The AGA Weblog

A Study of the 50 States’ Budget Processes

By: Sheila A. Weinberg

Sheila A. Weinberg is the founder & CEO, Institute for Truth in Accounting

Later this summer the Institute for Truth in Accounting will be issuing our survey of state governments’ deficits and balanced budget requirements. As a part of this research, funded by the Searle Freedom Trust, the Institute is studying each of the 50 state’s budget process and the results reported on their financial statements.

We believe that transparency is in each state’s budget process is critical because this process is the principal vehicle through which the state legislature and governor annually allocate resources generated through identified and regulated revenue streams. The budget document and process should be the cornerstone of government accountability. The research that we have done so far indicates two key problems with the current budgeting and accounting systems. First, the same accounting rules are not being used for budget calculations and financial reporting. Second, the audited Comprehensive Annual Financial Reports (CAFRs) are not being issued in time for legislatures or governors to meaningfully review the results before planning the next year’s budget. Our survey of the 50 states will determine what state budget processes, if any, are showing leadership in transparency and accountability to their citizens.

To the first problem, when states calculate their budgeted revenues and expenses, elected officials and their staff are using “modified” “cash basis” accounting. Only current cash inflows and outflows are included in “cash basis” accounting. Therefore budget calculations do not include liabilities incurred in the fiscal year that will be paid in future years. Our experience in Illinois shows that ‘modified’ seems to means that the elected officials can modify the budgeted amounts in almost any manner that they want, so they can claim a “balanced” budget. Another troubling trend the Institute researchers have noticed in Illinois is the lack of accounting for hundreds of millions of dollars of pension and other retirement benefit funding that were incurred but not funded in previous fiscal years.

The CAFRs are prepared in accordance with Generally Accepted Accounting Principles (GAAP). GAAP accounting gives a more complete picture of each state’s financial condition, including a clearer view of the state’s liabilities. The lack of consistency between the budget calculations and financial reporting results in an “apples and oranges” scenario, where the budget numbers have no bearing or relevance to the CAFR numbers. Public accountability is nearly impossible because there is no way for the public to compare the amounts included in the “balanced” budget to what was actually spent. For legislators, “cash basis” budgeting seems to work out very well: they only need to focus on expected cash flow in the coming fiscal year, without having to include amounts promised in future years. Unfortunately for the taxpayers, it creates a growing problem of having to pay for guaranteed liabilities that only loom larger every day they are not adequately addressed.

Initial Findings
Three states show the scale of the problem: California, Illinois and Vermont.

In California, the legislature and governor do not even include an estimate for anticipated revenues in the budget—it’s a “$0” entry. Only expected expenditures are included. The FY07 CAFR showed a net deficit of $1.083 billion and recent words of reform from the Sunshine State makes us worry. True transparency and accountability begins with a budget process that gives the taxpayers a clear and concise report of where their money is proposed to be spent. California hasn’t even begun.

In Illinois, where the budget does include both anticipated revenues and expenditures, the growing difference between the budgeted amounts and the CAFR amounts is staggering. In FY07, Illinois’ CAFR reported an accumulated net deficit of more than $20 billion. Yet in spite of this evidence, the legislature and governor are not close to bringing about meaningful change to the current procedures. This year’s budget process is showing signs of being as cantankerous as last years, where frustrated legislators were sequestered in Springfield until mid-August. When the governor claimed that the legislature was not working for a truly balanced budget, the state comptroller weighed in by advising that the last four budgets the governor had signed were not balanced. Illinois consistently ranks among the worst and most dire when it comes to budgeting and funding.

The Institute has found some promising results in Vermont, which is showing the way to budget transparency and accountability. Vermont is carrying a positive net operating balance and its budget tracks its CAFR comparatively well. Informed with such information, Vermont taxpayers, legislators and even the media have a more true depiction of the state’s financial condition, and therefore can participate more meaningfully in the planning for the next fiscal year, and beyond.

We will issue our 50-state survey of state government deficits and balanced budget requirements in late summer. Until then you can find more information on their websites at: www.truthinaccounting.org and www.truthin2008.org

TOMORROW: Anna Dixon, IBM Global Business Services, "Successful Large Scale Federal Financial Systems Modernization Using the Big Bang Approach and Enterprise Architecture"

Why Traditional Budgeting Just Doesn’t Work and What Government Can Do About It

By: Rhonda Reinke, CGFM, CPM

Rhonda Reinke, CGFM, CPM, a member of AGA’s Olympia Chapter, is chief administrative officer, Transportation Improvement Board, State of Washington

A very wise financial professional told me early on in my career—a budget is nothing more than a wish list, and as an accountant, I was responsible for telling the truth of the numbers. The budget is usually used as the conduit to ensure that there is “accountability” by placing limits on managers and staff to make sure that they do not overspend their allocation of expenditures. It doesn’t matter if the revenue decreases. As long as the expenditure authority is in place, the agency spends. At one agency where I spent a few years, expenditure reports were sent to managers trying to figure out why a department had under-spent the monthly allowance and what they were going to do to increase their spending. Outcomes were not even on the radar, let alone, revenue (and we were a revenue producing/spending agency).

