becomes surpluses. We roll over debt all the time through the treasury market.

the renewal of a loan. Instead of liquidating a loan on maturity, you can roll it over into a new loan. The outstanding principal and other components of the old loan are rolled-over with or without the interest outstanding on it.

Two important measures of debt

1. Gross debt - all the federal debt outstanding
2. Debt held by private investors - all federal debt except that held by federal accounts and the federal reserve system

Municipal debt vs treasury bills

Municipal- sold through mutual funds, packed with multiple maturities, multiple debt rankings; interest qualifies for exclusion from federal tax
Treasury- longer time frame on any debt the higher the interest rate

what level is municipal debt on

state and local

two types of municipal debt

1. Full faith and credit obligations- "general obligation bonds", issued for any purpose relation to government service, have unlimited claim on taxes and other revenues of the issuing unit
2. Non guaranteed debt- "revenue bonds" issued for capital projects and infrastructure with revenue source, sold on the basis of repayment from particular revenue sources only

Golden rule of debt issues

Do not issue debt for a maturity longer than the financed project's useful life

golden rule of capital projects

match current revenue to spending on current services, but borrow to support the capital spending and thereby maintain the net worth of the public sector

Bond issue

can be serial or term
-Bonds are issued by governments and corporations when they want to raise money.
-By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.

ratings

when risk is greater, the lender demands a higher return on their loan
-allowed gov to sell on larger capital market

four factors for reviewing ratings

1. the economy
2. debt
3. the government
4. financial analysis

Two types of pensions

1. defined benefit
2. defined contribution

Three firms that provide ratings

Moodys, fitch, standard and poors

what goes into a ratings formula that guide them for municipalities

evaluation of credit worthiness and risk of bond

budget

-determines if service is valuable
-facilitates spending control, not resource allocation, or measuring effectiveness
-top down approach
-need to start with question of goals states and then build the budget with resources to suit each individual goal

good budget flow chart

1. inputs
2. outputs
3. results of outcomes
4. consequences for society

federal reserve system

they only need to keep a fraction of deposits on hand in the bank from what they take in of direct deposits, around 7%
-created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.

Why was the Federal Reserve created?

-To prevent financial panics, panic of 1907 was when the stock market fell 50% from its peak the previous year and ended with bankruptcy of many state and local banks
-It was created to regulate bank reserves and influence the nation's money supply. The Fed became the central bank of the United States.

Gold standard

dollar was defined as a weight of gold or silver but americans did business with paper, each dollar denominated in silver or gold, no long term debt just deficits

Glass stegall act

separated investment and commercial banking activities and was important since speculation helped create the conditions for the market crash
-created the Federal Deposit Insurance Corporation and insured by it now for risker financial services

How many district banks

12, owned by the member commercial district banks in their district and banks have choice to belong, no credit unions

FOMC

Federal Open Market Committee (federal reserve) 12 voting members - 7 board governors and 5 district bank presidents
-has control over board of governors
-At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.

three tools of monetary policy

1. purchasing or sale of bonds to stimulate or slow economy
2. changing interest rates (fed funds rate and discount rate)
3. changing reserve requirements- only in extraordinary events

4 types of disbursements

1. payrolls
2. debt service
3. capital outlays
4. other purchases

3 principle invesments

-insures liquidity, liquidity\=safety
1. treasury bills
2. certificates of deposits
3. municipal debt

4 guidelines for investing into pensions

1. focus of the funds is long term
2. creditworthiness
3. liquidity
4. market rate of return

underwriter

-firm purchases the entire issue and borrower receives entire issue in hopes to resell the issue at a profit to investor through the spread.
-Firm price pays for the bonds, and what it can receive from investors
-bons is sold into the secondary market
Ex: JP morgan, goldman sachs

bond

-a fixed income instrument that represents a loan made by an investor to a borrower
-maturity, coupon (interest) rate, bond issuer, bond price, bond yield

Three funds that a bond proceeds goes in

1. debt service funds- account dedicated to the payment of interest and repayment of principal of debts
2. capital funds- funds construction, land acquistion, major capital purchases (dissolved when project complete)
3. permanent funds- principle always kept separate from other funds to ensure payment once maturity expires

what does treasurers manage

a company's capital (pension plans are managed by fiduciaries, trustees in many jurisdictions) and invests in pensions

cash fund

A cash fund is a managed investment scheme that aims to provide competitive returns relative to a benchmark investing in low-risk high liquidity cash or cash equivalents such as sort-term government bonds and bank bills.

percent of budgets that are traditional line item

80%, the budget we are

traditional line item budget characteristics

-focused on cost control and low cost to administrative units
-inputs purchased
budgetary focus: cost control

5 things that program budget allows us to do

1. facilitate comparisons
2. include complimentary resources
3. recognize how we allocate
4. multiple structures
5. recognize long term activities

4 types of budgets

1. traditional line item
2. traditional performance budget
3. program budget
4. result based/new performance budgeting

two types of governmental accounting standards

-independent authorities establish governmental accounting rule
1. (FASAB) Federal accounting standards advisory board - federal government
2. (GASB) - governmental accounting standards board - state and local government

5 funds that government revenues and expenditures broken up in

1. general fund
2. special revenue fund
3. debt service fund
4. capital funds
5. permanent funds

three characteristics defining a bond issue

constant, static, they never change

percentage of mandatory spending

70%, and largest is social security

percentage of discretionary spending

30%, and largest is defense department

proprietary and fiduciary funds

Proprietary:
-enterprise fund - self supporting government entities (post office, utilties etc)
Fiduciary funds:
-taking care of other people's money (pensions trust funds)

what level of government is the largest some of unfunded liabilities on

state and local

government expenditures are classified (5)

1. items purchased
2. activities or function
3. purpose
4. tasks or program

traditional performance budget

-Spending by workload category or agency activity Administrative unit organization.
-Look at unit costing of outputs.
-Primary Features
-Tasks/activities/outputs and workloads
-Budgetary Focus : Management, and technical efficiency
-Performance budgets consider whether it is being done at a low cost; they do not consider if the activity is worth doing!

program budget

-Spending according to common public goals or purpose. Breaks administrative organizational boundaries.
-Outcomes, final products and result oriented.
-Resource allocation and what the public truly wants.
-defines goals of gov, classifies organizational activities contributing to each goal

Results Based/New Performance Budgeting

-ultimate budget goal format
-info about objectives and results of government expenditures
-Spending by administrative units.
-Measured Outcomes, Performance measures. Was the purpose achieved?
-Results Driven Resource Allocation- Is it Successful?

inverse relationship with bond yield and face value

when bond price is higher than face value, the bond yield is lower than the coupon rate

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

non guaranteed debt

builds public projects and pay off bonds used to finance the construction of the projects w/ charges from users