1. Government Budgeting Jae-Young Kim Professor of Public Administration 1

2. Contents Governments & Budgets Functions of Gov’t Budgets Budget Classification/ budget types Organizations & Legal Bases 1 1 2 2 3 3 4 4 Budget Preparation 5 5 2

3. Contents Budget Consideration Budget Execution Budget Reform Cost-Benefit Analysis 6 6 7 7 8 8 9 9 Government Accounting 10 3

4. 1.Why do we study gov’t budgets?  To understand public affairs: cf. the gov ’ t spends 1/3 of GDP  To cultivate problem-solving abilities → policy agendas are complicated: “money is the answer to everything”  To see if your tax burdens and benefits are balanced 4 I. Governments & Budgets

5.  To have knowledge of budget operation, such as laws, evaluation and a/c techniques  To secure public control  An interesting way of studying gov ’ t, because money is to gov ’ t what blood is to a human body  Please be a number-wise person 5 Need for Study

6. 2. Definitions  Public financial management refers to managing material resources  It refers to all the activities of public organizations involving mobilization and distribution of financial resources  Cf. Public finance refers to all the economic activities of a society 6 I. Governments & Budgets

7. 3. Study areas  Budgeting and budgetary process (play of power among participants)  Revenue & expenditure analysis  Program evaluation, B/C analysis, that are related to policy analysis  Tax structures and administration 7 I. Governments & Budgets

8. 3. Study areas  Debt and pension management  Financial conditions analysis  Accounting & auditing  Budget reform  Local government financial admin. 8 I. Governments & Budgets

9. 1.Definition of a government budget  A financial plan of a public organization regarding revenues and expenditures for certain periods  Fiscal year(FY) of Korea: from January 1 st to December 31  Why not a biannual budget? 9 II. Functions of Gov ’ t Budgets

10.  A budget is information, a plan, policies, and a contract with citizens cf. principal-agent relationship - It shows gov’t structures & activities - It usually is an one-year plan - It contains and supports policies - It means governmental commitments to citizens 10

11. 2. Agency Theory  Assumptions: Social life is a series of contracts  The principal buys goods and services  The agent: those who provide goods  The principal-agent relationship is fraught with the problems of cheating and limited information 11 II. Functions of Gov ’ t Budgets

12.  Problems of principal-agent relations - bondage cost: contract fees - monitoring cost to prevent cheating or negligence - moral hazards on the part of agents - information asymmetry: usually agents possess more info. than the principal - adverse selection: employers tend to hire less qualified workers 12 II. Functions of Gov ’ t Budgets

13. 3. Market Failure (that) makes gov ’ t intervention unavoidable  Failure of competition, such as monopoly or economies of scale  Public goods, such as defense, fire or police protection, public utilities 13 II. Functions of Gov ’ t Budgets

14. 3. Market Failure and gov ’ t intervention  Externalities, both negative and positive, can be solved by fines or subsidies  Incomplete markets for worthy goods cf. gov’t actions during 2009 flu epidemic  Information failure, inflation, etc 14 II. Functions of Gov ’ t Budgets

15. 4. Political functions  Social interests are manifested in the budget process  These interests are compromised in the course of budget making  A budget is a document enforcing “ an authoritative allocation of values ” 15 II. Functions of Gov ’ t Budgets

16. 1)Stabilization  Policy objectives: Full employment + controlled inflation  Individuals or firms do not voluntarily invest to expand employment during a recession  Nor do they cut spending or shrink business during an economic boom 16 5. Economic Functions

17. 1) Stabilization When economy is in good shape, firms do not shrink invest or expenditures → may exacerbate inflation (or create bubbles)  Policy mix: fiscal and monetary policies - government initiates spending programs during recessions - high interest rate to fight inflation 17 5. Economic Functions

18. 2) Allocation  Governments have to decide the size of the public sector (small or large government)  They also have to decide resource allocation for each area or program in the public sector - development v. environ. protection - business v. education, culture - housing v. security 18 5. Economic Functions

19. 2) Allocation  Government intervention is justified due to market failures, such as externalities, provision of public goods, etc (pp. 14-15) cf. Tiebout hypothesis in local arena → citizens may choose their most wanted public services, be it education, clean air, or a job 19 5. Economic Functions

20. 3) Redistribution  Budgets and taxes are major tools for achieving social equity  Examples: Progressive income tax rates, tax exemption for low-income families, & special consumption tax 20 5. Economic Functions

21. 3) Redistribution  Welfare dividends and subsidies are targeted on the poor  Welfare expenditure constitutes the largest proportion in FY2009 budget  Welfare expenditure has negative effect on national economy—well, this is a controversial statement 21 5. Economic Functions

22.  Gini coefficient indicates the equality of income distribution 22 Lorenz curve D I₁I₁ C S₁S₁ A B Gini Coefficient ABD ∆ ABC

