ECN 3053 Government Budgeting Assoc. Prof. Yesim Kustepeli 1 FUNCTIONS OF THE BUDGET and BUDGET (THEORIES) FORMATS-I Classical Line Item Program Performance

ECN 3053 Government Budgeting Assoc. Prof. Yesim

Kustepeli 1

FUNCTIONS OF THE BUDGET and

BUDGET (THEORIES) FORMATS-I

Classical

Line Item

Program

Performance


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FUNCTIONS OF THE BUDGET

A. Classical Functions of the Budget

1. Fiscal and Economic Function: Budget establishes a balance between the government’s expenditures and revenues. This is called the fiscal function of the budget. Economic function of the budget refers to the choice among unlimited human needs under scarce resources.

2. Political Function: In democratic countries, the parliament has sovereignty on the execution by the help of budget. Legislative body audits the executive authority actions in preparing and approval of the budget. The members of the parliament are selected by the public and they are supposed to take actions with respect to the needs of the public in the preparation of the budget.


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3. Legal Function: Legislative body gives authority to executive body in making expenses and collecting revenues via law and codes. That’s why budget law has a obligatory property on the actions of the government officers and the parliament.

4. Controlling Function: Public sector controls itself in fiscal and economic aspects. Budget implements this function.

5. Auditing Function: Legislative organ audits the actions of executive body with regard to the budget, for example when the expenses done, how it is realized and what quantity of expenses are audited by legislative authorities.


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B. Contemporary Functions of the Budget

1. Stabilization (conjuncture) function: Economic stability = Price stability + full employment. Government provides stabilization according to the business cycles. Budget is a tool of recovery in the cyclical booms and recessions and maintaining price stability.

2. Allocation of resources function: Government tries to achieve the optimal use of scarce resources and effective functioning of the markets through the budget actions. To do this, public services (budget) must be realized effectively.


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3. Income distribution function: Government intervenes to the economy through the budget (by the help of government expenditures and revenues) for the purpose of fair income distribution. Government may subsidize the low level income people and may impose wealth tax for high level income people.

4. Planning and governing function : Government makes plans in order to achieve the functions above. Government uses budget as a tool for the planned tasks. Planning is a necessity to achieve the goals of the budget functions.


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BUDGET FORMATS AND THEORIES

Government activity fields expand rapidly, which means government size (expenditures) increasing so the government revenues must be harmonious with its expenditures.

The contemporary budgeting systems are developed in order to provide the effectiveness and the efficiency in the public governing. These budgeting systems are improved in order to use the budgeting as a public management tool. Here we will first analyze the classical budget theory and then we will focus on the contemporary budget theories.


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The development of new budget formats reflects a common and persistent attempt to discipline the forces of interest-group politics by systematic gathering and analysis of information. The goal of this disciplined analysis is to surface questions that normally do no get asked when interest groups lobby for allocation of money to support their favorite activities:

Are we spending the taxpayers' money efficiently? What are we accomplishing with the money we are spending? Should we be spending the taxpayers' money on more

important programs that affect the public interest?

Budget formats not only establish the rules by which the budgeting game is played (the decision rules), but they also create the standards by which success is measured (rules of evidence).

The history of public budgeting is a quarrel between two approaches: a political approach that emphasizes the importance of constituency interest groups and a planning and information-driven approach that emphasizes the importance of efficiency and effectiveness.


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A. Classical Budget Theory

The main idea of the classical budget theory is the balanced budget (expenditures and revenues must be equal).

Classical economists think that the actions of the government must be in the micro level and they are opposed to the government interventions to the economy. If budget deficit or budget surplus occurs, government is obligated to intervene the economy, and this situation breaks down the functioning of the invisible hand.

In the classical budget theory, there is no connection to the amount of the services, the budgeting takes care only the financial part. Government tries to match the purchasing expenditures of the inputs with their cost. That’s why it is also called as input budget.


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Classical budget is very detailed. That’s why it is not efficient.

There is only one program to implement a public service.

