Author: rte03

Final exam 

Budgeting 277

Chapter 3:-

Public budgeting systems which are devices for selecting societal ends and means, consists of numerous participants and various purposes that bring the participants into interaction.
Budget cycle: to provide for responsible government, budgeting is geared to a cycle. the cycle allows the system to absorb and respond to new information and therefore allow government to be held accountable for its actions. The budget cycle consists of four phases:-
1.	Preparation and submission.
2.	Approval.
3.	Execution.
4.	Audit and evaluation.

1.	Preparation and submission: the preparation and submission phase is the most difficult to describe because it has been subjected to the most reform efforts.                    chief executive responsibilities: the responsibility for budget preparation varies greatly among jurisdictions. At the federal; level, the president can make major changes in the budget. In parliamentary systems , the prime minister, typically has responsibility for budget preparation and submits what is usually called the government budget to the parliament.
Preparation authority, however, is not always assigned to state governors and local chief executives. While a majority of governors has responsibility for preparation and submission , some share budget-making authority with other elected administrative officers, civil service appointees, legislative leaders, or some combination of these parties. In parliamentary systems, if a coalition of several parties is necessary to form a government, and the coalition is held together by each of the main parties in the coalition controlling one or more ministries, the prime minister may have very little control over budget preparation.

Steps in the preparation stage. In the federal government, budget preparation starts in the spring or even earlier for large agencies. Agencies begin by assessing their programs and considering which programs require revision and whether new programs should be recommended. At approximately the same time, the presidents staff makes estimates of anticipated economic trends too determine available revenue under existing tax legislation. The next step is for the president to issue general budget and fiscal policy guidelines which agencies use to develop their individual budgets . These budgets are then submitted in late summer to the OMB. Throughout the fall and into the later months of the year, OMB staff members review agency requests and hold hearings with agency spokespersons. Not until late in process, usually in November , December, and into January does the president become involved in the process.
Political factors: the preparation phase, as well as the other three phases in the budget cycle, is replete with political considerations both bureaucratic and partisan in addition to policy considerations. Each organizational unit is concerned with its own survival and advancement. Line agencies and their subunits attempt to protect against budget cuts and may strive for increased resources. Budget offices often play negative roles, attempting to limit agency growth or imposing agency budget cuts. All members of the executive branch are concerned with their relationships with the legislative branch and general citizenry.

2. Approval phase: the budget is approved by a legislative body whether congress, a state legislature, a country board of supervisors, a city council, or a school board. The legislature reviews the executive budget recommendations and often has access to the original agency budget requests which enables it to make comparisons. At the federal level, the revenue appropriation processes have been markedly fragmented and involve numerous committees and subcommittees. Not only have revenue raising and spending been treated as separate process but the expenditure side is handled in many different appropriation bills instead of being treated as a whole. The legislature holds a series of hearings at which central budget office and the individual agencies testify. These hearings can be love fests in which the committees that oversee agencies are eager to recommend increased appropriations for agencies programs. An executive may emphasize the need to restrain expenses, which legislators may seek expansion of various programs and corresponding increases in expenditures.

In both the preparation and the approval phases, one or two issues often dominate budget deliberations. At the federal level, wrestling with a huge budget deficit was a primary focus in budgeting in the 80’s and 90’s and may be again with the return of large budget deficits that started in the early 2000’s.
Executive signature or veto powers:  the final step of the approval stage is signing the appropriation and tax bills into law. The president, and, in some cases mayors have the power to veto. A veto sends the measure back to the legislative body for further consideration.

3. Execution phase: apportionment process; execution, the third phase, commences with the beginning of the fiscal year, October 1 for the federal government and july 1 for most state governments. Some form of centralized control during this phase is common at all levels of government and is usually maintained by the budget office. The apportionment process is substantively important in that program adjustments must be made to bring planned spending into balance with available revenue. Because an agency most likely did not obtain all the funds requested, either from the president in the preparation phase or from congress in the approval phase, plans for the coming fiscal year must be revised.

Impoundment: the chief executive may assert control in the apportionment process through an informal item veto known as impoundment which is basically a refusal to release some funds to agencies.
Allotments: once funds are apportioned, agencies and departments make allotments. This process grants budgetary authority to subunits such as bureaus and divisions. Allotments are made on a monthly or quarterly basis and like the apportionment process, the allotment process is used to control spending over the course of the fiscal year.

Pre audits: before an expenditure is made, a form of pre audit is conducted. Basically, the pre audit ensures that funds are committed only for approved purposes and that an agency has sufficient resources in its budget to meet the proposed expenditure.

Execution subsystems: during budget execution, several subsystems are in operation. Taxes and other debts to governments are collected. The internal revenue service IRS in the treasury department is responsible for this set of tasks at the federal level.

4. Audit and evaluation: the final phase of the budgetary process is audit and evaluation. The objectives of this phase are undergoing considerable change, but initially the main goal was to guarantee executive compliance with the provisions of appropriation bills particularly to ensure honesty in dispensing public monies and to prevent needless waste. In accord with this goal, accounting procedures are prescribed and auditors check the books maintained by agency personnel.
Location of the audit function: in the federal government, considerable controversy was generated concerning the appropriate organizational location of the audit function.

* scrambled budget cycles:  although it is easy to speak of a budget cycle, no single cycle actually exists. Instead, a cycle exists for each budget period and several cycles are in operation at any given time. The decision -making process is not one that simply proceeds from preparation and submission to approval, execution and finally audit. Decision making is complicated by the existence of several budget cycles for which information is imperfect and incomplete. 
Overlapping cycles: at the federal level, the execution phase begins in October 1 giving congress approximately eight moths to consider the budget. Budget preparation is complicated particularly by this scrambling and intermingling of cycles. In the first place preparation begins perhaps 15 months before the budget is to go into effect. Moreover, much of the preparation phase is completed without knowledge of the legislature’s actions in the preceding budget period.
Federal experience:  at the federal level, this problem has proved especially thorny. Congress has historically been slow to pass appropriation bills, and the approval phase was rarely completed by the start of the fiscal year when it began July 1. The usual procedure was to pass a continuation bill permitting agencies to spend at the rate of the previous year’s budget while congress continued to deliberate on the new year’s budget.
Links between budget phases:  while a budget is being prepared, another one is being executed. The budget being executed may be for the immediately preceding budget year but it can also be for the one before. Under such conditions the executive branch may not know the effects of ongoing programs but nevertheless required to begin a new budget, recommending changes upward and downward. Sometimes a new program may be created and an agency must then recommend changes in the program for inclusion in the next budget without any opportunity for assessing its merits.
Length of preparation phase: the cycle particularly the preparation phase may be even longer than indicated above, especially when agencies must rely upon other agencies or subunits for information. The reliability and validity of data undoubtedly decrease as the leas time increases. Therefore, the earlier these schools submit their budget requests to the state capital, the less likely it is that such requests will be based on accurate assessments of future requirements. The reliability and validity of data undoubtedly decreases as the lead time increases. Therefore, the earlier these schools submit their budget requests to the state capital, the less likely it is that such requests will be based on accurate assessments of future requirements.

Intergovernmental factors: another problem arises from intermingled budget cycles because the three main levels of government are interdependent. For the federal government, the main problem is assessing needs and finding resources to meet these needs. In preparing budgets, governors take into account whatever information is available on the likelihood of certain actions by the president and congress. 
Budget years: budget cycles are further complicated by a lack of uniformity in the budget period. A case can be made for staggering the budget year for different levels of government. This practice might assist decision makers at one level by providing information about action taken at other levels.
Annual and Biennial budgets: not only is there inconsistency in the date on which budget years begin, but the length of the  budget period also varies. Whereas the federal government and most local governments operate under annual budgets. The argument is that annual budgets allow for careful and frequent supervision of the executive by the legislature and that this approach serves to promote greater responsibility in government. The problem with the annual budget, however, is that little breathing time is available. Both the executive and the legislative branches are continuously in the throes of budgeting. The biennial approach on the other hand relieves participants of many routine budget matters and may allow greater time for more thorough analysis of government activities. One of the greatest dangers of biennial system is that it may obstruct if not prohibit a prompt response to new conditions. The costs of not being able to adjust to changing conditions may far overweigh any benefits accruing from time saved. Still another consideration is whether under normal conditions sufficient amounts of new information become available to warrant annual systems. If program analysis were a well established part of the budgetary process, then conceivably new insights into operation of programs would continually occur. In such instances an annual process might be preferable. In other cases in which decision makers operate one year with virtually the same information as was available in the preceding year there seems to be little need for annual budgets. Partially for this reason proposals have been made for selectively abandoning the annual budget cycle.