23. 6. Administrative Functions  Control function, esp. at the budget execution stages (reports and rules)  Managerial function, to secure managerial efficiency, often measured by performance indices 23 II. Functions of Gov ’ t Budgets

24. 6. Administrative Functions  Planning function, for a budget is a plan cf. mid-term fiscal plans  A. Schick. (1966). “ The Road to PPB ” shows three stages of budget reform, each of them, while containing some features of all three functions, emphasizes one of them 24 II. Functions of Gov ’ t Budgets

25. 1. Types of Budget  General Account: - funds for basic gov ’ t activities, such as defense, SOC, welfare, etc - Revenues are mainly generated by taxes - funds can be transferred to special accounts 25 III. Budget Classification et al

26. 1. Types of Budget  Special Accounts: Projects that are deemed appropriate to separate from the G/A (e.g. public enterprises)  The budget of University of Incheon is a special account of Incheon City 26 III. Budget Classification et al

27.  Government Funds - established and operated apart from general revenues and expenditures (47.5 trillion won in 2010) -special funds for special purposes e.g. pension fund, lottery fund, housing fund, North-South Korea cooperation fund, etc 27 Types of Budget

28.  Government Funds -Legislative consideration is not needed -Control over funds management has been strengthened -Subject to legislative investigation -Fund operation plan/closed document should be submitted to Nat’l Assembly 28 Types of Budget

29.  Original Budget  Revised Budget: Revisions by the executive branch (the budget office) during legislative consideration to cope with changed environments or to meet new needs 29 Types of Budget

30.  Budget Addendum (supplementary budget): - revisions during budget execution for indispensable expenses - the scope and amount is determined by the limit of additional revenues - needs legislative consideration 30 Types of Budget

31. III. Budget Classification AreaAmountAreaAmount R&D13.7Culture & tourism3.9 Industry & energy15.1Environment6.3 Transportation25.1National defense29.6 Agriculture & food17.3Diplomacy & national unification 3.3 Health & welfare81.2(27.7%)Public order & security12.9 Education38.3(13.0%)General administration48.7 (16) Total292.8 FY 2010 Original Budget (Trillion won) 31

32. III. Budget Classification Area‘11‘12Area‘11‘12 R&D14.916.0Culture & tourism4.24.5 Industry & energy15.215.1Environment5.86.0 Transportation24.423.1National defense31.433.0 Agriculture & food17.618.1Diplomacy & national unification 3.73.9 Health & welfare86.492.6Public order & security13.714.5 Education41.245.5General administration 52.455.1 전체국가예산 대비 보건복지예산 비중 28.0 % 28.5 % Total309.1325.4 FY 2011-12 Original Budget (Trillion won) 32

33. 2. Budget Classification 1) Functional Classification - classified on the basis of gov ’ t policy areas or programs - “ classification for citizens ” - difficulties in classification, for such programs like military academy 33 III. Budget Classification et al

34. 2) Organizational Classification - classified on the basis of individual agencies in charge of spending - a basic classification scheme adopted in Korea(57 institutes for expenditure & 42 for revenues) 3) Classification by line items: A control-oriented classification 34 III. Budget Classification et al

35. 4) Classification by economic effects - provide useful information to policy- makers - shows some information of the effects of the gov ’ t budget to national economy 35 III. Budget Classification et al

36. 3. Budget Principles (traditional) 1) Publicity, for budget is information and a contract 2) Clarity: should be presented to citizens in an understandable fashion for ease of control and critic 36 III. Budget Classification et al

37. 3) Prior authorization: the exception is the quasi-budget, the one used when legislative review is not completed until the beginning of a fiscal year 4) Accuracy - the most difficult principle to keep - requires accurate estimates and forecasts to minimize revision 37 Budget Principles

38. 5) Annuality - each FY should be independent - exceptions: multi-year projects, transfers to the next fiscal year 6) Comprehensiveness - gov ’ t budget should include “ all ” -exceptions: public funds, net budget (cf. total budget) 38 Budget Principles

39. 7) Unity - all revenues and expenditures should belong to a single budget - non-affection: no direct connection between particular rev./expenditures - exceptions: special accounts, budget addenda, special purpose taxes 39 Budget Principles

40. 4. H. Smith ’ budget principles(1944)  Executive programming  Executive responsibility  Reporting  Adequate tools  Multiple Procedure 40 Budget Principles

41.  Executive discretion  Flexibility in timing  Two-way budget organization  Smith ’ principles, contrasting to traditional ones, argue for operational efficiency and flexibility in the use of budget 41 Budget Principles

42. 1. Budget Organizations  Planning: Ministry of Strategy & Finance  Accounting: MOSF  Tax Admin: National Tax Service  Purchase: Public Procurement Service  Evaluation: Board of Audit & Inspection, National Assembly Budget Office 42 IV. Orgs. & Legal Bases

43. 1) Basic Organizations  Central budget office: - aggregate & review agency requests - prepare executive budget  Office presiding revenues and expenditures (cf. parliamentary system v. presidential system)  Central bank: responsible for receiving and paying central government money 43 IV. Organizations

