Public (Municipal) Budgeting - Introduction

Public (Municipal)
Budgeting
By - Dr. Ravikant Joshi

7/9/2021 Public (Municipal) Budgeting 2
Public (Municipal) Budgeting
Introduction
Components of Budget
Essential Elements of Budget
Pre-requisites of the Budgetary Process
Elements of an Effective Budget System
Functional –Dysfunctional Aspects of Budget
Types of Budget
Techniques of Budgeting
Pre-requisites of Budgetary Control System
Establishing Budgetary Control System
Municipal Budgeting – Common Problems

Introduction
Public budgeting is a field of public
administration and a discipline in the
academic study thereof.
Public Budgeting is characterized by its
approaches, functions, formation, and
type.

Introduction
An Activity which is part of everyone’s life
It has roots in rational thinking and common
sense of human being
Though common man’s activity, at times
becomes highly complex and intricate one
Invented originally as tool of controlling, first
in governmental form of organisation and later
on in corporate sector.

Public Municipal Budgeting
Introduction
Involves both the basic functions of
management - Planning and Controlling
Budget - Formal statements of the financial
resources set aside for carrying out specific
activities in a given period of time.
Though it is the hallmark of governmental form
of organisation, it has become very important
tool of financial management

7/9/2021 Public - Municipal Budgeting 6
Public Municipal Budgeting
Introduction
Now it is viewed as a tool of management
The supreme example of rationality in
management.
An instrument of economic and social
reforms or changes. It expresses
government’s view.
Evolving as per the change in the
philosophy or role of government

Public (Municipal)Budgeting –
Different Perspectives
Robert W. Smith and Thomas D. Lynch - Four Perspectives
The politician sees the budget process as "a political event
conducted in the political arena for political advantage".
The economist views budgeting as a matter of allocating
resources in terms of opportunity cost where allocating
resources to one consumer takes resources away from another
consumer.
The accountant perspective focuses on the accountability
value in budgeting which analyzes the amount budgeted to the
actual expenditures thereby describing the "wisdom of the
original policy".
The public manager perspective on a budget is a policy tool to
describe the implementation of public policy.

Budget Defined
A "budget" is a plan for the
accomplishment of programs related
to objectives and goals with in a
definite time period, including an estimate
of resources required, together with an
estimate of resources available, usually
compared with one or more past
periods and showing future requirements.

Budget Defined
"A plan for financing an enterprise or
government during a definite period,
which is prepared and submitted by a
responsible executive to a representative
body (or other duly constituted agent)
whose approval and authorization are
necessary before the plan may be
executed." ~Frederick A. Cleveland
This is known as practical definition

Budget Defined
Theoretical definition:
The leading question: "On what basis shall
it be decided to allocate x dollars to
activity A instead of activity B?"
~V. O. Key Jr
7/9/2021 Workshop on Municipal Budgeting 10

Leading Theorists and contributions
Frederick Cleveland: constructed a practical definition of
budgeting.
William F. Willoughby: describes the purpose of a budget
document.
V. O. Key, Jr.: sparked the normative question regarding how
scarce resources ought to be distributed to unlimited demands.
Verne B. Lewis: argued for a budgeting theory based on economic
values; strongly contributing to the study of public finance.
Richard A. Musgrave: the Father of Public Finance; identified
the three roles of government in the economy: allocation of
resources, distribution of goods and services, and economy
stabilization.
Aaron Wildavsky: suggested that budgetary decision making is
largely political, rather than based on economic conditions.

Leading Theorists and contributions
Allen Schick: outlined the three functions of
budgeting:
Strategic Planning; deciding on the goals and objectives of an
organization.
Management Control; management's process of assuring
effective and efficient accomplishment of goals and objectives
laid out via strategic planning.
Operational Control; focused on proper execution of specific
tasks that provide the most efficient and effective means of
meeting the goals and objectives ordered by management control.
Irene S. Rubin: facilitated the discussion of the
dichotomy between theory and practice of public
budgeting.