Chapter 4:-

Principles of taxation: a chief concern that public officials have for any tax is the extent to which that tax will generate adequate revenue to fund the services provided by the government. The major revenue sources used by governments; income taxes, property taxes and sales taxes are used in large part because the number and value of taxable events or the value of the base are so large and therefore have the potential to generate so much income. There are other reasons which include the equity or fairness of the revenue source, the extent to which revenue source distorts economic choices, the cost of administering the tax, and the political feasibility of particular revenue sources.
Adequacy of revenue:  not all revenue sources have the same potential for growth. In general as an individual’s wealth or income goes up , he or she tends to demand more from government. For this reason, governments should avoid sources of revenue that do not have the potential to grow as fast as income or wealth. In addition, as noted above, some sources of revenue can produce large amounts of income for the government t relatively low rates because of the sheer size of the tax base. The federal income tax runs off a large tax base, and because of its progressive rate structure higher levels of income are taxed at higher rates. In addition to the sheer size of the base, it is important for tax policy makers to take into account the potential of the tax base to respond to changes in tax rates. For many taxes, as tax rates increase they discourage engaging in the taxed activity. Thus a higher sales tax increases the price of goods and high marginal income tax rates may encourage some individuals to choose leisure over work at least at the margin.
Equity: there are two general principles of tax equity. The first is the ability to pay principle, which says that the taxpaying capacity of different tax payers should be taken into account in designing the tax system. The second is the benefit principle which says there should be some relationship between the benefits received by the tax payer and taxes paid.
Ability to pay: different tax payers have different levels of income and wealth and therefore may have different capacities to bear the cost of financing government. One sense of equity relates to the ability to pay principle. A tax should be related to the tax payer or as economists refer to it the equal absolute sacrifice. Equity has both horizontal and vertical dimensions.
Horizontal equity: horizontal equity refers to charging the same amount to different taxpayers whose ability to pay is the same. If two taxpayers are the same on relevant dimensions, and they pay different levels of tax, that tax would be violate the principle of horizontal equity.
Vertical equity: while there is nearly universal agreement that horizontal equity should be adhered to, vertical equity is a somewhat harder principle on which to obtain consensus. Put simply, vertical equity has to do with treating different tax payers differently. The computation of the effective tax rate can yield conclusions that a given tax or tax system:-
•	Progressive: if effective tax rates are higher for higher income taxpayers than for lower income taxpayers.
•	Proportional: if effective tax rates are essentially the same across different income categories.
•	Regressive: if lower income taxpayers experience higher effective tax rates than higher income taxpayers.

Benefit received: some revenue is derived from payments by receipts for services rendered or benefits received. The principle of payment for services results in an efficient allocation of public sector resources, because people will use only the amount of a particular service for which they are willing to pay. This process is similar to the way in which the private market works. That is, the private market produces no more of those goods than people are willing to purchase. However, if all government services were paid for by fees, some people would be unable to pay and necessarily would be excluded.
Spillover effect: many government services cannot appropriately supported solely through user fees. In addition public goods have positive externalities, that is they benefit all citizens regardless of whether one actually uses the service. Moreover particular taxes maybe structured to permit the overall tax system to be better adhere to the benefit principle. 

Economic efficiency: according to the related concept of efficiency, an efficient tax is one that does not appreciably effect the allocation of resources within the private sector. However, taxes can be used for regulatory purposes, as opposed to purely efficient revenue-raisin purposes. Tax systems that are progressive can be inefficient and have unintentional consequences. If tax rates are particularly high for wealthy persons for instance then the system may encourage them to spend more time on leisure and less on working and earning more income. Tax system design generally tries to consider both equity and efficiency objectives. Use of taxes to regulate behavior is generally not consider in the overall design of a tax system, but rather is typically legislated separately.

Cost administration: generally, taxes that are expensive to administer should be avoided. Money spent to collect taxes represents a net loss to society and therefore the less spent on tax administration the better. There are a number of specific costs associated with tax collection. Some costs are to the government, some to the taxpayer and some to an intermediary such as a shopkeeper who collects the sales tax. most of the allowable deductions and credits for federal income tax stem from attempts to adjust the tax to allow for individual taxpayer conditions. There are taxes where the cost of compliance is relatively low, but the cost of initial collection by the government is high. Consider the case of the local property tax. Because the government is obliged to place a value on properties it needs to expend substantial resources to identify the level of taxes required to be paid and to collect those taxes in the first instance. Inn addition to the cost of initial collection, there is the separate cost to the government of enforcement. enforcement tends to be more difficult and costly incases where the responsibility for initial collection lies with the taxpayer. Thus, the income tax is relatively costly to enforce while the property tax is much less costly.

Political feasibility: even taxes that score well on adequacy, equity, efficiency and ease of administration still may fall short if they cannot be raised in the current political environment. States without an income tax will probably find it almost impossible to enact one despite whatever other appeals such a tax may have.

Income payroll, and property taxes: many of the major revenue sources used by governments are based on income or wealth property values being the primary wealth that is taxed in the US too generate revenue. These issues partially desirable because they are large; a relatively large amount of revenue can be raised at relatively low rates. They are also used because it is easy to adjust the tax to individual taxpayer conditions; that is those taxpayers with relatively higher incomes have a relatively greater ability to pay taxes. 
The personnel income tax: The income tax is a relatively recent, but important addition to the revenue sources used by government . This section describes the structure of the federal income tax system, and then discusses briefly the particular characteristics of state and local personal income tax systems. Income taxes, in general have the following structure:-
•	The computation of income which is the initial calculation of the tax base.
•	Reductions to adjusted gross income because of the individual taxpayer characteristics. These take the form of deductions.
•	The application of tax rates .
•	Reductions in tax paid as a result of tax credits.
Not all income is taxed. In the case of the federal government, decisions have been made about precisely which types of income should be subjected to taxation and which should not. The more sources of income included in the tax base, the more equitable the income tax. When the base excludes sizable segments of income, vigorous debates immediately arise over whether some interests are receiving undue favoritism as a result of legislative lobbying. Tax codes also provide for adjustments to gross income that typically have expenses and some employer-paid business reimbursements . The result of the components of income that are included , less these adjustments, becomes the base from which exemptions and deductions are subtracted or adjusted or gross income.
Exceptions and deductions: individual exemptions and deductions may further reduce the individual income tax base. Exemptions are reductions to the tax base that literally result  from existence. If you file income taxes, you can claim yourself as an exemption. More important than exemptions for many people are deductions. Each taxpayer is permitted to claim a standard deduction without providing any documentation. This standard deduction varies according to the filing status of the taxpayer.
Itemized deductions: are much more complicated. These deductions literally attempt to adjust taxable income to reflect differences in individual taxpayer conditions. As such, they can vary widely from one taxpayer to another, but they also require that the taxpayer maintain supporting evidence for the deduction. The main itemized deductions include:-
•	Home mortgage interest; the interest paid on borrowed funds for a taxpayer’s first two properties van be deducted from income.
•	Un-reimbursed health expenses; health care expenses, to the extent that they are not reimbursed, may be deducted from income.
•	State and local taxes; many taxes paid to state and local governments are exempt from federal taxation.
•	Charitable contribution; payments made by cash or check to recognized non-profit organizations are deductible.
•	Business expenses; particularly for self-employed individuals, a wide variety of business expenses can be deducted.
Rate structure: the principle of equity is furthered at the federal level by the use of progressive rate structure. 
Tax credits: unlike tax deductions, tax credits are dollar for dollar reductions in taxes that are applied after all the preceding steps have been completed.
The alternative minimum tax: the alternative minimum tax is a feature of the federal income tax system.
State and local income taxes: most personal income taxes levied by the states and local governments are modeled on the federal tax. The states sometimes use federal base or a modification of it.
Indexing: the federal government and some states use indexing in various forms to adjust income taxes in accordance with changes in price levels. 
Enforcement: a key income tax issue is enforcement. The individual income tax relies heavily on honest self-reporting by taxpayers. Although employers withhold an important proportion of total individual income taxes paid, thereby enforcing tax collection for the internal revenue service enforcement remains a problem and an especially difficult problem when taxpayers think the tax is unfair.
Tax expenditure: revenues that could be but are not collected constitute tax expenditures and can aid or hinder attempts to achieve an optimal balance.

*Corporate income taxes: taxes on corporate earnings have been defended as appropriate given the size of corporate economic power and the fact that some individuals might be able to escape taxation by hiding their income in corporations. On the other hand, corporate income taxes seem to result in double taxation. First a corporation is taxed and then individuals are taxed on dividends paid on their corporate stock holdings.
Tax base: corporate taxes use net corporate earnings as a base. Whereas the individual income tax base basically income before expenses, except for some deductions and exclusions, corporate income taxes apply only to net profit after operating expenses. In addition, some deductions are allowed for capital losses, operating losses, depreciation of capital investments, charitable contributions, and expenditures for research and development.
The incidence: the primary issue as regards corporate taxation is who actually caries the burden of corporate taxes. Corporations may be able to increase prices and in effect, make consumers pay the tax, or they may limit wage increases to workers and in effect have them pay the tax.