44. 2) Central Budget Office  Budget preparation, consideration, allotment, use of reserve fund  Planning, forecasting, budget review  Financial information, government efficiency → government innovation  Interest aggregation, public relations 44 IV. Organizations

45. 3) Executive Departments  Minister  CFO & budget officer: planning, budget requests, budget allotments, managing funds  Treasurer: -Approving expenditures -Issuing checks 45 IV. Organizations

46. 1) Constitution (1987. 10)  Article 59: “ types and rates of taxes are determined by laws ”  Articles 54-56: budget consideration by the legislature  Articles 58, 60: legislative approval on government debt, int ’ l agreements incurring tax burden 46 IV-2 Legal Bases

47.  Article 54: executive budget subject to Legislative consideration  Articles 97-100: Board of Audit & Inspection as a “ watch-dog ”  Articles 117-118: - Local autonomy - Local council 47 IV-2 Legal Bases

48. 2) Basic Law on nat ’ l taxes, income tax law, law on tariffs, corporate income tax law, etc. 3) What ’ s new in National Finance Law? - broader range - managing performance - adjustment in timing - centralization (top-down approach) 48 IV-2 Legal Bases

49. 1. Procedures  Apr. 30: MOSF “ Guides for Budget Preparation ” to each ministry  June. 30: Budget requests to MOSF  July – Aug: Budget review & Negotiation  Mid-Sept.: State Council review & Public notice through mass media  A Draft budget to the Nat ’ l Assembly 49 V. Budget Preparation

50. 2. Guides for Budget Preparation  The nation ’ s economic outlook  Fiscal policy of the next FY  Directions of budget operation & priorities of budget preparation  Standards & criteria for budget-making  Unit costs 50 V. Budget Preparation

51. 3. Methods of budget preparation  Costs for personnel  Non-personnel costs - volume x unit cost - workload x unit cost - workforce ratio - based upon last year ’ s spending 51 V. Budget Preparation

52. 4-1. Justifications  Mandates by laws or from higher governments  Improving operation methods: “ we spend to save costs ”  Increased workload  Higher prices of resources to purchase 52 V. Budget Preparation

53. 4-2. Indices supporting justification  Social indicators  Outputs, outcomes & impacts  Workload  Productivity  Program needs or demands “ Eliminate the program, don ’ t cut ” 53 V. Budget Preparation

54. ItemsFY 2011FY 2012Remarks Transportation House rent Meals Ceremonies Festival Miscellaneous Total 500,000 1,440,000 200,000 300,000 60,000 3,000,000 600,000 1,680,000 200,000 300,000 120,000 3,500,000 I S L 16.7% Example: MT Budget Request I S L means “increased service level” 54

55. V. Budget Preparation ItemsReasonsJustification Transportation House rent Meals Miscellaneous Bus rent fee increased (or more people to transport) Students want more spacious and comfortable rooms 3,500 x 80(people) x 6 = 1,680,000, Meal cost increased: 3,000 to 3,500 School requires at least 100,000 for emergency use Cost increase (increased workload) Needs and demands Cost increase Mandates by a higher Authority Justification for Increased Service Level (I S L) 55

56. 5-1. Methods of Budget Review  Current budget or base  Fixed-ceiling budgeting  Priority listing  Zero-base budgeting  Percentage increase or decrease  Priority listing 56 V. Budget Preparation

57. 5-2. Budget Review Techniques  Cut all increase in personnel  Cut all items appear to be luxurious  Cut items which have been cut before  Recommend repair or studying  Cut all costs by fixed percentages  Cut departments with bad reputation 57 V. Budget Preparation

58. 6-1. Political vs. Economic Rationality  “ On what basis shall it be decided to allocate X dollars to activity A instead of activity B? ” – V. O. Key (1940)  Budget-making is a blending of political and economic rationality  The history of budget reform: efforts to strengthen economic rationality 58 V. Budget Preparation

59. 6-2. Economic Rationality  Make values and objectives clear  Conduct means-ends analyses  Select most cost efficient programs, ones that maximize B/C ratios  Use comprehensive analyses cf. PPBS and Zero-base Budgeting 59 V. Budget Preparation

60. 6-3. Political Rationality  Selective, not comprehensive, analyses  Marginal analyses  Mutual adjustments = play of power  Budgets are determined incrementally, that is base + fair share (which agency can accept) 60 V. Budget Preparation

61. 7. Budget Draft Documents  Revenues and expenditures  Explanations of the above  Spending schedule of the continuing expenditures  Explanations of programs incurring national debts  T/O ’ s and unit costs 61 V. Budget Preparation

62.  Assessed values and estimates of national assets  Planning on performance improvement  Tax expenditures budget  Management plan of national debt  Specifications of transfers between accounts and funds (Article 34, National Finance Law) 62 V. Budget Preparation

