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INTRODUCTION

Chapter 1

1

In what many characterize as the information age,1 it is to be expected that anybook dealing with large organizations operating in the world economy wouldfocus extensively on information. This book is about complex governmental insti-tutions that operate in a world economy and society, and its extensive focus oninformation is no surprise. This book is about budgets, budgeting systems, andbudgeting processes; the nature of the decisions that are made; and the processesby which those decisions are made. As we discuss throughout the book, budget-ing has always been about information, and budget systems are about gatheringthe best information available, whether that information be primarily of a techni-cal nature or primarily of a political nature, and bringing that information to bearon decisions about allocating resources to purposes.

Public budgeting involves the selection of ends and the selection of means toreach those ends. It involves the division of society’s economic and financialresources between the public sector and the private sector as well as the allocationof such resources among competing public sector needs. Public budgeting sys-tems are systems for making choices of ends and means. These choices are guid-ed by theory, by hunch, by partisan politics, by narrow self-interest, by altruism,and by many other sources of value judgment including avarice and perceptionsof the public interest.

Public budgeting systems work by channeling various types of informationabout societal conditions and about the private and public values that guideresource allocation decision-making. Complex channels for information exchangeexist. Through these channels, people process information on what is desired,make assessments of what is or is not being achieved, and analyze what might or

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2 Chapter 1: Introduction

might not be achieved. Integral to budgeting systems are intricate processes thatlink both political and economic values. In making decisions that ultimately deter-mine how resources are allocated, the political process uses sometimes bewilder-ing and often conflicting information about values, about actual conditions, andabout possible condition changes. This book is an analysis of procedures andmethods—past, present, and prospective—used in the resource allocation process.

This chapter examines some basic features of decision-making and budgetingsystems. First, some major characteristics of public budgeting are explained throughcomparison and contrast with private forms of budgeting. Second, the developmentof budgeting as a means of holding government accountable for its use of society’sresources is reviewed. Next, budgets and budgeting systems are defined. Finally,the role of information in budgetary decision-making is considered.

Distinctions Regarding Public Budgeting

Budgeting is a common phenomenon. To some extent, everybody does it. Peoplebudget time, dollars, food—almost everything. The family hardware store budg-ets, Wal-Mart budgets, and governments budget. Moreover, important similaritiesexist in the budgeting done by large public and private bureaucracies.2

Budgeting is intended as a mechanism for setting goals and objectives, forallocating the resources necessary to achieve those objectives, for measuringprogress toward objectives, for identifying weaknesses or inadequacies in organ-izations, and for controlling and integrating the diverse activities carried out bynumerous subunits within large bureaucracies, both public and private.Budgeting is the manifestation of an organization’s strategies, whether thosestrategies are the result of thoughtful strategic planning processes, the inertia oflong years of doing approximately the same thing, or the competing politicalforces within the organization bargaining for shares of resources. Once resourcesare allocated through the budgetary process, the organization’s strategies becomeapparent even if they have not been articulated as strategies. Budgeting meansexamining how the organization’s resources have been used in the past, analyz-ing what has been accomplished and at what cost, and charting a course for thefuture by allocating resources for the coming budget period. Whether this processis done haphazardly or after exhaustive analyses, whether it is carried out byorder of the chief executive officer or requires the extensive input of citizens, it isstill budgeting.

Budgeting is also about assigning responsibility for accomplishing the resultsintended by the executive and legislative actors that ultimately set the public budget.Budgets are executed by individuals generally within large bureaucracies. Budget

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Distinctions Regarding Public Budgeting 3

allocations identify not only the amounts to be spent and the intended purposes ofthose expenditures, but also the unit within the bureaucracy—and by implication, theindividuals managing that unit—responsible for achieving the intended results. In thecontemporary age in which much of the value in any process, whether producing acommercial good or producing a public service, is in the information or knowledgeapplied, responsibility for budget decisions and budget implementation is vastlymore complicated. First, the information available to the decision makers, whetherthey choose to use it or not, is much more extensive. Second, decision-making process-es are more highly visible to citizens and other stakeholders. Thus, for practical rea-sons, and because strong central government controls are politically less feasible thanin the past in most countries, budgetary decisions are more decentralized than ever.

Public and Private Sector Differences in Objectives

Resource Availability. Important differences exist between the private and publicspheres. In the first place, the amount of resources available for allocation in thebudget process varies greatly. Both family and corporate budgeting are constrainedby a relatively fixed set of available resources, even if vastly different in size. Incomeis comparatively fixed, at least in the short run, and therefore outgo must be equalto or less than income. Of course, income can be expanded by increasing the levelof production and work such as a member of the family taking a second job, or tem-porarily by borrowing, but the opportunities for increasing income are limited.

Governments, on the other hand, are bound by much higher limits. In theUnited States at least, government does not use nearly all of the possible resourcesavailable. Only in times of major crises, such as World War II, has the governmentof the United States begun to approach the limits of its resources. Then the federalgovernment borrowed an amount that eventually came close to equaling the totalproduction of the economy in a year. Rationing, price controls, and other measureswere imposed so as to limit severely private sector consumption and instead allo-cate most of society’s resources to the government. During other times, much is leftto the private sector with government using only a fraction of society’s work force,goods, and services. In 2005, combined federal, state, and local governmentreceipts amounted to just over 31% of total gross domestic product (GDP), withabout three-fifths of that being the federal government. That percentage has variedlittle, from about 25% to about 30% since 1960.3 Government has the power todetermine how much of the society’s total resources will be taken for public pur-poses. Private parties operate within the limits of their ability to acquire resourcesthrough their market activities: selling their labor, selling goods, and so forth.

Profit Motive. Another major distinction between private and public budgetingis the motivation behind budget decisions. The private sector is characterized

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by the profit motive, whereas government undertakes many things that arefinancially unprofitable. In the private sector, profit serves as a ready standardfor evaluating previous decisions. Successful decisions are those that produceprofits (as measured in dollars). Some companies of course may focus onshort-term profits, and others may take a longer-term view, but in the end,failure to achieve a profit or at least break-even means the company goes outof business.

The concept of profit, however, can lead to gross oversimplifications aboutcorporate decision-making. Not every budget decision in a private firm is deter-mined by the criterion of making an immediate profit. Sometimes corporationsforgo profits in the short run. In the case of price wars, they attempt to increasetheir share of a given market even if it means selling temporarily at a loss. At othertimes, they incur large debts and take other apparently unprofitable actions tocombat a hostile takeover, an attempt by an outsider to purchase enough stock toexercise control over a corporation’s assets. Sometimes their major objectives areto produce a good product and to build public confidence. They have enough con-fidence in their pursuit of customer service that the result will be sustained, longrun profits. At other times they undertake actions for mainly social motives, wish-ing to make a contribution to the society that sustains their corporate existence, aconcept known as corporate social responsibility or CSR.4 Still in private sectorfirms, revenues must exceed costs over the long run.

Large firms also budget significant resources for research and development (R& D) activities, only a few of which eventually will lead to a product that gener-ates large sales and profits. An R & D division can be evaluated over the long termby how many of its developments contribute to profits, but this kind of evaluationis difficult. Often, the results of R & D are subtle improvements in existing prod-ucts and measuring the amount of investment relative to the incremental profitgain is impossible. In this regard, private budgeting for R & D is no less difficultthan the federal government’s support of R & D.

