Lesson 15 - Budgets Flashcards
budget
is the allocation and expenditure of funds to provide service to the public. A budget serves to set spending priorities.
operating budget
includes everyday expenditures of an organization, such as supplies, personnel, and maintenance of office space.
capital budget
includes long-term purchases, such as a new building, recreation center, water main, or major equipment. A capital budget is a one-year budget for capital expenditures, while a Capital Improvements Program (CIP) is a longer range (5-10 year) look at the capital needs of a community. A CIP includes project descriptions, estimated costs, construction timelines, and sources of funding.
Capital budgets are the first year of a capital improvements program. Capital improvements programs lay out plans for building infrastructure over a 5-7 year period.
purposes for creating a budget
- Budgeting can be used for resource allocation. A budget is a spending plan and is the principal mechanism for deciding priorities between programs;
- Budgeting can be used for financial control. It is one of the principal mechanisms for assuring resources are spent as decided by an agency. Actual spending can be compared with a budget;
- A budget can be used for management control and to help improve efficiency and effectiveness in an organization;
- A budget is a communication tool. It can be used to communicate organizational goals and objectives, and to determine how resources are allocated to meet these objectives;
- Budgeting is a planning tool. It can provide short and long-range forecasts of revenues, spending, and community change.
Line-item Budgeting
In line-item budgeting the emphasis is on projecting the budget for the next year while adding in inflationary costs. The advantage of this method is that it does not require any evaluation of existing services, it is easy to prepare and justify. Line-item budgeting is also easy for public officials to understand. However, its disadvantages include a lack of flexibility and a lack of relationship between budget requests and the objectives of an organization. This type of budget has a short-term focus. Line-item budget only looks one-year into the future and is not linked with strategic, comprehensive, or capital improvement plans. It lacks focus on programs, looking at individual expenditures rather than how those expenditures fund programs and/or the results of those programs
Planning, Programming, Budgeting Systems (PPBS)
PPBS is focused on planning through accomplishing goals set by a department. The advantage of this method is that it helps departments place their programs in perspective and evaluate efforts and accomplishments. The disadvantage is that it is time-consuming to prepare and requires that goals and objectives be stated in measurable terms. For example, a department may evaluate the number of permits that are issued per month rather than the satisfaction of applicants.
Planning, Programming, Budgeting (PPB) includes the following components:
Budget organized by program areas (includes program mission statements, objectives, and indicators of success);
Long-range planning of goals, programs, and required resources;
Policy analysis, cost-benefit analysis, program evaluation.
PPBS has limited success because of its heavy information requirements and the incompatibility of program format with control mission.
Zero-Base Budgeting (ZBB)
ZBB emphasizes planning and fosters understanding within all units of an organization. The advantage of this method is that it requires a department to consider every aspect of its operation and concentrate on why it does things the way it does. This is also the disadvantage, because it is time consuming to justify every activity.
Zero-Base Budgeting (ZBB) includes the following components:
Efficiency and effectiveness of programs to be re-evaluated on a regular basis;
Agencies to prepare “decision packages” for each program that look at the impact on mission of “low”, “medium”, and “high” funding;
Decision packages of all programs ranked by executive; facilitates budget cuts by City Council.
ZBB has limited success because of its intensive information requirements and limited benefits to managers.
Performance-based budget
Performance-based budgeting is focused on linking funding to performance measures. For example, funding could be tied to the amount of time it takes to process plat applications or building permits. Meeting performance goals results in funding increases. The advantage of this method is that it helps departments develop and evaluate performance standards. The disadvantage is that it is time-consuming to prepare and requires that goals and objectives be stated in measurable terms. For example, a department may evaluate the number of permits that are issued per month rather than the satisfaction of applicants.
Performance-based budgeting includes the following components
- Use of traditional function/object budget;
- Performance information on workload, productivity, outputs, and outcomes;
- Performance and spending may be linked through cost analysis, and program evaluation.
Financing alternatives
When agencies have major capital expenses, there are a number of financing alternatives available. The most common include the following:
- Pay-As-You-Go uses current funds to pay for capital improvement projects;
- Reserve Funds are ones that have been saved for the purchase of future capital improvements;
- General Obligation Bonds are voter-approved bonds for capital improvements. GO Bonds use the tax revenue of the government to pay back the debt;
- Revenue Bonds use a fixed source of revenue to pay back the debt. For example, revenue bonds could be issued to pay for a new water main. The debt would be paid back through the water use fees. Revenue bonds are commonly used to finance utility improvements and special facilities, such as baseball stadiums.
Tax Increment Financing (TIF)
allows a designated area to have tax revenue increases used for capital improvements in that area. All but one US state permit the use of TIF. A tax increment financing district is an area with substantial blight. The designated area receives targeted investment, such as infrastructure improvements which should enable the redevelopment and reinvestment in the area. The increase in value of property results in increased tax revenue. The increment of increase in tax revenue is used to pay back the investment made in the area.
Special Assessments
allows a particular group of people to assess the cost of a public improvement. For example, in Columbus, Ohio, the City has a plan to have every street lit by 2020. Property owners are offered the option of having regular street lights for free or ornamental street lights at their expense. In the latter case, all of the property owners on the street are assessed a fee to pay for the ornamental street lights.
Lease-purchase
allows a government to “rent-to-own.” The benefit is that the government does not have to borrow money to finance the acquisition of a major capital improvements.
Grants
allow for all or a portion of the cost of a public facility to be paid for by someone other than the local government. Grants are available from all levels of government, private sector, and foundations. Typically, grants require a match from the local government.
Taxes
In order to raise revenue, government agencies frequently assess taxes. The primary source of taxation varies from state to state. Taxes are used to generate revenue to finance government and redistribute income.
Governments frequently offer tax incentives in order to attract economic development. This loss of revenue is known as a tax write-off.