Classical budget theory gives importance to the institutions.

Expenditures and revenues must be equal and small in monetary terms.

In the classical budget system, first the amount of public expenditures are distributed to the public institutions, then the expenditures items are determined. This system is put into application for one year.


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B. Line Item Budgeting

Line item budgeting is technically known as object code or expenditure code budgeting.

The major categories of expenditure, such as personnel, materials and supplies, and capital outlay are assigned code numbers, with each of these major categories being broken down into as many subcodes as one wishes to create.

Line item budgeting enables one to prepare a budget for the upcoming year by simply adding an increment for inflationary increases to what you had last year.

There is no need to have clear program goals or any measures of efficiency and effectiveness to successfully carry out line item budgeting. It simply starts with an existing "base" budget and making marginal changes up or down each year based on some notion of "fair share".


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Origins and Purpose

Line item budgeting was first introduced as part of the early twentieth century reforms to reduce political corruption.

By creating detailed object codes for specific classes, public money could more easily be tracked from the point of appropriation by a legislative body to the point of expenditure by an administrative agency.

Because of its high value in promoting financial accountability, line item budgeting has become the most durable and commonly used budget format throughout the public sector.

Line item budgeting is almost always superimposed or used alongside all other budgeting formats.


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Advantages/Disadvantages

It can be assumed that what has been done will likely continue being done next year with some exceptions on the margin.

This reduces complexity and allows for the budget to be assembled without endless hours of analysis, pouring over reams of spreadsheet information, planning, and spending hours in meetings with others in re-examining everything that is currently being done. Line item budgeting reduces conflict.

With line item budgeting, when there are more requests than resources available, the budget can be brought into balance by cutting TLs, usually by relying on formulas like "across the board" cuts or some similar notion of "fair share".


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Because line item budgeting can proceed without knowing the purposes or accomplishments of expenditures, questions regarding efficiency, effectiveness and future priorities aren't systematically addressed.

It is common practice under line item budgeting formats to incorporate a wide variety of quantitative information, such as workload measures, activity indicators, etc.

But the inclusion of such information is not necessarily systematic with line item budgeting and usually begs the question of the larger purposes these measures are intended to serve.


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B. Program based budget theory (PPBS)

While program budgeting has been a common practice for more than 50 years, it came into popularity as a distinct budgeting innovation in the 1960’s under the name of Program, Planning and Budgeting Systems (PPBS).

In Turkey, this system was used since 1973 because of the deficiencies of the classical budget system. Also the change and development of economic and fiscal policies led to the application of the program based budget system. But in 2006 with the code no 5018, the use of this system is ended.

In the program based budget, the system is developed for the decision about allocation of the public resources optimally.


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Origins and Purpose

Program budgets organize the traditional categories of expenditure used in line item budgets into larger units of activities performed by an agency/program.

The purpose is to highlight the units of activity that the object codes support. Plans and planning are the essence of program budgeting.

Budgets may carry a program budget label, but unless there is a concrete plan that connects program expenditures to a set of objectives, which in turn are connected to goals, a true program budget does not exist.


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The development of goals and objectives for an organization/program unit is fundamental to management planning.

Goals and objectives, when tied directly to budgeted resources, represent an overall plan for operating agencies.

Once a set of long range goals or general directions has been established, a series of directly related, measurable short range objectives, can be developed.

The short-range objectives become the projected or planned achievements for an agency/program during a particular time period. The amount of resources made available and the ability of management to achieve objectives can determine the level of actual achievements.

As dynamic planning tools, objectives set the framework for the services that organizations provide.


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Goals and objectives need to be evaluated periodically to ensure that they properly reflect the planned actions of an organization as well as the changing conditions in which the organization is functioning.

There are both external and internal advantages to having clear goals and objectives that are tied to the budget process.

Externally, a program budget provides important management information to the council/board/legislature.

Information on the objectives of departments and the degree to which the objectives are achieved can reduce the element of risk-taking in council/ board/legislative decisions and is important in making policy and resource decisions.


