2. 2
After studying the material in this chapter students will:
describe the purpose of a budget
compare and contrast different types of budgets
identify sources of revenue and expenditures
contrast governmental accounting methods
discuss types of governmental funds
CHAPTER 1 LEARNING OBJECTIVES
3. What Is a Budget?
3
A budget is a fiscal policy document
that outlines revenues and
expenditures an organize needs to
carry out some specific functions
during the fiscal year.
4. Fiscal Year
4
Fiscal year (FY), a twelve-month
period where funds are collected and
spent.
◦ For example, FY 2018 for most states
begins on July 1, 2017 and ends June 30,
2018.
◦ At the end of this period the budget must
be balanced
5. What Is a Budget?
5
State and local governments should
not carry deficits over to the next fiscal
year.
Three Roles originate from budgets:
◦ Allocation-What services will result from
allocation?
◦ Distribution-Who will benefit from
the distribution and who will pay for
the services?
◦ Economic Development-What level
of income and job growth are required
to maintain stability?
6. Functions of a Budget
6
Accountability-used to determine if an
organization has accomplished its
objectives.
Control-legislators appropriate the
money strategically, but, they have the
legal right to withhold funds.
Planning-by organizing costs around
some function or activity, agencies
have some estimates of what their
tasks will cost and how to go about
carrying out those tasks.
7. Budget Formats
7
Budgets generally come in three formats:
◦ Line-item (traditional budget)-allocates funds
to specific commodities or objects of cost
(e.g., personnel, supplies, equipment,
utilities, capital outlays, etc.).
easiest of the three to prepare, but it’s major
shortcoming is its inability to describe the activities
that will be performed by the agency.
used for accountability and control
Given this detail, line-item budgets should always
be placed in a spreadsheet program to ensure
fewer mathematical errors.
8. ◦ Program-this budget allocates funds to
programs or activities within an
organization.
allows programs of a similar nature to be
combined rather than split into separate
budgets. It allows legislators to not only plan
for the current fiscal year, but also for future
years.
lists the goals and objectives of an agency
along with the funds that are allocated to
achieving those objectives.
allow for the use of analytical tools to measure
costs and benefits.
focus is on the program’s expenditure rather
than the object of expenditure 8
Budget Formats
9. Performance Budget
• Performance budget-classifies funds based
on some activity and the direct output
created by the activity.
This type of budget relies on :
Strategic planning-It closely monitors an agency’s
mission, capacity, and the environment in whit it
exists.
Operational planning-monitors the allocation of
resources on a task-by-task basis in order to ensure
that goals and objectives are met.
Performance accountability-measures progress by
results
10. Performance Budget
An advantage to using a performance based
budget is the direct correlation between spending
and services provided.
This type of budget is advantages to both agency
heads and legislators, but it can also be a
double-edged sward.
◦ Agency heads must be very specific in detailing their
operations.
◦ Legislators must appropriate funds based on
performance rather than the normal line-item format.
◦ The main benefits of a performance budget is that it
allows for the outcomes of spending to be monitored
every fiscal year (see, p. 17).
11. Other Approaches
Zero-Based Budgeting-(rarely used)
each unit submitting a budget has to
justify all of their budget requests from
beginning to end without assuming a
guaranteed allocation
Incremental approach- simply adding
or subtract from the previous years
spending
12. Reading a Budget
A good budget is user friendly. The
lay reader should be able to determine
how much the government intends to
collect (revenues) and what it plants to
spend the money on (expenditures).
13. Reading a Budget (common
features)
Budget Message/Budget
Highlights/Executive Summary
(Budget Letter)
Budget Summary
Source of Revenues
Department/Agency Budget
Information
Supplemental Budgeting Information
14. Public Versus Private Budgets
Decision Making-Public budgeting often involves the
interaction of many actors involved with a variety of different
agendas.
Funds-funds that are spent and collected in the public
sector are collected from tax payers who may or may not
want the monies to be collected and spent and may not
receive any direct services as a result of paying the tax. On
the other hand, monies collected in the private sector are not
compulsory (enforced or required) and services are directed
accordingly.
Flexibility-public budgets are well designed documents that
are written to last an entire fiscal year (or two). They are not
very flexible. When crisis or other unplanned events occur, it
can be catastrophic to budget analysts as well as elected
officials. Private budgets are very flexible and can be
changed at a moments notice in order to move with changes
in the economy, budget shortfalls, etc.
15. Public Versus Private Budgets
Rules and Actors-the number of rules
and actors involved in public
budgeting far surpasses that in the
private sector. The process can be
overly bureaucratized when compared
to the private sector.
◦ appropriation acts and ordinances are
legal documents that place limits on
spending.
16. Revenues-are the monies collected by all levels of government to
pay for the operation of government.
Expenditures-are financial obligations that flow from the operation of
government.
The major source of revenue for state and local governments is
taxes. For some states, income taxes make up the greater
proportion of taxes collected. Unlike state governments, some local
governments have the option of collecting payroll taxes (income
taxes).
Income taxes are progressive taxes-the more money an individual
makes, the more they pay in taxes.
Individual income taxes make up about one-third of all taxes
collected in a state.
