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Public Budgeting PA 512. Intergovernmental Trends Decreasing federal $ to S&L governments Increasing $ to individuals (e.g., Medicaid) Few new big grants.

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Presentation on theme: "Public Budgeting PA 512. Intergovernmental Trends Decreasing federal $ to S&L governments Increasing $ to individuals (e.g., Medicaid) Few new big grants."— Presentation transcript:

1 Public Budgeting PA 512

2 Intergovernmental Trends Decreasing federal $ to S&L governments Increasing $ to individuals (e.g., Medicaid) Few new big grants (Exception: SCHIP and No Child Left Behind) State initiatives (e.g., health care in MA and CA) Devolution (e.g., Temporary assistance to needy children)

3 Coercive. E.g., increased unfunded mandates, preemptions (e.g., Clean Air and Cleanwater Acts) Cooperative. Cooperation in local grant implementation. Pork Barrel Opportunistic. E.g., welfare reform Federalism Models

4 Interlocal IGR Methods Contract for service (e.g., water and sewer service) Transfer city function to county (e.g., libraries, tax assessment Double taxation (e.g., recreation and Sheriff) Annexation Methods: legislative, vote of the people, unilateral action, judicial, quasi-legislative Unilateral: Density of 2 person per acre, must put in water and sewer trunk lines within 1 year ( 5,000) Satellite: Up to 10% of the population Extraterritorial jurisdiction (ETJ). 1-mile. Less than 10,000 population 2-miles miles. Over 25,000 population All of the cities zoning and subdivision regulations apply in the ETJ

5 State and Local IGR Local legislation Local bill affects 15 or fewer counties During long session any member can present a bill During the short session all members of the delegation must approve Contentious issues 0.4% real estate transfer tax Medicaid reimbursement to counties

6 Forms of Local Government Cities: Strong-mayor. Counties: Elective executive Cities: Weak-mayor council. Counties: Weak-executive commission Cities: Council-manager. Counties: Commission-manager

7 Strong-Mayor Found mostly in large cities Exceptions: Sunbelt cities (e.g., Charlotte, Phoenix, San Diego, Dallas, San Antonio) None in NC Model Charter recommends mayor have a Chief Administrative Officer (CAO)

8 Weak-Mayor Whole Board supervises departments Each Board member supervises a department Board appoints an administrator without the powers of a city manager Role of Mayor: If elected, only votes in case of a tie. If selected by Board, votes in all instances

9 Council-Manager In theory the Board sets policy; manager administers it Politics v. administration dichotomy Boards: 75% are non-partisan Role of mayors All mayors play the ceremonial role Some mayors are policy consensus builders

10 Differences Between Cities and Counties in NC Counties have department heads who are elected officials (e.g., Sheriff) Counties have more Board members that run on a partisan basis Most county chairs are appointed by the Board Three major county departments (Health, Mental Health and Social Services) have advisory boards Counties jointly fund: Community colleges, Agricultural Extension and Public Schools Most counties do not provide water and sewer services County budgets are more constrained by federal and state mandates E.g., NC is the only state to require county Medicaid funding, which is 15% of the budget of budgets on average, over 20% in poor, rural counties

11 State Government NC Organization Executive branch Powers: Institutional, personal Cabinet Legislative branch Professional, hybrid and citizen legislatures Council of State Judicial branch

12 State Trends Decline in Council of State agencies (not in NC) Stronger veto power (NC governor given veto power, but 43 states have line-item veto power Increase in Republican governors (Gov. Martin, 2 terms) Increase in partisan splits (Republicans have controlled the House) 2-year to 4-year terms (not in NC) Increase in term limits (not in NC) More lobbyists (yes in NC) More think tanks (yes in NC)

13 Medicaid Spending *2010 percentage projected by Health Management Associates Source: NASBO State Expenditure Report

14 NC Center for Public Policy Legislative Effectiveness Criteria Participation in committee work Skill at guiding bills thru floor debate General expertise in special fields Respect from fellow legislators Political power they hold by virtue of their office, longevity or personal attributes Ability to sway fellow legislators Aptitude for the overall legislative process