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The program can provide citizens with information on levels of services provided by agencies and the costs of those services. One of the purposes of both program and performance budgeting is to enable citizens to have easier access to usable information.

There can be clear disadvantages of relying mainly on program-based budgeting information.

The lack of detailed line-item historical information can obscure frequent subprogram changes and information on the efficiency of a program's operation. This is especially the case in larger units of government, where the definition of "program" may be so broad that it covers most of a unit's activities.

Changes within these units may be significant over time, but never show up in the budget process for much centralized review because the name of the program and total amount being spent from year to year hasn't appeared to change very much.


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Example of Program Budgeting: Community Corrections

Mission: To provide safe and productive incarceration for citizens who have been sentenced to prison or released on parole.

Goal #1: To rehabilitate clients on parole and probation so they can return as productive members of society.

1.Objective: To increase FYII employment references of clients by 10% more than FYI with no budget increase over what was allocated for these in FYI.

2.Objective: To double total mental health consultations experienced by clients in FY II compared to FY I at a cost of 1.0 FTE Mental Health Nurse.

3.Objective: To limit FY II parole and probation violations to 15% of corrections clientele by introducing a bracelet monitoring program at a cost that does not exceed the total budget allocation expended in FY I for parole and probation monitoring.

Goal #2: To provide a safe incarceration environment for inmates.

1.Objective: To reduce the number of violent incidents by inmates by 10% in FY II at a cost increase that is no more than 5% more than FY I.

2.Objective: To reduce the possession of illicit drugs by inmates by 15% in FY II at a cost increase that is no more than 5% more than FY I.


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KEY ELEMENTS OF PROGRAM BUDGETING Program budgeting consists of the following five essential steps: mission

statement, goals, objectives, activities undertaken to achieve the objectives, and a summary integration of activities into a program.

1.Mission-a statement of general purpose for an organization.

2.Goal - a statement of purpose directed toward an identified community need. A goal statement can be either city/county/state-wide in scope or department specific.

3.Objective - a desired result in which the achievement is measurable within a given time frame. An objective can be either city/county/state/county wide in scope or department specific.

4.Activity - a specific and distinguished unit of work performed by an organization to accomplish a specific objective.

5.Program - related activities and projects which seek to accomplish a specific objective. A program can exist independently at both the city/county/statewide and department specific levels.


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Formulating Goals and Objectives

There are three basic steps in developing a department’s objective hierarchy:

1.Formulating department goals.

2.Formulating department objectives.

3.Identifying and selecting performance measures. This is an umbrella term that includes workload measures, efficiency measures as well as effectiveness measures.


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1.Formulating Goals

a) A goal: is an important value to be sought. should be related to an important community need. is timeless in terms of when it will be accomplished. should be placed in a hierarchy so interrelationships can be

determined.

b) Examples of Goals : To operate and maintain treatment sewage in a dependable, safe,

and efficient fashion so that an effluent is discharged which meets standards, protects the environment, and safeguards the public health. (Wastewater Treatment)

To manage the traffic system in order to reduce accidents, congestion and negative environmental impacts. (Traffic Engineering)

To provide timely and quality legal services at a reasonable cost to agencies (Attorney General/County Attorney)


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c) Suggestions for Establishing the Goals for a work unit

Review existing budget requests. Interview governing board members, program administrators,

managers and supervisors. Review legislative acts that authorize the program. Review legislative budget hearings. Review grant applications which fund a program. Review ‘’goal setting’’ efforts by other comparable departments. Review statements of responsibilities prepared for or by

organizational units. Review complaints and concerns of residents in the community Review complaints and concerns of clients of the program. Review the operating and service characteristics of the agency . Review the results of previous program evaluations.


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d) Suggestions for Minimizing Problems

Include members of the staff in the process. Interview as many of staff as possible, for their ideas on what the goals of the organization are or should be.

Identify the major programs of service that the organization provides to the community or to other agencies.

Be aware of the need to avoid duplication of goals among programs/divisions.

