The budget process and revenue sources for different organization types

Controller Budget Process

A huge part of running any business or government agency is the budget that the firm or agency could or should adhere to. Indeed, the financial plans and desire outcomes of a firm should be planned for and projected as much in advance as possible. While the process for a budget plan is a bit different depending on whether an organization is profit, non-profit or public, the general steps are roughly the same. A general overview of those steps will be covered and then there will be a drill-down on what makes public agencies and budgets different. While budgets are only part of the larger financial picture, they are definitely one of the larger and more important pieces.

Analysis

The first major part of the budget process is to create, mold, shape and finalize the strategic plan for the applicable organization as it relates to the budget year in question. The budget year, otherwise known as the fiscal year, is the twelve-month period to which the budget applies. This period may or may not align with the calendar year. For example, the year in question may run from January to December or it would be July to June. Regardless, this twelve month period is the basis for all budgetary plans. The "year" for the budget is always the year in which the budget year ends. For example, a budget for July 2014 thru June 2015 would typically be referred to as a fiscal year 2015 budget (Thriving Small Business, 2014).

Regardless, the plan that an organization has vis-a-vis their budget and other endeavors in general would be defined and summarized in their strategic plan. It is a mapping from the vision and mission statement for a firm to the way in which the firm will meet the mission and vision statements. Part of that would be the business goals of the firm. The business goals would align to the steps that will be taken towards reaching those goals and the accountability that will be extended regarding the same. However, the huge parts of any budget are where the money is coming from and the expenses, both fixed and variable, that will reduce the amount of money for projects, unforeseen expenses and mid-year changes. For a for-profit business, the revenue would simply be the money taken in from sales of goods or services. For a non-profit, revenue would be money taken in from donations and over revenue streams like grants and government contributions. For a government agency, the sources of revenue are typically taxes such as sales taxes, income taxes or excise taxes. A municipality, city or county would get their revenue through things like sales taxes, property taxes as well as fees for service requests and changes (Thriving Small Business, 2014).

Regardless of where the money is coming from, there are several different types of costs that have to be taken into account and those are fixed and variable. Fixed costs are those that are at least projected to specific and flat in nature. Common fixed expenses would be things like rent, utility bills and so forth. More often than not, the overall amount that those items will cost is known months or years in advance. Rent and utilities do tend to go up with inflation and such. However, they do not vary all that much (if at all) in the short-term or, in most cases, within a single fiscal/budget year. Costs that tend to vary, a little or a lot, would be variable costs. Examples of this would be for events that are unforeseen and/or unpredictable. For a common business or anyone else that pays hourly employees or has expenses that very based on things like weather, foot traffic and so forth, this would include overtime, costs of dealing weather events and their after effects (e.g. snowstorms, power outages, etc.). Related to the fixed and variable expenses above are the typical handling of expenses and such. This includes things gasoline, office supplies and so forth. Quite often, if there will be at least a chance of additional revenue, that revenue will be offset at least in part by the cost of getting that revenue. This is often referred to as cost of goods sold (COGS). The money left over would be the profit or excess. For a public agency, excess funds after paying all bills (if any) will probably be returned to the taxpayer coffers, will be held in reserve or will simply be applied to the next budget year. For a profit-based business, the excess money is often returned to investors or stakeholders in the form of dividends, return on investment or something else of that nature (Thriving Small Business, 2014).

Regardless of the formation of a business, there is typically a Board of Directors that assembles, summarizes and then approves the budget in advance of the budget year starting. After the year is full-swing, there will be a monitoring and surveillance of how the company or agency is performing and progressing as compared to the pre-planned budget. They will typically monitor and assess all expenditures as they happen and help prevent fraud or other misuse by executives and employees alike. Examples of this fraud, misuse or other budgetary deviations would be spending too much on certain items, spending at all on unapproved items, fixed costs being different (higher or lower) than was planned, variable costs being different (higher or lower) than what was planned and so forth. There will typically be meetings that occur on a monthly basis to assess actual events and performance as compared to what is planned. If/when there are variances, these meetings can be used to react to and adjust for variances from the plan. If there is a surplus of money, then it can be decided what to do with that excess money. If there is a shortage, then why precisely it occurred and best to deal with the same can be addressed (Thriving Small Business, 2014).

