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CHAPTER
13
Public Financial
Management
I. LEARNING OBJECTIVES
After reading Chapter 13 in the textbook, the student should be able to:
1. Understand concepts and terminology used in public budgeting
pp. 507–515
2. Assess how budget theory affects budget systems and
pp. 515–526
3. Explain the political and economic concepts and criteria that
pp. 527–534
4. Understand concepts and terminology used by governments
in acquiring debt, making choices about investment financing,
and balancing budgets.
pp. 535–545
II. SUGGESTED LECTURE
The public budget for any jurisdiction—if prepared properly—is a jurisdiction’s
most important reference document. Budgets record policy decision outcomes, cite
A. Public Financial Principles
No public policy or function can survive unless it is associated with a flow of funds
that make it possible. Public financial management rests upon the system of designs
and reforms adopted over many years. Public financial management is a dynamic
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system with which citizens interact every day. At the heart of the design of the
American system of public financial management are six principles:
1. Democratic consent: Taxation and spending should not be done without
consent of the governed.
2. Equity: Governments should be equitable in raising and spending capital.
B. Balanced Budgets
The balanced budget, where receipts are equal to or greater than the government
outlays, is the sign of a financially healthy government. There are also advantages,
however, to “unbalanced” budgets where extra spending can stimulate a slow econ-
C. The Budget Theory and Practice
A public budget has four critical dimensions. First, it is a political instrument that
allocates scarce public resources. Second, it is a managerial and administrative tool
D. Historical Highlights of Budgetary Reform
The Taft Commission (1912) recommended a national budgeting system. William
Willoughby wrote The Movement Towards Budgetary Reform in the States (1918),
which suggested additional reforms on the state and local levels. The General
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II. Suggested Lecture
E. Objectives of Budgeting
Budgeting has four objectives: allocation, distribution, stabilization, and growth.
Within these objectives, two types of budgets exist: operating and capital.
F. Waves of Innovation
The structure and format of budgets have been subject to waves of innovation
which have led to the evolution of different types of budgeting. These include:
1. Executive Budgeting: submitted by the chief executive to the legislature for
action.
2. Line-Item Budgeting: classification of accounts according to detailed objects
of expenditure.
3. Performance Budgeting: performance requirements to be stated alongside line
G. Financing Public Expenditure
Governments may raise monies in the following ways:
1. Imposing a direct tax paid by the taxpayer to the government.
2. Imposing an indirect tax paid to a third party who then pays the government.
3. Imposing user charges for government customers.
H. The Problem of Debt
The national debt is the total outstanding debt of the national government. In recent
times, the growing debt of the United States is a major concern, both nationally
and internationally as the US economy has global effects. The level of debt must be
viewed in both historical and comparative perspectives. The historical perspective
looks at the particular debt position today compared with its long-term trend. Is
the level of debt today in accord with a normal position or is it extraordinary? The
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I. Financial Management in Local Government
There are 80,000 local governments, school districts, and other small bodies in the
US. The small units have very simple budgets, while the larger municipalities may
J. Economic Policy
Economic policy is the process by which a nation manages its trade, business, and
finances. It traditionally consists of three dimensions: fiscal policy, monetary policy,
III. ASSESSMENTS
Multiple-Choice Questions
1. Which of the following are one of the principles of the American system of
public financial management?
a. Democratic consent, equity, and transparency
b. Laissez faire capitalism and market control
c. Prudence, probity, and accountability
d. a. and c.
p. 514, d
2. Deficit financing refers to:
a. loans made by the federal government to subnational governments.
3. A capital budget:
a. covers long-term projects, such as bridges.
b. covers short-term immediate government needs.
c. is used by local governments to build interstate freeways.
d. none of the above.
p. 520, a
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III. Assessments
4. The individual who showed that government spending, as a macroeconomic
policy, is critical for stimulating the economy was:
5. Which of the following are the timed steps in the budget cycle?
a. Preparation and approval
b. Reporting and writing
c. Execution and audit
d. a. and c.
p. 520–521, d
6. The government task force in 1912 that recommended the creation of a
national budgeting system was the:
7. “Program Budgeting,” first proposed in the 1950s by David Novick of the
RAND Corporation, is a form of budgeting that does all of the following,
except:
a. permitting global understanding of expenditures, consolidated into
programs, focused on effectiveness.
b. consolidating spending into “programs”.
c. ranking programs by order of importance, and facing the possibility of the
least important ones being discontinued.
d. focusing on effectiveness.
p. 522–523, c
8. Management consultant Peter Phyrr first developed the theory of, for Texas
Instruments.