Overall, the evidence is that investing in R & D yields positive returns on thatinvestment.5 A Congressional Budget Office review of studies estimating thevalue generated by R & D expenditures noted that although precise achievementsare difficult to estimate, R & D spending does yield positive returns.6 A NationalAcademy of Sciences panel studied five federal agencies’ implementation of theGovernment Performance and Results Act of 1993 to measure the results of theirresearch and development activities. The study noted that the benefits of researchare difficult to assess, concluding that “the most effective technique for evaluatingresearch programs is review by panels of experts using the criteria of quality, rel-evance, and, when appropriate, leadership.” 7

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Regardless of the role profit plays in the private sector, government decisionmaking in general lacks even this standard for measuring activities. Exceptions tothis generalization are government activities that yield revenues. State control andsale of alcoholic beverages, whether undertaken for profit or for regulation of pub-lic morals, can be evaluated, like any other business, in terms of profit and loss.Similarly, the operation of a water system, a public transit authority, or a publicswimming pool can be evaluated in business profit-and-loss terms. This does notmean that each of these should turn a profit. After all, operating a public swim-ming pool may be the result of a decision to provide subsidized recreation to alow-income neighborhood whose residents cannot afford other private recre-ational alternatives. The budgeting process, however, can be used to assess theoperation as a business to clarify the subsidy level and to aid decision makers incomparing costs with those for other public services provided free of direct charge(see Chapter 12).

Nevertheless, the majority of private sector budget decisions pertain to atleast long-term profits, and most public sector budget decisions do not.Governments undertake some functions deliberately instead of leaving them tothe private sector. Public budgetary decisions, for example, frequently involveallocation of resources among competing programs that are not readily suscepti-ble to measurement in dollar costs and dollar returns. For example, there are noeasy means of measuring the costs and benefits of a life saved through cancerresearch, although the value of future earnings sometimes is used as a surrogatemeasure of the value of life. The U.S. government undertakes large programs tocontrol or eradicate malaria and other tropical diseases, not based on economic orfinancial returns, but on a broad concept of the public interest in eradicating dis-eases that affect low-income populations in developing countries. Nor is there aready means of clearly separating private incentives from public incentives. Forexample, although the National Cancer Institute spends millions of public dollarsannually on cancer research, the amount is minuscule compared with the amountspent by private companies on research for cancer prevention and treatment.

Just because most public sector activities are not intended to be profitable, itdoes not mean that business-like measurement of results in relation to costs is use-less. Although not susceptible to bottom-line or profit-and-loss measurement, manygovernment programs are able to measure their results in terms of output (efficien-cy) and outcome (effectiveness). The tropical diseases eradication programs under-taken by the U.S. government for reasons of the public interest, for example, can andare measured by the efficiency and effectiveness with which the programs are imple-mented.8 Legislation passed in 1993 mandated the use of performance measures toimprove the federal government’s accountability for the results of its expenditures.9

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Public and Private Sector Differences in Services Provided

Public Goods. Some government services yield public or collective benefits that areof value to society as a whole, whereas, corporate products are almost always con-sumed by individuals and specific organizations. When Ford Motor Companyproduces automobiles, persons buying the automobiles use them to meet theirown personal needs. When the Departments of Defense and Homeland Securityproduce a network for preventing nuclear devices from entering the nation’sports, that network benefits the public in general. Economists call these kinds ofproducts and services public goods. They have two properties. The first is nonex-cludability. Once the network is in place, no one can be excluded from its benefits.10

The second is nonrivalness. One person’s use of the good or service does not dimin-ish another person’s use. For example, a second person can “consume” nationaldefense without lessening the benefits that the first person gets from that publicgood. Of course, few public products and services qualify as pure public goods,and many goods and services produced by governments are also produced by theprivate sector. Police protection is a public service, but communities, companiesand even individuals also purchase from private security companies variousforms of protection against crime.

Externalities. Another class of government services consists of those from whichindividuals can be excluded but for which the benefits, or costs, extend beyondthose who are the immediate targets of the service. When Ford Motor Companysells a car, its stockholders enjoy the benefits of the profits, but those profits do notspill over to society at large. However, when a child is educated through a schoolsystem, not only does the child benefit, but society’s productive capacity is alsoenhanced. Many private schools educate children for a profit, and the owners ofthe school enjoy the benefits of the profits along with the child and society.However, it seems unlikely that these same for-profit schools would willingly pro-vide equivalent education to all children who cannot make tuition payments.Economists label the benefits that spill over to the rest of society externalities.Governments provide at least some services that produce significant externalitiesbecause the private sector would provide these only to the extent that profit couldbe made. Education, if left entirely to the private sector, presumably would beavailable only to those who could pay, or would be provided in insufficient quan-tity and quality for the needs of society.

Pricing Public Services. Defining just what is clearly public in nature and deter-mining what the private sector presumably cannot or will not provide is contro-versial. During the 1980s and 1990s, the federal government cut back on transfersto state and local governments, which also faced more stringent tax and spending

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limitations inspired by their voters (see Chapter 5). As a consequence, many serv-ices once thought to be exclusively public were converted into private services orto public services provided by private firms on a contract basis.11 That trend con-tinued when state and local budgets shrank dramatically with the recession thatstarted in 2001–2002, though there is some evidence that smaller jurisdictions orsmaller private contracting for public services has waned somewhat, while largecontracts seem to be increasing.12

This trend advanced throughout many developing countries with public sec-tors even larger than in the United States. The Margaret Thatcher government, inprivatizing many formerly public services such as the water utilities throughoutthe United Kingdom, served as a model for the early 1980s movement in theUnited States and around the world.

This type of conversion is not a new idea, but public sector budget pressureshave changed the landscape to require those who benefit directly from a govern-ment service to pay for its cost (see Chapter 5). For example, in the 1990s the U.S.Coast Guard stopped providing towing services to disabled boats unless a genuineemergency exists; it instead notifies private operators, who charge the cost to thedisabled boat captain. That practice has cut back significantly on calls for towingin general, with prices providing a rationing mechanism. What is private and whatis public varies over time, and public budgeting is affected by those variations.13

Other Public and Private Sector Differences. Whatever objectives other than profitprivate corporations may have, to stay in business they must seek economic effi-ciency and obtain the greatest possible dollar return on investments. In contrast,governments may be intentionally inefficient in resource allocations, undertakingservices that the private sector would be reluctant to provide at all. For example,government-financed medical care for the elderly may be inefficient in the sensethat other government programs provide greater economic returns to society, butit has been agreed that at least some support should be provided to the elderly.Governments are also charged with other unique responsibilities such as inter-vention in the economy (see Chapter 15).

Another difference between private and public organizations lies in the clien-tele and the owners of the means of production. In theory, at least, both corpora-tions and governments are answerable to their stockholders and clients. In the pri-vate sector, these individuals can disassociate themselves from firms. Their coun-terparts in the public sector are denied this choice except through the extreme actof emigration. Private stockholders expect dollar returns on their investments,and if they are not satisfied, they sell their shares. Because government costs andreturns are not so easily evaluated, the electorate has no simple measure forassessing the returns on the taxes they pay, and they have no means to sell their

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shares, other than to move to another country. Even so, many state and local gov-ernments provide annual reports to citizens that are similar in purpose to stock-holder reports. These reports emphasize the investments government is makingand the benefits citizens are receiving in lieu of profits. Of course the stockholdersof corporations and of governments from time to time change management, thelatter through regular elections.

Corporate budgetary decision-making is usually more centralized than gov-ernment decision-making. Corporations can stop production of economicallyunprofitable goods such as Oldsmobiles. Given the nature of the public decision-making process, however, governments encounter more difficulty in making deci-sions both to inaugurate programs and to eliminate them. For example, thoughthere was an apparent large majority consensus for over two decades that theMedicare program that assists the elderly in financing health care, should includesome form of prescription drug coverage, it was not until 2006 that a programfinally was implemented.

Responsible Government and Budgeting

The emergence and reform of formal government budgeting can be traced to aconcern for holding public officials accountable for their actions.14 The “reinvent-ing government” movement represents the most recent manifestation of a ratherancient concern that public officials be held accountable for their actions, thoughsome critics have held that the precepts of reinvention are not new and not neces-sarily internally consistent.15 No matter the particular reform terminology invogue, in a democracy, budgeting is a device for limiting the powers of govern-ment. Two issues recur in the evolution of modern public budgeting as an instru-ment of accountability—responsibility to whom and for what purposes.