63. 1. Procedures  Pre-consideration by each committee - approving departmental programs - setting budget amounts  Comprehensive consideration by the Budget committee - budget proposal by the MOSF head - review by the chief officer 63 VI. Budget Consideration

64. - questions and answers - consideration by 5-6 divisions - consideration by departments - review by the Details Adjustment Committee - vote and approval by the Budget Committee  Vote and approval by the Assembly 64 VI. Budget Consideration

65. 2. Functions of Legislative consideration  Grants legitimacy to the proposed draft  Determines programs and sizes  Determines total budget amount  Controls executive policies & programs  Allocate national resources 65 VI. Budget Consideration

66. 3. Interests of Each Party  Legislature - political climate setting - arbitration and compromise - political discrimination - political control 66 VI. Budget Consideration

67.  Executive departments - formulation of specific policies - planning, analyses, and consistency - administrative fairness - administrative discretion 67 VI. Budget Consideration

68. IV. Budget Consideration 4. Factors Affecting Consideration  Environmental Factors national economy, power structure in political parties  Structure of the Legislature partisan politics, procedures, length of consideration period, advisory staff  Personal Traits of Assemblymen professionalism, ideology 68

69. 5. Special Features of Legislative Consideration in Korea  Executive budget system, which implies superiority of the executive party  Those who cut or add to -MSF, minority party, budget committee -Department, majority party, standing committees 69 VI. Budget Consideration

70.  Non-budgetary issues are debated during budget consideration  Lack of criteria in determining amounts  Ambivalence of Assemblymen - promise economic development - support tax cut  General lack of knowledge and info of assemblymen 70 VI. Budget Consideration

71. 1. Procedures  MOSF-Ministries: - Demand/approval quarterly allotments  MOSF-Ministries - Monthly collection schedule - Monthly expenditure schedule - Monthly allotments through BOK 71 V. Budget Execution

72.  Budget Execution in a Ministry - CFO: monthly allotments, monthly collection and expenditure schedule - A/C dept: revenues, expenditures, accounting, purchasing, closing - Finance officer: spending actions - Treasurer: issues checks 72 V. Budget Execution

73.  National Tax Service(NTS): collect taxes, tax expenditures  Public Procurement Service(PPS): purchase, storage, other contracts  Board of Audit and Inspection: reviews accounting materials  Bank of Korea: make payments 73 V. Budget Execution

74. 2. Implications  Occupies 50-75% of budget officers  A procedure to substantiate the policy objectives stated in budget documents  An arena of bureaucratic discretion  Observing the spending limit  Two conflicting values: Control versus Flexibility 74 V. Budget Execution

75. 3. Technique over Purpose: Too much control in execution (Schick, 1964)  Demand for expenditure schedule  5-10% reserve fund  Control on recruitment  Control over transfers, purchases, & travel expenses 75 V. Budget Execution

76. 4. Ways to Secure Flexibility  Lump-sum budget  Transfers(NFLaw 46, 47) - within specified limits - under approval by MPB head - when there are changes of functions or reorganizations 76 V. Budget Execution

77.  Deferment to the next FY - explicit deferment (NFL 24) - accidental deferment (NFL 48)  Continuing Expenditures (Const. 55)  Reserve fund w/I 1/100 range (NFL 22)  Programs incurring national debt  Budget addenda or supplementary B ’ s 77 V. Budget Execution

78. 1. Procedures  Feb. 10: last day to make transactions  Feb. 28: final report to MOSF  Mar-Apr 10: financial reports at MOSF  Apr. 10: all documents to BOAI, MOSF  May 20: Audit report to MOSF  May 31: the report to the legislature 78 VI. Closing and Audit

79. 2. Functions of Closing/Audit  Closing - Closing all transactions in a FY - to observe financial constraints - to make reports on performance  Audit: examine financial records and to give feedbacks 79 VI. Closing and Audit

80. 3. Types of Audit  A financial audit: - traditional control-oriented audit - to see whether guidelines are kept  A management of operations audit: to see if there are wastes  Program audits: to see program effectiveness  A performance audit: to see whether intended results are achieved 80 VI. Closing and Audit

81. 1. What are Budget Reforms?  Changing decision-making system of allocating government budget  Changing program selection methods  Changing techniques of managerial & operational control  Budget reform changes political process 81 VII. Budget Reform

82. 2. Control-oriented (LIBS)  A product of reform in early 1900s  Budgets documented by expenditure items (inputs)  Executive budgeting + legislative control  Ceilings are explicitly stated  Secure a/c responsibility  Base for incremental budgeting 82 VII. Budget Reform

83. 3. Performance Budget  Recommended by Hoover Commission  A the budget size grows, focus has been shifted from control to mgt.  Budgets are prepared by activities (output-oriented)  Budgets are tools to evaluate agency performance 83 VII. Budget Reform