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16 Types of Funds Governmental General Special revenue Debt service Capital projects Permanent Proprietary Enterprise Internal service Fiduciary Pension trust Private-purpose trust Investment trust Agency

17 State of NC Funds General Special Revenue State Highway Highway Trust Tobacco Settlement Clean Water Wildlife Resources Commission Enterprise State Fair USS NC Battleship Commission Agricultural Farmers Marked Internal Service Prison Enterprises Motor Fleet Courier Service Temporary Solution Computing Services State Telecommunications

18 Basis of Accounting Modified accrual: governmental funds Accrual: proprietary and fiduciary funds Cash: small local units, nonprofits and the state of NC, which converts to accrual at fiscal year end Cash to accrual: Pros and Cons. Provides more accurate fiscal picture, but reduces fund balance in the conversion year and requires software and expertise

19 Accounting and Auditing Terms GAAP The “Blue Book” GAAFR GASB FASB CAFR and PAFR Statement 117 The 990

20 Indirect Costs (ISFs) Internal service funds (ISFs) Local government: fleet, printing, IT, custodial services All but fleet are easy to create Provides more accurate departmental costs NC: prison enterprises, fleet, courier services, IT, telecommunications

21 Accounting and Auditing Terms GAAP The “Blue Book” GAAFR GASB FASG CAFR and PAFR Statement 117 The 990

22 General Fund Fund Balance Revenues  Property Tax  Sales Tax  Fines  User Fees  Inspection Fees  Investments  Transfers from other funds Expenditures Direct Services  Police  Fire  Recreation  Planning  Inspections  Roads Indirect Services  Personnel  Purchasing  Accounting  Legal  Manager  Board  Auditor  Other Expenditures  Transfer to other funds Special Revenue Funds  Fire Protection District  Downtown Development District Internal Service Funds  Motor Equipment  Printing  Information Technology  Building Maintenance Enterprise Funds  Water  Sewer  Electric  Public Transit  Parking

23 Indirect Costs (Reciprocal Services) General fund indirect services (e.g., legal, accounting, auditing, purchasing, human resources, city manager) provided to other funds Costing method: A-87 Cost Allocation Plan (CAP) Pros and cons of charging other funds for indirect services

24 Indirect Costs: Non Profits Auditor usually approves the method Indirect administrative costs are charged to program services Typical methods: Programs’ relative share of expenses or personnel Some funders limit the amount of indirect costs. Program ratio: program expenses/total expenses (E.g., Wake United Way limit is 25%)

25 Certificate of Achievement for Excellence in Financial Reporting (CAFR) Content Management and discussion analysis (MD&A) Notes to financial statements Required supplementary information (RSI) Statistical section Obtaining a CAFR: Pros and cons

26 Fund Balance Unreserved Designated Undesignated Fund balance policy Norm amounts: Local government in NC NC State government Nonprofits

27 Balances Remain Healthy; Some Decline Likely for Fiscal 2008 *2007 figures are estimated; 2008 figures are recommendedSource: NASBO June 2007 Fiscal Survey of States

28 Budget Cuts have Declined Since Early 2000’s Downturn Source: June 2007 Fiscal Survey of States

29 Ways to Increase Fund Balance Increase property tax rate Adopt a cost allocation plan (CAP) Increase property tax collection rate (90% to issue bonds) Put names in the paper Put a lien on paycheck Sell the property for back taxes Underestimate next year’s revenues (3% of budget) and budget a full employment budget (5%)

30 Local Government Fiscal Indicators General fund Property tax collection rate Net debt per capita Direct debt per assessed value Fund balance Unfunded pension and health liabilities Enterprise funds Retained earnings Net working capital Current ratio Quick ratio Day’s cash Day’s receivables