Responsible to Whom?

Responsibility to Constituency. Basically, responsibility in a democratic societyentails constituents holding their officials answerable, usually through elections.Elected executives and legislative representatives at all levels of government are,at least in theory, held accountable through the electoral process for their decisionson programs and budgets. In actuality, budget documents are not the main sourceof information for decisions by the electorate. Obviously, most voters do not dili-gently study the U.S. budget before casting their votes in presidential and con-gressional elections. However, when the government’s share of the total economygrows, it is increasingly clear that voters do hold elected representatives respon-sible for the overall budget, the budget deficit, and the general performance of the

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Responsible Government and Budgeting 9

economy. That the electorate holds presidents responsible for the economy wasevidenced in 1992 by President George H. W. Bush’s defeat in his bid for re-elec-tion. Eight years later, the 2000 election showed that even in the midst of a boom-ing economy, many voters were more concerned about apparent ethical and morallapses in the White House than their happiness with the economy. In 2006, votersindicated great unhappiness with the wars in Afghanistan and Iraq and the over-all performance of the presidency by changing the party control in both the Houseand the Senate. Huge budget deficits seemed to play only a minor role in voterdecisions in that election.

State and local governments have specific creditors: the purchasers of bondsissued to finance long-term capital improvements. The interest rates that state andlocal governments have to pay on their bonds are affected by their ability to pro-vide creditors with convincing evidence of their creditworthiness (see Chapter13). Hence, financial institutions that purchase bonds and ratings institutions thatrate state and local bonds are important constituents to whom these governmentsare accountable.

Because the public in a large society cannot be fully informed about the oper-ations of government, the United States has used the concepts of separation of pow-ers and checks and balances as means of providing for responsible government.Power is divided among the executive, legislative, and judicial branches, and eachprovides some checks on the others. Although the president is held responsible toCongress for preparation and submission of an executive budget, only Congresscan pass the budget. Specifically, the U.S. Constitution in Article 1, Section 9 statesthat “no money shall be drawn from the Treasury, but in consequence of appro-priations made by law. . . .” In most states and many localities, the chief executivehas a similar responsibility to recommend a plan for taxes and expenditures. Thelegislative body passes judgment on these recommendations and subsequentlyholds the executive branch responsible for carrying out the decisions. Local gov-ernment practice varies more since some local governments do not have an elect-ed chief executive.

Development of the Executive Budget System. The development of an executivebudget system for holding government accountable was a long process that canbe traced as far back as the Magna Charta in 1215. The main issue that resulted inthis landmark document was the Crown’s taxing powers. The Magna Charta didnot produce a complete budget but concentrated only upon holding the Crownaccountable to the nobility for its revenue actions.16 At the time, the magnitude ofpublic expenditures and the use of these funds for public services were of less con-cern than the power to levy and collect taxes. It was not until the EnglishConsolidated Fund Act of 1787 that the rudiments of a complete system were

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established, and a complete account of revenues and expenditures was presentedto Parliament for the first time in 1822.17

The same concern in eighteenth-century England for executive accountabilitywas exhibited in other countries. It was carried over to the American experienceeven prior to the ratification of the Constitution in 1789. Fear of a strong executivebranch was evidenced by the failure to provide for such a branch in the Articles ofConfederation in 1781. Fear of “taxation without representation” probablyexplains why the Constitution is more explicit about taxing powers than the pro-cedures to be followed in government spending.

The first decade under the Constitution saw important developments thatcould have resulted in an executive budget system, but the trend was reversed insubsequent years. The Treasury Act of 1789, establishing the TreasuryDepartment, granted to the secretary the power “to digest and prepare plans forthe improvement of the revenue . . . [and] to prepare and report estimates of thepublic revenue and expenditures.” 18 Alexander Hamilton, secretary of the treas-ury, in interpreting his mandate broadly, asserted strong leadership in financialaffairs. Although the act did not grant the secretary power to prepare a budget byrecommending which programs should and should not be funded, such a devel-opment might have subsequently occurred.

Instead, Hamilton’s apparent lack of deference to Congress strengthened thatbody’s support for greater legislative control over financial matters. To curtail thediscretion of the executive branch, Congress resorted to the use of increasing num-bers of line items, specifying in narrow detail for what purposes money could bespent.19 The pattern emerged that each executive department would deal directlywith Congress, thereby curtailing the responsibilities of the secretary of the treas-ury. The budgetary function of the Treasury Department became primarily minis-terial. The Book of Estimates, prepared by the secretary and delivered to Congress,could have become the instrument for a coordinated set of budgetary recommen-dations. Instead, it was simply a compilation of departmental requests for funds.A. E. Buck wrote, “Thus budget making became an exclusively legislative functionin the national government, and as such it continued for more than a century.” 20

Modern Executive Budgeting. By the beginning of the twentieth century, changingeconomic conditions stimulated the demand for more centralized and controlledforms of budgeting. E. E. Naylor wrote that before this time there was little“enthusiasm for action . . . since federal taxes were usually indirect and not severe-ly felt by any particular individual or group.” 21 By 1900, however, existing rev-enue sources no longer consistently produced sufficient sums to cover the costs ofgovernment. At the federal level, the tariff could not be expected to produce a sur-plus of funds, as had been the case. Causes of this growing deficit were theexpanded scope of government programs and, to a lesser extent, waste and cor-

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ruption in government finance. The latter is often credited as a major political fac-tor stimulating reform.

Local government led the way in the establishment of formal budget proce-dures. Municipal budget reform was closely associated with general reform oflocal government, especially the creation of the city manager form of government.In 1899, a model municipal corporation act, released by the National MunicipalLeague, featured a model charter that provided for a budget system whose prepa-ration phase was under the control of the mayor. In 1907, the New York Bureau ofMunicipal Research issued a study, “Making a Municipal Budget,” that becamethe basis for establishing a budgetary system for New York City.22 By the mid-1920s, most major U.S. cities had some form of budget system.

Substantial reform of state budgeting occurred between 1910 and 1920. Thisreform was closely associated with the overall drive to hold executives account-able by first giving them authority over the executive branch. The movement forthe short ballot, aimed at eliminating many independently elected administrativeofficers, resulted in governors being granted greater control over their bureaucra-cies. Ohio, in 1910, was the first state to enact a law empowering the governor toprepare and submit a budget. A. E. Buck, in assessing the effort at the state level,suggested that 1913 marked “the beginning of practical action in the states.” 23 By1920, some budget reform had occurred in 44 states, and all states had a centralbudget office by 1929.24

Simultaneous action occurred at the federal level, and much of what tookplace there contributed to the reforms at the local and state levels. Frederick A.Cleveland, who was director of the New York Bureau of Municipal Research andwho played a key role in national reform, asserted that “it was the uncontrolledand uncontrollable increase in the cost of government that finally jostled the pub-lic into an attitude of hostility.” 25 In response to this public concern, President Taftrequested and received from Congress in 1909 an appropriation of $100,000 for aspecial Commission on Economy and Efficiency. Known as the Taft Commission,the group was headed by Cleveland and submitted its final report in 1912, rec-ommending the establishment of a budgetary process under the direction of thepresident. This report was to spur activity at the state and local levels.

