E

Module 8 Textbook Notes

Budgeting Process

  • Before 1921, Congress did budgeting; executive became involved with Budget and Accounting Act of 1921 (created by the Taft commission)

    • BAA created the Bureau of the Budget (BoB) and the Government Accountability Office (GAO)

      • BoB was the agency thru which the president prepares and presents a formal budget to Congress — was replaced by Office of Management and Budget (OMB) in 1970 by Nixon.

      • GAO is responsible for auditing/reviewing the fed budget (made President into dominant budgetary role)

  • Process

    • President presents a budget request to Congress detailing agency budgets that are needed

      • Request prepared by OMB. OMB budget examiners go to agencies to determine necessary budget —> make final recommendations to the OMB

    • OMB provides this info to Congress: how much money is being requested, how much tax money will be collected, whether there is a surplus or deficit, and how much the budget/shortfall amount to

    • Congress receives budget request and questions EOP about it —> both chambers create separate resolutions —> sent to separate floors for debate to allow changes —> changes are ironed out and a single version is presented to both chambers for a majority vote

    • Resolution is sent to both chamber Appropriations committees —> discretionary is split into 13 categories (ind. appropriations bills) —> all 13 are debated, amended —> differences ironed out —> voted on by both chambers and can be approved/vetoed by President

  • President priorities relate to both discretionary and entitlement spending

    • Discretionary must have funding approved each year (defense, education, housing)

    • Entitlement is mandated by law (social security and Medicare) but President can recommend changes to these programs

  • This resolution is not signed by President; it is a blueprint for future appropriations legislation

    • Resolution has two definitions of spending: budget authority and outlays.

      • Budget authority is the amount of money Congress allows the feds to spend

      • Outlays is actual amounts spent each year

      • BA for ‘school construction’ may be $100 mil but maybe there won’t be that much in outlays until the next fiscal year

  • Process includes audits done by GAO to ensure lawful, efficient spending by agencies

Types of Budgets

  • Budgets are plans on how revenues are spent in a yearly cycle

    • Cycle: preparation —> approval —> implementation —> auditing

  • Who prepares the budget?

    • Executive budgets by President / Governor / County Executive / Mayor

      • Developed from requests by govt. agencies —> sent to legislative body for approval (can be Congress or city council)

Operating vs. Capital Budget

  • Operating Budget: Plans how resources will be allocated for agencies. Focuses on day-to-day expenses such as salaries, utilities, and routine maintenance.

  • Capital Budget: Allocates funding for long-term investments in infrastructure, services, and facilities. Financed through borrowing (bonds)

Line-Item Budget

  • Illustrates where public money will be spent, item by item.

    • Personnel costs, office supplies, etc.

  • Used by local govts due to simplicity

    • Advantage: keeps people accountable

    • Disadvantage: not tied to performance—allocations differ very little and assessing how much should be spent becomes difficult.

Performance Budget

  • How much is spent on a Department directly ties to how well they a re performing.

  • Requires the establishment of ‘performance levels’ — indicators are outputs and outcomes

    • Output: units produced or numbers of services provided (could be miles of road swept)

    • Outcomes: how well entity meets goals/objectives (can be “street cleanliness” measured via visual inspections, degree of citizen satisfaction/number of citizen complaints)

  • Points of performance budgeting: amount of work done is measured / quality is measured / impacts how much money a department receives

    • Overperformance = more money, underperformance = less

  • Criticisms: taking money from struggling departments exacerbates problems, and collecting performance data is too costly and time consuming

Zero-Based Budget

  • All departments defend their programs and, as well, their level of funding.

    • Head of department would be required to show what would happen if amount budgeted for (example) street sweeping outputs would be maintained, reduced, increased, or eliminated.