31 Nonprofit Ratios Program ratio Fundraising ratio Fundraising efficiency ratio Current ratio Net working capital

32 Budget Cycle Budget preparation Budget forms and procedures Budget approval Budget message Budget execution Financial audit and evaluation

33 Budget Decisions The fiscal year Balanced budget Strategic plan Reserve amount Accounting basis Budgetary system Meet with governing board Meet with department heads

34 Agency Request Strategies Increasing workload It is a mandate It is a crisis!!! It pays The camel’s nose under the tent The public wants it

35 Budget Analyst Review Possible roles Watchdog only Facilitator only (captured) Watchdog and facilitator Needed skills Assertion and active listening Know one’s self Clear and succinct writing Spread sheet capability Desire to make a difference

36 Types of Budgets Line-item Line-item performance Performance Program Zero-based Target v. open-ended Entrepreneurial Multi-year Full employment Current services Base v. expansion Capital

37 Types of Revenues State individual income tax State sales tax Property tax State-collected, locally shared revenues Development fees Impact fees (22 states) Connection charge Exaction

38 Property Tax How to compute a 1 cent change Delinquent property tax collection rate (90% issue debt; 93% get a unit letter) Methods: Names in paper, lien on paycheck, sell parcel for back taxes owed Exemption Income level $25,000. Pay taxes on ½ the value if the home is over $ Circuit breaker or deferral Property tax base mix Property tax cycle Appraisal methods: mass cyclical, segmental and annual

39 State Revenues Income tax: 43 states; 6 with a flat rate General sales tax: 45 states. 4%-7.25% range. Very popular. Sumptuary excise: tobacco and booze. Very regressive. Gambling: 37 states; 2% of revenues (1%- 8%)

40 Revenue Criteria Equity Ability to pay v. benefits received Horizontal equity Vertical equity Regressive Progressive Proportional Elasticity Compliance costs Public acceptance Transparency

41 Water and Sewer Revenue Policy Questions Adopt a user fee policy? How much to charge water and sewer users living outside the town? How much water usage to apply the sewer rate to? Whether to charge impact fees and if so, how much? What type of water and sewer rate? Declining block Uniform rate Ascending block Seasonal

42 Revenue Forecasting Methods Qualitative Deterministic Extrapolative Penultimate year Average change Simple moving average Linear regression Multiple regression Politics Federal government: CBO v. OMB Election-year estimates

43 Types of Measures Output Intermediate outcome End outcome Efficiency Output/costs. Output/hours Intermediate or end outcome/costs or hours Guidelines Measure quantity and quality Avoid goal displacement Involve stakeholders in deciding what to measure

44 Legislative Budget Review State of NC House and Senate standing committees Key players Fiscal Research Division Fiscal note preparation Local governing board review Nonprofit board review

45 Budget Documents Budget in brief Federal documents Budget of the U.S. Government The Budget Appendix Analytical Perspectives North Carolina documents Governor’s Recommended Budget NC Capital Improvement Plan Post Legislative Budget Summary Legislative Session Fiscal and Budgetary Actions (Fiscal Research Division)

46 Levels of Capital Budgeting Level 1. No separate CIP. Level 2. Large projects in CIP, capital projects funds, ordinances, etc. Level 3. Level 2, plus master planning, multi-year financial forecasting, sophisticated project management

47 Why Have a CIP? Orderly replacement of facilities and equipment More time to arrange financing and acquire land Better project coordination Information for developers and neighborhood groups Bond rating

48 Capital Policies Term of debt to not exceed useful life of the asset Limit debt financing to one-time projects Dedicate a specific amount of operating property tax rate to pay for infrastructure along with debt Maintain an internal service fund to purchase equipment Lease purchase only when the useful life is equal to or longer than the length of the lease. Limit the amount of GO debt will to x% of assessed value

49 LGC Debt Review GO bonds Tax information Budgeting requirements Purchasing requirements Cash management requirements Other requirements Revenue bond requirements Revenue projection Rate projection Repayment plan

