Public Budgeting: Definition

Public Budgeting: Definition Decision about how much of society’s resources we want to take from the private sector to use for problems of broader public interest

Budget Formats • line item -- emphasize control • pushes policy into background • minimizes conflict • program budget -- emphasize policy • what should government do • requires more analysis • performance budget -- emphasize management • productivity of specific tasks, not overall goals • administrative outcomes

Federal v State/Local Budgeting • Federal: • economic and political perspectives • expenditure driven • entitlements • defense • State/Local: • organizational and administrative perspectives • revenue driven • more unified executive control • more issues concerning citizen input

Budget Theory • Theory: a framework for accumulating knowledge • Normative, descriptive, positive • normative -- what should be • descriptive -- what is • positive -- what will be (predictions) • V. O. Key 1940 question in search of normative theory: “On what basis should it be decided to allocate X dollars to activity A instead of B”

Budget Theory -- continued • Aaron Wildavsky • normative theory impossible -- utopian • descriptive theory: incrementalism • how decisions are made (process or outcome?) • how strategies selected • main theory today but partially discredited

Examples of Budget Theory Questions • how much can revenue estimates be politicized before other means are found? • how much of the political can be treated technically without loss of political accountability? • how does the political or technical become more dominant at one stage or another or in various circumstances? • when does executive v legislative have upper hand? • does citizen participation in resource allocation increase support for government?

Traditional v. Contemporary Budgeting Contemporary • Focus on policy/performance • decentralized • public sharing of information • program format • priorities • maximum flexibility for managers • accountability for outcomes Traditional • focus on control • centralized • private exercise of admin power • line item format • formulas • minimal flexibility for managers • accountability for inputs

Key Features of State Process • Greater executive control than in Federal process • Budget balance requirement • Focus on agency programs and policy • One committee, one bill, one process in each house • Senate Budget and Fiscal Review • Assembly Budget • Appropriations committees no budget bill role • Trailer Bills • Governor’s Budget sets agenda for budget hearings • LAO gives item by item analysis (not done by CBO)

State Budget Process: Actors and Timeline • Governor • Department of Finance (equivalent of federal OMB) • Executive agencies • Senate and Assembly budget committees/subcomm. • Legislative Analyst’s Office (equivalent of federal CBO) • Timeline (about 12 months) • Initial preparation: July-August • Agency budget development (BCPs): Sept - Dec • Governor’s Budget Presented: January 10 • LAO Analysis published: mid-February • Budget subcommittee hearings: February - May • May Revise • Conference Committee/”Big Five”: June • Constitutional Deadline for Legislature: June 15 • Start of fiscal year: July 1

State Legislature -- Budget Subcommittees Senate • Education • Resources • Health • General Government • Energy Assembly • Education • Resources • Health and Human Services • State Administration • Information Technology / Transportation

The Kingdon Model of Policy-making • Purpose: • how do issues rise and fall on the agenda? • how do agendas translate into policy? • how can non-incremental change be explained? • Key feature: distinction between agendas (problems) and alternatives (policies) • different processes • different participants and roles • Major challenge to linear models of policy making!

The Kingdon Model: Components • Three streams or processes • problems (agendas) • policies (alternatives, solutions) • politics • Two types of participants • visible cluster (dominate agenda and political streams) • hidden cluster (dominate policy stream) • Window of Opportunity • predictable, e.g. elections, budget process • unpredictable, e.g. natural disaster

Kingdon Model: Policy Change • Three streams must converge • Being on agenda is necessary but not sufficient • need solutions and ripe political conditions • Role of the policy specialists • form communities and work on alternatives • look for opportunities to match to problems • policy entrerpreneurs • bring the solutions together with problems • importance of framing

Kingdon Model Applied to Budgeting: • key concept: understanding budget problems as policy problems • not a question of economic efficiency but values • allows application of Kingdon • how do budget issues get on the agenda? • how does budget policy get made? • State Budget Offices play a key role • gatekeepers • how do they make decisions? (micro model)

Different State Budget Office Orientations • Control orientation • Compile agency requests • Don’t question policy orientation • Budget execution emphasis • Far removed from Governor’s policy staff • Policy orientation • Analyze agency proposals against Governor’s policy • Develop alternatives • Proactive on major policy/budget issues • Focus on agency mission and effectiveness • Closer involvement with Governor’s policy staff

Policy-oriented Budget Offices and Policy Change • Budget analysts are like Kingdon’s policy entrepreneurs • nexus of macro and micro budgeting • manage top down and bottom up information flow • bring together problems, solutions, politics • part of “hidden” cluster of actors (institutional memory) • two major deadlines provide windows • Skills used • efficiency analysis: technical/economic • effectiveness analysis: political, social, legal

Local Budgeting (v State) • More constrained—less discretionary • Less political executive influence • More managerial/staff-driven • city manager drives budget • mayor policy positions not very public • More expectation for direct citizen access and participation • More or less ideological?