Overview of Revenues & Expenditures
17. The second major source of revenue in a
state (and in some localities) comes from
sales and use taxes.
Sales taxes are considered regressive taxes.
Citizens pay the same rate regardless of their
income level.
Each state sets its own sales tax rate. States and
localities also have some discretion as to what
items will be assessed sales taxes.
Other sources of revenue for the state include:
tobacco, alcohol, petroleum product taxes,
inheritance taxes, automobile taxes, and public
utility taxes.
Overview of Revenues & Expenditures
18. States also get a large amount of
revenue from the federal government
in the form of grants.
Grants come in two major forms:
categorical and block.
◦ Categorical grants- used for a specific
program and has very strict guidelines for
the activities to be carried out within a
specific time period.
◦ Block grant-used for broad policy areas.
Overview of Revenues & Expenditures
19. Overview of Revenues & Expenditures
A major source of revenue for local
government is property taxes.
Other sources:
◦ sales taxes
◦ license fees on motor vehicles.
◦ licenses and permits, franchise fees and user
charges.
◦ proceeds from public utilities. Public utilities are
government owned business (e.g. water utilities,
gas utilities, electric utilities, sewers, and intercity
transit).
◦ revenues collected from casinos, lotteries, and
other forms of gambling.
20. Overview of Revenues & Expenditures
Taxes and other sources of revenues are used
to pay for government expenditures-an
expenditure is the disbursement of money to
cover the costs of governmental agency’s
operation.
The majority of revenues collected by local
governments are used towards the payment
of salaries and fringe benefits to employees.
◦ In addition to personnel cost, supplies, equipment,
contractual services and capital outlays make up
the vast amount of the budget.
21. Bonds-they are not considered to be a source of
revenue, but are used by governments to borrow
money for construction of public buildings,
schools and other big ticket items.
Notes or Loans Payable
Line of Credit
Common Debt Instruments
22. Capital Items
Capital outlays are monies allocated
for big ticket items that cannot be
completed in a single fiscal year.
Capital items also have a “life”
meaning they will last for more than
one year.
23. Governmental Accounting
Governments receive revenues monthly,
quarterly, annually, and daily. So they must
allocate and manage funds in order to cover
expenditures.
State and local governments typically use a
fund accounting system. The Governmental
Accounting Standards Board (GASB)
establishes accounting and reporting
standards for state and local governments.
The GASB created the Generally Accepted
Accounting Principles (GAAP). Audits of
state and local governments are performed
based on GAAP and an opinion is rendered
by an auditor. 22
24. The GASB provides standards for reporting but not budgeting.
There are no standards for budgeting unless they are established by
state law.
Government accounting normally takes three forms:
◦ Cash basis-comparable to your checking account system. Budget officials
basically add the revenue to an account when they literally receive the funds in
their hands. On the expenditure side of the equation, funds are subtracted
from an account as soon as they are spent.
◦ Modified accrual-records revenues when they are received (measurable and
available). Expenditure are recorded when a fund liability is incurred. (the goal
is to match revenues to expenses)
◦ Full accrual-records revenues as it is earned regardless to whether the
revenue has been received. For example, property taxes are recorded when
the bill is mailed (earned) rather than when the bill is paid. This system
records expenses when a financial obligation is incurred. (see table on pg.24)
Governmental Accounting
25. Governments tend to be financially
conservative when it comes to
estimating or forecasting revenue.
Most governments use the cash basis
for budgeting taxes in general,
although some use the modified
accrual method.
Some use a hybrid system-modified
accrual for some sources and cash for
others.
Governmental Accounting
26. Class of Funds
As revenue comes in, it is placed into
separate funds. GAAP sets up three class of
funds:
◦ Governmental- these funds are those that are
used to carry out basic government services and
are primarily supported through taxes and
shared revenues
◦ Proprietary-these are business-type in nature
and are similar to those used in the private
sector.
◦ Fiduciary-these funds are used to account for
assets that are held by the government as an
agent or trust. They are not used to carry out
government activities.
27. Within each class of funds, there are
several types of funds.
The largest classes of funds are
governmental funds. There are five
types of funds within this class:
◦ General
◦ Special
◦ Debt Service
◦ Capital Project
◦ Permanent
28. Proprietary funds are for public service
activities that resemble those of the private
sector, proprietary or businesses like
activities.
◦ Enterprise Funds-contains revenues collected
from individuals external to governments (e.g.,
user fees for public transportation)
◦ Internal Service Funds-contains revenue from
agencies within the government for services
rendered. They are used within the government
and provide a service to other government
agencies rather than the public at large (i.e.,
when a car needs to be repaired, the city garage
repairs it).
29. Fiduciary funds are revenues held for
other individuals or government
organizations.
There are four types of fiduciary funds:
◦ Pension Funds
◦ Investment Funds
◦ Private-purpose Funds
◦ Agency Funds
30. Summary
Elected officials can use the budget as a
tool to control the bureaucracy, as a plan
of action, and to create accountability.
The type of budget used plays a
significant role in the information that is
conveyed.
Elected officials frequently do not have in
dept knowledge of all the agencies that
they ultimately govern. As a result, the
type of budget used can serve several
purposes.
The type of accounting methods used
can affect how the monies can be spent.