The Budget and Accounting Act, which established the new federal system,was not passed until 1921.26 In the interim, deficits were recorded every yearbetween 1912 and 1919 except 1916. The largest deficit occurred in 1919, when(largely because of the need to finance World War I) expenditures were three timesgreater than revenues ($18.5 billion in expenditures as compared with $5.1 billionin revenues). During this period, vigorous debate centered on the issue of whetherbudget reform would in effect establish a super ordinate executive over the leg-islative branch. In 1920, President Wilson vetoed legislation that would have cre-ated a Bureau of the Budget and a General Accounting Office on the grounds that

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the latter, as an arm of Congress, would violate the president’s authority over theexecutive branch. The following year, President Harding signed virtually identi-cal legislation into law.

Thus, an executive budget system was established, despite a historical fear ofa powerful chief executive. In 1939, as a result of recommendations made byPresident Roosevelt’s Committee on Administrative Management called theBrownlow Committee, the Bureau of the Budget was removed from the TreasuryDepartment and placed in the newly formed Executive Office of the President.This shift reflected the growing importance of the bureau in assisting the presi-dent in managing the government. Ten years later, the budgetary task force of theFirst Hoover Commission on the Organization of the Executive Branch recom-mended that the Bureau of the Budget be reinstated in the Treasury Department,but the commission as a whole opposed the recommendation.27 The Budget andAccounting Procedures Act of 1950 reinforced the trend of presidential control byexplicitly granting the president control over the “form and detail” of the budgetdocument.28 The Second Hoover Commission in 1955 endorsed strengthening thepresident’s power in budgeting as a means of restoring the “full control of thenational purse to the Congress.” 29 A president, who had full control of the bureau-cracy, could be held accountable by Congress for action taken by the bureaucracy.

One of the stated goals of the reform movement was to bring the sound finan-cial practices of business to the presumably disorganized public sector —a goaloften expressed by current reformers. Available evidence, however, indicates thatbusiness practices were not particularly exemplary at the turn of the century, sug-gesting that the reforms were largely invented within the public sector rather thanbeing transferred into government from the outside.30 It remains popular to advo-cate bringing good business practices to government, but the corporate account-ing scandals that revealed false revenue claims in such giants as Enron suggestthat private practices are not always exemplary.

Responsible for What?

Revenue Responsibility. The earliest concern for financial responsibility centered ontaxes. As indicated above, the Magna Charta imposed limitations not on thenature of the Crown’s expenditures but on the procedures for raising revenue. Thesame concern for the revenue side of budgeting was characteristic of the early his-tory of budgeting in this country. The Constitution is more explicit about the taxpower of the government than about the nature or purposes of governmentexpenditures.

Expenditure Control, Management, and Planning. The larger the budget has become,the more the concern has shifted to expenditures. Increasing emphasis has been

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placed on the accountability of government for what it spends and for how wellit manages its overall finances. Expenditure accountability may take several dif-ferent forms. Budgeting scholar Allen Schick described the focus on accountabili-ty in U.S. budgeting as having gone through three stages by the 1960s.31

The first stage he characterized as legislative concern for tight control overexecutive expenditures. The most prevalent means of exerting this type of expen-diture control is to appropriate by line item and object of expenditure. Financialaudits are then used to ensure that money is, in fact, spent for the items author-ized for purchase. This information focuses budgetary decision-making on thethings government buys, such as personnel, travel, and supplies—the objects ofexpenditure—rather than on the accomplishments of government activities. Inother words, responsibility is achieved by controlling the resources or input side.

Schick’s description of the second stage was that of a management orienta-tion, with emphasis on the efficiency of ongoing activities. Historically, this orien-tation is associated with the New Deal through the First Hoover Commission(1949). The emphasis was on holding administrators accountable for the efficien-cy of their activities through methods such as work performance measurement.Budgeting by activity achieves accountability by measuring the activities carriedout for the money expended.

The third stage of budget reform Schick identified was based on the post-Hoover Commission concern regarding the planning function served by budgets.The traditional goal of controlling resource inputs may be accommodated in theshort time frame of the coming budget year. Managerial control over efficiency,although aided by a longer time perspective, also may be accommodated in a tra-ditional budget-year presentation. The planning emphasis focuses on a longertime frame. Many objectives of government programs cannot be accomplished inone budget year. A multiyear presentation of the budget is thus necessary to indi-cate the long-range implications, both financial and program results, of currentbudget decisions.

The advent of program budgeting in the 1960s with its focus on multi-yearplanning and the ultimate results of government programs was the culminationof the planning focus on outcomes that must be measured outside the governmentitself. Control-oriented information such as objects of expenditure and manageri-al-oriented information such as the outputs produced by government activities(and the costs to achieve those outputs) do not really require measurement out-side the orbit of governmental agencies. A focus on outcomes requires much moreextensive information that is not generated by the accounting system.Understanding outcomes requires information about what happens as a result ofgovernment expenditures. Typically, these outcomes are achieved only by com-mitment of resources over many budget years.

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Some services provided by government lend themselves well to measures ofaccomplishment, and some do not. Federal responsibilities for defense and for-eign policy certainly have visible consequences, but narrowing down to particu-lar budget decisions on expenditures and particular defense or foreign policy out-comes is both conceptually and practically difficult at best. Local governmentservices such as water, streets, solid waste collection and disposal and so forth aremuch more susceptible to results measurement. The planning approach epito-mized by program budgeting reforms stressed outcome measurement over amulti-year horizon. Are society’s ends being achieved as a result of programexpenditures?

Financial Management, Financial Condition, and Program Performance. Since thosethree stages were characterized in the 1960s, additional improvements in usinginformation to ensure responsible government budgeting have become standardpractice. Some have suggested that these efforts since the 1960s’ constitute addi-tional or new stages of budget reform. One author has offered up prioritization,characterized by budget cutbacks in both federal and state government budgetingin the 1980s, as a fourth stage and accountability, emphasizing performance meas-urement, as a fifth stage.32 Another has suggested a similar fourth stage, labelingit limitation, emphasizing the attempts in the 1980s to shrink the federal budgetand state taxing and expenditure limitations (see Chapter 4).33

While it is clear that budgeting at the federal, state, and local levels continuesto change in terms of emphasis and focus, the labeling of additional stages issomewhat in the eye of the beholder. It is difficult to discern a major differencebetween limitation and control, for example. It is also clear that some additionalbudgetary analysis and planning tools have become important in public budget-ing systems since the three stages description was first put forward. One of theseis performance measurement and performance management, which enhances theability to budget for the achievement of results. (Au: please check the previoussent.) Another is financial management, which entails greater attention to thefinancial soundness of public sector institutions and new and enhanced tools tomeasure and report on financial soundness. Measuring financial health andincreased use of business-like financial management tools enhances the ability ofelected leaders to exert control over resources.

Performance Management. Performance measures associated with work activitiesand with long-term results are not new as already noted. However, performancemeasurement has evolved and expanded since the 1980s. Program budgeting wasmuch more an approach for the executive to gain greater understanding and con-trol over spending by focusing on plans and results. Today performance meas-urement and management have a strong emphasis on public reporting on

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progress and redefining programs based on citizen response to the measuredprogress. This emphasis on public reporting is a logical extension of the broaderconcept of accountability for results that characterizes budgeting systems, andreforms in budgeting. Newer information tools are focused on external commu-nications. Local government budgeting increasingly focuses on performancebudgeting as the major tool for communicating with the public and garneringpublic support for the budget.34

With or without a complete budgetary system overhaul such as programbudgeting entails, all levels of government in the U.S., and especially state andlocal government, typically have extensive performance management systems.35

The “reinventing government” movement and the National Performance Reviewof the Clinton administration were two examples of the trend toward more meas-urement and management of results, but with a much greater emphasis on publicreporting.36 The George W. Bush administration has attempted to build on thisprogress, but moved more toward the use of performance measures, with itsProgram Assessment Rating Tool and the President’s Management Agenda.