84. 4. Planning Programming Budgeting System (PPBS) 1)Basic Frameworks  Economic analysis  CBA, systems analysis  Planning + budgeting  Competition among programs 84 VII. Budget Reform

85. 2) Important Features  Longer time-horizon  Use analyses in budget preparation  Means-ends analysis * but this procedure is really hard  CBA is often not meaningful  Resistance to a new format 85 VII. Budget Reform

86. PBPPBS Period1930-1950s1960s Main functionmanagementplanning Objectivesefficiencyrationalization Methodswork-cost measurement CBA, output measurement Theoriescost a/cEconomics 86

87. 5. Zero-base Budgeting 1) Objectives - To consider budgets from zero base - To prevent incremental growing - Flexible transfers among activities - To search for optimal alternatives 87 VII. Budget Reform

88. 2) Structures: decision package - funding levels and increments - activity description - resource requirement - short-term objectives - impact on major objectives 88 VII. Budget Reform-ZBB

89. 3) Strengths and Limitations - facilitating participation - developing data and analyses - too much efforts and time - not meaningful w/ 70% of fixed cost - lack of interest in developing alternatives 89 VII. Budget Reform-ZBB

90. 6. Management by Objectives  A private management tool  Bottom-up approach in setting objs.  A plan of resource allocation  Monitoring and feedback  Evaluation of goal achievement 90 VII. Budget Reform

91. 7. Conclusion  Reform efforts pursued rationality  All reform measures failed, as systems  Contributions: - systemized information - flexibility in decision-making 91 VII. Budget Reform

92. 8. Program Budget in Korea  Structuring programs  Change budget structure to fit to the new system  Performance management  Calculating costs 92 VII. Budget Reform

93. 1. 예산서 비교 : 품목별 예산 VII. Budget Reform 장 ∙ 관 ∙ 항 ∙ 세항 ∙ 세세항목예산액산술기초 3332 도로관리 22,779,000 220 자체사업 5,766,000 401 시설 및 부대비 5,766,000 01 시설비 ∙A 구간 1,586,000 - 시설비 1,586,000 ∙B 구간 2,890,000 - 설계용역 80,000 - 토지매입 2,810,000. C 구간 995,000 - 토지매입 995,000 271,000 02 감리비 ∙A 구간 271,000 24,000 03 시설부대비.A 구간 9,000.B 구간 10,000 93

94. 조직정책단위회계세부편성목예산액전년도 ( 가정 ) 비교증감 도로과 22,779,00 0 21,179,0001,679,00 0 광역도로건설 22,779,00 0 21,179,0001,679,00 0 ABC 도로일반 5,766,0005,166,000666,000 A 도로사업 1,866,0004,666,000- 2,800,00 0 시설비 및 부대비 1,866,0004,666,000- 2,800,00 0 B 도로사업 2,900,000500,0002,400,00 0 시설비 및 부대비 2,900,000500,0002,400,00 0 C 도로사업 1,000,0000 시설비 및 부대비 1,000,0000 VII. Budget Reform 2. 예산서 비교 : 사업예산 94

95. VII. Budget Reform 내 역 20102011 NEW ISL 목표 1. 신규 도로 건설 2. 신규 보도 건설 3. 경계석과 소형배수로 건설 4. 대형 배수로 ( 관 ) 건설 5. 자전거 도로 건설 수요 1. 신규도로 건설 ( 마일 ) 2. 신규보도 건설 ( 피트 ) 3. 경계석과 소형배수로 ( 피트 ) 4. 대형 배수로 ( 관 ) 건설 ( 피트 ) 0.3 15,000 5,000 6,810 0.3 15,000 5,000 6,810 회계 : 일반회계 / 공공사업 사업명 : 도로 건설 3. 사업 예산서 예시 (1) 95

96. 내 역 20102011NEW ISL 작업량 1. 신규 도로 건설 ( 마일 ) 2. 신규 보도 건설 ( 피트 ) 3. 경계석과 소형 배수로 ( 피트 ) 4. 대형 배수로 ( 관 ) 건설 0.1 10,210 5,000 6,810 0.1 12,000 5,000 6,810 ISL 효율성 1.1 마일당 신규도로건설비 2.1 피트당 보도 건설비 3.1 피트당 경계석과 소형배수로 4.1 피트당 대형배수로 건설 N/A 650,000 14.50 17.1 480 효과성 1. 공기 내 완공예정 공사 2. 수요대비 도로 확충 75% 92% 75% 95% VII. Budget Reform 사업 예산서 예시 (2) 96

97. 내역 20102011NEW ISL 자원 배분 100 인건비 200 경상경비 300 자재비 400 관리비 기타 500 자본지출 계 전일 근무 인원 시간제 근무 인원 212,133 177,551 21,260 681 7,900 419,525 20 - 246,200 166,000 15,400 600 16,800 445,000 21 - ISL VII. Budget Reform 사업 예산서 예시 (3) 자료 : 미국 플로리다 주 탈라하시 시 사업예산서 97