*Payroll taxes: insurance trust funds, which separate accounts set up to hold certain earmarked revenues, are financed by means of charges on salaries and wages. These are typically referred to as payroll taxes, and they are differentiated from income taxes because they are taxes on wages and salaries only as opposed to more comprehensive taxes on income.
Social security supplemental security income: social security is a trust program of vast proportions. One motivation for reform is the political point of view that the fund should behave as revolving fund, with proceeds paid into the fund being invested as in most pension funds.  A second motivation for reform is closely linked too the debates on the federal budget surplus or deficit. Because the fund shows a surplus, and all revenue to the fund counts as part of the federal governments revenue total, the size of the federal deficit is disguised. A third issue discussed by advocates for reform is that the funds being paid into social security should be earning more than the implicit treasury bond rate.
Medicaid: a fifth program often mentioned in conjunction with these other programs is Medicaid. It does not technically fit under a discussion of payroll taxes since it is funded by federal and state tax revenue as opposed to payroll taxes earmarked for the social security trust fund.
Unemployment insurance: the second largest trust for state governments is unemployment compensation. This program is administered by the states within a framework imposed by the federal government. 
Workers’ compensation: another important insurance trust at the state level is workers’ compensation, which provides cash benefits to persons who, because of job-related injuries and illnesses are unable to work.
*property taxes: taxes on wealth are based on accumulated value in some asset rather than on current earnings from the asset. Real and personal property, financial assets and equipment are important types of wealth that sometimes are subject to taxation. The wealth tax that is most important in the eyes of taxpayers, however, is the real property or real estate tax. The property tax is the one most relived by taxpayers, largely because it is regarded by many as the most unfair. The jurisdiction for using the property tax as the major revenue source for local government is that the services provided by local government supposedly increase the economic value of one’s property.
The property tax is also less susceptible to tax avoidance than other broad based taxes because it is clearly visible and is immobile. One way to tie the benefits of services affecting property values to taxes on property is through tax increment financing. Tax increment financing has been used in the redevelopment of inner cities to capitalize on the economic and financial gains that stem from a major rehabilitation project for a continuous are usually characterized by urban blight and abandoned properties. The main policy issue with the property tax is its regressive nature. Higher income taxpayers tend to have  a larger proportion of their wealth in assets that are not subject to the property tax.
Tax base:  the base of the real property tax is the assessed value of the land and any improvements on it, such as homes factories and other structures. The value is what the property would sell for if placed on the market.
Assessment: after registering all properties in the taxing jurisdiction the first major step is generating revenue from the tax is to assess the value of the properties. While the goal in many jurisdictions is to assess each property as its full market value, in practice many jurisdictions assess parcels at a percentage or fraction of the full market value. The ratio of the assessed value to the market value is known as the assessment ratio. 
Tax rates: property tax rates are a percentage of the assessed value.
Circuit breakers: as taxes rise some property owners may encounter considerable difficulty in paying their tax bills and may even be forced to sell their homes and move into rental houses.
Personal property: besides real property, some jurisdictions tax personal property. For individuals, such property includes furniture , vehicles , clothing jewelry and the like.
Taxing and spending limitations: although citizens seemingly have had little opportunity to affect taxes and spending other than through the process of selecting representatives. Property taxes remain one of the most criticized forms of taxation. This is probably because of dissatisfaction with the results schools systems are producing which are funded almost entirely by the property tax. The result has been several types of tax and expenditure limitations. One review classified them into 5 categories:-
1.	Overall property tax limitation.
2.	Specific property tax limitation.
3.	Property tax levy limit.
4.	General revenue or general expenditure increase limit.
5.	Property tax assessment increase limit.
Most of these limitations on the property tax specifically, but the fourth is more broadly restrictive and can apply at the state as well as the local level. The effect of these limitations has varied, but in most cases local governments made up for the revenue loss through other resources, usually non general revenue sources. First, state legislatures and local governments are much more reluctant to initiate new programs and especially to propose tax increases or new taxes. Second, combined with major cutback in federal aid to states and localities, the limitation movement set these governments on an imaginative hunt for alternative finance measures. Third, states provided increased financial assistance to hard-pressed local governments. Fourth, overall expenditures have been cut somewhat and some services have been reduced, either in quality or quantity as a means of curbing spending. Fifth, tax and expenditure limitations have had different effects on the capacity of local governments to rely on local property taxes to deliver services.

Chapter 10:- Budget execution

Budget office and agency relations: as would be expected, relationships both direct and indirect are extensive between the central budget office and the line agencies during the execution phase of the budget. 
Interactions on budgeting: execution is the action phase of budgeting, in which the plans contained in the budget are put into operation. Every budget either explicitly or implicitly contains plans for work to be done and the achievements to be made. Execution, then involves converting those plans into operations. During this phase, budget office personnel gain important insights into the operations of agencies and this knowledge later becomes important during the next round of budget preparation.
Legislative intent: the legislature provides some indication of legislative intent through a variety of mechanisms, some legally binding and some advisory programs. Legislative intent begins with the creation of a government unit and programs for it to administer. Agencies prefer lump-sum appropriations, meaning monies that are in one overall pot and not broken into smaller ones. The legislative intent contained in authorizing and appropriating legislation is by definition legally binding during budget execution, but beyond these is a grey area of legislative intent. Bills reported out for full house consideration are accompanied by committee reports that explain what provisions were considered and why the committees are recommending specific provisions. These reports can run to tens or even hundreds of pages in length. When a bill is debated on the floor of the house and senate at the federal and state levels, members of the relevant committees will speak about the bill’s provisions as will other members. These presentations may be aimed at persuading colleagues to vote for the bill as reported and without unwelcome amendments, but certainly of equal importance is getting into the official record the intent of the bill’s framers. In some cases, legislative units issue further reports about bills after passage. In other words, after an appropriation bill is passed , a legislative unit may prepare a summary report explaining its interpretation of what transpired when the full legislative body adopted the bill. Except for two critical factors, statements contained in committee reports, statements made from the house and senate floors and the statements made in reports subsequent to passage of bills lack much legal status regarding legislative intent. First these statements have the effect of putting the budget office and the affected agencies on notice of what is expected in the implementation of the laws. The second factor involves legal challenges. Some laws and how they are administered are challenged in court by private citizens state and local governments, interest groups and even legislators themselves. 
Apportionments and allotments: at the state and federal levels, an apportionment process is used in which line agencies submit plans to the central budget office for how appropriated funds will be used. The plans often indicate proposed expenditures for each month or quarter of the fiscal year. Office of management and budget OMB governs this process at the federal level. 
A primary purpose of apportionment is to insure that agencies spend at a rate that will keep them within limits imposed by their annual appropriations. Another purpose is to guide agencies so that the desired program accomplishments are achieved. At the federal level, agencies use a standard form to submit their apportionment plans, that OMB then approves, modifies, or disapproves. Spending cannot begin until approval is granted. The budget office may require modification of agency proposals and eventually approves apportionments for each agency. Following the approval of apportionments by the budget office, allotments are made within departments. This process grants expenditure authority to subunits. 
* in the apportionment process, chief executives and their budget offices have greater power to deny authority than to grant authority to agencies. The executive cannot approve apportionments for projects prohibited in the appropriation but may be able to reduce or eliminate some appropriated items.
Initial planning: at the outset of the fiscal year agencies must  accommodate differences between the actual appropriations and the original requests for funding. For agencies that were fortunate enough to obtain increased funds for improving or expanding existing programs or for new programs, the budget office plays a key role.
Control agencies : from the perspective of the central administration, agencies must live within their budgets.
Pre audit: after approval of an apportionment plan and granting an allotment, an agency still is not free to spend but rather must submit a request to obligate the government to spend resources.
Mid year changes: as the year  progresses, the budget office conducts reviews of agency operations. One all-too-common problem is that the need or demand for services far exceeds the funds appropriated. Each summer the OMB issues the mid-session review of the budget that discusses economic trends and the ways in which these trends are affecting receipts, spending patterns, the activities of credit programs and whatever other procedures are in place to attempt to limit the budget deficit. The congressional budget office issues budget reviews and then in mid-summer updates its budget and economic outlook. Another more extreme, technique is furlough employees. Some governments have expected all employees to share in the solution by working and being paid for a four-day week rather than a five-day week, thereby creating a 20% savings.
When an agency wishes to shift existing resources to meet new needs during the fiscal year or when an agency receives a supplemental appropriation, it must prepare a revised apportionment or reapportionment plan. The budget office then has an opportunity to exercise some guidance over how the agency will spend its monies. This process is sometimes known as budget revision or re-budgeting. Budget increases and decreases occur simultaneously during budget execution. Some agencies’ budgets of necessity may be augmented while others are cut to try to make up the difference.
Throughout the execution phase, which by definition is the entire fiscal year budget analyst play critical roles. Here leadership in the budget office is essential since left on their own, analyst will vary greatly among one another as to how they operate. Some may perform more of a control function, focusing largely on financial numbers and trying to keep agencies in check. During the execution phase, agencies are required to supply reports on their budgets. At the federal level, quarterly reports are required by law .
End-of-year spending: as the fiscal year approaches its end, agencies will attempt to zero out their budgets. An agency having unexpended funds at the end of the fiscal year may be considered a prime candidate for cuts in  the upcoming budget. Agencies with budget surpluses at the end of the year may have their budget bases reduced in the next fiscal year. Also unexpended or unencumbered funds often lapse at the end of the budget year. From the agency’s perspective, it is a now-or-never situation for spending the available money. Another factor is that an agency may have delayed some expenditures, saving a portion of its budget for contingencies. The delay results in results spurt in expenditures at the end of the year with some spending being highly appropriate and other spending being utterly wasteful. An alternative is to allow surplus funds to be transferred to the agency’s new budget without requiring a re appropriation. Some jurisdictions allow this kind of transfer  within limits, such as a small percentage of each units total budget,