  • This is called decision packages and one is prepared for each department program

    • Packages are ranked from most to least importance to maintain funding or decrease if cuts are necessary

  • Advantage: allows department heads to set priorities of where budget increases and cuts should happen

  • Disadvantage: labor intensiveness (overwhelming to prepare and rank packages) and also subjective

PPBS

  • Planning Programming Budgeting System—based on rational decision making

    • Uses cost-benefit analysis where program costs are compared to benefits - if the ratio is greater than 1.0, benefits are greater than costs

    • Difficult because it can’t really place a monetary value on the intangible benefits of programs

  • This system compares a particular program’s cost-benefits compared to possible alternative programs

Budget Auditing

  • Auditing ensures that public money is being spent lawfully and efficiently—are done by independent investigators

    • Federal level = GAO

    • State level/large cities = Office of the Comptroller

  • Types of audits: Compliance and performance

    • Compliance = govt. spends money in accordance with the law

    • Performance = looks at organizational effectiveness and efficiency—if goals/objectives are being met at a reasonable cost

Where Do Governments Get This Money? 

  • Federal govt. raises money through the taxation of income, wealth, and consumption.

    • Income tax: personal (progressive tax system) taxes where if you earn more you pay more

      • Corporate: corporations are taxed at varying rates based on their profitability

    • Payroll tax: Paid by both employer and employee, money withheld from paychecks to pay into Medicare and Social Security

    • Capital gains taxes: taxes on sales of stock, bonds, precious metals, and real estate

  • State govts. rely on personal and corporate income taxes, and also consumption/sales tax

    • Consumption: cents added to every dollar spent on goods/services

    • Income, corporate. sales tax rates differ between states

  • Local govts. rely on property taxes to finance services and projects

    • A property’s value is assessed and then multiplied by a set tax rate

Theories of Budgets

  • Because of scarcity, budget makers determine how resources are used

    • Three viewpoints: rights (legal or contractual obligation), deserts (merit and utilitarianism), and needs (taking from the wealthy to support the poor).

      • These are ways of dealing with equity

    • Should they be allocated based on need (Temp Assistance for Needy Families/TANF) or should contract be the basis (Social Security/Medicare)?

  • Three perspectives: the economist, the political scientist, and the public administrator

  • Economist: rationality with a regard to normative theory of budgeting

    • Determine organizational goals but economy is a means in terms of relative value, effectiveness, and incremental comparisons

      • Relative value: opportunity cost of a policy decision (usually difference between first and second choices)

      • Effectiveness: evaluating a policy/budgetary preference in terms of achieving a common purpose

      • Incremental comparisons: comparing value/cost at the margin, where value diminishes with quantity

    • Closest application of this concept is zero-based budgeting

    • The budget process is to support policies where value > costs and is to identify/sustain worthwhile government activities while minimizing resource waste

      • Process creates a “common pool” of resources where private income becomes common property —> becomes a problem as the transfer creates incentives for exploitation

        • The pool is “up for grabs” among competing interests—obtaining parts of it creates tension and conflict

        • Brubaker embraces a process that expresses public preference, creates universal net benefits, decreases opportunities for rent seeking, allows direct participation

      • Public choice measures would reduce magnitude of budgetary commons

        • Tax credits offered for contributions made to providers of quasi-public services

        • Taxpayers can choose to not participate in programs that provide dividable goods or services

        • Citizens could participate in determining their tax share (this is prone to free rider problems and lack of knowledge)

    • Ability to pay depends on tax system (income taxes are progressive, consumption taxes are proportional)

  • Political Scientists: Budgeting is an interest oriented process where decisions are made in the context of who pays and who receives

    • Budget is a set of individual preferences/conflicts over whose preferences should prevail

    • Whicker (1992): wealthy taxes should be given to services for poor, ideology filtered through parties controls the budget

      • The redistributive components of diff ideologies are the basis for how resources are split

    • Swedlow (2002): cultural theory is a basis for budget decisions; culture embodies ideology, impact of redistributive policies on individual autonomy and collective relationships

      • Cultural theory predicts which political actors will form coalitions and what budget outcomes they prefer

        • Egalitarian culture = budgets via referendum, individualistic culture = budgets that are decentralized/fragmented

  • Public administrator: Equity is in the budget making process

    • Encompasses notions such as equality in govt. services, responsiveness to citizen needs, approach to public admin that includes practical applications, being problem oriented, and theoretically sound

Key Terms