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Introduction to Public Budgeting November 17, 2012.

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Presentation on theme: "Introduction to Public Budgeting November 17, 2012."— Presentation transcript:

1 Introduction to Public Budgeting November 17, 2012

2 What is budgeting? Budgets link tasks to be performed with the amount of resources necessary to accomplish those tasks. Budgets limit expenditures to the revenues available (projected). Budget are not merely technical, managerial documents, they are intrinsically and appropriately political.

3 What is budgeting? Budgets reflect choices about what government will and will not do. Budgets reflect priorities Budgets reflect the degree of importance that legislators place on satisfying their constituents. Budgets provide a powerful tool of accountability for citizens.

4 What is budgeting? Budgets reflect citizen’s preferences for different forms and different levels of taxation. Budgets reflect the relative power of different individuals and organizations to influence outcomes. It is a spending plan and sets spending limits.

5 What is budgeting? The selection of ends and the best means to achieve those ends Ends: public policies that are deemed most worthy of receiving limited resources Discretionary & Mandatory Fund Accounting Means: resources allocated to meet public policy priorities (taxes, user fees, other?)

6 What is budgeting? The budget should be the centerpiece of a thoughtful, ongoing, decision- making process for allocating resources and setting priorities and direction. (Government Finance Officers Association GFOA) Governmental Accounting Standards Board GASB and Financial Accounting Standards Board FASB

7 Separation of Payer & Decider Those who pay are not the ones who make the decisions on how the money is spent.

8 Budget Cycle Executive Preparation Legislative Consideration Execution Audit-Evaluation Overlaps year to year

9 Standards FASB – Financial Accounting Standards Board –Private Sector GASB – Governmental Accounting Standards Board –Public Sector

10 Fund accounting Governmental Funds –General, Special Revenue, Debt Service, Capital Projects, Permanent Funds Proprietary Funds –Enterprise, and Internal Service Funds Fiduciary Funds –Pensions, Investment Trust, and Agency Funds.

11 CAFR – Comprehensive Annual Financial Report GAAP – General Accepted Accounting Principles Accounting Basis: –Cash –Revenue when received; Expenditures when cash payment made. –Accrual –Revenue when earned; Expenditures when goods or services used. –Modified Accrual –Revenues when measurable and available; Expenditures when liability incurred.

12 Revenues Appropriate amount of taxation is established by spending choices. Structure of the tax system is very important.

13 Sources Revenues For the most part from: –Income –Purchases or sales –Property ownership or transfer

14 Federal Revenue

15 Income taxes $1.5 Trillion Social Insurance Taxes $0.9 Trillion All other $.23 Trillion Income tax –14% Corporate 42% Individual

16 State Revenues Source:

17 State Revenues Total $122,746 Million Personal Income Tax $50,665 Million Sale Tax $32,970 Million Corporation Tax $10,966 Million Highway Users Tax $5,495 Million Motor Vehicle Fees $7,027 Million Examples from FY 2011-2012

18 City Revenues Source:

19 City Revenues Vary greatly depending on many factors: –Character of the City Residential or Commercial Population (per capita subventions) –Types of Service Provided Water and/or electric enterprises –General Law or Charter City –Contract or Full Service City –Prop 13 Property Tax Share

20 City Revenues Example from FY 2004-2005 Los Angeles Total Revenues $10,743,389,655 Property Tax $937,913,506 Motor Veh In-Lieu $42,161,773 Sales Tax $322,099,865 Utility Users Tax $589,858,014 Bradbury Total Revenues $754,188 Property Tax $238,551 Motor Veh In-Lieu $12,730 Sales Tax $0 Utility Users Tax $0 Source:

21 Summary of Revenues Federal –Income Tax State –Income Tax –Sales Tax City –Property Tax –Sales Tax –State and Federal (Intergovernmental) –Fees –UUT

22 Tax Equity & Collectability Horizontal = equal among capability to pay Vertical = comparison among unequals Income Tax scores well on both.

23 Transparency Adoption in a open legislative process. Payment based on objective and explicit criteria. Each taxpayer should understand how the tax is determined, can be effected, & the filing responsibilities. Each taxpayer should know how much tax is being paid.

24 RST = Retail Sales Taxes Are ad valorem taxes on sales Are suspended on items purchased for resale Are added at purchase rather than being included in the price


26 Value Added Tax Invented by Maurice Laure a French economist in 1954. European version of sales tax Levied on goods and services Consumption tax borne by the end user

27 Value Added Tax A business includes the tax in the price charged for the goods or services at each stage of the economic chain. VAT can help if tax evasion is a problem.