*reorganizing, downsizing, privatizing, and outsourcing: budget offices historically have played a central role  in examining the structures of departments and agencies, with an eye towards possible reorganization as a means for increasing the efficiency of operations. In addition to structural arrangements, budget offices often seek improvements in management processes as a means of garnering savings.
Management agenda: that a cost had been paid for the years of cutbacks. Downsizing and rightsizing and similar efforts may be aimed simply at reducing the size of government on the assumption that the bureaucracy is bloated and that cutbacks are possible without really altering the level of service. Other effects to functions are necessary but that most likely are not well run and could be performed better by the private sector. One option to achieve this reduced role of government in favor of the private sector is privatization. While definitions vary, the core of any definition of privatization or privatizing is the reassignment of government activities to the private sector. Privatization typically involves the selling of government assets to the private sector and turning the operation of these facilities over to private companies. The delivery of governmental services can be carried out to a considerable degree with the cooperation of private for this contracting or outsourcing in which a private firm provides a product or service at an agreed quantity, quality and price.
Outsourcing of government services is intended to increase government efficiency and reduce government spending. It should be kept in mind that outsourcing may result officially in a reduction in the number of government employees but that many private sector employees will have jobs only because of government contracting. Contracting out has 2 types of supporters; one group wants to increase efficiency of government operations through utilization of the private sector. The second group adheres to the view that the population is better served if service is left, where possible to the private sector. These advocates of outsourcing contend that government should be proactive in seeking opportunities for turning over functions to the private sector. There is a need to consider whether cost efficiencies will be attained, whether the private firm will be held accountable for its performance, whether any cost efficiency is attained at the expense of quality and whether equity or fairness in treating citizens and employees will be achieved. Whether companies in the market can provide the agreed-upon services in a timely fashion and can respond to unforeseen problems that may arise.

Management controls: budget offices have been assigned a variety of management -related duties beyond the core activities of assembling proposed budgets and overseeing their execution. Some budget offices have responsibility for studying agency procedures and for recommending new procedures. These organization-and management studies can recommend changes in the department’s management process. Budget offices set ground rules for many of the routine activities of line organizations. Some budget offices are charged with performing a legislative clearinghouse function. Before an agency may endorse a proposal for new or revised legislation, the proposal must be vetted through the budget office. This practice helps ensures that what is proposed is consistent with the views of the chief executives, both substantively and financially. Because corruption in government often involves finance, budget offices sometimes have major responsibility for protecting the government against fraud, waste and abuse of government resources. Another function of OMB is to deal with alleged instances of post-employment conflicts of interest in which former government employees may be illegally benefiting from their previous experience in government or their new employers may be illegally benefiting from inappropriate contacts. Of course, OMB is not the sole central agency responsible for handling problems in this area. Other important offices include the office of personnel management. Agencies must report to OMB on several other matters. Budget offices may have some responsibility for other management controls over agencies.
Control of information collection, quality, security, and dissemination: budget offices are heavily involved in government collection and dissmination of information. A chief concern is that government agencies heap huge burdens on individuals and corporations and in the case of the federal government on state and local governments in requiring them to submit information. 
Information collection budget: the document indicates both reductions and increases in burden hours. Any new collection of information must be approved by the office of information and regulatory affairs but first an agency must go through an elaborate analytic process. Factors to consider include the importance to the agency in collecting the information and a determination that the information does not exist already in some other  form or in another agency. The agency might be expected to implement a pilot program as a means of evaluating the collection process and the utility of the information collected. Once all of this activity is completed, the agency must post a notice about the proposed collection process in federal register and then go through a period in which it accepts comments from the public  OMB provides guidance so that the dissemination process does not evade the privacy of citizens or reveal trade secrets of corporations. OMB has other important roles in the information arena. The office influences how much information is collected by controlling agencies budgets, particularly those agencies whose primary mission is information collection. If budgets are cut. 

*enterprise architecture and e-government: the term enterprise architecture has become widely used throughout the public and private sectors and refers in general to a framework for how business processes within an organization should relate to one another. Major emphasis is given to information technology for linking these processes. OMB is responsible for overseeing this aspect of information management.
*Control regulations: in addition to providing relief from paperwork, budget offices maybe responsible for providing regulatory relief to business governments. The regulatory process at all levels of government and has its champions and critics at all levels. OMB has identified nine basic steps that include drafting the regulation, publishing it in draft form, obtaining public comments preparing it in final form, obtaining OMB approval and publishing it in final form. 

*tax administration and debt collection: tax administration has 4 main steps:-
1.	Determining the objects or services to be taxed.
2.	Applying the tax.
3.	Collecting the revenues.
4.	Enforcing the law.

*organizational structure: the internal revenue service has 6 operating divisions:-
1.	Wage and investment for individual tax payers.
2.	Large and mid-size business.
3.	Small business self/employed.
4.	Tax exempt and government entities.
5.	Tax compliance.
6.	Professional responsibility.

Enforcement: numerous tax enforcment measures are used , and well-trained and ethical personnel are essential for effective enforcement practices:-
•	Tax return information supplied by individuals is compared with information supplied by banks and employers.
•	Governments share computer-based data to compare information on income being reported.
•	Taxpayer services are provided to help I preparing tax returns.
•	Any government must decide how many resources to commit to these various activities and how resources should be disturbed among them. Decisions must be made not only about the type of activity to conduct, but also about the distribution of tax enforcement resources across different forms of taxes.
A component of the objective of having taxpayers comply with the law is having them report all taxable income. Greater revenue can be achieved through a variety of means including levies on government payments and abatement programs. With regard to levies, government sometimes is in situation of making payments to taxpayers both individuals and corporations for one purpose while those entities are simultaneously in arrears on their taxes. Levies can be imposed to recoup the taxes owed.
*technology in tax administration:-
•	Besides routine recordkeeping, computers are used for drawing samples for tax auditing and for cross-checking information between different sources.
•	Many businesses are required to make federal tax payments through the electronic federal tax payment system.
•	Electronic auctions are used by governments to sell delinquent tax properties.
*intergovernmental relations in tax administration: there are intergovernmental aspects to tax administration. As already noted some governments share information with each other to help detect non compliance with tax laws. Tax provisions of governments are sometimes linked too each other so that thee calculation of one governments tax is based on the calculation of another governments tax. This fact can unintentionally create policy and administrative problems. The federal government and the states have cooperated somewhat in tax administration. As noted earlier governments may expect tax and social security holdings to be submitted electronically.
*data collection and taxpayer rights: one of the biggest debts owed government is taxes, but individuals and corporations also may owe several other types of debt to government. Loans both direct and guaranteed result in some defaults. Federal credit programs exist for college students, low-income housing, ship construction, development in other nations and small businesses recovering from disasters. The federal government is attempting to deal with hidden liabilities of federal credit programs. General information on credit is contained in the analytical perspective budget document and more detailed information is available through other documents produced by OMB and the treasury department.
*cash management:-
Cash flow: an essential aspect of cash management is forecasting when revenues will be received and in what amounts and when expenditures will occur and in what amounts over the course of the fiscal year and beyond. A cash management plan will strive to accelerate the receipt of revenues and delay or minimize expenditures.
Inflow of revenues: enforcement of tax laws is viewed as one means of maximizing inflow. Other techniques involve depositing government receipts’ as soon as possible into interest-bearing accounts. Governments attempt to minimize the float time between when checks and currency are received and when they are deposited. Accounts receivable, involving payments due from citizens corporations and other governments are kept at a minimum. Inflow can be accelerated by prompt invoicing.
Lockboxes: another technique used selectively by the federal government and same state governments is the lockbox system, which uses post office boxes that are under the control of banks. Taxpayers send their payments to designated post office boxes that are opened by banking officials, and the receipts are deposited promptly. The process reduces the amount of float time between when a check is written and when government deposits it and begins earning interest.
Expenditure planning and prompt payment: some techniques deal not with inflow but with outflow. Here the concern is keeping money in interest-bearing accounts until it is needed to cover expenses and avoiding the need to borrow funds to cover expenses when revenues, such as tax receipts are unavailable in the projected amounts. Cash flow planning is one reason that agencies are required to submit apportionment plans to the central budget office. Agencies may be instructed to shift expenditures in apportionment plans from one month or quarter to another. One rule is to pay promptly that is when bills are due and not before or after.  
Borrowing: if forecasted expenditures cannot be adjusted downward to be no greater the expected revenues, then short term borrowing becomes an important option. Governments also may spend their own reserves and borrow from themselves.
Unrestricted fund balances: which are in effect contingency funds, may be drawn upon to meet unanticipated expenditure needs. Short term borrowing from one fund to meet the cash needs of another also occurs as in the case of a local government’s borrowing from its pension funds. Some governments have established rainy day funds or budget stabilization funds than can be used during years when revenues decline. 
*investment planning: when forecasts show periods during the year when revenues will exceed expenditures, plans are made for investment. Virtually all governments encounter this situation. Often there are spurts in revenue receipts. At least 7 factors must be taken into account when devising an investment strategy:-
1.	Security.
2.	Maturity date.
3.	Marketability or liquidity.
4.	Call provisions .
5.	Denominations.
6.	Yield or return on investment.
7.	Legal authority.
*Investment instruments: the instruments available for state and local investments consist of three general types:-
1.	Federal securities: they are largely sold at auction and are then made available for purchase through financial institutions. Other federal related securities; other securities are issued by credit institutions created by the federal government and may have full limited or no backing ambiguous backing of government.
2.	Corporate securities: corporations are another possibility for the investment of state and local monies.
3.	Money market instruments: financial institutions provide numerous investment opportunities. Interest is paid on negotiable order of withdrawal checking accounts on savings accounts. Not only can government earn interest on these deposits, but other benefits also maybe negotiated through linked deposit agreements. In these situations, banks as condition of receiving government deposits may agree to make available more loans for housing in a community or for industrial development in a targeted area. 