Performance management emphasizes setting objectives and then motivatingmanagers to be entrepreneurial in their pursuit of those objectives.37 Of course,since managing growth in government and achieving efficiencies is such a strongfocus in performance management, the tools also may be used to shrink programsfor other than managerial reasons.38 Other countries also have given the sameemphases to results-oriented or value-driven budgeting as a primary tool inincreasing the efficiency and reducing the size of the public sector.39

Financial Management. Another feature that has seen heightened focus is on thefinancial health of the governmental entity or the entire government. There aretwo facets to this: 1) improved public reporting on the financial condition of gov-ernment and 2) a significant focus on the value and condition of long-lived assetssuch as infrastructure systems. Publicly traded corporations have always had toanswer to their stockholders for the financial condition of the corporation and pri-vately held companies at a minimum have to demonstrate sound financial condi-tion to secure debt financing from lenders. But the application of financialmanagement concepts to focus on the financial condition of government agencieswas new starting in the late 1980s. The emphasis has been on new tools for meas-uring the financial condition of government, adapted from private financial andmanagerial accounting practices, and new mechanisms for ensuring that the gov-ernment remains in a sound financial position.

One of the motivations behind the concern to hold government accountablefor its long-run financial position was the New York City budget crisis of the mid-1970s. Following on the heels of that near-bankruptcy, both financial institutions

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that purchased municipal bonds and citizens who wondered about their owncities sought to improve the reporting of the long-term financial position of gov-ernments.40 At the time, the general operating budget and related accountingreports often did not reveal the overall financial position of the government enti-ty. Now, virtually every large local and state government in the U.S., and the fed-eral government, routinely produce reports often with much public fanfare ontheir financial condition.41

Fixed Asset Management. Concern at the federal level has led to a much greateremphasis on fixed asset management and increased attention in the annual budg-et to investments in long-lasting assets. The Governmental Accounting StandardsBoard Statement No. 34 (GASB 34) requires state and local governments and otherpublic entities to report on their fixed assets (see Chapters 11 and 12). Some gov-ernment expenditures are really investments in future economic productivity.Others primarily consume resources with little hope of any future payoff.Investment means creating additional productive capacity, such as improvingtransportation networks that reduce the cost of private sector economic activitythrough more efficient means of transportation and upgrading education systemsthat enhance the long-term intellectual ability of students to develop new prod-ucts and new processes.

All governments budget for these activities, but not all government budget-ing systems make explicit the consumption versus investment tradeoffs in budg-et decisions. The argument can be made that some funds should be diverted awayfrom social welfare programs that fail to produce new capability and towardinvestment opportunities that stimulate regional and national economic develop-ment. While most state and local governments employ formal capital budgetingtechniques, federal agencies typically do not, although in specific types of invest-ments such as information technology, formalized capital investment planningand analysis now are required (see Chapter 12).42

The notion of stages in budgeting can be overemphasized. Whether onedecides ultimately to label trends as new stages, it is clear that there is a strongeremphasis on program and performance measurement and on financial manage-ment and reporting with significant efforts and new information tools at all levelsof government. Most of the emphasis in this book is on the budget as an instru-ment for financial and program decision making at all levels of government—fed-eral, state, and local. The one responsibility that most sharply differentiates feder-al budget decisions from state and local decisions is the federal government’sresponsibility for the overall state of the economy. The federal budget not onlyallocates resources among competing programs but it is also an instrument forachieving economic stability and growth (see Chapter 15). The responsibility to

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Budgets and Budgeting Systems 17

use it as an instrument of economic policy has been a part of the federal budget-ary process since the Employment Act of 1946.43

Budgeting is an important process by which accountability or responsibilitycan be provided in a political system. As has been discussed, responsibility variesboth in terms of the people to whom the system is accountable and in terms of itspurposes. Given the various forms of accountability and the types of choices thatdecision makers have available to them, different meanings can be attached to theterms budget and budgeting system. Depending on the purposes of a budget,decision makers will need different kinds and amounts of information to aid themin making choices. The following sections and subsequent chapters focus on thekinds of information required for different budgetary choices and the kinds ofprocedures for generating the necessary information.

Budgets and Budgeting Systems

What Is a Budget?

Budget Documents. In its simplest form, a budget is a document or a collection ofdocuments that refers to the financial condition and future plans of an organiza-tion (family, corporation, government), including information on revenues,expenditures, activities, and purposes or goals. In contrast to an accounting oper-ating statement, which is retrospective in nature, referring to past conditions, abudget is prospective referring to anticipated future revenues, expenditures, andaccomplishments. Of course, budgets always contain some information aboutpast revenues and expenditures that is consistent with accounting records.Historically, the word budget referred to a leather pouch, wallet, bag, or purse.More particularly, “In Britain the term was used to describe the leather bag inwhich the Chancellor of the Exchequer carried to Parliament the statement of theGovernment’s needs and resources.” 44

The status of budget documents is not consistent across political jurisdictions.In the federal government, the budget has limited legal status. It is the official rec-ommendation of the president to Congress, but it is not the official documentunder which the government operates. As will be seen later, the official operatingbudget of the United States consists of several documents namely, appropriationacts (see Chapters 8, 9, and 11). In contrast, local budgets proposed by mayors maybecome official working budgets adopted in their entirety by the city councils.45

In still other instances, there may be a series of budget documents instead ofone budget for any given government. These may include (1) an operating budg-et, which handles the bulk of ongoing operations; (2) a capital budget, which cov-ers major new construction projects; and (3) a series of special fund budgets that

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cover programs funded by specific revenue sources (see Chapter 11). Special fundbudgets commonly include those for highway programs financed through gaso-line and tire sales taxes. In such cases, revenue from these sources is earmarked forhighway construction, improvement, and maintenance. As another example, fish-ing and hunting license fees may constitute the revenue for a special fund devot-ed to the stocking of streams and the provision of ample hunting opportunities.

The format of budget documents also varies. On the whole, budget docu-ments tend to provide greater information on expenditures than on revenues,which are usually treated in a brief section. On the expenditure side, budgets aremultipurpose, in that no single document and no single definition can exhaust thefunctions budgets serve or the ways they are used. At the most general level,budgets can be conceived of as (1) descriptions, (2) explanations or causal asser-tions, and (3) statements of preferences or values.

Budgets as Descriptions. Budgets are first descriptions of the status of an organiza-tion, whether it is an agency, a ministry, or an entire government. The budget doc-ument may describe what the organization purchases, what it does, and what itaccomplishes. Descriptions of organizational activity are also common in budgetdocuments. Expenditures may be classified according to the activities they sup-port. For example, a revenue department may be concerned with initial tax col-lection, taxpayer assistance, and audit/enforcement. Another type of description,organizational accomplishments, states the consequences of resource consump-tion and work activities for those outside the organization. For example, success-ful job placements for individuals finishing a vocational rehabilitation programconstitute one type of outcome or consequence of a public expenditure. Thesestatements require external verification of the effects of the organization on itsenvironment.

As descriptions, budgets provide a discrete picture of an organization at apoint or points in time, in terms of resources consumed, work performed, andexternal effects. The dollar (or euro or pound sterling) revenues and expenditures,according to these types of descriptions, may be the only quantitative informationsupplied. Alternatively, information may be supplied about the number and typesof personnel; the quantity and kinds of equipment purchased; measures of per-formance, such as the number of buildings inspected or the number of acres treat-ed; and measures of impact, such as the number of accidents prevented, theamount of crop yield increases, and so forth. Generally, the more descriptive mate-rial supplied, the more the organization can be held accountable for the fundsspent, the activities supported by those expenditures, and the external accom-plishments produced by those activities. Much of the history of budget reform

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Budgets and Budgeting Systems 19

reflects attempts to increase the quantity and quality of descriptive material avail-able both to decision makers and to the public.