28 Property Taxes Property tax “is the lifeblood for fiscal independence of local governments.” During the Great Depression there was a shift toward retail sales tax & motor-fuel excises but property tax remained important.

29 Property Taxes Real Property = real estate, realty, or land and improvements on that land. Personal Property = everything that can be owned that is not real property (machinery and equipment, jewelry, automobiles, inventory, stocks, and bonds, etc.

30 Property Taxes Tangible Personal Property = property held for its own sake (cars, machinery, inventories, etc.) Intangible personal property = property valued because it represents an ownership claim on something of value ( stocks, bonds, and other financial assets.)

31 Property Taxes Advantages –Base is immobile –Tax is stable??? –Tax can vary within small area –Services typically supported –Many decisions made by local government impact property value

32 Property Taxes Disadvantages: –Seen as regressive –Are horizontally inequitable –Local property taxes create a scattered pattern of fiscal affluence and fiscal poverty (disparity in the type and quality of public services that the localities can afford)

33 Disadvantages cont.’.: –Property tax burdens can be shockingly high for people living in an area with increasing property values and can become difficult for people with low incomes.

34 Property Taxes In California, property taxes are 1% of value with a 2% increase each year depending on CPI.

35 User Fees, Charges, and Fiscal Monopoly When government services (parks, cultural events, garbage collection, etc.) are provided without direct charge for their use, those services are not free. The choice is between users paying or paying with taxes.

36 User Fees, Charges, and Fiscal Monopoly User Fees and Licenses –Motor vehicle, massage parlor, and hunting licenses –Imposed to regulate specific activities for the benefit of the general public

37 User Fees, Charges, and Fiscal Monopoly User Charges –Are feasible when identifiable individuals or firms benefit from the service –Require an economical method for excluding from service benefits those who do not pay for the service –Turnpikes, toll bridges, etc.

38 User Fees, Charges, and Fiscal Monopoly Public Monopoly –Utilities, liquor stores, and Gambling Enterprises –Government owning and operating a business enterprise to sell private goods

39 Federal Expenditures Source:

40 Sources : $1,897,834 Social Security, Defense, & Medicare 51% $2,020,430 Social Security, Medicare, Income Security Programs, Medicaid and Unemployment Benefits 54%

41 Sources : Over $1.5 trillion deficit in 2010

42 Sources : 2011 Federal Budget

43 Sources : / 2011 Federal Budget

44 State Expenditures Source:

45 City Expenditures Source: Average California City

46 City Budgets Expenditures vary a great deal from city to city In the past there were not extreme changes in expenditures from year to year within a local government

47 Accountability and Acceptability Accountability means transparency to the taxpayers about budget decisions. Acceptability means gaining public support, or at least acquiescence. Source: Ruben

48 Politics of Balancing the Budget Even if balanced at the beginning of a fiscal year, a budget may become unbalance. Deficit is the fiscal year difference between receipts and outlays. Debt is the accumulated deficits.

49 Politics of Balancing the Budget Expectations of the public cannot be underestimated –There can be public pressure to eliminate a tax with no offsetting service cuts (example: VLF) –Once a public program is started, it is hard to cut or eliminate the program.


51 States Facing Deficits Responsibility usually falls to the governor. Raise revenues or cut expenditures Gimmicks –Borrowing money expected Example: tobacco lawsuits –Draw down on reserves –Borrow from pension funds

52 States Facing Deficits Obscuring the Deficit –accelerate tax collections –delay expenditures –changing accounting methods –borrowing between funds Buffering –underestimating revenues or holding back expenditures –using fund balance

53 States Facing Deficits Passing the buck to local governments –Many states now prohibit unfunded state mandates on local government –In recent years California has passed two propositions to protect local government revenue

54 Cities Facing Deficits Draw down reserves Delay capital projects and equipment replacement Hiring freezes Eventually cities must pay the piper

55 Balancing Budgets Budget balancing is more than a technical activity. –Politics –Policy decisions “...Government has many valued outputs…” (James Wilson, 1989)

56 Final thoughts for the day A budget is not a promise to pay. Only the Federal Government can print money and that only goes so far. To come back into balance you can either cut expenditures or raise revenue, everything else is smoke and mirrors.

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