Budgets

Andrew Graham
School of Policy Studies
Queens University
Logic Model

• First, define budgets, their form and

some technical elements
• Then, look at planning and budgetary
processes
• Issues of capital budgeting

2
What is a Budget?

• The Budget process allows the Government to:

– plan for the period ahead
– allocate resources in line with policy priorities
– seek authority from Parliament for spending.
• For a not-for-profit organization in the public
sector a budget:
– Presents a financial plan for the period ahead
– Assigns resources to projects, line items or programs
– Sets out budgetary revenue and expenditure
requirements

3
What is a Budget?

• Not primarily financial documents but basis from

which finances are settled
• Future perspective: projection of future revenues
and expenditures
• Important benchmark to control the fiscal
operations of a departments, unit or municipality
or hospital
• Assigns resources to objectives
• Deals with both revenues and expenditures: on
annual or multi-year basis

4
The Budget as an Instrument of Public Policy and
Management

• Planning Instrument:: Sets goals, priorities,

and strategies and coordinates the
government/agency resources into an
expenditure plan identifying what program or
activities will take place and at what levels.
• Political Instrument: Involves competing
interests attempting to influence a
government or agency to form policy
favourable to them.
• Social Instrument: Provides a vehicle to grant
and deny privileges and disburse burdens and
benefits to individuals and businesses.
• Economic Instrument: Offers powerful
potential for affecting the growth and
productive capacity of the community and its
citizens.
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The Budget as an Instrument of Public Policy and
Management

• Legal Instrument: Grants authoritatively the

rights, responsibilities, power, and guidelines
that regulate the budget format, timing and
process.

Source: Jerome B. McKinney and Lawrence C.

Howard, Public Administration: Balancing Power
and Accountability (Oak park, IL: Moore
Publishing, 1979)

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The Legal Basis of Budgets

• The law or collection of laws authorizing

expenditures, and/or the incurrence of
obligations to make expenditures, to be
financed from taxes or levies, as well as the
specification of the sources of revenue
from which expenditures are to be
financed
• The laws authorizing the expenditures or
the incurrence of financial obligations are
called appropriations laws
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Functions of a Budget

• Planning
• Choosing goals
• Reviewing options and predicting results
• Deciding on options
• Communicating and coordinating
• Defines both objectives and spending
limits
• Produces benchmarks for monitoring
compliance and progress
• Evaluating performance
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What is a Public Sector Budget?

• Term is used for many different kinds of ‘budgets’:

government-wide, departmental, branches, units
– The budget as an organization-wide policy and planning
statement – legislative or organizational budget
– Budget as a specific spending plan – legislative,
organizational and managerial budget
– Budget as a manager’s allocation of resources – managerial
b budget
• Both a financial and a policy document as well as a
management tool
• Legislative or organizational budget focuses on
changes in spending, taxation, debt and regulations
• Best seen as a fiscal plan not just a spending plan
since all spending is not it in and impacts go well
beyond government operations, e.g. tax changes
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What is a Public Sector Budget?

• Result of intense planning process, short-term

decisions, roles of the dice and political nuance
• Budgets from Ministers of Finance, i.e. high level
political documents not the sole source of
program funding:
– Statutory funding
– Self-funded programs
• Management budget sets limits, targets
and authorities to get on with the work.

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What is an Appropriation?
New
Zealand
An appropriation is a Parliamentary authorization Definition
for the allocation of resources to a Minister for a
specified purpose.
In the Estimates, Ministers specify how much they
need to purchase particular outputs.
The Government requests an appropriation for each
class of outputs (whether to be supplied by a
department or other organization), capital
investment (capital contributions to departments,
investments in other organizations and purchase or
development of Crown capital assets), and other
expenses.
Appropriations are also made for benefits or other
unrequited expenses, borrowing
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What is an Appropriation?

Definition: Appropriation: Approval by

a legislative body of an organization’s
budget. Appropriations create the
authorization for spending the
amount in the budget.

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 Types of Budgets

• Operating Budget:
– also called recurrent budget
– funds designated to continuing operations
– Finkler: “Plan for the day-in and day-out operations of the
organization. It is generally prepared for one year.”
• Capital Budget:
– budget for permanent works: defining permanent
– tends to combine current year and future year plans
– current year often transferred into Operating Budget
– Finkler: “Plan for the acquisition of buildings and equipment
that will be used by the organization in one or more years
beyond the year of acquisition.”
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 Types of Operating Budgets

Budget Type Characteristics General Use

Line Item Expenditures and revenues Control

are related to commodities

Performance Expenditures and revenues Management

are related to workload efficiency

Program Expenditures and revenues Planning and

are related to public goals Impact

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 Line Item Operating Budget

• Budget information organized according to types of

expenses, expenditure or cost categories
• Generally on a cash basis
• Often detailed in object codes
• Cost category of capital outlay includes office equipment,
furniture and vehicles
• Primary orientation is expenditure control and
accountability: permits inter-budget cost comparisons,
creates common reference points
• Relatively easy to prepare
• Does not provide any information regarding activities and
functions of a program