Budgets as Explanations. When they describe organizations in terms of purchases,activities, and accomplishments, budgets also at least implicitly serve a secondmajor function—explanation of causal relationships. The expenditure of a specif-ic amount for the purchase of labor and materials that will be combined in partic-ular work activities implies the presumed existence of a causal sequence that willproduce certain results. Regardless of how explicit or how vague the budget doc-ument or the statements of organization officials may be, budgetary decisionsalways imply a causal process in which work activities consume resources toachieve goals. Some organizations may have little accurate information aboutaccomplishments, especially public organizations whose accomplishments are notmeasured in terms of profit and loss. Governments may choose not to be explicitabout particular results because they are difficult to measure, politically sensitive,or both. Regardless of the availability of information or the willingness of anorganization to collect and use it, the budget is an expression of a set of causalrelationships.

Budgets as Preferences. Budgets are statements of preferences. Whether intended ornot, the allocation of resources among different agencies, among different activi-ties, or among different accomplishments reveals the preferences of those makingthe allocations. These may be the actual preferences of a few decision makers, butmore often they are best thought of as the collective preferences of many decisionmakers arrived at through complex bargaining. A preference schedule reflects, ifnot any one individual’s values, an aggregate of choices that become the collectivevalue judgment for the local government, state, or nation.

What Is a Budgeting System?

Systems. Budgeting can best be understood as a kind of system, a “set of unitswith relationships among them.” 46 Budgetary decision-making consists of theactions of executive officials (both in a central organization such as the governor’soffice or the mayor’s staff and in executive line agencies), legislative officials,organized interest groups, and perhaps unorganized interests that may be mani-fested in a generally felt public concern about public needs and taxes. All theseactions are related, and understanding budgeting means understanding the inter-relationships. Such understanding is best achieved by thinking in terms of com-plex systems.

A complex social system is composed of organizations, individuals, the valuesheld by these individuals, the norms they act upon, and the relationships among

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these elements. A system may be thought of as a network typically consisting ofmany different parts with messages flowing among the parts. The elements of sys-tems interact with each other to produce system results, or consequences, and thenetwork of interactions may produce the same set of results through several dif-ferent paths, or the same path may from time to time produce different out-comes.47 Budgeting systems involve political actors, economic and social theories,numerous institutional structures, and competing norms and values, all of whichproduce outputs in patterns not immediately evident from studying only budgetdocuments.

Budget System Outputs. In a budgetary system, the outputs flowing from the net-work of interactions are budget decisions, and these vary greatly in their overallsignificance. Not every unit of the system will have equal decisional authority orpower. A manager of a field office for a state health department is likely to haveless power to make major budgetary decisions than the administrative head of thedepartment, the governor, or the members of the legislative appropriations com-mittees. Yet each participant does contribute some input to the system. The fieldmanager may alert others in the system to the emergence of a new health problemand in doing so, may contribute greatly to the eventual establishment of a newhealth program to combat that problem. Modern information technology and thegreater emphasis on responsibility at all levels of the organization for achievingresults means the lower-level staff in an agency are much more influential thanthey have been in the past. Even actors not in the formal budgeting system mayinfluence the decisions. For example, doctors and hospitals, who are part of sur-veillance for early detection of avian flu, in effect are providing inputs to thebudgeting system.

Like the outputs of any other system or network, budget decisions are seldomfinal and more commonly are sequential. Decisions are tentative, in that each deci-sion made is forwarded for action to another participant in the process. This doesnot mean that all decisions are reversible. Major breakthroughs, such as passageof the Elementary and Secondary Education Act of 1965, which provided sub-stantial federal aid to education, are abandoned only in response to powerfulpolitical pressure.48 The George W. Bush administration’s No Child Left BehindAct, which reauthorized major elements of federal assistance to elementary andsecondary education, continued most of the key elements of the original 1965 leg-islation, although giving great emphasis to testing student achievement as ameans of ensuring accountability at the classroom level.49 Likewise, the introduc-tion of prescription drug care into Medicare in 2006 was only after years of debateand proposals. Despite dissatisfaction, eliminating such hard fought programs isnearly impossible. Subsequent budget decisions, therefore, are in large part

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Information and Decision Making 21

bounded by previous decisions. The subsequent decisions tend to center on thequestion of changing the level of commitment—allocating more resources, fewerresources, or different kinds of resources—to achieve desired levels of impact ordifferent types of impact.

System Interconnectedness. Another feature of a system is that a change in any partof it will alter other parts. Because all units are related, any change in the role orfunctioning of one unit necessarily affects other units. In some instances, changesmay be of such a modest nature that their ramifications for other parts of the sys-tem are difficult to discern. However, when major budgetary reforms are institut-ed, they assuredly affect most participants. For example, if one unit in the systemis granted greater authority, individuals and organizations having access to thatunit have their decisional involvement enhanced, whereas those groups associat-ed with other units have diminished roles.50 Thus, each individual and institutionevaluates budget reforms in terms of how political strengths will be realignedunder the reforms.

Information and Decision Making

Types of Information

To serve the multiple functions described in the preceding section, budgeting sys-tems must produce and process a variety of information. Most of the majorreforms, whether attempted or proposed, in public budget systems have beenintended to reorganize existing information and to provide participants with dif-ferent types and greater quantities of information. Basically, two types of infor-mation exist: program information and resource information. The latter type ismore traditional. People are accustomed to thinking of budgets in terms ofresources such as monetary units and personnel. A budget would not be a budg-et if it did not contain dollar, ruble, or other monetary figures. Similarly, budgetscommonly contain data on employees or personnel.

Conventional accounting systems provide much of the information that pub-lic organizations use for budgetary decisions. This type of information is limitedto the internal aspects of organizations, e.g., the location of organizational respon-sibility for expenditures and the resources purchased by those expenditures.When the decision-making system incorporates information about the results orimplications of programs, one must leave the boundaries of the organization toexamine consequences for those outside it. This step requires more extensive andmore explicit clarification of governmental goals and objectives (see Chapter 6)and increases the importance of analysis.51 This feature of budget reforms such as

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program budgeting, zero-base budgeting, managing for results, and performancebudgeting with their emphasis on program information and priority setting, hasgenerated the most heat among critics of budget reform.52

Decision Making

Much of the criticism of reform has involved the argument that reform of deci-sion-making systems must take into account the limitations on human capabilitiesto use all the information that might be collected and analyzed. Although some-times subtle differences distinguish theories of decision making, the various the-ories can generally be classified into three basic approaches: pure rationality, mud-dling through or incrementalism, and limited rationality.53 An early application ofthese notions to public sector decision making was Graham Allison’s study of theCuban Missile Crisis, The Essence of Decision, in which he characterized three mod-els as rational, organizational, and governmental/political.54 These are descriptivetheories as well as prescriptions for how decisions ought to be made.

Rational Decision Making. Decision making according to the pure rationalityapproach consists of a series of ordered, logical steps. First, all of an organization’sor a society’s goals are ranked according to priority. Second, all possible alterna-tives are identified. The costs of each alternative are compared with anticipatedbenefits. Judgments are made as to which alternative comes closest to satisfyingthe relevant needs or desires. The alternative with the highest payoff and/or leastcost is chosen. Pure rationality theories assume that complete and perfect infor-mation about all alternatives is both available and manageable. Decision making,therefore, is choosing among alternatives to maximize some objective function.The rational choice model is built on microeconomics and the notion of the indi-vidual actor making an optimal choice to maximize the decision maker’s utility.