Other instruments include bankers’ acceptances, commercial paper, repurchase agreements. Bankers’ acceptances are agreements to purchase a banks’ agreement to loan money on a short term basis to a corporation.
Derivatives: one of the most controversial financial instruments is known as a derivative. Derivatives are highly complex devices that often are poorly understood by both those who sell and the state and local governments that buy them. A derivative’s value depends upon some underlying security or a market index.
Investment pools: another money management technique that has become popular is for jurisdictions to combine their investments into a state investment pool.
Yield rates: provides a snapshot of yield rates for some of the industrial instruments discussed here.
Use of investment instruments: most of the money in state and local government trust funds, such as employee retirement systems and workers compensation is invested and little is kept on hand.
*investment risks: investments are not risk free one type of risk involves the credit worthiness of the issuer of a security. Bonds issued by the federal government are nearly risk free in this sense and bonds issued by major corporations are low risk. Another aspect of risk, however, is whether a particular instrument is government bonds are risky investments.
*federal cash management: the federal government’s cash management system is considerably different from those of state ad local governments. Federal monies are kept with the federal reserve system, which pays of interest deposits and banks which also pay interest. The inflow of federal receipts comes from taxes and other payments and from the sale of T-bills and other instruments discussed earlier. These sales are handled through the federal reserve and are limited according to the total debt ceiling set by congress. T-bills are auctioned off weekly and other instruments are sold less frequently. Another important consideration is that the federal government must meet its cash needs on a global basis . Sufficient amounts of money must be available at specific times in specific countries.
Checks: the government did not only redesign its currency also it redesigned its checks. 
Electronic funds transfer: advances in computer technology have made possible extensive use of electronic fund transfer. An advantage of electronic fund transfer is that it can be used for recurring payments. 
Letters of credit: an important cash management technique, especially for the federal government which is the use of letters of credit.

Other cash management considerations:-
Computer usage: new computer technology has greatly altered how financed institutions operate and how governments handle cash.
Intergovernmental relations: cash management has important intergovernmental aspects. States as noted earlier, have passed laws setting standards for their local governments, which often view these laws as unnecessarily restrictive. Several states have established investment pools for their local governments.
Cash and investment managers: as is obvious, cash management involves complex set of interdependent activities that require extensive expertise.
*procurement: procurement entails the acquisition of resources required in providing government services. Contracting, while fundamental to operations of government is not always handled well in budgets.
Organizational configurations: most jurisdictions have procurement systems that blend centralized and decentralized services. A central purchasing agency maybe responsible for acquiring commonly used materials. Centralization at least in theory has the advantage of providing overall controls to ensure that appropriate procedures are followed, resulting in fair competition among government suppliers and the purchase of quality goods and services at the lowest possible prices. Decentralization on the other hand presumably reduces red tape allowing individual agencies to make purchases as needed and custom-tailor purchases to their specific needs. At the federal level, several major organizational units are responsible for procurement. All federal line documents and agencies carryout procurement with the department of defense having one of the largest procurement operations. Choices also must be made between purchasing leasing and privatizing. The federal government however may rely too heavily on leasing office space as ownership presumably is less expensive in the long run. Outsourcing is another option and may involve contracting with a private firm to use its facilities, personnel and other resources to deliver a service. In many cases, private contractor employees and government employees work side by side to produce services in government facilities.
*contracting process: steps; standard procedures are normally followed when contracting for products or services. Specifications for what is to be purchased are determined. Contracting officers are required to perform a best value analysis so that the lowest technically qualified bid is not necessarily the best value. Not all spending is handled through the bidding process. Many small purchases can handled through government credit cards and no bids are required. Although restricted to small purchases, the credit card transactions amount to may billions of dollars each year and pose major challenges for auditors.
Competition: competition in procurement is considered one of the best means of ensuring quality products or services at minimum cost. Lack of competition may result from blatant favoritism is awarding contracts or from somewhat more subtle ploys blatant favoritism in awarding contracts or from somewhat more subtle ploys such as specifying a named product brand and model. Not all awards are made on a competitive basis.
Several factors discourage competition: lack of knowledge about contracts, are awarded and how to prepare a bid excludes some companies from bidding although that problem is somewhat mitigated today given the vast amounts of information on contracting available on government websites. Many procurements are so large and complex that companies would have to make major investments in personnel and technology just to become competitive in the bidding process. Design and build contracts, in which several contract awards may be made for the design phase with the best design being selected for the build or implementation phase enable more firms to compete for much larger more complex contracts. Competition is restricted in other ways as well. A close and long-term relationship between a government agency and a contractor can develop over time. When a contract is to be re-bid for a new time period the company already holding the contract usually has a decided advantage.
Contract bundling: tends to prohibit smaller companies from competing for contracts whether this be at local, state or federal level. In contract bundling several would be small contracts are put up for bid as a single large contract. The advantages of government are first administrative costs of handling the bidding and contracting processes are reduced. Second, the item or service being purchased often is less expensive when it is ordered in bulk as in a bundled contract than when it is purchased in several smaller contracts. Combining efforts into larger and larger contracts often is an agency response to budget cuts or cuts in personnel complement. Fewer procurement officers and fewer government staff to oversee contracts increase the pressure on the agency to make fewer but larger awards. 
Problem areas and innovations:-
Credit cards and ID cards; government issued credit cards have become standard components of acquisition systems. Some governments now provide employees with credit cards so that they may charge their travel expenses and be reimbursed later rather than use travel advances or their personal funds to cover costs until being reimbursed.
Affirmative action: a continuing problem is the extent to which procurement should support affirmative action to assist minority owned businesses, women contractors and other special groups.
Labor management relations: in the contracting process, labor-management issues may arise such as whether a contractor will enter into agreements with labor unions.
Other problems: other procurement problems involve energy, the environment and immigrants. Agencies are expected to purchase equipment that is efficient in the use of energy and minimize pollution.
*Risk management: to provide services, governments must have the property and personnel. Arising from this simple fact are a series of exposures or risks such as the risk of property being damaged or lost owing to natural disasters, employee error and fraud by employees and others. Property damage can lead to major repaid or replacement costs to loss of income.
Liability: governments are vulnerable to suits brought by employees or by corporations and private citizens. Negligence is often the basis of suits in which government is alleged not to have acted the was a reasonable person would and inflicted harm as a result.
Managing risks: governments need a management strategy for dealing with exposures. Risk management planning begins by identifying risks and where possible eliminating them. Having eliminated or reduced risks, governments must be prepared to deal with the remaining areas of exposure . Commercial insurance is used by governments and awarded through a bidding process similar to any other purchasing arrangements. Another option is self insurance, where a government sets aside funds on a regular basis to cover awards or simply expends funds from the current budget to cover abnormal expenses. 