50 Typical Financing Team City Senior underwriter (lead banker) Co-managers (bankers) Fiscal advisor LGC staff and Commission members Bond counsel Underwriter’s counsel Trustee (trustee bank)

51 Capital Funding Methods General obligation bonds Revenue bonds. Rate covenant. Tax increment financing (non appropriation clause and essentiality) Certificates of participation ($10 million and bids)/Installment purchases (1 or 2 banks) State revolving funds. Must have a 75 from the Municipal Council to get a loan) Lease-purchase (e.g., motor grader or fire truck) 2/3 Rule (Issue $3 million in 1 year can issue $2million the next year w/o a vote)

52 Planning and Budgeting Inventory facilities and service levels Water capacity Sewer capacity Roads Parks and recreation Public buildings Identify environmental trends Develop service objectives Identify financial resources Select projects Identify future recurrent costs

53 Decisions Pay-as-you go v. pay-as-you use? National or local bond counsel? Financing method General obligation bond v. COP/IP? Public v. negotiated bond sale? Form a bond committee? Purchase insurance?

54 How to Improve the Bond Rating Improve the economy (e.g., more diverse and growing economy) Improve debt features (call in outstanding debt) Improve governmental features (e.g., adopt a CIP, obtain GFOA recognition of financial report and budget, collect a higher percentage of property taxes, improve the management team) Improve financial features (e.g., increase fund balance, reduce unfunded liabilities, correct deficiencies in the management letter) Bond insurance Ratings presentation

55 Budget Execution and Oversight Pre-audit expenditures and positions Allotments Mid-year changes in budget Budgetary transfers Legislative oversight Legislative intent Sunset legislation

56 Brief History of Federal Budgeting Congressional Budget Act of 1974 Reagan revolution Decrease regulations Decreases taxes and tax rates Increase defense Cut discretionary spending Balance the budget Large deficits Gramm-Rudman-Hollings. Stalemate Budget Enforcement Act. PAYGO Bush 41 tax increase

57 History (Cont.) Omnibus Budget Reduction Act (ORA) Gas tax increase by 4.3% Highest tax bracket from 34% to 36% Contract with America Democrats lose Congress Budget Shut Down $236B surplus Bush 43 tax cut

58 Components of Federal Spending, FY 2006 ($ in billions)

59 Fiscal Federalism— Employment However, the federal government is actually quite small. State governments employ 13-14% of the domestic civilian work force --teachers, police, firemen, economists, etc. The federal government employs about 1.5%. Remove the civilian employees of the Departments of Defense and Veterans Affairs, and of the Postal Service, and the federal share falls to 0.75%. Contract employees probably add another 1% to the total. Federal purchases of good and services constitute slightly more than 25% of the budget; two thirds for defense.

60 The Federal Government— Fiscally Primarily a Transfer Mechanism So where does this tax revenue go? It goes to transfers. Transfers to individuals for such purposes as Social Security, military and veterans retirement and pensions, Food Stamps, unemployment insurance, civilian retirement, debt service on our growing debt. Transfers to the medical industries, for hospital and doctor care, for prescription drugs and vaccines, for community health centers, for graduate medical education, etc. Transfers to state and local governments, for grants in support of federal and state and local interest. Transfers to the private sector, for subsidies.

61 Federal Budget Issues Social Security Medicare Medicaid and VA Interest on the debt Defense spending

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64 68% of Medicaid Spending on Benefits in 2007 is for Elderly and Disabled Children = 19% Elderly = 22% Disabled = 46% Adults = 13% Children = 48% Elderly = 9% Disabled = 17% Adults = 26% 2007 U.S. Total = 62.2 million U.S. Total = $305 billion in % 68% Source: Vernon Smith, Health Management Associates

65 Is the Deficit a Problem? Only about 3% of GDP Crowds our unneeded social spending Future Social Security and Medicare problems are exaggerated Will be a bigger % of GDP Does not include social security and other trust fund surpluses Alternative minimum tax problem Future Social Security and Medicare costs are real


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