The applicability of the rationality model is limited, and few argue that it is adescription of how ordinary human beings make most decisions. It is most con-sistent with notions of technical or economic rationality, where objectives can bestated with some precision and the range of feasible alternatives is finite.55 Also,the model can be of use where accurate predictions of behavior are possible, suchas in the private market, where assumptions regarding rational behavior can beused to predict future economic trends.56

As a description of how government budgeting works, the pure rationalitymodel is obviously misleading. Meeting the complete requirements of even a fewof the steps is impossible. It has been argued that the costs of information are sohigh as to make it rational to be ignorant, that is, to make decisions on the basis ofa limited search and limited information. Some attempts at budget reform havebeen criticized as attempts to impose an unworkable model, pure rationality, on

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Information and Decision Making 23

government financial decision making. The use of program information has beena particular target for criticism.57 However, this criticism is somewhat misdirectedin that it is not so much the information search cost that is limiting, but rather theindividual decision-maker’s perspective. Public budgeting decisions are made ina larger political context with numerous actors involved, a more complicated sit-uation than the clear-sighted approach toward an agreed-upon objective that isthe essence of the rational choice model.

Incrementalism. The second approach to decision making, muddling through orincrementalism, has been advocated by critics of pure rationality such as CharlesE. Lindblom, Aaron Wildavsky, and others.58 According to this view, decisionmaking involves a conflict of interests and a corresponding clash of informationwhich result in the accommodation of diverse partisan interests through bargain-ing. “Real” decision making is presumed to begin as issues are raised by signifi-cant interest groups that request or demand changes from the existing state.Decision making is not some conscious form of pure rationality, but is a process ofincrementally adjusting existing practices to establish or reestablish consensusamong participants. Alternatives to the status quo are normally not consideredunless partisan interests bring them to the attention of the participants in the deci-sion-making process. There is only a marginal amount of planned search for alter-natives to achieve desired ends. The decision process is structured so that partisaninterests have the opportunity to press their desires at some point in the delibera-tions. Decisions represent a consensus on policy reached through a political,power-oriented bargaining process.

The most important characteristic of the muddling through or incrementalistapproach, is its emphasis on the proposition that budgetary decisions are neces-sarily political. Its descriptive appeal is that it more accurately depicts a process inwhich numerous actors, each with a different point of view, negotiate and bargainfor a consensus. The larger the issue, the more difficult it is to achieve consensusfor radical change, which results most often in incremental adjustments to the sta-tus quo. Whereas a purely rational approach might suggest that budgetary deci-sions are attempts to allocate resources according to economic or other “objective”criteria, the incrementalist view stresses the extent to which political considera-tions outweigh calculations of optimality. The strongest critics of many budgetreforms have tended to equate those reforms with seeking to establish the purerationality model or a solely economic model, a description rarely accepted bythose proposing budget reforms. As will be seen throughout this book, any “real”budget reform is forced to accommodate the political nature of decision making.In reality, elements of rationalism and incrementalism pervade the budgetaryprocess.59

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Limited Rationality. The third approach to decision making, a compromisebetween the other two approaches, is called limited rationality. This model recog-nizes the inadequacies in the assumptions behind the pure rationality descriptionof decision making as applied to complex problems. While acknowledging theinherent constraints of human cognitive processes, limited rationality does notsuggest that a deliberate search for alternative approaches to goal achievement isof no avail. Searching for alternatives is used to find solutions that are satisfacto-ry but not necessarily optimal.

Substantial evidence, cited by some of the giants in budgeting (Wildavsky)and decision making (Lindblom), indicates that many decisions are indeed incre-mental, and clearly each budget decision does not require a thorough review of alloptions and careful calculations of the possible outcomes of each option. Yet majordecisions that depart dramatically from the past are made from time to time in thebudgetary process. Non-incremental change, especially at the macro level,addressing major deficits and surpluses do occur.60 And, of course, major eventssuch as terrorist threats and creating a new agency such as the Department ofHomeland Security cause non-incremental change, although the core of federalbudgeting did not change significantly after September 11, 2001.61 Furthermore,decision makers often do attempt to achieve public values and are motivatedmore by the social and economic problems their agencies must address than bybureaucratic budget maximizing and interest-group pressures.62

Limited rationality suggests that large forces are marshalled at times for majorchange, and incremental adjustments are made at other times for issues that donot generate demand for substantial departure from the status quo. Decision the-ories do differ in how they view the values that decision making serves and thecapacities of decision makers to serve those values. One model assumes virtuallyno limits on human capacities for processing information, another suggests thatdecision making should be sensitive only to partisan political interests, and stillanother attempts to strike a balance between the other models. The history ofbudgeting and budget reform, we argue, reflects the tensions among theseapproaches to decision making.

Summary

Public budgeting involves choices among ends and means. Public budgetingshares many characteristics with budgeting in the private sector, but it oftenrequires the application of criteria different from those used by private organiza-tions. Chief among these differences is that few public sector decisions can be

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Notes 25

assessed in terms of profit and loss. Private sector decisions, on the other hand,ultimately must consider the long-run profit or loss condition of the firm.

Budgeting systems involve the organization of information for makingchoices and the structure of decisionmaking processes. Public budgeting systemshave evolved as one means of holding government accountable for its actions.Budgetary procedures are developed to hold the government in general account-able to the public, the executive branch accountable to the legislature, and sub-ordinates accountable to their managers. Budgetary procedures also are devel-oped to specify what the executive is accountable for. Concern for the financialsolvency of some city governments and the size of the federal budget deficit andtotal debt have led to reform proposals to use budgeting as a device for holdinggovernments accountable for their long-term financial position. Renewed inter-est is evident in citizens demanding that governments report regularly on theirperformance.

Budgetary systems work through information flows. However, each par-ticipant in the budgetary process pays selective attention to information. Thevarious theories of decision-making advanced differ in terms of how muchinformation decision makers are willing and able to consider. The decision-making approach that seems best to characterize budgetary systems is the lim-ited rationality approach. This approach underlies the discussions throughoutthis book.

Notes

1. Warsh, D. (2006). Knowledge and the wealth of nations: a story of economic discovery. NewYork: W.W. Norton.

2. Downs, A. (1967). Inside bureaucracy. Boston, MA: Little, Brown.

3. U.S. Office of Management and Budget (2007). Budget of the United States government:fiscal year 2007, historical tables. Washington, D.C.: U.S. Government Printing Office, 313.

4. Porter, M. & Kramer, M. (2006). Strategy and society: the link between competitiveadvantage and corporate social responsibility. Harvard Business Review, 84, 78–92.

5. Hsieh, P. et. al. (Au: a complete citation, please) (2003). The return on R&D versuscapital expenditures in pharmaceutical and chemical industries. IEEE Transactions onEngineering Management, 50, 141–150.

6. U.S. Congressional Budget Office (1993). CBO staff memorandum: a review of EdwinMansfield’s estimate of the rate of return from academic research and its relevance to the fed-eral budget process. Washington, DC: U.S. Government Printing Office. Mansfieldupdated that research in 1998, showing similar results. Mansfield, E. (1998).Academic research and industrial innovation: an update of empirical findings.Research Policy, 26, 773–776.

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7. U.S. General Accounting Office (2000). Managing for results: emerging benefits fromselected agencies’ use of performance agreement. Washington, DC: U.S. GovernmentPrinting Office.

8. U.S. Agency for International Development (2006), Control of neglected tropical diseases.Solicitation (M-OAA-GH-06-845) for and subsequent award of CooperativeAgreement (RTI International) to implement the program.

9. Bingham, C. (2006). Proposals for improving GPRA annual performance plans. PublicBudgeting & Finance, 26, Summer, 143–154.

10. Rosen, H. (2004). Public finance, 7th ed. New York: McGraw-Hill.

11. Brooks, R. (2004). Privatization of government services: an overview and review ofthe literature. Public Budgeting, Accounting and Financial Management, 16, 467–491.

12. Rubin, I. (2006). Budgeting for contracting in local government. Public Budgeting &Finance, 26, Spring, 1–13.

13. Brown, T. et al. (2006). Managing public service contracts: aligning values, institu-tions and markets. Public Administration Review, 66, 323–331.

