Exam 1: Section 2: Legal Foundations of the Government Financial Environment - Learning Objectives

Sovereignty (S2.A1)

Fiscal Powers

Limitations

Fiscal Powers

Tax citizens/corporations for revenue

Establish Budgets

Borrow fund for operations and capital projects

Create money (national level)

Limitations

Legal constraints (constitutions, laws, statutes, and ordinances)

Checks and balances derived from separation of powers

Deliberate legislation process

Ballot box

Power of Government to Tax and Borrow (S2.A2)

Purpose

Term

Amount Limits (National, State, Local)

Process

Purpose: Often restricted to capital projects (rarely for operations)

Term: Debts must be repaid in a specified period

Amount

National: Absolute value of the debt

State: Percentage of total state budget

Local: Assessed value of real estate

Process: Allowed by referendum

Establishing Monetary Policy (S2.A3)

Authority

Purpose

Authority: US Federal Reserve System (central bank independent of US government)

Purpose

Control interest rates

Control reserves other banks must keep on deposit with Federal Reserve

Affects the cost and availability of credit

Establishing Fiscal Policy (S2.A3)

Authority

Purpose

Authority: Executive and Legislative branches

Purpose

Level of taxation

Amount of overall government spending

Amount/Nature of government transfers back to citizens/businesses

Budget - Significance (S2.B1)

Document that defines and constrains government operations via law (national/state) or ordinance (local)

Budget - Relationship with Strategic Planning (S2.B1)

Reduces level of policy deliberations during budget process by clarifying policies and objectives before process begins

Can link budget to performance goals

Budget - Objectives (S2.B2)

Policy

Financial

Communication

Operation

Policy Document: notes negotiated priorities between executive and legislative branch

Financial Plan: Defines expenditures and their funding source for budget period

Communication Device: Provides insight into government operations for citizens

Operation Guide: Prioritizes and limits government expenditures

Budget Process - Objectives (S2.B3)

Priorities

Policy

Resources

Revenue

Defines Priorities: Prioritize government expenditures and allocate financial resources to fund them

Debate Policy: Reflects public values and negotiations among branches and components of government

Allocates Resources: Resources defined in terms of personnel, equipment, systems and capital investments

Identify Revenue Source: Fund sources defined in terms of taxes, borrowing, user fees and intergovernmental transfers

Budget - Legal Aspects/Limitations (S2.B4)

Appropriation: Legal limit on the purpose of expenses, when expenses can be incurred, and the amount of money spent

Special funds / earmarks to limit the collection and spending of revenues

Officials can be fined or jailed if knowingly exceeding the budget

Separation of powers / checks and balances

Spending Control - Legislative Branch (S2.B5)

Funding

Oversight

Funding

Power of the purse

Appropriation: Legal limit on the purpose of expenses, when expenses can be incurred, and the amount of money spent

Oversight

Can set organization structure and staffing procedures

Can require budget execution and spending reports

Can conduct reviews and hold hearings to evaluate programs or issues

Spending Control - Executive Branch (S2.B6)

Implements the budget

Review allocation of resources over time and among programs

Spending Control - Judicial Government (S2.B7)

Judicial review over disputes

Intervene if purpose or manner of spending violates constitution/laws

Can require or limit budgetary action for both executive and legislative branches

Budget Control Devices (S2.B8)

Account Structure

Appropriation / Apportionment / Allotment

Accounting

Account Structure

Defines spending based on program (overall purpose) and object class (specific goods/services beneath program)

Increases accountability

Prevents/limits flexibility

Appropriation / Apportionment / Allotment

Appropriation (Legislative mandate): Controls broad totals budgeted for spending public funds

Apportionment (Executive control): OMB disperses budgeted appropriation to specific department/agencies by time and project to control the spending pace

Allotment (Agency execution): Agency breaks down apportionment from OMB into specific division or object classes/line items

Accounting

Creates commitments/requisitions

Creates encumbrances for the commitments/requisitions

Links specific invoices and expenditures to the encumbrances

Special Funds and Dedicated Revenues (S2.C)

Purpose

Types: Federal, State, Local

Purpose: Used to direct the collection and expenditure of public funds to specific purposes

Types: Federal

Special Funds

Revolving Funds

Trust Funds

Types: State/Local

Special Revenue Fund

Debt Service Fund

Capital Projects Fund

Permanent Funds

Enterprise Funds

Internal Service Funds

Earmarking (S2.E)

Purpose

Examples

Criticism

Purpose: Amount in an appropriations statute for a specific project

Examples

New road

Tax abatement for an individual company

New facility for a specific state school

Criticism

Moratorium in place on federal level due to past abuse

Not subject to management analysis to justify spending

Bypass normal legislative processes

Reduces transparency and accountability

Result of successful lobbying from specific entities