Public Budgeting in America Theory

Public Budgeting in America

Theory of Budget Execution #10

Fixing Responsibility #9

Allotment #6

Encumbrance #3

Bid requirements #19

Cash flow #11

Idle cash #12

Economic ordering quality #18

Miller-Orr Model #7

Cash management #1

Cash position #14

Integrated system #20

Independent stand-alone system #15

Information technology architecture #13

Budget development

Human resources and payroll

Accounts payable

Accounts receivable and billing

Project cost

Business process re-engineering #17

There are several different types of marketable securities. They roughly fall into four categories -- cash equivalents, debt, equity and derivatives. Cash equivalents are highly secure, short-term instruments. They are typically issued by banks or governments. Interest is paid, typically at low rates. They are used primarily to offset the devaluation of money as a result of interest. They are fully liquid and can be converted to cash quickly, typically overnight. Debt instruments are an obligation that the issuer has to the holder. They range in security depending on the issuer's credit rating. Debt instruments are fairly liquid, but may fluctuate in value. The interest rate will vary with the credit rating. Equity instruments are a share in ownership of a company. These may or may not pay dividends, and are subject to fluctuations in value. Equity is risky, but is generally liquid. Derivatives are best used to reduce the risk of equity positions. They are related to the value of the equity and can fluctuate dramatically in value. If used without an underlying position, they are extremely risky.

Question 3. The Theory of Budget Execution considers how budgets are executed by elected officials. Operating procedures are an important component of budget execution, because they set out how civil workers conduct their jobs, and thus how much of the budget is spent. Management practices are another key component of the theory, since the ways in which management allocates the budget are central to its effectiveness.

Civil managers are able to utilize procedures and practices to determine how budget funds will be spent in the achievement of the legislature's goals. Some key tools used are budget cycles, allotments, cash management, appropriations, budget development and project costing, and bid requirements. The latter compel the agencies that receive funds to behave in certain ways, in turn executing the budget to the needs of the civil managers.

Unit 6 Question 1.

Debt #10

Principle #2

Interest #9

Sinking Fund #7

Pay-as-you-go #13

Mortgage bonds #15

Accounts payable #5

Unfunded pension liability #6

General obligation debt #8

Revenue debt #4

Special authority debt #17

Lease-backed debt #16

Traditional capital financing #1

Public-private capital financing #12

Creative capital financing #18

Financial engineering #20

Derivatives #11

Operating Budget #3

Capital Budget #14

Speculators #19

Question 2. There are several warning signs that a municipality is in financial trouble. One is unfunded pension obligations. If the municipality is not putting enough money into its pension fund, it may be having difficulty covering regular operating expenses. Likewise, if the municipality has a sinking fund that it is no longer contributing to, this could be a sign of distress. If the municipality's debt rating is reduced, this is another sign. It means that the municipality's balance sheet is believed to have deteriorated.

There are other signs of distress as well. Certain types of debt issues signal distress more than others. For example, revenue bonds may indicate that the government needs to issue debt that is not subordinated, in other words nobody will lend them money without having first dibs on the municipality's revenue streams. Likewise, if the municipality is using accounts payable as a form of debt for the raising of capital, this indicates that they have run out of other capital-raising options. Thus, they are forced to stretch their payables in order to conserve their cash flow.

Question 3. Capital budgets represent the major, long-term expenditures for the government. These are typically for large projects, often for infrastructure, and are not generally for ongoing expenses. Major capital projects could include new roads, major sewer upgrades or any such substantial one-time expense. Each budget session sees a portion of the budget funds placed into a capital account to be used on such major projects. Many capital projects, upon completion, will then have ongoing operating expenses. Many capital projects are depreciated, rather than expensed.