Chapter 11:-
Governmental accounting: a standard definition of accounting is the art of analyzing, recording, summarizing, evaluating and interpreting an organization’s financial activities and status, and communicating the results. Accounting is one type of information system, one which contains mostly financial information on transactions involving the receipt of funds and their expenditure.
Organizational responsibilities and standards: purpose; accounting systems have been devised for a variety of purposes. They are based on details, but those who operate accounting systems should never lose sight of the main purposes. 
Federal governmental accounting organizations: for accounting systems to serve these purposes, certain conventions or standards must be established, or else chaos would resign as each government or department within a government established its own standards and practices. Numerous organizations establish the ground rules for accounting. Both the government  accountability office GAO, which is an agency of congress and the office of management of budget OMB, which is an arm of the executive office of the president set guidelines for federal agencies and to some extent compete with one another over control of accounting.
Private sector accounting organizations: the private has long had a well established standard setting organization. 
Standards and principles of accounting: at the federal level, the generally accepted accounting principles are established by the federal accounting standards advisory board, having been granted this authority by the American institute of certified accountants.  
Organizational arrangements and fraud: creating organizational arrangements that deter fraud is of paramount interest in accounting. Fraud can be committed by workers handling receipts. Fraud can involve one or two individuals or an be systematic. One prescription is that accounting systems need to be transparent. How they operate and the products of their operations, specifically their various reports need to be available to interested parties and the public in general. This of wide-spread concern ranging from highly developed countries to less developed ones. To prevent fraud and to reduce other losses due to errors and the like, internal controls that specify organizational arrangements and procedures are established. One standard practice is to segregate duties so that one individual may have only limited authority over monies and two or more people may be required to approve some financial transaction. The presumption is that if two or more individuals are part of a particular process they will monitor each other’s behavior and limit various abuses. Employees are trained in how to enter transactions properly in accounting systems and what their ethical and legal responsibilities are in handling public resources. Individuals who handle funds maybe subject to more extensive background checks before hiring and may be bonded. Downsizing can force the elimination of personnel and increase the risk that funds are vulnerable to theft or accidental loss due to the reduced oversight of financial operations. Auditing bodies are important in preventing and detecting fraud. GAO audit’s the financial statements for the government as a whole for departments. 
Fraud accounting: governments separate financial resources into distinct accounting entities called funds. Each fund is set up to record and account for the use of a specific group of assets or sources of revenue or collection of specific type of costs.
Governmental funds consist of five types:-
1.	The general fund; is the most important governmental fund.
2.	Property funds; the second class of funds consist of those that are proprietary or business like nature.
3.	Fiduciary funds; this class is often called trust and agency funds consists of accounts that are dedicated to a third party.
Account groups: according to generally accepted accounting principles, governmental funds use account groups to report fixed assets and long-term liabilities, whereas proprietary and fiduciary funds report these resources and debts within the funds themselves. Governmental funds include only financial assets namely, assets that will be converted to cash and therefore the general fixed asset accounting group is used to report assets that will not be converted to cash such as buildings, swimming pools…etc
The second account group is the general long term debt account group. This group reports, government debt that is not part of the proprietary of fiduciary funds. 

*Structure and rules of accounting: ledgers; accounting systems use ledgers as a means of organization or structure. Each fund has a general ledger and subsidiary ledgers. The general ledger records the overall status of revenues and expenditures, while subsidiary ledgers are established for each revenue source and type  of expenditure.
Expenditure subsidiary ledgers control expenditures by appropriation, organizational unit, object of expenditure, and sometimes purpose or activity. Accounting systems are used to track expenditures according to provisions.
Accounting formula: accounting systems use equations that allow systematic recording of transactions and double-checking that the transactions have been properly recorded. The basic equation that is used: assets = liabilities + fund balance. in the formula, assets can be the revenue in a fund. Liabilities are the monies owed others. Specific accounts are established for each of the three components of the formula. 
A resource is an item with a present service capacity. A resource maybe tangible and have the right to use intellectual property or may even be embodied in the skills of individuals. Other terms defined are:-
•	Assets; are resources that the entity presently controls.
•	Liabilities; are present obligations to sacrifice resources or future resources that the entity has little or no discretion to avoid.
•	An outflow of resources; is a consumption of net resources by the entity that is applicable to the reporting period.
•	An inflow of resources; is an acquisition of net resources by the entity that is applicable to the reporting period.
•	A deferred outflow of resources is a consumption of net resources by the entity that is applicable to a future reporting period.
•	A deferred inflow of resources is an acquisition of net resources by the entty that is applicable to a future reporting period.
•	Net assets are the residual of all other elements presented in a statement of financial position.
•	double entry accounting in which any single transaction is recorded twice is used as a cross check. The double entry approach also can be used within one portion of the overall formula. 
•	Specified procedures: flowing out of accounting standards and principles are procedures that determine how transactions will be recorded and in what accounts.  These procedures are typically specified in manuals or handbooks so that employees involved in whatever aspects of accounting know how to meet their responsibilities. Payroll procedures will be specified in some detail in a manual and are likely to require approval of specific individuals, possibly including written signatures confirming which employees are to be paid what amounts.
•	The typical accounting cycle is as follows. An event occurs and a source document is prepared. The event might be a decision to tax property and the document might be a tax bill sent to a citizen. When the citizen pays the bill, another transaction occurs and the accounting system needs to reflect such. These types of events or transactions will be posted in a journal, which is chronological listing of events or transactions the journal entry indicates both the credits and the debits involved in the transaction. Entries once recorded in the journal are posted ledgers, and from time to time the debits and credits of these accounts are totaled to obtain trial and final balances. The balances are used in preparing financial reports.