9. Legislation that provides budget authority for specific ongoing activities
when the regular fiscal-year appropriation for such activities has not been
enacted by the beginning of the fiscal year is known as a(n):
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10. Aaron M. Wildavsky:
a. criticized PPBS as unworkable.
11. Which definition best describes the process of zero-based budgeting (ZBB)?
12. Municipal bonds are:
a. debt instruments of state governments.
b. exempt from federal taxes.
c. certificates of loans, or promises from a a borrower to a lender to repay
principal and interest accrued.
d. all of the above.
p. 537, d
Chapter 13 Student Self Assessment Questions
Q1 Which of the following is an accurate definition of the term fiscal year?
Q2 Assume that a police department replaces its patrol cars every 2 years.
Money to be spent for the planned and regular replacement of these patrol
cars would most likely come out of the .
Q3 A sales tax is an example of what kind of fee?
Q4 The practice of financing some federal government activities, such as the
operations of intelligence agencies, outside of the official budget is a violation
of which of the following principles of American financial management?
Q10 If the newly elected governor of a state declared that he would undertake a
complete budget review and rejustify spending levels for all programs, the
new governor would be advocating the use of what method of budgeting?
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IV. Activities
Q11 According to Aaron Wildavsky, why have many attempts to “rationalize”
the federal budget process through linking expenditures to unit costs or
programmatic goals failed?
Q12 Performance Results Budgeting is similar to past systems innovation in
budget reforms, but has several new features and process elements. Which
old budget system reform do you think PRB most closely resembles?
Q17 A tax that would exempt the first $50,000 of income from taxation, but
would tax all other income at the rate of 20 percent, might be called a flat
tax, but would function more like what?
Q18 If a city places a tax on beverages with sugar, which group of citizens will
be most affected?
Q19 One of the central tenets of Keynesian economics is the idea that, during
times of economic recession, the government should do what?
Q20 When a ratings agency lowers the credit rating of a government, the
interest rates that the government must pay to borrow money are most
likely to .
IV. ACTIVITIES
Critical Thinking: “Balancing the Federal Budget—‘The Buffet
Rule’ on Taxation”
Because of the problems of balancing the budget of the United States in recent
times, there have been calls from both parties for a balanced-budget amendment to
the US Constitution. This will require the Congress to pass a balanced budget each
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year. In order to do this, government spending would need to be less than or equal
Source: Breena E. Coates, Professor, Department of Management, California State
University San Bernardino.
Small Group Exercise: Thought Piece—“To Tax or
Not to Tax? That is the Question.”
The city leaders of Bridgepoint suffered a budget shortfall last year. In their plan-
ning for the new fiscal year, they feel they can raise the needed revenue by imposing
a sales tax on the consumption of the citizens of the community. They are particu-
Class Exercise: The School Tax Crisis of Meadowbrook
Meadowbrook is a municipality with a population of 112,000. This year the Mead-
owbrook School Board informed the City Council Budget Committee that extensive
renovations would be required in the high school’s gymnasium. The high school had
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IV. Activities
those who wished to attend, and an opportunity for increased revenue for the school
system through ticket sales and concessions was lost.
The renovations would include:
Q constructing new locker rooms
Total estimated cost: $12.2 million School Property Tax Demographics:
36 % Business and manufacturing (represented by the Chamber of Commerce)
A town meeting has been scheduled to discuss a possible increase in the school
tax to cover the cost of the renovations.
School Tax: A school tax is a local property tax imposed by a school district to
cover the cost of providing education and related activities.
Instructor’s Note: Break the class into five groups. One group takes the responsi-
Writing Exercises
Using one of the following key words or phrases of your choice, write a short
analysis linking the word or phrase from the scholarly text to an incident in your
workplace, your daily life, a media report that you have heard, or historical event.