Be sure the goal statements are broad enough to cover all of activities and that they say something about where you want your organization (or some program or service) to be in the future.

Be sure the goal statements are timeless so that future measurement is possible.


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2.Formulating Objectives

a) What is an Objective? –a desired result in which the achievement is measurable within a given time frame.

b) Examples and Characteristics of Objectives

AN OBJECTIVE MUST BE STATED IN TERMS OF A NEEDED RESULT AND NOT PROCESSES OR ACTIVITIES

Should be Results Oriented 1.To reduce the accident rate at 100% of the locations at which

traffic signals are installed, modified, or remodeled, to a rate no greater than the current average rate for the signal system.

2.To reduce by X% the level of congestion at Y% of affected locations by completing and implementing traffic investigation studies.

Should not be Process Oriented1. Install x traffic signals2. Complete and implement traffic studies


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AN OBJECTIVE SHOULD SPECIFY THE COST PARAMETERS FOR ACHIEVING THE OBJECTIVE

Specifies Cost Parameters 1.To reduce by X% the level of congestion at Y% of affected locations

by completing and implementing traffic investigation studies, at a cost no greater than 110% of what was spent last year

2.To resolve X% of the citizen and public agency requests for controlwithin two weeks of receipt at a cost no greater than what was spent on such activities in last year

3.To ensure effective enforcement by increasing the number of code violations which are corrected from X% to Y% by FY II, at cost no greater than 105% of what was spent last year

Does Not Specify Cost Parameters1. Complete and implement traffic studies2. To correct all code violation by FY II


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AN OBJECTIVE MUST BE SPECIFIC AND UNDERSTANDABLE SO PROGRAM ADMINISTARTORS RECOGNIZE WHEN AN OBJECTIVE HAS BEEN MET

Should be Specific To increase available on street parking space by X% in walking

districts, Y% in scooter districts and Z% in outlying districts, through effective enforcement of parking regulations in FY II compared to FY I

To resolve X% of the citizen and public agency and public agency receipt requests for traffic control within two weeks of requests for traffic control

To increase the use of the auditorium as a visual arts facility by increasing the percentage of time available for temporary visual arts displays by X% by FY II

1. Should Not be General 2. Increase parking space3. Resolve citizen4. Increase the use of the auditorium


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AN OBJECTIVE MUST BE MEASURABLE AND FEASIBLE WITHIN A SPECIFIC TIME FRAME

Should be Measurable To increase available on street parking space by X% in walking

districts, Y% in scooter districts and Z% in outlying districts, through effective enforcement of parking regulation in FY II compared to FY I

To eliminate X% of grass and weed violations at least once within the 120-day period between June 1 and October 31 in those places identified as problem areas

1. Should be Feasible 2. To resolve X% of citizen and public agency requests for parking control

investigations within two weeks of receipt3. To ensure effective enforcement by increasing the number of code

variations which are corrected from X% to Y% by FY II Not Measurable1. Improve business in the down town area2. Improve environment of county3. Not Feasible4. Resolve all citizen and public agency requests for parking 5. To correct all code violations by FY II


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Revisions The processed formulating goals, objectives and performance

measures seems repetitive and appears to be circular. In developing performance measures, it may become apparent that the objective needs reworking. it may become clear that the goal statements have been too narrowly defined. Revision is part of the creative processes and represents a positive clarification and refinement of the work.

revisions may become necessary after managers within the organization have worked with the established objectives and performance measures. The data for tracking performance may not be available as had originally been thought. Objectives, which had appeared feasible, may not prove to be so. There may be changes within the organization itself, which necessitate changes in the objective hierarchy.

Objectives, and particularly performance targets, are not static. Performance measures, which do not adequately measure, should be changed and refined to a point of general managerial acceptance.


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C. Performance based budget theory

One of the purposes of this system is to measure the efficiency of the public institutions which produces goods and services. The relation between the cost of production and the quantity of production is important in the performance based budget system.

Performance based budget system is also called functional budget, operational budget or action budget. Services must be measurable and countable.