Is/Should/Can the Budget Process be Rational? • What is rationality? • The economics/politics debate • do concepts of economic efficiency and rationality apply to politics? • do they apply to budgeting?

Critique of the Market Model of Politics

Critique of Rational Model of Policy Analysis Successive Limited Comparisons: • Objectives and choices are linked 2. Ends and means not distinct 3. Good policy is one on which agreement can be reached • Analysis is always limited 5. Information is ambiguous; subject to interpretation/framing 6. Outcomes rationalized afterward Rational-Comprehensive Method: 1. Clarify objective apart from policy choices 2. Ends-means analysis 3. Good policy is the best means to the ends 4. Analysis is comprehensive --accounts for all relevant impact • Information is conclusive and authoritative • Outcomes projected with certainty

Rationality in Budgeting: Assumptions of Rational Process • economic, not political • based on analysis • comprehensive review of options • orderly decision rules • allocated funds where they are most needed by objective measures • promote reallocation from lower to higher priorities

Critiques of rational budgeting • Practical critiques: • comprehensive analysis is impossible • asks analysts to do what they cannot • Normative critiques • budgeting is about choosing among values • political process does a better job of solving value problems • political strength of program = deserving of $$ support • incrementalism/bargaining is the most fair • process reflects political system – change system not process • analysis must serve, not replace, politics

Rational Budget Reforms Proposed to replace line-item budgeting – why? • Performance budgeting • links inputs with outputs • Planned Programming Budgeting Systems • link program goals/strategic plans with program costs • Management by Objectives • links manager-driven objectives with budgets • Zero-Based Budgeting • justify all costs above specified level --------------------------------------------------- • Do the outcomes justify the efforts?

The Possibility of Rationality - 1 • rationality fixes have failed • technique cannot substitute for political judgment • role of Congress must be honored • implementation problems • process fixes have failed • procedures cannot substitute for political judgment • always a circumvention strategy • procedures cannot force unwanted decisions • creativity and game playing • Other foils: • top-down, centralized process open to interest groups/closed to citizens • anti-tax sentiment • divided party government

The Possibility of Rationality - 2 • Solution: political leadership • confront controversy • promote vision and values • promote citizenship and sense of fairness • define the public interest • other characteristics of effective political leadership? • Would a greater sense of fairness of tax and spending policies help? • disconnection between who pays and who benefits • should there be a closer connection?

Deficit Politics—State level • Does the state face the same pressures toward deficits? • Do process or rationality “fixes” have a better chance of success at the state level? • Current deficit • what’s the constituency for budget balance? • what strategies (gimmicks) are being used? • real alternatives – who is proposing them? • Proposed reforms • ZBB • Commission on Government Waste and Inefficiency

Role of Budget Analysis • Are politics and analysis antithetical? • How can analysis serve, rather than replace politics? • What should analysis try to accomplish? • If analysis is rejected by decision makers, is it useless? • What should budget analysts try to accomplish? • Would unlimited analysis achieve rationality?

Balancing Budgets -- State and Local • Balanced budget requirement • More intense efforts to hide deficits • Fewer macroeconomic issues to consider • Greater influence of environment on balance/deficit • Deficits don’t (usually) accumulate--problems more tractable • Temporary, not structural deficits -- more fixes available

Three Characteristics of Revenue Politics The problem: getting support for increasing revenues is much harder than getting support for spending proposals • Public officials must go about getting support very carefully • “anti-revenue” politics: politics of protection from taxation, tax reductions, exceptions • Attention to protecting individuals, interest groups, regions from taxation leaders to piecemeal, complicated, inconsistent, inequitable structures => pressures for reform