*Classification of receipts and expenditures: receipts; the monies that government receives need to be recorded according to the source. The money derived from each tax source such as property and income taxes needs to be recorded separately and in distinction from user fees. The federal government treats user fees as offsetting collections.
Fund and appropriation: expenditures are accounted for in a variety of ways . One set of characteristic is the fund and appropriation. An appropriation is a legislative approval to spend from a specific fund.
Organizational unit: expenditures are made by organizational units and accounting systems must track expenditures accordingly.
Objects of expenditures: accounting systems invariably in terms of the objects acquired or the objects of expenditure.
Purpose and activity: program oriented budgets that focus decision making attention on specific program goals and objectives also require accounting based information on how much program costs. The federal government uses broad functional categories.
Performance and measurement: while practitioners and academics in the field of budgeting have long been concerned about how to measure the results of government programs.
*Basis of accounting: the basis of accounting refers to the timing of transactions, or when a revenue item is recorded as received by the government and when an expenditure is recorded as having occurred.
Cash accounting: the oldest system is ash accounting, which is still used today particularly is small governments. In a cash accounting system, tax receipts are recorded when they are actually  received by the government and expenditures are recorded when payments are made.
Encumbrance accounting:  a step in the direction of anticipating future transactions  is encumbrance accounting. Expenditures are recorded when purchase orders are written or contracts are signed.
Accrual accounting: in accrual systems, financial transactions are recognized when the activities that generate them occur. Revenues are recorded when the government earns the income as when a local government sends tax bills to property owners.
Cost accounting: while the cash, encumbrance and accrual bases of accounting focus attention on resources coming into government and being expended, cost accounting is concerned with when resources are used in the production of goods and services.
Activity based costing and activity based management: concentrate on collecting costs of delivering services to citizens. 
Cost accounting is especially important in the public sector in an era of privatization. Cost accounting requires that special attention be given to acquisition and utilization of fixed assets. Fixed assets sometimes are sometimes financed centrally and don’t appear in the budgets of the organizational units that actually use these assets.
Depreciation: is essential in cost accounting and depreciation rules need to be applied differently according to the assets involved.
Project-based accounting: another option that is not as elaborate as cost accounting is project-based accounting. Accounts can be established on a temporary basis to track costs for selected activities. Project-based accounting also is used for monitoring internal operations. If a corporation is developing a new product or group of products, separate accounts can be established to gauge the developmental costs of the project.
Cost finding: in some instances, governments may be satisfied with something less than a complete cost accounting system or even-project based accounting rather than having an ongoing cost information system, governments sometimes selectively study costs of specific activities that may be contained within a single organization or spread across several units.
Allowable costs:  the awarding of grants and contracts, governments need to determine what cost are allowable. 
Risk d credit accounting: public sector officials have come to recognize that risks arise in carrying out public duties. Risk management involves assessing the risk exposure of a government. On the one hand, in making and guaranteeing loans, the federal government assumes risks that can have major financial consequences as evidenced by the forced bailout of failed savings and loan association. OMB requires agencies to supply data on direct loans, loan subsidies, guaranteed loans and guaranteed loan subsidies as part of the agencies’ budget submission. 
Generational accounting: of growing interest are the potential effects of government finances on different generations. 
Need for different bases:  these different approaches to the basis of accounting are not substitutes for one another. Each satisfies a different need:-
•	From a treasury department’s point of view, a cash basis for recorded receipts and expenditures is necessary because the department has the legal responsibility to receive revenue and issue checks to cover expenses.
•	The encumbrance basis is important in showin the current status of assets and liabilities that will place a demand on cash in the future.
•	Cost accounting is valuable in identifying resources consumed as distinguished from resources acquired and placed in inventory.
•	Risk accounting provides a more comprehensive overview of obligations than is available through accounting systems that cover only revenues and expenditures.
•	Generational accounting provides insights into the implications of government finances.
Defined benefit and contribution plans: pension systems in the public sector have used defined benefit plans, in which benefits normally are determined according to some combination of years of services, wages or salaries and age at time of retirement. Cost living allowances: are usually assigned to pensioners, in some cases on an automatic basis according to an economic barometer such as the consumer price index and in other cases on an ad hoc basis. An alternative to defined benefits is the defined contribution plan; under this plan benefits are not defined in advance of retirement but rather the employer commits to contributing regularly to an employee’s retirement account. The benefits received at the time of retirement are a function of the employer’s and employee’s contributions plus investment earnings on these contributions.
 Funding: pension plans are funded by a combination of contributions from government and employees and investment earnings on those contributions. There are basically two methods of financing retirement programs: pay as you go and advance funding. With pay as you go method, all that is required in any one budget year is to raise sufficient revenue to cover retirement benefit checks. This method is generally discouraged because it allows for the accumulation of debt.
Several options are available for improving the funding situation of retirement systems:-
•	An obvious option is to increase government and employee contributions.
•	Retirement systems can pool their funds for investment purposes.
•	Some jurisdictions have sold bonds to obtain the funds needed to cover retirement liabilities.
*Reporting: accounting systems generate reports that are used by managers, policy makers and people outside of government. Annual reports are particularly useful to people and organizations outside of government. They can show tax payers how revenues have been used to support services. Annual reports of local  governments are helpful for businesses that are considering locating, relocating, or expanding existing facilities. Such reports help discover the financial condition of governments and decide whether to purchase their bonds. 
Balance sheets: a balance sheet can be thought of as a snapshot of a government’s finances at a point in time, such as at the end of a quarter or fiscal year. A balance sheet is organized according to the accounting formula discussed earlier. Assets are first listed, showing cash on hand and taxes receivable. The balance sheet then indicates liabilities namely accounts that are payable and bonds outstanding followed by the fund balance, showing items such as monies that are encumbered.
Operating statements: a second major type of financial statement is the operating statement, which shows the monies and expended during a specified period of time. Expenditures can be reported by major objects, organizational units or other means.
The pro forma operating statement represents a particular type of statement, it rarely is used as such in the public sector. It commonly is prepared in the private sector when a company is considering a capital investment. The statement has three component forecasts; demand and prices, variable expenses and fixed expenses. The pro forma is used to determine whether a potential capital project would add to the company’s bottom line. 
Cash flows statements: a third form of financial statement details cash flows. The purpose is to show how cash entering and leaving a fund affects an entity’s operations. these statements cover cash equivalents , such as short term investments. 
Pre-audit occurs before the government commits itself to a purchase and is used to verify.
Post audits generally involve more extensive procedures and often more participants.
Auditing objectives and organizational responsibilities: purposes; auditing in the private sector is used largely to insure that the financial statements issued by a firm fairly reflect its financial status, and this same concern exists in the public sector. Auditing provides some assurance to investors in both the private and the public sectors that their investments are secure and are being well managed.
Another purpose of auditing is ensuring that funds are not subject to fraud, waste, and abuse or subject to error in reporting.
Auditing in government is used for compliance purposes as well. As has been noted, accounting systems track receipts and expenditures to ensure that they are handled in conformance with restrictions contained in revenue and appropriation bills. Auditing helps ensure that an agency does not spend funds on an activity that while beneficial to society simply has not been authorized. 
Auditing organizations: nationally several organizations influence the practice of auditing. The OMB is deeply involved in auditing, a relatively new role for the organization.
Audit types: financial audits focus on whether financial statements prepared by government accurately reflect financial transactions and the agency’s status. Financial audits also review how financial matters are handled or whether suitable internal control exist to protect resources. Auditors are concerned with the vulnerability of a financial management system to potential fraud. Identification of risks is the first step in eliminating problems, auditor’s limited resources.
Auditing standards: the federal government auditing standards provide overall guidelines as well as standards for conducting field work and preparing audit reports.
The single audit: a concern of the federal government for many years has been the large volume of federal financial transfers to state and local governments and to nongovernmental organizations and verification of whether these transfers are being suitably audited.

Chapter 13: capital finance and debt management:- 
Types of finance: in the private sector, there are three sources of financing capital assets; debt, equity, and retained earnings. Retained earnings are what households think of as savings. Debt is available to both public and private institutions, and to households. Equity comes in the form of stock issuance in the case of publicly traded companies. Puchasers of stock then literally own a fraction of the corporation. They are not 

Entitled to any repayment of the money invested in purchasing the stock. Rather, they are entitled to a share of the value of the corporation. They may benefit from the value if the corporation  pays dividends, or they may sell the stock as a later date, and if the company has performed well in the market, the value of the shares sold will have appreciated. Equity investors of the course also may experience a decline in value and actually sell their stock for less than they originally invested. Creditors who have lent money to a public or private enterprise legally have first recourse to being repaid, they have the first claim on the assts of the borrower. Equity investors come in after all debts are satisfied. The other forms of equity capital are owners equity investments in the case of privately held companies and retained earnings.
Retained earnings, essentially profits not distributed to owners are the third source of equity capital. For private companies, revenues in excess of cost may be distributed to the owners as their share of the profits, or they may be reinvested in the company for a variety of purposes, including capital facilities expansion. These retained earnings, earnings not paid out to owners but kept in the company for investment, are an important source of finance for capital investment. These excess revenues often may be referred to as retained earnings. All three sources of finance are used by public sector institutions to secure the capital needed to finance investments that may be rehabilitating aging infrastructure or other facilities or building new capacity in order to meet the needs of a growing population.
*Debt capacity and management: since the federal government borrows for purposes other than capital investment.
Size of debt: the size of debt can be assessed in several ways. The total amount of debt is probably the least meaningful measure. Per capita debt; per capita debt figures help put the total government debt in perspective. Ratio of debt to personal income; relating debt to personal income instead of population begins to clear the picture.
Debt default: it is important to remember that the figures on debt do not reflect the full scope of future financial obligations of governments. Pension programs for public workers constitute a form of debt and often are inadequately funded.
Debt capacity: measuring debt capacity; measuring debt capacity is an art rather than a science, in the last couple of decades, the public finance and budgeting profession has paid considerably more attention to improving the level of the art. Three main factors influence debt capacity: expenditure pressures, resource availability, and the commitment of governmental officials to se resources to meet debt requirements. Assessing resource availability involves analyzing all potential sources of revenue including own-source revenues; transfers from other levels of government and types of self financing including user charges, special assessments, impact fees and a variety of other measures to collect fees or revenues sufficient to support the specific project or facility. 
Expenditure analysis look at the present and potential future commitments of jurisdictions. 
Debt burden: the most common overall measure of debt burden is the ration of debt to debt-carrying capacity, which reflects the extent to which revenues are sufficient to cover debbt service, in addition to operating expenses. The debt to equity ratio is a measure of the extent to which a utility is financing itself through debt relative to equity. The higher the ratio, the more risk there is in additional debt issues, as lenders want to see borrowers also making significant commitments of their own resources. Another common ratio, interest share of operating income,, measures the amount of debt as a percentage that operating income has to cover.
Debt management: in general, sound debt management at the state and local levels involves restricting debt primarily to financing long term investments. A central rule is that borrowing should not be used to meet current operating expenses.
Debt refinancing: from time to time, substantial swings in market conditions bring interest rates down and spur a round of refinancing bonds.
An alternative that does not require any actual transaction with outstanding bonds is an interest rate swap. In this type of transaction, the borrowing authority agrees to pay a third-party financial investor a variable rate of interest over a fixed period of time in exchange for payment of a fixed rate of interest by the third party. This is a synthetic variable rate financing deal in that the bonds themselves remain as they were with the terms and conditions unchanged.
*private equity financing for public assets: concession contracts; concession contracting involves a substantial change from a conventional public sector financing and operation of public service facilities. Concession contracting involves the government awarding a contract with one or more companies to operate a service for a fixed concession period. There are three types of concessions. First is an operating concession in which a new facility or asset is to be constructed, and the private contractor both constructs and operates the facility for the contract period. However, in this structure the contractor is not involved in the capital financing. Second is a concession contract for operating an existing infrastructure system. In this, the contractor is responsible for both debt and equity capital finance. The third concession-type contract is similar to the second, except that it involves not an existing facility or capital asset, but the construction and operation of an entirely new facility a so called Greenfield project. In contrast with the first type of concession contract the private party is responsible for the capital financing requirements, both debt and equity. The build operate transfer structure is where the private company is awarded a contract to build and operate a facility for a period of time but the government or agency that contracts with the private group provides 100% of the financing.
Characteristics of concession contracts:-
•	Concession contracts were selected in preference to privatization.
•	Public utility concessions generally are competed on the basis of bidder’s proposals as to the amount of capital investment they will charge consumers for the services and the stipulation.
Build-operate-transfer: a variation in concession contracting involves a still higher degree of private sector investment. It is more common where the intent is to build infrastructure in a geographic are where no service presently exists.

