Public Budgeting

By Steven Yang

What is a Budget?

In simplest terms, a budget is a plan regarding how revenues (or tax dollars in the case of public organizations) will be spent on a year-to-year basis.

Definition of a Budget

A budget is a microeconomic concept that shows the tradeoff made when one good is exchanged for another.

An estimation of the revenue and expenses over a specified future period of time.

A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money.

Budget and Accounting Act of 1921

Created the Bureau of the Budget, now called the Office of Management and Budget.

OMB review funding requests from government departments and to assist the president in formulating the budget.

Assist the president in the preparation of the budget and the formulation of the fiscal program of the government.

Created the General Accounting Office, now known as the Government Accountability Office (GAO), conduct audits of governmental accounts.

Office of Management and Budget

Provides the following financial information to Congress:

1.How much money the president is requesting for the various federal agencies?

2.How much money in taxes the federal government will collect in a fiscal year?

3.Whether the federal government will have a budget surplus or budget deficit?

4.How much either the budget surplus or deficit will amount to?

The Budget Cycle

Each year, the budget follows a predetermined cycle:

Preparation of the budget, entails where tax dollars will be spent

Budget approval

Budget implementation

Budget auditing

The Budgeting Process

Executive Budget

Prepared by chief executives or the president within a government's executive branch, the governor at the state level, the county executive at the county level, and the mayor at the municipal level.

Legislative Budget

Prepared by a body of elected representatives, the state legislature or city council.

Types of Budget

Capital

Operating

Line-Item

Performance

Zero-Based

Public Budgets

Capital Budget

Operating Budget

Capital Budget

A long-term plan that deals with the financing of capital projects, investments that include buildings, bridges, and quality of life projects such as parks.

Financed through borrowing, usually in the form of bonds. States, counties, municipalities issue bonds to raise revenue.

Investors buy the bonds and earn interest on them.

In most instances, interest made on government bonds is tax exempt, thus increasing their appeal from an investment perspective.

There is no capital budget at the federal level.

Operating Budget

A short-term, year-to-year budget that plans how resources be allocated for government agencies and programs.

Based on estimates of income and expenses associated with the organization’s operations.

Administration, marketing, labor, manufacturing, and any other production associated costs are included, whereas long-term items such as capital debt and income not associated with company operations, such as investments are excluded.

Line-Item Budget

Most popular among local governments, given its relative simplicity.

Illustrates where public money will be spent item by item.

The amount that will be spent is clearly defined to keep spending under control.

Simple tool for keeping tabs on where money goes, ensuring that funds are spent appropriately.

Personnel costs, office supplies, and the like are projected each year and are lined up beneath one another.

Performance Budget

Commonly used by the government to show the link between the funds provided to the public and the outcome of these services.

Allocation of funds and resources are based on their potential results.

Place priority on employees' commitment to produce positive results, particularly in the public sector.

Reflects the input of resources and the output of services for each unit of an organization.

Zero-Based Budget

Starts from a "zero base" and every function within an organization is analyzed for its needs and costs.

Budgets are then built around what is needed for the upcoming period.

All expenses must be justified for each new period.

All departments must defend their programs and consequently their level of funding each year.

Department head must demonstrate how different levels of funding would impact the delivery of a given program’s services.

Planning Programming Budgeting System(PPBS)

Based on the principles of rational decision making, mirrors the aim of cost-benefit analysis.

Program costs are compared to program benefits, both of which are expressed in monetary terms.

Results are presented as a benefit-cost ratio, which equals the benefits of a program divided by its costs.

If the benefit-cost ratio is greater than 1.0, the benefits of the program are greater than its costs.

Budget Surplus

Budget Surplus = Savings

A company's or individual's income exceeds its expenditures over a particular period of time.

The amount by which government revenues exceed government spending.

A surplus is considered a sign that government is being run efficiently.

Used to pay off debt, save for the future, or to make a desired purchase that has been delayed.

Budget Deficit

Budget Deficit = Shortfall

A company’s or individual's liabilities exceeds its assets over a particular period of time.

The amount by which government spending exceeds income in any one fiscal year.

Financed by borrowing money and paying interest on the borrowed funds.

Program Spending

Discretionary Spending

Programs that are deem discretionary must have funding approved each year.

ie. Defense, Education, and Housing

Entitlement Spending

Funding for entitlement programs are mandated by law.

ie. Social Security and Medicare

Question #1

How much should I set aside for investments?

Question #1

How much should I set aside for investments?

When deciding how much you should put aside to save or invest, there are many factors to consider, including your age, disposable income and liquidity needs.

Your age determine how much money should be put toward future goals like buying a home or retirement.

The amount of disposable income you have will determine how much fun you can have now, and how much fun you can plan for later in life.

Liquidity means how fast you can convert your assets to cash.

Question #2

Why do I need an emergency fund?

Question #2

Why do I need an emergency fund?

“Hope for the best, plan for the worst”, expecting the unexpected.

Emergency fund is not meant to cover expected occasional costs (washing machine, refrigerator, and water heater breakdown or stopped working).

Experts recommend 6 to 9 months of your living expenses for emergency fund, especially if you’re self-employed or your income fluctuates.

If you have credit card debt, you should put aside a small emergency fund towards paying down your credit card debt.

The End

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