INST 275 Administrative Processes in Government

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INST 275 Administrative Processes in Government

• Lecture 12 Public Financial Management I

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The Importance of Public Financial Management

• The flow and management of funds is the lifeblood
  of our system of public administration.
• Many aspects of the design of the American system
  of public financial management go back to our
  deepest political traditions and compacts.
• Others, like the idea of the welfare state, go
  back only a few generations.
• Still others, such as the concept of user pays,
  are at their height.

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The Importance of Public Financial Management

• Think of the system as rather like a huge
  irrigation system, one which gathers rainfall in
  large dams, and distributes the flow of water
  through large and small pipes to many disparate
  communities, to commercial users, schools and
  hospitals, to parklands and charities, to
  businesses and individuals, to seaside areas and
  deserts.

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Six Principles

• Boston Tea Party.
• No taxation without representation.
• Principles.
• Democratic consent.
• Equity.
• Transparency.
• Probity.
• Prudence.
• Accountability.

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Balanced Budgets

• A balanced budget is a budget in which receipts
  are equal to or greater than outlays.
• A government that has one is financially healthy.
• There are advantages to an unbalanced budget.
• Extra spending can stimulate the economy.
• But large deficits can devalue the currency,
  kindle inflation and crowd out capital markets.
• All states have balanced budget requirements.
  The federal government does not.

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The Fiscal Year

• Fiscal deals with taxation, public revenues, or
  public debt.
• The fiscal year is a 12-month accounting period
  without regard to a calendar year.
• The federal governments fiscal year starts on
  October 1 and ends September 30. The current
  federal fiscal year is FY 2008.
• Californias fiscal year starts on July 1 and
  ends June 30. The current state fiscal year is
  FY 2008.

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The Budget Game

• In the United States, the budget game is a major
  preoccupation in politics, occupying the time and
  energies of thousands of lobbyists, politicians,
  and officials in the national capital, and fewer
  but similarly motivated categories of people in
  state capitals.
• Why? The budget is the biggest game in town.

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The Politics of the Budgetary Process

• The emphasis on the horse trading nature of the
  budgetary process is the counterpart of
  Lindbloms emphasis on the incremental nature of
  decision-making.

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The Politics of the Budgetary Process

• A process that concentrates on the increment is
  preferable to one that attempts to review the
  whole budget because it moderates conflict,
  reduces search costs, stabilizes budgetary roles
  and expectations, reduces the amount of time that
  busy officials must spend on budgeting, and
  increases the likelihood that important political
  values will be taken into account.
• Allen Schick.

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The Politics of the Budgetary Process
Table S1. U.S. Budget Totals (Dollar amounts in
billions)
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The Politics of the Budgetary Process (California)
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The Politics of the Budgetary Process

• The danger in elevating horse trading to an art
  and a science is the loss of direction.
• Three conditions are essential for incremental
  policy-making to be adequate
• The results of present policies must in the mean
  be adequate.
• There must be a high degree of continuity in the
  nature of problems.
• There must be a high degree of continuity in the
  available means for dealing with problems.

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The Politics of the Budgetary Process

• Developing countries cannot pursue incremental
  policies, nor should the U.S. when changes in
  values make formerly acceptable policies
  untenable.
• Washington gridlock is certainly one outcome.

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The Politics of the Budgetary Process

• Budget process resembles riverboat poker game.
• Administrative agencies at one table pursuing
  zero-sum game.
• Congress people at another table watching the
  other table and their backs.
• Lobbyists linger in background signing up members
  of Congress for persuasion and deals.
• Press corps at the bar.
• Think tanks outside on the deck.
• Academic theorists in steerage.

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Budget Maximizing Bureaucrat

• Bluff and overstatement are key tactical tools of
  departments and spending advocates during budget
  processes.
• Aware that their bids will be subject to some
  degree of cutback, bidders build in a protect
  buffer to allow for it.
• There are rules in budget preparation including
  allowable inflation indices, appropriate cost
  estimates, and appropriate program documentation.

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Budget Maximizing Bureaucrat

• No limits on the ambitions of bureaucrats who
  wish to maximize their agencys budgets and their
  programs importance.
• Mine is bigger than yours.
• The misrepresentation of budget estimates is a
  tool used by both program advocates and program
  opponents. That is why Congress prepares its own
  version of the budget.

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Budget Maximizing Bureaucrat

• The budget game consists of two fields of play
• Defending your clientele against revenue hikes
  such as tax increases.
• Seeking to attract government spending programs
  that will benefit your clientele.
• Game so skillful that sometimes difficult to
  categorize action as revenue or expenditure.