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Line Item Operating Budget - Example

Budget of the Killaloe General Hospital for Fiscal Year 200X

Object Code Budget

100. Salaries 8,000,000
200. Supplies 2,000,000
300. Rentals 250,000
400. Professional Fees 750,000

Total 11,000,000

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Line Item Operating Budget - Example

Revenue
Net revenue $ 97,980,000
Gift shop revenue 120,000
Investment revenue
Endowment 50,000
Total revenue 98,150,000
Expenses
Salaries $ 78,900,000
Supplies 15,400,000
Bad debts 2,200,000
Interest 400,000
Rent 3,100,000
Total expenses $100,000,000
Surplus/Deficit $ (1,850,000)

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 Responsibility Centre Budget

• Distributes budget to internal units: Responsibility

Centre
• Important means of assigning resources to
program objectives, specific offices and specific
locations
• Seldom see this on its own for operational
purposes
• Usually in combination with a line item approach
A responsibility centre is part of the organization, such as a
department or unit, for which a manager is assigned responsibility,
usually with spending authority for the assigned budget as well as
responsibility for its proper use. 18
 Responsibility Center Budget - Example

Budget of the Killaloe General Hospital for Fiscal Year 2005

Responsibility Centre Budget

01. Operating Room 4,000,000

02. Laboratory 1,000,000
03. Radiology 1,000,000
04. Patient Care 2,500,000
05. Outpatient Care 1,500,000
06. Administration 1,000,000
Total 11,000,000

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Functional Budgets

.
• Functional Budgets focus on the major functions
performed by an organization.
• Combine elements of Line-Item and
Responsibility Centered budgets
• This format is often used for external reporting
• Note the line item detail

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 Functional Budgets - Example
Budget of the Killaloe General Hospital for Fiscal Year 2005

Responsibility 100. Salaries 200. Supplies 300. Rentals 400. Total

Centre Professional
Fees
01. Operating 3,250,000 250,000 50,000 450,000 4,000,000
Room
02. Laboratory 550,000 350,000 25,000 75,000 1,000,000
03. Radiology 450,000 450,000 0 100,000 1,000,000
04. Patient 2,000,000 400,000 0 100,000 2,500,000
Care
05. Outpatient 1,050,000 125,000 25,000 50,000 1,250,000
Care
06. 700,000 425,000 50,000 100,000 1,250,000
Administration
Total 8,000,00 2,000,000 150,000 850,000 11,000,00
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Flexible Budget

 Organizations often experience more or less volume

than
budgeted.
 Flexible budgets look at expected revenues, expenses,
and net income under different volume assumptions.

 The key to flexible budgeting is the identification of:

Fixed Costs - which do not change with volume.
Variable Costs - which do change with volume.
 Flexible budget results are normally shown in a side-
by-side columnar format.

 A flexible budget is a form of "What if?" analysis.

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Fixed and Variable Costs

• Fixed costs are • Variable costs will

costs that do not change as volume
change with or use changes.
volume changes
with a normal
range.

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A ‘What If’ Flexible Budget - Example

Budget 10% Increase

Revenue 40 campers 44 campers
Camp tuition $5,200 $5,720
Church subsidy 500 500
Total revenue $5,700 $6,220
Less expenses
Campground rental $ 350 $ 350
Bus transportation 1,225 1,225
Equipment rental 1,600 1,760
Meals 2,600 2,860
Total expenses $5,775 $6,195
Surplus/loss $ (75) $ 25

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A ‘What If’ Flexible Budget - Example
Hot Meals for School
Flexible Operating Budget for 2006
Volume of Breakfast Provided[1]
300 450 600

Expenses

Salaries 50,000 50,000 50,000

Supplies[2] 180,000 270,000 360,000
Rent 14,400 14,400 14,400
Other 5,000 5,000 5,000
Total Expense 249,400 339,400 429,400
Revenues

Municipality 200,000 200,000 200,000

Fund raising 75,000 125,000 125,000
Total Revenue 275,000 325,000 325,000
Surplus/(Deficit) 75,000 (14,400) (104,400)
[1] Assuming that the service is provided 200 days a year
[2] Assume the cost per meal is $3.00 with little flexibility for economies of scale.
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 Program Budgets

• Program budgets move closer to the realm of

‘telling a story’ and a greater linkage to the ‘what’
of expenditures
• More of a focus on expected results of services
and activities to be carried out
• Usually organized around broad areas of
expenditure and also overall financial
performance
• But greater emphasis on results, especially in the
further variation Performance Budgeting

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 Program Budgets
Program budgets include both revenue and expenses
for the major activities of an organization.
Helps managers focus on sources of profits and losses
(surpluses and deficits) of programs that could be
discontinued.