Now that the general budget process has been covered, there will be some drilling down that at least mostly centers on the municipality budget angle. One such perspective and example was typified and made very clear by the recent global financial crisis that affected countries around the world including the United States, most of Europe and others. Spain in particular had some issues with municipalities trying to hike taxes as a way to offset losses in revenue intakes that were caused by the aforementioned crisis. A study looked at tax collection efforts and suggested that there was a linkage or even a causality that showed the financial health of local tax agency given the efficacy and presence of those efforts. Indeed, it was found that "the budgetary solvency dimensions is associated with the tax collection effort for all municipalities studied." While this study was held in Spain and not the United States, that same financial crisis hit the United States head on as well and many (if not all) of the same lessons can be held true for American municipalities (Cabaleiro-Casal & Buch-Gomez, 2014). When it comes to municipalities, there is a common expectation or demand that the taxpayer money be spent efficiently and on the right expenditures. Even countries as ostensibly obscure as Morocco see this played out every day (El Mehdi & Hafner, 2014).

As mentioned before, there will come times when there is a shortage of money or perhaps a surplus. The question becomes how to deal with these variances from the budget as they arrive. Indeed, there are ways they can and should be dealt with and ways that are less than wise. One factor in the equation is how long it takes to make adjustments when problems arise. Smaller firms are typically able to react slower than larger firms. Larger firms often experience a sort of "inertia" that prevent them from reacting as quickly and dynamically as they might like to. Regardless, one particular cause of having to adjust are changed in demographics in an area. This could include an influx of people, and out-flux of people, an aging of the population, a population that is getting younger and so forth. Indeed, some areas like New York and California will see people leave the area while those in Florida or Denver will see lots of faces (Anessi-Pessina, Sicilia & Steccolini, 2012),

Speaking of Denver, the recent legalization of recreational marijuana was a game changer for their revenue model. It also caused a massive influx people seeking legal marijuana. However, those same municipalities have to deal with the new laws, licenses and other procedural morass that comes with a new tax and/or regulatory framework. The point is that simply taxing something and waiting for the money to roll in is sometimes easier than it seems, first of all. Second of all, there can be a major issue with what tax projections are vs. what they actually end up being. Coming back to the marijuana example, the $44 million or so in marijuana tax revenues was below projections. The problem with that is that the missed money was planned for and was likely already spent and planned for. As such, the aforementioned budget adjustment process will have to be put in force due to lower sales tax revenues, income taxes and so forth (Pacula, Kilmer, Wagenaar, Chaloupka & Caulkins, 2014).

There are some studies in the scholarly world that even correlate local taxing and spending with school achievement. Given that so much money for schools comes from local sources, this raises the stakes of municipality taxes and budgets even higher. Indeed, it was found that when a local tax jurisdiction raised local taxes and salary levels for school district administrators, there was a positively related reaction in terms of student test scores. In other words, if more money was collected (or at least allocated from the usual pot of money) to schools, the test scores went up. However, allocating these dollars when there other needs and requirements or when there are lower tax revenues can be a challenge (Menash, Schoderbek, Michael & Sahay, 2013).

Another consideration is that it is often not all that hard for people to "vote with their wallets" and shop elsewhere. Other times, people can even choose what city or municipality to live or not live in given the prevailing tax rates for that area. One example of this are sales tax "holidays" that some areas will engage in. These are often during the holiday season but can really be at any time. Indeed, there was a story that came out in 2014 that reflects that roughly a dozen states that had a sales tax holiday in one or more areas of the state. However, some question the efficacy and wisdom of such holidays given the lower tax revenues that are taken in and the long-term effects on tax revenues and local budgets in general. Indeed, a person quoted in the story said that this strategy is not "tax reform" but is rather a reflection of a "one weekend only" change. However, tax breaks for individuals or businesses are a way for many jurisdicitons to lure consumers and/or businesses to plant roots in their area. The idea is to get more revenue over the long haul rather than just in the short-term (Feran, 2014).