Functions of Public Budgeting
As a policy document, a government's budget is designed
as a plan for implementing its policy.
Traditionally, budget is a rigid tool to implement policy in
a retrospective setting.
The Traditional Model - control, management, and
planning.
The Modern Model - replaced control function with the
monitoring function, the management function with the
steering function, and the planning function with the
strategic brokering function.
Steering: as a response to the traditional management function, the
steering function serves as a guide for managing.
Strategic Brokering uses the budget document as a means of constantly
looking for possible directions and reacting to the environment.

7/9/2021 Public - Municipal Budgeting 14
Functions/Components of Budget
A Policy Document
A Financial Plan
An Operations Guide
A Communication Device
As per Government Accounting Standard Board
Of USA-
Expression of Public Policy
A Financial Plan
A Form of Control
A Basis for Evaluating Performance

Essential Elements of Budget
Prepared in advance.
Based on a future plan of actions.
Based on objectives to be attained.
Statement expressed in monetary and /
or physical units.
Provides basis for controlling and
performance measurement.

Values in Public (Municipal)
Budgeting
Accountability focuses on the inputs going into the
system or program in action and is best characterized
by the line-item budgeting approach. It is best suited
for the control and monitoring functions of a budget.
Efficiency focuses on the process of the system or
program and its conversion of inputs (resources) into
outputs (policy). Its focus on the process makes this
value appropriate for performance budgets and most
in-line with management and steering functions.
Efficacy focuses on outputs and outcomes, measuring
the impact of policy. This value follows both the
program budget and PPBS budget approaches and
coincides with the planning and strategic brokering
functions.

Pre-requisites of Budgetary Process
A total Corporate Exercise
Motivational Approach
Management by Delegation
A Consultative Process
A Good Reporting System
Commitment to the Budget

Elements of an Effective Budget System
Knowledge & Use of Full Costs
Accountability for Mission Results
Consideration of Alternatives
Minimum Use of Line Item Preparation and
Control
Incentives to Save Money and Achieve
Performance Goals
Operational Management Information System

Functional Aspects of Budgets
Positive motivational impact
Establish co-ordination
Safety signal
Valuable source of past information
Brings economy in working
Buck passing avoided
Impress communication
Instrument of evaluation & control.

Dysfunctional Aspects of Budgets
Differing perceptions : Futile exercise
Devise for catching mistakes, curb or
restriction
Very costly & time consuming
Delayed communication
Negative motivational impact - Scapegoat
Setting of non-attainable goals
People are measured against goals

Municipal Budgeting
Dysfunctional Aspects of Budgets
“Whipping post”
Pressure devices
AIM SHOULD BE TO CONTROL / minimize
dysfunctional aspects & to enhance functional
aspects
Budget is only a management tool & not end
itself or management
Budget can act as a friend, philosopher and
guide to the management.

Municipal Budgeting
Types of Budget
Period - short, medium, long-term
Operations - receipt, expense, profit
Nature of expenditure - revenue (non-plan)-
developmental/capital (plan) & Extra-ordinary
Contingency - fixed - semi-variable and
variable
Source of receipts – revenue, capital(own
sources - loan-grant) extra-ordinary (deposits-
advances-funds) called as suspense or debt
head at some places
Concept - cash and accrual

Techniques / Approaches Budgeting
Line-item - Legality & regularity of
expenditure
Performance - Linking with physical plan
Programme - Planning - an allocating process
Zero - base - 1969 - Peter A. Phyrr - Texas
Instruments
Sun-set legislation - Colorado's Law - 1976.
There is no logical & sequential development in
budget techniques

Line Item Budgeting is arguably the simplest form of
budgeting, this approach links the inputs of the system
to the system. These budgets typically appear in the
form of accounting documents that express minimal
information regarding purpose or an explicit object
within the system.
Program Budgeting takes a normative approach to
budgeting in that decision making—allocating resources—
is determined by the funding of one program instead of
another based on what that program offers. This
approach quickly lends itself to the PPBS budgeting
approach.

PPBS Budgeting or—Program Planning Budgeting System—is the link
between the line-item and program budgets and the more complex
performance budget.
This decision making tool links the program under consideration to the ways and
means of facilitating the program.
It is a long-term planning tool - decision makers are made aware of the future
implications of their actions - useful in capital projects
The planning portion of the approach seeks to link goals to objects or expected
outcomes from specific outputs, which are then sorted into programs that
convert inputs to outputs
PPBS helps determine how to fund the program.
A leader in the promotion of PPBS was Robert McNamara's use in the United
States Government's Department of Defence in the 1960s.