14. White, M. (1978), Budget policy: where does it begin and end? Governmental Finance,7, August, 2–9, credits W.F. Willoughby’s The problem of a national budget with an early(1919) statement of budgeting as a process for holding government accountable.

15. Osborne, D. & Plastrik, P. (1997). Banishing bureaucracy: the five strategies for reinventinggovernment. Reading, MA: Addison-Wesley. For the critics’ view, see Williams, D.(2000), Reinventing the proverbs of government. Public Administration Review, 60,522–534.

16. Webber, C. & Wildavsky, A. (1986). A history of taxation and expenditure in the westernworld. New York: Simon & Schuster.

17. Burkhead, J. (1956). Government budgeting. New York: Wiley, 2–4.

18. Treasury Act (1789). Ch. 12, 1 Stat. 65.

19. Smithies, A. (1955). The budgetary process in the United States. New York: McGraw-Hill, 50.

20. Buck, A. (1919). Public budgeting. New York: Harper and Brothers, 17.

21. Naylor, E. (1941). The federal budget system in operation. Washington, DC: printed pri-vately, 22–23.

22. Burkhead, J. (1956). Government budgeting, 12–13.

23. Buck, A. (1919). Public budgeting, 14.

24. Burkhead, J. (1956). Government budgeting, 23; Willbern, Y. (1967). Personnel andmoney. In J. Fesler (Ed.) The 50 states and their local governments. New York: Knopf, 391.

25. Cleveland, F. (1915). Evolution of the budget idea in the United States. Annals, 62,November, 22.

26. Budget and Accounting Act (1921). Ch. 18, 42 Stat. 20.

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Notes 27

27. U.S. Commission on Organization of the Executive Branch of the Government (1949).General management of the executive branch. Washington, D.C.: U.S. GovernmentPrinting Office.

28. Budget and Accounting Procedures Act (1950). Ch. 946, Title I, part I, 64 Stat. 832.

29. U.S. Commission on Organization of the Executive Branch of the Government (1955).Budget and accounting. Washington, D.C.: U.S. Government Printing Office, ix.

30. Rubin, I. (1993). Who invented budgeting in the United States? Public AdministrationReview, 53, 438–444.

31. Schick, A. (1966). The road to PPB: the stages of budget reform. Public AdministrationReview, 26, 243–258.

32. Tyer, C. & Willand, J. (1997). Public budgeting in America: a twentieth century retro-spective. Journal of Public Budgeting, Accounting and Financial Management, 9, 189–219.

33. Bartle, J. (2001). Budgeting, policy, and administration: patterns and dynamics in theUnited States. International Journal of Public Administration, 24, 21–30.

34. Tat-Kei Ho, A. & Ya Ni, A. (2005). Have cities shifted to outcome-oriented perform-ance reporting?—a content analysis of city budgets. Public Budgeting & Finance, 25,Summer, 61–83.

35. Melkers, J. & Willoughby, K. (2005). Models of performance-measurement use inlocal governments: understanding budgeting, communication, and lasting effects.Public Administration Review, 65, 180–190.

36. National Performance Review (1993). Mission driven, results-oriented budgeting.Washington, DC: U.S. Government Printing Office; Thompson, J. (2000). Reinventionas reform: assessing the national performance review. Public Administration Review,60, 508–521.

37. Martin, L. (1997). Outcome budgeting: a new entrepreneurial approach to budgeting.Public Budgeting and Financial Management, 9, Spring, 108–126.

38. Gilmour, J. & Lewis, D. (2006). Does performance budgeting work? an examinationof the Office of Management and Budget’s PART scores. Public Administration Review,66, 742–752.

39. Allen, R. & Tommassi, D. (Eds.) (2001). Managing public expenditure. Paris:Organization for Economic Co-operation and Development.

40. Johnson, R. & Lewin, A. (1984). Management and accountability models of publicsector performance. In T. Miller (Ed.), Public sector performance: a conceptual turningpoint. Baltimore, MD: Johns Hopkins University Press, 224–250.

41. A good example is Comptroller, State of New York (annual). (Year- Au: yes that wouldbe nice!)) State of New York financial condition report. Albany, N.Y.: Comptroller’s Officeof Public Information.

42. U.S. Office of Management and Budget (2002). OMB releases new business referencemodel to improve agency management, press release Executive Office of the

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President: Office of Management and Budget, Retrieved July 24, 2002 fromhttp://www.feapmo.gov.

43. Employment Act (1946). Ch. 33, 60 Stat. 23.

44. Burkhead, J. (1956). Government budgeting, 2. (Au: Please add a Location and publisher)

45. Powdar, J. (1996). The operating budget: a guide for smaller governments. Chicago, IL:Government Finance Officers Association; Bland, R. & Rubin, I. (1997). Budgeting: aguide for local government. Washington, DC: International City/County ManagementAssociation.

46. Miller, G. (1965). Living systems: basic concepts. Behavioral Science, 10, 200.

47. Kendall, K. & Kendall, K. (2004). Systems analysis and design, 6th ed. New York:Prentice-Hall.

48. Elementary and Secondary Education Act (1965). P.L. 89–10.

49. No Child Left Behind Act (2001). P.L. 107–110.

50. Jones, L. & McCaffery, J. (1994). Budgeting according to Aaron Wildavsky: a biblio-graphic essay. Public Budgeting & Finance, 14, Spring, 16–43.

51. Administration for Children & Families, U.S. Department of Health and HumanServices (2006). The program manager’s guide to evaluation. Retrieved November 15,2006 fromhttp://www.acf.hhs.gov/programs/opre/other_resrch/pm_guide_eval/reports/pmguide/pmguide_toc.html.

52. Wildavsky, A. & Caiden, N. (2000). The new politics of the budgetary process, 4th ed.New York: Longman Press; Kelly, J. (2003); The long view: lasting (and fleeting)reforms in public budgeting in the twentieth century. Public Budgeting, Accounting andFinancial Management, 15, 309–326.

53. Brewer, G. & de Leon, P. (1983). The foundations of policy analysis. Chicago: Dorsey.

54. Giannatasio, N. (2002). Budget decision making at the grass–roots level. Journal ofPublic Budgeting, Accounting and Financial Management, 13, 48–82, evaluates Allison’sdecision-making model’s applicability to public budgeting at the local level. Allison,G. (1971). The essence of decision: explaining the Cuban missile crisis. New York: Harper.

55. The terms technical and economic rationality are the names of two of five basic typesof rationality identified by Diesing, P. (1962). Reason and society. Urbana, IL:University of Illinois Press.

56. Friedman, M. (1953). Essays in positive economics. Chicago, IL: University of Chicago Press.

57. Wildavsky, A. (1979). Speaking truth to power: the art and craft of policy analysis. Boston,MA: Little, Brown.

58. Lindblom, C. (1959). The science of “muddling through.” Public AdministrationReview, 19, 79–88; Jones, L. (1997). Changing how we budget: Aaron Wildavsky’s per-spective. Journal of Public Budgeting, Accounting and Financial Management, 9, 46–71.

59. Reddick, C. (2002). Testing rival decision-making theories on budget outputs: theo-ries and comparative evidence. Public Budgeting & Finance, 22, Fall, 1–25.

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Notes 29

60. Reddick, C. (2003). Budgetary decision making in the twentieth century: theories andevidence. Journal of Public Budgeting, Accounting and Financial Management, 15,251–274.

61. Joyce, P. (2005). Federal budgeting after September 11th: a whole new ballgame, or isit déjà vu all over again? Public Budgeting & Finance, 25, Spring, 15–31.

62. Reddick, C. (2004). Rational expectations theory and macro budgetary decision-mak-ing: comparative analysis of Canada, UK, and USA. Journal of Public Budgeting,Accounting and Financial Management, 16, 316–356.

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