While businesses that are established are usually the beneficiary, Puerto Rico tax authorities took the step of suggesting that entrepreneurs could get a pass on taxes for the first half million they make. Sometimes, a controller or other personnel in a municipality have to grease the proverbial skids to get people and businesses to plant roots in an area and thus help generate revenue for the same. Areas like Puerto Rico are especially vulnerable and apt to resort to tricks like this as Puerto Rico has been in a recession lasting eight years. Puerto Rico recognizes that their chances of keeping positive cash flow at the municipality level is lesser if the younger and brightest leave the area for proverbial greener pastures. Much of the same thing could be said about other areas in the United States like Oakland, Detroit, Saint Louis and Chicago. It is not remotely as simple as looking at the overall tax base that can be taxed and assuming that the taxes will just come in without a problem. It has to be assumed that there will be people that leave, people go and that not everything will break even when that occurs. There could be a net loss or gain of both people and revenue or a combination of the two. Hurricane Katrina and its impact on the population and tax bases of New Orleans is a perfect example of this in motion (Associated Press, 2014).

There can also be an issue with laws being passed that are not enforceable in light of a legal appeal. New York City currently has a tax on its residents. This tax has been in place for quite a while. However, it only applies to people that live in the area rather than simply folks who live there. As an example, if a person lives in the Bronx and works in the Bronx, they pay the tax. If they live in the Bronx but work in Paterson, New Jersey, they still pay the tax because they live in the New York tax area. However, if they live in Paterson, New Jersey and work in the Bronx, they do NOT pay the tax. This has not always been the case, however. The tax used to apply to anyone who lives or worked in the area and this was indeed what was enacted into law. However, the non-resident tax was repealed in the 1990's and that surely was not expected or preferred by the local governments in that area s they were surely coveting and expecting that tax revenue to come through for them. The Affordable Care Act, although not a local piece of legislation or tax law, has experienced similar issues (Hayashi, 2014).

Another piece to the puzzle for controllers and the creation of local or municipal budgets would be the law of diminishing returns and taxpayers getting a little salty about their level of taxation. The diminishing return principle is that there comes a point where taxes get too high and it leads to consumers changing their behavior. It is much like what is seen when gas prices get too high. The latter of those events leads to people driving less and buying smaller cars so as to avoid spending so much on gas. Property taxes are not all that different and this is important for local budget creation and adjustment because property taxes are the largest source of revenue for most jurisdictions. One fatal flaw with many jurisdictions is that there is not a 1:1 value between fair market value of a property and the tax that is paid for that same property. In other words, just because two different homes are valued at $250,000 does not mean that they will pay the same amount of property tax. A lot of that stems from the market value being different from the tax base used by the local tax jurisdiction. Regardless, if a person is paying a tax amount that is clearly at odds with the fair market value of the property, that will lead to a glut of houses going unsold or even unoccupied due to people deciding that they should not have to pay property taxes of a certain level (Hayashi, 2014).

The intent of the local tax, of course, was to negate that and tax everyone that worked or live in the area. This feeds into the competition for tax dollars that some cities have to engage in at times. Some cities are lucky and there are not a lot of cities and counties that have to be competed with New York is in a pickle because some of the major parts of New Jersey, Connecticut and Philadelphia are close to fairly close to the greater New York area. On the other hand, Denver, Colorado really only has to worry about Colorado Springs. There is not much else close to them or even in the broader state and Denver is not close to the state line. Also, there is often a correlation between taxes going up and jobs going down. Indeed, Frontier Airlines has a hub in Denver but they recently had to lay people off. They directly cited the taxes levied by the city of Denver as being a reason for the drawdowns in headcount. They also cited higher landing fees, lesser local tax incentives and an airport operating cost that was higher than other airports. Of course, that is Frontier's take and that surely differs from Denver's and both could be different than the actual reality of things (Keeney, 2015).