Individual Assignments
Four articles are linked that discuss budget issues—at the federal, state, and local
levels. They involve the dynamics between budget process and politics—or how to
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articles point out, sometimes there is conflict and the budget process grinds to a
halt with major repercussions. As before, each student will draw one of four recent
media clips about a recent development in budgeting.
A Federal—Do Shutdowns Save Money?
D Local—Two clips on Participatory Budgeting in Chicago
Chose one article and prepare a short solution to the “problem”
Q1 From a budgeting perspective—what is the “cost” of the problem?
Q2 Is this problem significant in terms of impact on the city, state, or nation?
Q3 Why did the “problem” develop—was it an issue with politics, or a problem
with the budget process? Is this a conflict between political parties (liberal vs
conservative) or political authorities (legislative vs executive vs judicial)?
A: SHUTTERING THE GOVERNMENT ACTUALLY
COSTS MORE THAN KEEPING IT OPEN—
MORE THAN $2 BILLION LAST TIME
Lisa Rein, The Washington Post , September 24
Budget hawks in Congress may stand their ground on wasteful spending, but
shutting down the governmentis no example of fiscal frugality.
The effects, according to anaccountingby the Office of Management and
Budget and later by theGovernment Accountability Office,also added up to
less effective government services as federal agencies spent much of their time
ramping up for a closure before it happened, then recovering afterward from
delays to their operations.
Closing the government has macroeconomic effects on economic output,
and forecasters had varying estimates two years ago on how significant that was.
Much clearer, though, were the direct costs to taxpayers.
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IV. Activities
Other direct costs came from missed fees from national parks, interest due on
late payments, missed revenue fromtax enforcement and some stop-work orders,
among other money that normally flows to government agencies.
The reports run through a lengthy list of disruptions in 2013. They include a
backlog in veterans’ disability claims, nearly 6,300 children left out of Head Start,
patients left out of cancer studies at the National Institutes of Health, halted
consumer-safety work, delays intax refunds. TheFood and Drug Administration
After the shutdown, HHShad to figure out how to adviseits employees to
stop their applications or, in some cases, repay the insurance benefits since they
received back pay. This took time.
At the Energy Department, the shutdown caused disruptions at nuclear
storage sites, the budget office said, costing weeksof productivity.The National
Nuclear Security Administration “devoted time and resources to placing nuclear
minutiae.
Lisa Rein covers the federal workforce and issues that
concern the management of government.
B: CALLS HIS PROPOSALS “HISTORIC REFORMS”
WHILE CRITICIZING GOP
Kate Giammarise, Post-Gazette Harrisburg Bureau, September 16, 2015
HARRISBURG—Gov. Tom Wolf said Wednesday that he had offered major
compromises on two key issues in the budget impasse, proposing private
management of the state-owned liquor store system and a new pension system for
future state and public school employees that would save money.
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But in doing so, the Democratic governor unleashed another attack on
Republican legislative leaders, calling them inflexible and uncompromising as
they took steps toward passing a short-term spending plan that he is almost
certain to veto. Mr. Wolf said he would agree to lease the liquor stores to a
private entity while retaining state ownership of the system and offered a plan
with a 401(k)-style component for state and school employees. “Today, I put on
the table historic reforms on pensions and liquor ... two things that they say are
very important to them,” he said in a late afternoon Capitol news conference.
“And what do I get in return? Nothing. I got nothing on [natural gas] severance
tax. Nothing. I got nothing on education. Nothing. I got nothing on property
tax relief. And I got nothing ... on how we are actually going to balance this
budget.”
Mr. Wolf’s liquor proposal would provide for a long-term lease agreement
The governor in July vetoed a Republican plan to close state-run stores and
permit private sales, saying it was not a “responsible means” of overhauling
Pennsylvania’s liquor system and because it would hurt consumers.
Wendell Young IV, president of the union that represents many state store
employees, United Food and Commercial Workers Local 1776, said he was
generally supportive of what he knew about the governor’s recent proposal
but needed to see more details. “If it is what was explained to me, I would be
interested to see more details and see it in writing. Details matter,” Mr. Young
said.
Mr. Wolf’s proposed pension changes would include a mandatory