98. VIII. Cost-benefit Analysis 1. Definitions  Cost-benefit analysis: a systematic and quantitative method to assess government expenditures and/or to evaluate alternatives  Operations research: -use of a scientific model with which to compare the outcomes - application of mathematics or logical analysis to help a client improve her efficiency 98

99. VIII. Cost-benefit Analysis  Systems analysis: similar to OR, but SA is concerned with higher level and be applied to problems of optimal choice, while OR is confined to efficiency problems  Policy analysis: is more likely to be used when political and social factors predominate OR seeks to help do something better; SA seeks to do the right thing (goals) better and cheaply; Policy analysis does all the above with equity 99

100. VIII. Cost-benefit Analysis 2. Fundamentals of CBA  cost: sum of monetary and non-monetary expenses of the society incurred by a project  benefit: sum of monetary and non-monetary gains of the society resulted from the project  the issue of discounting: the need to adjust future values into present one using a discount rate (cf. interest rate) 100

101. VIII. Cost-benefit Analysis  the issue of redistribution: reflect equity concerns when assessing the costs and benefits of the project (cf. policy analysis)  the problems of risks and uncertainty: the applicability of CBA can be limited due to environmental changes, forecasting errors, or bounded rationality of people → sensitivity analysis, which may smooth the effects of changing variables 101

102. VIII. Cost-benefit Analysis 3. Decision Criteria 1) Net present value(NPV):  Present value benefits B = B 0 + B 1 /(1+r) + B 2 /(1+r) 2 + … + B n /(1+r) n  Present value costs C = C 0 + C 1 /(1+r) + C 2 /(1+r) 2 + … + C n /(1+r) n NPV = B – C (all values in present terms) 102

103. VIII. Cost-benefit Analysis Costs and benefits NPV Option 1Option 2rOption 1Option 2 Cost (this year)800 --- benefit 1st year 2 nd year 3 rd year 4 th year 5 th year 200 300 500 300 200 0 500 1,200 0.00 0.05 0.10 0.15 0.20 700 498.02 334.50 200.48 89.4 900 551.58 286.61 82.49 -76.62 103 A case analysis with NPV method At the first glance options 2 looks competitive, but, in fact, option 1 becomes better with discount rates higher than 0.10

104. VIII. Cost-benefit Analysis benefitscostsb/c ratio Project A (road)25 billion won10 billion won2.5 Project B (dam)20 billion won10 billion won2.0 104 2) B/C ratio B/C ratio is often appropriate when size matters. However the ratio can vary as one puts certain effects of the project to cost or benefit.

105. 1. Definitions  Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events, which are, in part at least, of a financial character, and interpreting the results thereof — AICPA, 1941. 105 IX. Government Accounting

106.  Accrual Basis: Recognizes transactions when economic events actually take place  Dual-entry Bookkeeping - record in accordance with accrual basis - a transaction is recorded both in debit and credit simultaneously 106 IX. Government Accounting

107. 2. Principles of Dual-entry Bookkeeping  Asset = Own capital + Borrowed capital or Liabilities → B/S  Asset at end – Liabilities at end = Capital at end  Capital at end – Capital at the beginning = Net Profit or loss → P/L 107 IX. Government Accounting

108. 3. Financial Statements  Balance Sheet (B/S): Financial status at a certain time  B/S consists of fixed assets, variable assets (cash, bank deposits, goods), liabilities (checks payable, debts, advance receipts), and capital. 108 IX. Government Accounting

109.  Profit/Loss Statement (P/L) - A comprehensive business performance at a certain period - Shows detailed costs and profits  P/L consists of revenues (profits, non- business profits) and expenses (sales expenses, taxes, prime costs) 109 IX. Government Accounting

110. 4. Why Is Dual-Entry A/C Called for?  To improve the usefulness of financial Information, such as assets, liabilities  To enable local government to have a comprehensive look  To let local governments recognize their assets 110 IX. Government Accounting

111.  To set basis for performance measure by means of accrual basis accounting  To incorporate general, special a/c ’ s, and funds  To improve clarity, responsibility, and efficiency of financial management 111 IX. Government Accounting

112.  To be accord with IMF standard of GFS (Government Financial Statistics) - We ’ ve generated GFS since 1979 - IMF changed a/c standard from cash basis to accrual basis in 2001 → MUST change for int ’ l comparison of GFS 112 IX. Government Accounting

113. 5. A/C Reforms of other Countries  New Zealand (Big-bang type): Adopting accrual basis by all agencies in 1989-1990  England - New system by all agencies (2001) - All gov ’ t a/c ’ s are connected in 2006 113 IX. Government Accounting

114. 6. Road Map  1999. 12 - 2001. 3: - Sample cities selected - Preparation for a/c standards - Developing computer programs  20003.10 - 2004.12: expanding sample governments  2007. 1. 1 : All local governments 114 IX. Government Accounting