The target is to attain the maximum level of services with the minimum level of inputs.

According to the code no 5018, Public Fiscal Governing and Control, from 2006 the system of performance based budget is began to be used in Turkey.


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PURPOSE AND HISTORY OF PERFORMANCE BUDGETING

Performance Budgeting is a term that applies, broadly to any number of budgeting formats that attempt to incorporate the measurement of results as an important consideration in the allocation of budget resources.

If outcomes are measured, but are not taken into consideration in the allocation of public resources, you may have some kind of performance system, but you do not yet have performance budgeting.

performance information provides an opportunity for managers to determine whether an organization is achieving its general and specific goals. As achievement is measured, an information base on which to make program adjustments is provided.

Disentangling Political Influence from Program Assessment Rating Tool (PART) Scores.

Gilmour J B , Lewis D E J Public Adm Res Theory 2006;16:169-186

© The Author 2005. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: [email protected].


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One of the primary purposes of performance budgeting is to temper the influence of political pressures on the resource allocation process with a strong dose of rational assessment of what is being purchased with tax money.

Performance measurements can be used to evaluate specific program or project proposals by comparing planned to actual achievements. Programs can be evaluated in terms of improved performance while at the same time considering whether changes are cost effective.

Performance measurements can be used to forecast resource requirements.

Performance information provides an important rationale to justify budgetary resource requests. Performance-based rationales supplement, and sometimes counter, the arguments made by political interest groups in favor of and in opposition to public programs and services.


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Community Corrections ExampleGoal: To rehabilitate clients on parole and probation so they can return as productive

members of society.

1. Objective: To increase FY II employment references of clients by 10% over FY II with no budget increase over what was allocated for these activities in FY I.

Performance Measures: 1) Number of FY II employment references are at least 10% more than FY I 2) at a total cost that is equal to or less than what was allocated in FY I.

2.Objective: To double total mental health consultations experienced by clients in FY II compared to FY I at a cost of 1.0 FTE Mental Health Nurse.

Performance Measures: 1) Total mental health consultations in FY II is a double than total mental health

consultations in FY I and 3) costs no more than $33.203.

3.Objective: To limit FY II parole and probation violations to 15% of corrections clientele by introducing a bracelet monitoring program at a cost that does not exceed the total budget allocation expended in FY I for parole and probation monitoring.

Performance Measures: 1) FY II parole and probation violations is 15% or less than the FY I parole and probation

violations and 3) the total costs do not exceed what was allocated in FY I for the bracelet program.


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Productivity and Performance Measurement

While the concepts of productivity and performance measurement are not synonymous, they are very closely linked. Without a system for measuring the changes in actual performance, it is very difficult to determine if any strides are being made toward increasing productivity.

Government productivity has two dimensions: effectiveness and efficiency.

Effectiveness concerns the extent to which governments achieve program objectives and is a qualitative or quantitative aspect of output.

Efficiency concerns the ratio of a unit of goods and/or services produced in relationship to the amount of resources required to produce it.

Higher productivity means:1.Keeping expenditures constant and improving effectiveness and/or

efficiency.2.Keeping effectiveness and/or efficiency constant and reducing

expenditures.3.Increasing expenditures but improving effectiveness and/or efficiency at a

higher proportional rate


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Performance measurement involves monitoring the varying degrees of effectiveness and efficiency in performance that results from the production process.

Performance measurement completes the cycle of management planning, i.e.,

1. development of goals and objectives (for resource allocation), 2. process implementation (the comparison of inputs to outputs in

order to determine productivity), 3. performance measurement (efficiency and effectiveness

determination). 4. performance budgeting completes the planning cycle that is an

integral part of PPBS.

Performance measurement takes considerable time and energy to execute over time, especially if reliability is an important concern.

the development of performance measures may be threatening to program managers and staff, especially if the performance measures will be used to justify program and staff cuts.


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The three types of performance measurements are effectiveness measures, efficiency measures, and work load measures.

