Finance and Budgeting Exam 2

3 roles of government in the marketplace

Enforce contracts, Protect property rights, Discourage fraud

Discretionary Spending

flows through annual appropriations process via 12 appropriation bills, meaning Congress can adjust these funding levels each year as they see fit (National Defense, Environmental Protection Agency(EPA))

Mandatory Spending

spending according to statutory guidelines, instead of regular annual appropriation (Social Security Benefits, Medicare, Medicaid)

Legislative Act with the greatest impact on financial policy in the US

Budget Enforcement Act of 1990 because it fundamentally restructured federal spending and governance. Created mandatory and discretionary spending categories, PAYGO rules, and spending caps.

Budget and Accounting Act of 1921

Created the Bureau of the Budget (OMB), GAO, supplemental appropriations, and the President's budget message.

Congressional Budget and Impoundment Control Act of 1974

Created the CBO, budget committees, budget resolutions, tax expenditure analysis, and the Oct 1–Sept 30 fiscal year.

Balanced Budget and Emergency Deficit Control Act of 1985

Established deficit targets and formula sequestration.

Line Item Veto Act of 1996

Gave the President power to veto specific spending or tax benefits in a bill.

PAYGO Act of 2010

Required revenue-reducing legislation to be offset by spending cuts or tax increases.

Budget Control Act of 2011

Established firm discretionary spending caps through 2021.

Congressional Budget Office (CBO)

Reports to Congress; established by the Congressional Budget and Impoundment Control Act of 1974.

Office of Management and Budget (OMB)

Reports to the President; originally established as the Bureau of the Budget by the Budget and Accounting Act of 1921

Government Accountability Office (GAO)

Reports to Congress; Budget and Accounting Act of 1921.

What does revenue forecasting provide?

A revenue baseline.

What federal agency prepares the revenue forecast at the federal level?

Office of Tax Analysis

What method does the Office of Tax Analysis use?

Micro-data Model

What is the most often used method of revenue forecasting?

Multiple Regression

What is revenue estimating?

Determining the change in revenue due to administration or legislative change.

Another name for revenue estimating

Scoring (US) Tax Costing (UK)

Two components of revenue estimating

Static Component and Dynamic Feedback Component

Static Component

Presumes taxpayers don’t alter their behavior in new tax structure

Dynamic Feedback Component

People do change their behavior in new tax structure

Supplemental Appropriation

An appropriation of funds to be spent during the current fiscal year in addition to the original appropriation.

Continuing resolution

Continuing operations in a fiscal year, despite the fact it has received no appropriation for that year.

Why do governments privatize?

Raise revenue, increase efficiency, achieve economies of scale.

Artificial Monopoly

Company so large nobody can compete.

Natural Monopoly

Single provider operates most efficiently due to high infrastructure costs (Utility)

Budget Cycle Stages

Agency request, executive consideration, legislative consideration, implementation (or service delivery), and audit.

Deficit

Expenditures exceed revenues

Debt

Accumulation of all deficits

What does it mean for a state government to have a balanced budget?

All expenditure proposed in that document must be covered either by revenue raised currently or available from prior year surpluses.

Largest category of spending for State Government

Public Welfare

Largest category of spending for Local Government

Primary and Secondary Education

What are the two largest entitlement programs for federal government?

Social Security and Medicare

Largest Revenue source for Federal Government

Income Tax

Largest Revenue source for State Government

Sales Tax

Largest Revenue source for Local Government

Property Tax

Appropriations Authority

Allows federal agencies to incur obligations and make payments from the treasury for specific purposes.

Loan and Loan Guarantee Authority

Allows an agency to pledge to pay all or part of the principal and interest to a lender if a borrower defaults.

Entitlement Authority

Allows authority to make payments without advance budget authority to any person or government meeting legal eligibility requirements, such as Social Security, Medicaid, and welfare.

Borrowing Authority

Allows an agency to incur and liquidate obligations from borrowed funds by borrowing from the treasury, the public, or a federal funding bank.

Contract Authority

Allows agencies to enter into binding contracts even before obligations are incurred.

Division of Powers

Federal, State, Local. Derived from US and state constitution and statutes.

What is a budget?

Policy Document, Financial Plan, Operations Guide

PAYGO budget requirement meaning

that legislation that would increase entitlement spending must be accompanied with an increase in revenue or reduction in spending sufficient to cover the new entitlement spending

Executive Budget

An executive plan for fiscal operations for an upcoming period.

Congressional Budget and Impoundment Control Act of 1974

The legislation that established the October 1st to September 30th fiscal year. It also created the Congressional Budget Office (CBO), House and Senate Budget Committees, the requirement for a current service budget presentation by the president, congressional budget resolutions, functional classifications in the president's budget, and tax expenditure analysis

Biennial Budget

Two year budget

Budget Outlay

Budget requests for future years. Payments made by Treasury.

Budget and Accounting Act of 1921

Established the fiscal year starting July 1 and ending June 30, supplemental appropriations, the Bureau of the Budget (now the OMB), the General Accounting Office (GAO), the requirement for the President's budget message, and prohibited direct submission of appropriation requests.

Congressional Budget and Impoundment Control Act of 1974

Established the current federal fiscal year (October 1 to September 30), the Congressional Budget Office (CBO), House and Senate Budget Committees, the requirement for a current service budget presentation by the president, congressional budget resolutions, functional classifications in the president's budget, and tax expenditure analysis.

Balanced Budget and Emergency Deficit Control Act of 1985

Established deficit targets and a formula sequestration process to enforce those targets, along with requiring an earlier presidential budget message.

Budget Enforcement Act of 1990

Created mandatory and discretionary spending categories, established PAYGO requirements for mandatory spending to ensure increases were revenue neutral, and set strict discretionary spending caps/limits.

Line Item Veto Act of 1996

Established the presidential power to veto specific discretionary spending, direct spending, or tax benefits when signing a bill or joint resolution.

PAYGO Act of 2010

Mandated that any changes to taxes, fees, or mandatory spending cannot increase the deficit, requiring that any legislation reducing revenue be offset with mandatory spending cuts or other revenue increases.

Budget Control Act of 2011

Established firm discretionary spending caps through fiscal year 2021 and required a vote on a balanced budget amendment.

Reasons for long-term budget forecasting

Guides local governments and infrastructure development, and shows credit rating agencies flow for loan for bonding.

Rosy Scenarios

Overly optimistic economic and revenue forecasts used by policymakers to make future budget deficits look smaller than they actually are or to justify new spending and tax cuts without making hard fiscal choices.

Magic Asterisk

A budget gimmick where a footnote (*) claims large, unspecified future spending cuts will balance the budget later without identifying what will actually be cut.

Bubble

A temporary, unsustainable surge in tax revenues (often from a booming stock or housing market) that makes the budget look healthier than it actually is, or a temporary spike in spending/tax rates that later drops back down.

Timing

A budget gimmick where payments are pushed into the next fiscal year or revenue collections are pulled into the current fiscal year to artificially shrink the current year's deficit without actually saving money.

One-Shot

A budget gimmick where a non-recurring windfall (like selling public assets, legal settlements, or draining reserve funds) is used to balance ongoing, recurring operating expenses, leaving a structural deficit for the following year.

What budgets are taken “off budget” in order to meet statutory or constitutional requirements for a balanced budget?

Capital budgets, enterprise funds, public authorities, pension trust funds

Q1

October 1 - December 31

Q2

January 1 - March 31

Q3

April 1 - June 30

Q4

July 1 - September 30