115. 7. Transactions 115 IX. Government Accounting DebitCredit Increase in assetDecrease in asset Decrease in liabilitiesIncrease in liabilities Decrease in net assetIncrease in net asset Expenses incurredRevenues obtained

116.  Exercises 1) goods ( ￦ 5,000) purchased by cash goods 5,000 // cash 5,000 2) a/c payable paid by issuing a check a/c payable // bank deposit 3) rent ( ￦ 500,000) paid by a check rent 500,000 // deposit 500,000 116 IX. Government Accounting

117.  Exercises 4) interest ( ￦ 900) received cash 900 // earned interest 900 5) paychecks for employees issued salary 5,000,000 // bank deposit 6) debt w/ interest ( ￦ 500) paid back debt 800,000 // cash 800,500 paid interest 500 117 IX. Government Accounting

118. 8. Financial Statements of Local Gov ’ t  Financial conditions report (B/S) 118 IX. Government Accounting 과 목 General Account Special Account Fund Account 자산 Ⅰ. 유동자산 Ⅱ. 유형자산 부채 Ⅰ. 유동부채 Ⅱ. 장기부채 순자산 순자산 = 자산 총계 - 부채 총계

119.  Operational Report - similar to P/L of Firms - no detailed report of cost - illustrate revenues and expenses in a systematic manner - operational performance is measured by revenues – expenses ( 운영차익 ) 119 IX. Government Accounting

120.  Additional Reports -cash-flow report ( 현금흐름보고서 ) -Budget closing report: To show the rates of budget execution -Change of Net Asset Report -( 순자산변동보고서 ) 120 IX. Government Accounting

121. 9. Tasks of the Future  Link A/C items to budget items  Recognition and assessment of Assets  Types of Financial Statements  Consolidation of central and local governments ’ financial reports along with all types of accounts 121 IX. Government Accounting

122. 122 10. Exercise (1): Local Government  Jan. 10 local tax revenue ( 지방세 수익 ) 10,000 was deposited in the bank  Jan. 20 purchased a table worth 5,000 with cash(duration 4 years, the remaining value 1,000, annual depreciation by a fixed cost)  Feb. 1. borrowed 8,000 at an annual int. rateof 12%, interest is paid on Jul. 31 and Jan 31  Apr. 6. purchased a fan of which the price is 5,000, paid 3,000 cash and the rest a/c payable ( 외상매입금과 미지급금의 구분 )  Jul. 1building insurance fee for one year 1,200 paid w/ cash  Jul. 31paid interest with cash

123. IX. Government Accounting  Sep. 10purchased materials for office use (1,000) by account payable ( 비품과 소모품 )  Nov. 20paid the above a/c payable with cash  Dec. 31uncollected tax revenue is 5,000, about 10% of it will be delinquent  Dec. 31the inventory for office supply is evaluated 400 at end of the fiscal year Let’s journalizedebitcredit  Jan. 1cash10,000 tax revenue10,000  Jan. 20furniture 5,000 cash 5,000 123

124. IX. Government Accounting  Feb. 1cash8,000 borrowing 8,000  Apr. 6furniture5,000 cash3,000 a/c payable2,000  Jul. 1advance fee ( 자산 )1,200 cash1,200  Jul. 31bank interest 480 cash 480  Sep. 10office supply 500 a/c payable 500  Nov. 20a/c payable1,000 cash1,000 124

125. IX. Government Accounting  ( 수정분개 at end of fiscal year)  Dec. 31depreciation(furniture) 1,000 accumulated depreciation 1,000  Dec. 31bank interest400 payment due ( 미지급이자 ) 400  Dec. 31insurance fee600 fees paid in advance600  Dec. 31taxes receivable5,000 tax revenue5,000  Dec. 31delinquent taxes 500 taxes receivable( 미수금 ) 500  Dec. 31office expenses 600 office supply600 125

126. X. Government Accounting 1/10 10,000 2/1 8,000 1/20 5,000 4/6 3,000 7/1 1,200 7/31 480 11/20 1,000 Balance 7,320 126 Accounts showing postings of journal entries involving all the budgetary accounts Cash account 다른 계정들은 생략 — 각자 연습해보시기 바람

127. X. Government Accounting Debitamountcreditamount 1. 유동자산 현금 및 현금성자산 선급보험료 미수금 ( 대손충당금 ) 저장품 2. 유형자산 비품 ( 감가상각누계액 ) 7,320 600 5,000 (500) 400 10,000 (1,000) 1. 유동부채 미지급이자 미지급금 단기차입금 부채총계 2. 순자산 일반순자산 400 2,000 8,000 10,400 11,420 자산 총계 21,820 부채와 순자산총계 21,820 127 재정상태보고서

128. X. Government Accounting 과목일반회계특별회계 1. 자체조달수익 지방세수익 2. 운영비 대손상각비 감가상각비 보험료 소모품비 3. 기타비용 이자비용 4. 운영차액 15,000 500 1,000 600 880 11,420 128 재정운영보고서