1.MEASURES OF EFFECTIVENESS

Effectiveness is a result-oriented concept. It focuses on how well the goal or objective is accomplished independent of cost.

Examples:• Percentage of improved neighborhood locations in which

through traffic is no greater than 1,000 vehicles per day one year after improvement.

• The average number of highway deaths from drunken driving in FY II compared to the average rates in FY I.


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2.MEASURES OF EFFICIENCY

Efficiency is a process-oriented concept. It focuses on how well resources are utilized without particular regard for the amount of service output produced in relationship to the amount of resources required.

For example:

1. Cost per participant in the tuition reimbursement program.

2. Cost per million gallons of wastewater processed.

3. Cost per installation of traffic control devices.


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3. MEASURES OF WORKLOAD

These measure the amount of work done. For example:1. number of traffic lights installed.2. Number of public requests for parking enforcement

resolved.

Workload measures are commonly used by supervisors and serve various operational purposes but indicate little about the quality of the work. However, they can be utilized to develop effectiveness measures by conversion to a rate or normalized basis, such as:

Number of public requests resolved within established response time compared to the number received.

Workload measures can also can be utilized to develop efficiency measures by conversion to a cost or input:

Cost per traffic light installed.


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GUIDELINES FOR DEVELOPING PERFORMANCE MEASURES

1.Make certain there is a strong causal connection between the performance measure and the objective.

2. The performance measure should not overstate or understate how much of the objective can be achieved by the chosen performance measure.

3. How many multiple performance measures do you need in order accurately to measure the achievement of the objective?

4.Is the measure valid? Does the indicator measure the effectiveness or efficiency of the objective?

5.Can the measure be quantified?

6. Is the data required to develop the measure available?


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7.Is the measure as simple as you can make it?

8.Is the measure acceptable to those who are likely to care about its use?

9.Does the measure give you timely information? Will the measure reveal problems soon enough to permit corrective action before significant loss of service occurs?

10.Can the information be collected and sustained over a broad enough sample and period of time to provide you with a reliable measure? How dependable is the data collection system?

11.Can the information be collected at a reasonable cost?

12.Are you spending so much time on the development of performance measures that service delivery is suffering?


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Advantages of Performance Budgeting By budgeting to a plan, it enables an organization to

purposefully allocate its scarce resources.

Performance budgeting provides visible and concrete expression to the citizens how their tax money are being spent.

Disadvantages of Performance Budgeting It limits their flexibility to shift money from one program to

another. Over time programs build up strong constituency support, which means that any program cuts may attract strong external opposition.

True performance budgeting is quite time consuming.


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The Differences Between Classical Budget And PPBS

In PPBS the payment is made to the service. In classical budget, payment is made to the institution.

PPBS is a long term budget and related to long term plans. Classical budget is annual.

PPBS gives importance to the outputs of the services. Classical budget gives priority to inputs.

The effectiveness of the public services is important in PPBS but in classical budget, the important thing is that the expenditures shouldn’t exceed the predetermined limitations.

PPBS makes cost-benefit analysis and makes choices among different alternatives. There is no alternative project in the classical budget.


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The Differences Between PPBS and Performance Budget

In the performance based budget, the way of doing services is important.

In PPBS all actions are grouped and the most beneficial activity to the public is made.

In the performance based budget, the statistics about previous actions are gathered.

In PPBS future plans are made.

In the performance based budget, the decisions are taken by all the hierarchically low level administrative units.

In PPBS the decision of top level governors is important.


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PPBS differs from the traditional budgeting process in two significant ways.

Emphasized objectives—PPBS focuses less on the existing base and annual incremental improvements to it, and more on the objectives and long-term alternative means for achieving them.

Linked planning and budgeting— PPBS installs a process that essentially defines a procedure for distributing available resources equitably among the many competing or possible programs.

Documents

ECN 3053 Government Budgeting Assoc. Prof. Yesim Kustepeli 1 FUNCTIONS OF THE BUDGET and BUDGET (THEORIES) FORMATS-I Classical Line Item Program Performance