($000’s) Oncology Rhinoplasty Cardiac Total

Revenues $40,000 $ 8,150 $50,000 $ 98,150
Expenses 37,000 17,000 46,000 100,000
Surplus/Defic $ 3,000 $(8,850) $ 4,000 $(1,850)
it

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Program Budget - Example
Bureau of Public Safety and Leisure Services FY
2003-04
Program Program Amount
Element
05 -Public 0501-Fire 3,500,000
Safety Protection
0502 - Police 5,000,000
Subtotal 8,500,000
06 – Leisure 0601 – Parks 2,000,000
Service
0602 – 1,000,000
Library
Subtotal 3,000,000
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Total 11,500,000
Program and Line Item Budget - Example

Bureau of Public Safety and Leisure Services

Detailed Budget Information FY 2003-2004
Program Program Responsibility Line Amount
Element Centre Expenditure
05- Public Safety 0501 – Fire 050101- Central Staffing 250,000
Protection Office
Supplies 500,000
050102 – Upper Staffing 1,250,000
Level Station
Supplies 150,000
050103 – River Staffing 1,200,000
Street Station
Supplies 150,000
Total 3,500,000

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Performance Budget

• Focuses on work that it to be

accomplished
• Can be extensive, covering a full
range of objectives and outcomes
• Or, can be input oriented, i.e. how
many units will be produces

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Performance Budget - Example

Road Maintenance Budget FY 2006-2007

Activity Cost Formula Amount

Paving Roads Miles to be paved: 10 4,000,000

Cost per mile: $400K

Resurfacing Roads Miles: 5 750,00

Cost per mile: $150K

Total Road 4,750,000

Maintenance Costs

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Off-Budget Expenditures

• Budget as a comprehensive document

is a recent phenomenon
• Seen as positive and useful in getting
a government’s financial house in
order
• Not all spending authorizations within
the budget

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Off-Budget Expenditures

• Introduction of accrual also highlights financial

obligations of a non-cash nature that create
potential liabilities for the government, e.g. loan
guarantees
• The main forms of off-budget expenditures are:
– off-budget funds;
– direct loans;
– guarantees;
– Public Private Partnerships (PPPs).
• Main forms of “back door” expenditures are
entitlements (financial obligations created by
substantive law) and tax expenditures (tax relief's
created by tax laws). 33
Off-Budget Expenditures

• Entitlements and tax expenditures do

not necessarily create a problem for
the proper functioning of the budget
as long as the budget procedure
provides for the opportunity to
change the substantive laws creating
the entitlements and tax
expenditures in the course of the
budget process.
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Off-Budget Expenditures

• Off-budget funds are special funds owned by the

government, that are not part of the budget and
that receive revenues from earmarked levies,
possibly next to other sources such as fees and
contributions from the general tax fund.
• Loan guarantees are guarantees by the government
to non-governmental lenders in case of debtor
default. Loan guarantees are supposed to include
public insurance of loans by non-governmental
lenders against an insurance fee.

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Challenges of Off-Budget Funding for Voluntary
Sector

• Getting ‘off-budget’ assistance ‘on-

budget’, and trying to get donors and
NGOs to develop systems that
synchronize activities with
government systems, has become a
major challenge for governments
(and donors).

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Challenges of Off-Budget Funding for
Voluntary Sector
• As project-driven systems become entrenched, so
too do the incentives to remain separate, both for
donors and for those involved in projects, within
and outside of government.
• Bringing financial flows ‘on-budget’ becomes
increasingly difficult – one code for this is the lack
of ‘sustainable funding’
• As a result, fiscal discipline is limited, policy-
making remains ad hoc and driven by external
resource flows, and it is difficult to set up any
systematic planning and implementation across
government. The longer this continues, the harder
it is to change.
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Funds in Budget Architecture

A fund is defined as a fiscal accounting

entity with a self-balancing set of
accounts recording cash and other
financial resources, together with all
related liabilities and residual equity
or balances, and charges, which are
segregated of the purpose of carrying
on specific activities or attain certain
objectives for which special
regulations, restriction or limitations
apply. 38
 Funds in Budget Architecture

• Budgets will become more complex as the

organization becomes more complex and the
purposes for the funds become more diverse
• Often, special funds are created to segregate
monies for programs for special purposes or as a
result of unique designated revenue sources

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 Funds in Budget Architecture

• Often funds are managed and reported separately

– leading to a separate set of financial statements
• The use of funds restricts budgetary flexibility but
displays allocation for specialized purposes in a
transparent way – funds are often mandated in
accounting standards or law, e.g. for municipal
governments

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Funds in Budget Architecture

• Use of funds varies with governments

• Municipal governments tend to be built
almost entirely around funds.
• The federal government and provinces will
create special funds for a variety of
purposes, some that are linked to unique
sources of funds through fees or special
taxes, some of which are administered at
arms length from normal practice.