129. X. Government Accounting 10. Exercise(2): a Service Center  1/1received 1,000,000 grant from ward office  1/16 months rent 600,000 paid by cash  1/5received service fee 200,000 for an errand  1/10borrowed 500,000 cash from a bank  1/12performed an errand service to B firm, the fee 300,000 shall be received later  1/15deposited 300,000 to a bank, i =10%/yr  1/20received 300,000 for 1/12 transaction  1/31paid back 400,000 bank loan with interest 5,000  1/31paid employee salary 300,000  1/1 cash 1,000,000t/s revenue1,000,000 129

130. X. Government Accounting  1/1 rent 600,000cash600,000  1/5 cash 200,000fee revenue200,000  1/10 cash 500,000bank loan500,000 (short-term debt; borrowing)  1/12 a/c receivable300,000 fee revenue 300,000  1/15 long-term deposit 300,000 cash300,000  1/20 cash 300,000 a/c receivable 300,000  1/31 bank loan 400,000  interest 5,000cash 405,000  1/31 salary 300,000cash 300,000 130

131. X. Government Accounting  [Question] Accumulated depreciation 감가상각누계액은 도대체 무슨 계정입니까 ?  [Answer from Naver] 자산에서 차감하므로 부채입니다.  예제 : 00 구청은 사용중인 건물을 토지와 교환하면서 150 만원을 추가로 지급하였다. 건물의 장부가액은 300 만원 ( 원가 600 만, 감가상각누계액 300 만 ) 이며, 건물의 공정가치는 400 만원이다. [ 풀이 ] 토지 550 만건물 600 만 감가상각누계액 300 만유형자산처분이익 100 만 현금 및 현금성자산 150 만 토지의 가격 = 건물공정가치 + 추가 현금 131

132. X. Government Accounting  Exercise(3): A Law Firm  5/1established a law firm w/ 15,000 cash  5/3rent for the month of may 300 paid by cash  5/5purchased furniture 1,000 w/ 300 cash, the rest shall be paid later, the good’s endurance period is 20 months  5/6paid 10 Mth insurance fee 150 in advance  5/7purchased 10 month office supply 200 cash  5/8case A completed, 800 will receive later  5/15received 300 by cash for case A  5/18received 800 by cash for case B  5/20a co-investor takes out 500 cash for personal use  5/31office maintenance fee 410 paid by cash 132

133. X. Government Accounting  5/1 cash15,000capital15,000  5/3 rent 300cash 300  5/5 furniture 1,000cash 300 a/c payable 700  5/6 advance 150cash 150 insurance fee  5/7 office supply 200cash 200  5/8 fees receivable 800sales(fees) 800 ( 매출채권 ) ( 매출 )  5/15 cash 300fees receivable 300  5/18 cash 900sales(fees) 900  5/20 capital 500cash 500  5/31 maintenance 410cash 400 fee 133

134. X. Government Accounting debitpageAccount name credit balancetotal balance 14,340 500 200 150 1,000 300 410 16,200 800 200 150 1,000 500 300 410 1 2 3 4 5 6 7 8 9 10 Cash 매출채권 Office supply 선급보험료 Furniture a/c payable Capital Sales(fees) Rent Maintenance 1,860 300 700 15,000 1,700 700 14,500 1,700 16,90019,560 16,900 134 합계잔액시산표 (2010. 5. 1- 2010. 5. 31)

135. X. Government Accounting  수정분개와 원장정리 및 시산표 재작성 135 debitpagea/c title credit balancetotal balance 50 135 50 15 150 50 135 50 15 150 3 4 11 12 13 14 Office supply 선급보험료 Depreciation 감가상각누계액 Insurance fee Office use 50 16,95019,610 16,950 5/31 depreciation 50 accumulated Depreciation 50 5/31 insurance fee 15 fees paid in advance 15 5/31 office use 150 office supply 150 수정분개 결과 반영, 앞의 잔액시산표와 달라진 부분만 표기

136. X. Government Accounting Debitamountcreditamount 1. 유동자산 현금 및 현금성자산 선급보험료 미수금 ( 매출채권 ) 2. 유형자산 소모품 비품 ( 감가상각누계액 ) 14,340 135 500 50 1,000 (50) 1. 유동부채 미지급금 부채총계 2. 순자산 고정순자산 일반순자산 운영차액 순자산총계 700 14,500 775 15,275 자산 총계 15,975 부채와 순자산총계 15,975 136 재정상태보고서 (a law firm)—as of May 31, 2010

137. X. Government Accounting 과목일반회계특별회계기금 1. 자체조달수익 용역수익 2. 운영비 임차료 관리비 감가상각비 보험료 소모품비 3. 기타비용 이자비용 4. 운영차액 1,700 925 300 410 50 15 150 775 137 재정운영보고서 (2010. 5.1-5.31)

138. 138