Chapter 15:-  

Measuring the size of the economy:-

Two basic concepts, production and income, characterize the economy in terms of the total value of goods and services produced and the income derived from the production of those goods and services.
Gross national product: gross domestic product is the basic measure of economic output. It is the value of the total goods and services produced by the nation. Gross domestic product is the aggregate of personal consumption expenditure, gross private domestic investment, net exports of goods and services, and government purchases of goods and services.
Gross national product: an indicator similar to GDP, gross national product GNP for many years was the common indicator of total production. For U.S, GDP and GNP typically do not differ much because income earned abroad and income remitted tends to balance.
Net national product and national income: two related indicators, both derivatives of GDP, are net national product (NNP) and national income NI. Gross domestic product includes all capital investment, some of which does not produce new productive capacity but instead replaces capacity that has been used up such as measures only capital investment net of depreciation. National income is derived from NNP by eliminating indirect business taxes included in the price of goods sold and business transfer payments.
The United States and the world economy: similarly economic growth in several nations once considerably smaller than the US economy, including Japan and Germany, and the emergence of the Indian and Chinese economies as major economic participants in the world economy mean that the US share, although still a major component of the world economy is merely one among several important national economies.
Foreign direct investment: is the largest source of capital inflow in developing economies. The notion that there is now a global economy, and that the united states is a part of that global economy but not the controlling agent, is accepted by most people, albeit for some quite uncomfortably. Of course the United States is also vehemently criticized for its size and the influence of its economy in some other countries.

The United States as a debtor nation: a second major factor influencing today’s world economy involves the debt of US individuals, corporations, and governments. Citizens not price increases in gasoline and other products dependant on imports and dramatic political conditions such as terrorism. Not as obvious are the credit flows among nations and how the US is both actor and reactor to worldwide economic forces. Generally though the claims of foreign investors both private and governmental on assets in the United States regularly exceed the claims of US investors, private and governmental on assets in other countries. Foreign asset holding in the united states in descending order are:-
1.	Debt and equity securities.
2.	Fixed assets including resorts, factories and even public utilities such as water companies through direct foreign investment.
3.	US government treasury securities through portfolio investment.
The inflow of foreign capital has helped the keep the US interest rates low because it fills part of the demand for borrowing created by federal budget deficits. And it finances high levels of consumption including imported products by US households.

Value of the US dollar in the world economy: the third phenomenon relates to changes in the value of the dollar in the world economy. One of the major factors affecting the value of the dollar has been the introduction of a common currency in most of Europe; the Euro. The US economy was booming and there were federal budget surpluses. In recent years, the Euro has appreciated against the dollar in part because of cyclical economic change, but also because the prices of goods and services in the various former European country currencies now have settled into clear value in Euro terms. 
Competitiveness of the US economy: a fourth key economic phenomenon to note is the competitiveness of the US economy relative to other emerging industrial powers. The preceding phenomena indicate that the US economy is so independent with those of other nations that no significant actions that the United States takes lack repercussions around the world. Likewise, no significant economic events in other major industrial nations or groups of developing nations fail to have repercussions in the United States. 

*objectives of economic policy: the role of the federal government in the economy consists of several interrelated functions. First the government provides the legal framework in which economic transactions take place. Second, it directly produces services and some goods and it regulates private production. Also it purchases significant quantities of goods and services and redistributes income among individuals and groups. One goal of the government’s regulation of economic transaction through setting the legal framework is sometimes described as maintenance of a level playing field. Making sure that all economic actors play by the same rules and succeed or fail on the basis of their own strengths and weaknesses. The first three objectives of the federal government are primarily domestic in nature. In many respects, they can be summarized in a single prescription: achieve a level of economic growth that produces full employment without unacceptable inflation. Economic growth is the engine that drives demand for employees however running that engine too fast or with too rich a fuel mixture may cause prices to rise unacceptably. The reformulation of these objectives into a single statement brings out the casual connection that exists between economic growth and employment and unacceptable inflation.
Full employment: as a measure of economic performance, is the number of civilians over the age of 16 outside of institutions who are working in formal income producing jobs. The most commonly used measure of employment is unemployment. It is the proportion of the workforce not employed at a given time. The controversy of over time work is another issue, many people choose part time work but companies also have increased the number of workers they hire as part time in order to reduce total wage costs by not paying fringe benefits to part timers. 
Relationship between unemployment and inflation: the more the unemployment rate decline, the more difficult it becomes to find workers. As a result wage rates may be bid up creating inflationary pressures.
Economic productivity: unemployment is not the only and perhaps not the best measure of the economy’s health. Even if the rate of unemployment and the rate of inflation are both at acceptable levels the overall productivity of the economy could be seriously declining.
Impact of government on productivity: most economists think that the primary impact of the government on economic productivity and long term growth is due to influences on knowledge development and investment in productive capacity. The impact of the direct and indirect actions of government on improving the productivity of the economy can be measured only in the long run. 
Balance of payments: balance of payments refers to the value of goods and services and the financial assets and liabilities flowing between the United States and other countries. The simple trade balance is the net balance of goods purchased abroad versus goods sold abroad. This is called the current account surplus or current account deficit. Besides the trade balance, financial transactions help determine the current account surplus deficit. The net flow of capital investments is called the capital account surplus deficit
Financing the US economy: the flows of capital across international boundaries and the financing of investment will continue to be major focal points of both economists and governments. 
Gross national savings: is the sum of household saving, corporate saving, and the government saving.
Net national saving captures the difference between investment in productive capacity whether government or corporate that adds to new production by subtracting out the value of fixed assets replaced. 
Size of the US federal debt: to understand the debate about governemnt debt we should understand the relative size of the federal debt and then consider its origins and implications. Economic performance affects the size of the federal debt based on 2 circumstances which explain the rapid rise in the federal goverments debt. One the federal budget in terns of both revenues and expenditures is affected by the overall performance of the economy. And two similtaneous wars, high prices of ipmported oil and rising cost for some federla programs such as medicare continued the longer term trend to higher deficits in later years.
Effects of tax cuts on the size of the federal debt; the secondset of circumstances affecting the deficit are tax policy decsisionsbeggining with the adminstration of presidant ronald reagan. The theiry behind the tax cuts was that the funds not collected by the governement would be better invested by the private sector yielding a future revenue dividend in the form of increased tax yields from the heightened economic activity . in reality the fiscal dividend never materialized.
Coincident indicators report the state of the economy nowas they commonly reachthe piblic’s attention such as prices they are another measure of what is happening.
Unemployemnt: two other measures provide good indications of the current state of the economy; unemployment and industrial production. Unemployment measures the percentage of the people within the labor force who are not emplyed.
Leading indicators: employemnt related indicators; the average of weekly hours in manufacturing. A later indicator is the weekly initial claims for unemployment unsurance.
Stock markets: stock markets are watched closly by the buisness community and government analyst but their volatility makes them difficult to use as leading indicators.
Combining fiscal and monetary policy: different organizational entities are involved; monetary policy is somewhat clear cut in the the federal reserve system is in charge. The tools that were discussed are under the control of the board with the leadership of the chair. Discount rate is a means used by the the reserve to influence the level of borrowing through its lending rate to member institutions, open market operations  are highly visible to the financial community because they occur daily.
Fiscal policy is more complicated. The presidant is responsible for recommending policy and congress for setting it.the council of econmic advisors as well as other key advisors provide input into the presidants decision making as to what to recommend to congress.
Link between infastructure and economic growth; the casual link betweenthe two depends on two conditions. The lack of facilities or infastructure has to be a barrier to investment and the costs of the investement have to be in principle recoveravble through economic gains.
Tax policies: expenditure programs are not the only form of income redistribution.differnt taxes have different impacts on various groups. The overall structure of the entire tax system may operate to redistribute income among different groups.