Strategies for Getting Support for Tax Increases: • Confront issues of fairness, public good, options • Accountability for use of funds • Timing – e.g. crisis • Earmark revenues • example: California Lottery • Temporary increases • Tax politically weak/outsiders • Gimmicks (smoke and mirrors)

Principles of sound tax policy: • Equity • similar situations treated similarly • differential burdens fair • Administrative feasibility • efficient, uniform • high degree of voluntary compliance • Appropriateness • sufficient; stable; predictable • Political feasibility (acceptance) • Accountability/Visibility • payer understands charges

Income Tax Issues • Logic: capacity to pay as measured by earnings • Importance: over half of State General Fund • Policy issues • tax rates v tax base (deductions, exclusions, credits) • simplification (relates to acceptance) • reliance on volatile source

Sales Tax Issues Logic: capacity to pay as measured by consumer spending Importance: provides about 1/3 of state and city revenues Policy issues: • Role in local finance (regional growth) • Exemptions of household purchases • Tax expenditure programs • Include services in addition to goods –erosion of base • Internet sales • fairness and revenue issues

Property Tax Issues • Logic: capacity to pay as measured by property holding • Importance: about 30% of local revenues Policy Issues • public opposition – ideological reasons • equity • allocations by state among local governments • assessment methodology (subjectivity leads to public opposition) • importance to school finance (other states)

Tax Expenditures Purposes • Promote certain economic behavior • e.g. research and development • Prevent harmful activity • e.g. tax benefits for alternative fuel • Tax relief for certain segments of society • e.g. low-income tax credits • Facilitate tax administration • e.g.conform to Fed tax Criteria • Efficient accomplishment of policy goal • Subject to review and periodic reporting

Tax Expenditures versus Budgeted Expenditures • Similarities to budgeted expenditures • aimed at accomplishing public policy objectives • cost to the taxpayer • subject to interest group pressure • pork for constituents • Differences from budgeted expenditures • not directly measurable--must estimate (indirect effects) • subject to far less analysis • less visible; beneficiaries harder to discern • more resistant to cuts -- become entitlements

Counties before 1978 • Board of Supervisors used to set a countywide property tax rate to fund countywide services • Counties had a greater share of the costs of human services programs • VLF was a much less significant revenue source

Pre Prop 13 Relationship of Taxes & Spending • Board of Supervisors had discretion over property tax rate & property tax revenue • There was a political balance between taxing and spending. • An elected official could gain political credit for keeping tax rates down

Prop 13 & Aftermath • Property tax rate reduce to 1% • Base growth capped at 2% • System forced to use growth to maintain base spending • Subsequent Ballot Initiatives: • Shifted of property taxes from schools to local government • Had the State of California assume greater share of human services

The Fix Unravels1991-1993 • The state’s support of local government was withdrawn in the early 1990s • Realignment -- share of sales tax replace shares of support for human service programs

County Budget Priorities • Funding mandates • County shares of state & federal programs • Honoring contracts • County workforce • Debt • Political priorities • Some are more equal than others

Balancing the General Fund -- Theory • Financing • Fund Balance • Revenues • Reserve releases • Requirement • Appropriations • Reserve contributions

Balancing the General Fund -- Reality • Net cost of programs is determined & compared to general purpose financing • Net cost is equal to program expenditures less program revenues • General purpose financing is not linked to specific programs or groups of programs • No link between program net cost & availability of general purpose financing

Strategies for Developing Budget Justification • baseline cost/workload data (which base year to choose?) • justify changes from base (e.g. quantify workload increase) • comparisons (relevant) • formulas and standards (appropriate and inappropriate uses) • “fair share” • research on cause and effect • best practices • pilot (where research may be lacking or inconclusive) • fit under budget office guidelines, strategic plan, etc. • propose accountability measures • check to avoid “the big mistake”

Characteristics of Good Budget Request • Frames request in terms of program priorities/strategic plan • Provides baseline data for a few years, for context • Clearly lays out different parts of request • Deals with each part in turn (and they add up!) • Provides quantitative justification for dollar amounts • Makes logical arguments • Reflects research – not the easy way out • Doesn’t try to fool the analyst • Honest about current resource availability • Addresses issues of priority within the department • Acknowledges recent history of budgeting in the unit • Addresses one-time v on-going needs openly • Includes objectives, expected results, and performance measures

Public Budgeting: Definition