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Revolving Funds

• A revolving fund is an authority, in the case

of government usually a statutory one, to
use the revenues generated from an
activity to finance it.
• This authority generally continues on a
permanent basis from one year to the next
without further authority being needed.

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Revolving Funds

• Always created through budgetary

expenditure means, but then those funds
move off-budget.
• Although surpluses or deficits may occur
from year to year, they are generally
expected to balance out over time.
• Many arrangements exist for the use of
retained earnings, with the principle being
that the fund retains its earnings unless
some form of gain sharing is put in place.
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Revolving Funds

• Further, governments can “top-up” such

funds through the budget if they have
resource needs
• Also called an Enterprise Fund
• A revolving fund should support increased
cost effectiveness, optimal use of
resources, responsiveness to clients and
good business practices, when used in
conjunction with other appropriate
arrangements. 44
Use and Application of Funds Accounts for
Budgeting and Accounting – Voluntary Sector

• Restricted funds
• Unrestricted funds
• Endowment funds
• General funds

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Municipal Fund Structures

Fund Definition
General Fund Consists of general revenue
sources such as taxes, fines,
licenses and fees.The general
fund is usually the largest
municipal fund.
Special Revenue Fund Consists of resources that are
restricted for special purposes.
Examples would be special
funds from other governments
for special program funding, e.g.
infrastructure improvement.
Debt Service Fund Consists of resources used to
repay long-term general
obligation debt.
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Municipal Fund Structures
Capital Project Funds Consists of resources restricted for
construction and acquisition of capital
facilities.
Fiduciary or Trust Fund Account for assets held by a
governmental unit in a trustee
capacity.
Endowment Fund Usually a donated amount for specific
purposes that is intended to earn
income for the organization or
university. Often government by
separate governing board.
Program Specific Fund Special purpose program, e.g.
Millennium Fund, which manages its
own resources and does not have to
return those funds at the end of the
fiscal period. To be used for intended
purpose only.
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 Funds

• Debate about whether enhance or hinder

accountability.
• Generally held that they improve accountability
as they provide specialized focus on one area.
• On the other hand, they often are subject to
different accounting rules (carry forward of funds,
private banking), cannot be reallocated to priority
areas, and increase the complexity of government
accounting and reporting

48
 Non-Budgetary Expenditures

• Non-budgetary transactions are transactions in

loans, investments and advances, in liability for
the administration of public money received and
collected for special purposes, in unmatured debt
• Difference from budgetary expenditures in that
there is an expectation that the funds will be
returned
• Not expected to affect the budget or encumber
funds
• Has no impact on the calculation of the deficit

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Zero-Based Budgeting

• As much of a process as a budget

format
• Attacks concept of the incremental
nature of most budgets
• Can provide the basis for reallocation
of resources to priority areas or to
reduce overall costs

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 Zero-Based Budgeting
Zero-Based Budgeting
1. Evaluation of current activities and
examination of alternatives leads to
operational budget.
2. Ignores past behaviour and assumes a
clean slate of activities let alone budget
to support them
3. Creates cost/benefit analyses of all
alternatives including the status quo
4. Point of departure is the program
architecture and need to continuing with
activities.
5. Examine new means of delivery for
continuing programs.
6. Decision makers faced with options,
alternatives and different levels of
services decisions within the budget
package.
Incremental Budgeting
1. Operating budget is subject to series
of incremental changes (increases or
decreases) on a line item basis often with
an overall budget increase set.
2. Accepts the existing base and
estimates costs of new activities or
changes including decrease
3. Focuses analysis and alternatives on
changes to program and new activities
4. Focuses on costs and money rather
than program continuity
5. Budget process not used to reevaluate
existing programming.
6. Little scope for examining alternatives.
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Principles of Sound Budgeting

• Universality Principle: all expenditures financed by

taxes or levies and all revenues collected through
taxes or levies should be in the budget
• Unity Principle: all expenditures in the budget to be
made during a certain period of time (usually a year
or a few years) and all revenues in the budget to be
collected during that period should be presented to
the budgetary authorities for the purpose of
decision-making in a single document
• Specificity Principle: expenditures and revenues should
be specified separately in the budget (“gross
recording”) and at a level of detail required by the
budgetary authorities

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Source: OECD, Best Practice Guidelines, GOV/PGC/SBO (2004)6
Principles of Sound Budgeting

• Accuracy
• Comprehensiveness
• Consistency
• Honesty
• Judgement
• Legitimacy
• Timeliness
• Transparency

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Factors Negatively Affecting Budgets

• Unreliable Information
• Excessively optimistic revenue claims
• Excessive prudence
• Unpredictability
• Extra budgetary funds

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