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Budget Maximizing Bureaucrat

• Example government housing assistance to
  low-paid workers is an expenditure.
• Housing assistance to high-paid workers is a
  revenue exemption or tax expenditure.
• The interplay between the President and the
  Congress represents the ultimate showdown in the
  budget game.
• The budget game should never be ignored or
  underestimated by public administrators.

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Budgeting Theory and Practice

• Budgeting is the single most important decision
  making process in public institutions.
• The budget is a jurisdictions most important
  reference document.
• Budgets simultaneously record policy decision
  outcomes, cite policy priorities and program
  objectives, and delineate a governments total
  service effort.

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Budgeting Theory and Practice

• A public budget has four basic dimensions
• A political instrument that allocates scarce
  public resources among the social and economic
  needs of a jurisdiction.
• A budget is a managerial or administrative
  instrument.
• It specifies the ways and means of providing
  public programs and services.
• It establishes the costs of programs and the
  criteria by which these programs are evaluated
  for efficiency and effectiveness.
• It ensures that programs will be reviewed or
  evaluated at least once during the budget year or
  budget cycle.

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Budgeting Theory and Practice

• A public budget has four basic dimensions
  (contd.)
• A budget is an economic instrument that can
  direct a jurisdictions economic growth and
  development.
• A budget is an accounting instrument that holds
  government officials responsible for the
  expenditure of the funds with which they have
  been entrusted.

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Budgeting Theory and Practice

• U.S. Budget, FY 2008.
• http//www.whitehouse.gov/omb/budget/fy2008/.
• California Budget, FY 2008.
• http//www.ebudget.ca.gov/.
• Kern County Budget, FY 2008.
• http//www.co.kern.ca.us/cao/budget/fy0708/rec/.
• City of Bakersfield Budget, FY 2008.
• http//www.ci.bakersfield.ca.us/administration/cit
  ymanager/budget/index.htm.

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The Taft Commission

• Prior to 1900, the processes of public financial
  management in America lacked overall objectives.
• In 1912, the Taft Commission recommended a
  national budgeting system to deal with the
  increasing complexity of the budget process.

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The Taft Commission

• William F. Willoughby (1918) argued that budget
  reform at the state level would involve three
  trends.
• How budgets would advance and provide for popular
  control.
• How budgets would enhance legislative and
  executive cooperation.
• How budgets would ensure administrative and
  management efficiency.

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The Taft Commission

• The Budget and Accounting Act (1921).
• Bureau of the Budget In Treasury.
• The General Accounting Office.
• Initially, budgetary and compliance procedures
  remained simple using line-item budgeting.
  Compliance focused on whether expenditures
  matched allocations.
• Budgetary theory remained inadequate.

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The Influence of Keynes

• John Maynard Keynes (1883-1946).
• Demonstrated how government spending could be
  critical to managing the economy by stimulating
  demand when resources were underutilized and
  unemployment was high.
• Created notion of budgetary policy as an
  instrument by which a nation could execute
  macroeconomic policy.
• Justification for deficit spending to stimulate
  the economy.

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The Influence of Keynes

• Aaron Wildavsky (1930-1993) highlighted the
  extent to which budgeting was a political and
  economic rather than a mechanical process.

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The Objectives of Budgeting and Revenue Generation

• Allocation ensuring that an appropriate level
  of funding flows into sectors of the economy
  where it is required
• Distribution ensuring that the balance in
  public funding between regions, between classes
  of people in society, between public and private
  sectors, and between government and business
  reflects public policy

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The Objectives of Budgeting and Revenue Generation

• Stabilization using public spending to
  stabilize the macroeconomy (or in some cases part
  of it) as prescribe by Keynes and.
• Growth using the power of government spending
  to facilitate economic growth and wealth creation.

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The Objectives of Budgeting and Revenue Generation

• Of course, the objectives are often not clear or
  agree upon.
• Supply side economics.

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Two Types of Budget

• Most common operating budget.
• Short-term plan for managing the resources
  necessary to carry out a program.
• Usually developed each fiscal year.
• Capital budget.
• Planning for large expenditures for capital
  items.
• Usually cover five- to ten-year periods.
• Federal government has never used.

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Waves of Innovation in Budget Making

• The structure and format of government budgets
  have been the subject of successive waves of
  innovation throughout the twentieth century.
• Why? The budget is the focal point of public
  administration.

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Executive Budget

• The first conceptual breakthrough was the
  conception that there should be a government
  budget at all.
• Legislative budgeting largely ad hoc.
• A lot of room for incompetence and corruption.
• An executive budget is both a technical process
  and a physical thing.

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Executive Budget