Performance Based Budgeting attempts to solve decision
making problems based on a programs ability to convert inputs
to outputs and/or use inputs to affect certain outcomes.
Performance may be judged by a certain program's ability to
meet certain objectives that contribute to a more abstract
goal as calculated by that program's ability to use resources
(or inputs) efficiently—by linking inputs to outputs—and/or
effectively—by linking inputs to outcomes.
A decision making—or allocation of scarce resources—problem
is solved by determining which project maximizes efficiency
and efficacy.
7/9/2021 Public Budgeting 26

Zero-based budgeting is a response to an incremental
decision making process whereby the budget of a given
fiscal year (FY) is largely decided upon by the existing
budget of FY-1.
In contrast to incrementalism, the allocation of scarce
resources—funding—is determined from a zero-sum
accounting method.
In government, each function of a department's section
proposes certain objectives that relate to some goal the
section could achieve if allocated x dollars.
7/9/2021 Public Budgeting 27

Flexible Freeze is a budgeting approach pioneered by President
George H. W. Bush as a means to cut government spending. Under this
approach, certain programs would be affected by changes in
population growth and inflation.
Program Assessment Rating Tool (P.A.R.T.) is an instrument
developed by the United States OMB to measure and assess the
effectiveness of federal programs that review the program’s purpose
and design, strategic planning, program management, and program
results and accountability. The scores are rated from effective
(ranging between 85 and 100 points), moderately affective (70-84
points), adequate (50-69 points), and ineffective (0-49 points).
7/9/2021 Public Municipal Budgeting 28

Priority Based Budgeting is a response to poor economic conditions.
As opposed to incremental budgeting, where resource allocation is
determined based on marginal shifts in costs, priority based
budgeting fixes the amount of governmental resources and then
allocates resources across the various programs.
The programs receive their allocation based on their priority;
priorities may include safe and secure communities, health,
education, and community development among others.
Outcome assessment then determines the efficacy of the programs.
Although this approach is pro-democratic, critics suggest the
administration of this process is extremely difficult.
7/9/2021 Public Municipal Budgeting 29

Phases of Public Budget Cycle
The budget cycles occurs in four phases.
The first requires policy planning and resource analysis
and includes revenue estimation.
The second phase is referred to as policy formulation
and includes the negotiation and planning of the budget
formation.
The third phase is policy execution which follows budget
adoption is budget execution—the implementation and
revision of budgeted policy.
The fourth phase encompasses the entire budget
process, but is considered its fourth phase. This phase is
auditing and evaluating the entire process and system.

Steps in Public Budgeting
Revenue Estimation performed in the executive branch
by the finance or budget director, manager, or a team.
Budget Call issued to outline the presentation form,
recommend certain goals.
Budget Formulation reflecting on the past, set goals for
the future and reconcile the difference.
Budget Hearings include departments, sections, the
executive, and the public discuss changes in the budget.
Budget Adoption final approval by the legislative body.
Budget Execution amending the budget as the fiscal year
progresses.

Budgetary Control-Pre-requisites
Establishment of budget
Collection of actual data or measurement
of actual performance
Continuous comparison of actual with
budget
Analysis, interpretation and reporting of
variance
Revision of budgets

Budgetary Control-Pre-requisites
Objective of a budgetary control is never
rigidity.
Principle of ‘Management by Exception’
Total corporate exercise
Motivational approach
Appropriate delegation of authority &
responsibility
Participatory process
Good reporting system
Attitude of management

Establishing Budgetary Control
Determination of objectives
Organization for budgeting - appropriate
Budget manual - objectives & procedures
of budget operation. time-table
Responsibility for budgeting
Budget - key factors/limiting/governing-
making forecasts - alternatives

Common Problems
Inadequate Revenue
Slow and Inaccurate Accounting System
Weak Budgetary and Financial Control
Lack of Analytical Capacity
Absence of Strategic Planning
Framework
Failure to Balance the Budget

Public (Municipal) Budgeting - Introduction

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