The reason why this happens is that budgets are inflexible, outdated as soon as they are passed, and not tied to goals or outcomes. What can be done about this? Well, it would take an act of congress or legislature, but the tide is turning. One example in my home state of Washington is Snohomish County. They actually looked at what the laws said they were to spend money on. They do not just take the program manager’s word. Rather, the laws and ordinances are documented for the actual minimum level of services to provide. Then, anything over the minimum has to be purchased through a thoughtful and deliberate process. It appears to be working.

They call it Budgeting for Outcomes, but the rest of us call it the “P” word…. Performance-Based Budgeting. When I put those three little words into Google within seconds, more than 4.8 million entries came up ranging from software packages costing millions, to books, seminars and videos (do you really want to sit through three jam-packed, exciting hours of watching someone speak about budgeting?) So what can be done about this?

1. Look at the must have versus the nice to have. An analogy that I really like is water compared to any other drinks. Water is a life sustaining substance that everyone must have in order to survive—you cannot go more than three days without it. Compare your services to this benchmark!
2. The budget should be a spending plan based on policies, not policies based on spending. From the congressional budget: The budget system of the United States government provides the means for the president and Congress to decide how much money to spend, what to spend it on, and how to raise the money they have decided to spend. (Does anyone else see backward logic in this?)
3. Traditional budgets are very inflexible and are based on the information projected at the time of preparation, which is usually six to 12 months before it is enacted. If you don’t have a crystal ball that shows you everything you need to know about what the economy will do, don’t try to predict it because you will be wrong.
4. Citizen priorities are different than what you think. One of the interesting items that resulted from citizen surveys in Washington is that transportation and getting to a destination on time is the greatest concern to the citizens.
5. What are the citizens willing to pay? Any analysis will show you that most taxpayers do not hate paying for services as long as they see something for their money. But they have a price point (debt to equity ratio) on what they perceive as inefficient or wasteful spending. This leads to:
6. Performance matters and citizens must see it. With public protection, citizens want to see police cars on the street and they want ongoing patrols. Most don’t care how many firehouses are in their city, they want to make sure that response is within a couple minutes and that their loved one having the heart attack is taken to the emergency room and survives.

Government has always had data and lots of it, so why haven’t we used it? And why can’t the budget be a more flexible spending plan and show the taxpayers what they get for their money? Finally, from your perspective, what are the barriers to “performance based budgeting,” and more importantly, how can this be overcome?

TOMORROW: Michael Jacobson, Director of Performance Management, King County, WA, on "Can We Do It All? Is It Possible to Have All of the Performance Management Pieces in Place at One Time?"

Questions on posting comments or wish to subscribe to the feed that sends blogs right to your e-mail? Find instructions here. Want to be our guest on the Blog? Contact Marie Force, AGA communications director, at mforce@cox.net.

Accountability: The Budget’s New Clothes

By: Thad Juszczak

Thad Juszczak, a member of AGA’s Washington, D.C. Chapter, is a senior manager with Grant Thornton LLP, a retired federal budget officer and AGA National Treasurer-Elect.

Because I’ve spent most of my career as a budget officer, I’d like to deal today with an issue that is faced by budgeteers as well as other accountability professionals. Performance budgets have recently become popular, but their focus is often on building and justifying the budget. These aspects of budgeting, especially testifying before the legislative body, seem pretty high profile. (I was going to say “sexy,” but you have to be a real budget wonk to see the budget as sexy.) From my perspective, though, it’s when executing the budget, after it is approved, that the greatest opportunities for accountability arise.

A good performance budget is a political document that lays out what your agency plans to accomplish during the coming budget period (the “outcomes” that everyone talks about), how you will measure your planned success and how much your activities will cost. Once your budget is approved and you begin executing it, you monitor your agency’s progress:
• are your planned outcomes/results being achieved?
• are you meeting the benchmark measures of success that you projected?
• are things costing what you calculated they would? (note that this is listed last)

Some budgeteers are good at pointing out that through five months they have spent 35 percent of their travel budget. They might even produce statistics showing what percentages were spent through five months in past years or what the agency planned to spend through five months this year. This is all very useful, quantitative stuff, and execution budgeteers are nothing if not quantitative.

But, spending money is not the goal of any agency (I hope). Achieving results is what we should all be about. Therefore, the critical question is: what results did the agency achieve with the travel funds that it spent. Did the travel contribute to the desired results? We are now in qualitative territory, perhaps uncharted for many, but it is where some of the best contributions can be made toward accountability. Here the usual tools of the budgeteer and accountant, Excel spreadsheets, are not as useful as logic maps, some of the budget’s new wardrobe. Logic maps help to explain how the various agency activities are the cause of the outcomes/results achieved.

Don’t think that this results stuff is just for those people who track performance measures. Budgeteers and accountants also contribute to accountability by tying financial and performance data together to give actionable information to agency decision-makers. Do we need more travel funding? Less? Is travel contributing to our results? Do we need to refocus the trips we are taking?

No matter what role you play—budgeteer, accountant, performance analyst—you need to bring together the approved performance budget and plan, the actual costs through a point in time and the actual performance levels met to help your agency be accountable to the citizens for the results it is supposed to achieve. What kind of performance questions have you been able to raise during budget execution? Does number-crunching still have a legitimate role to play?

MONDAY: John Saco, Associate Professor of Public and International Affairs at George Mason University on "Blogging for Dollars."

Questions on posting comments or wish to subscribe to the feed that sends blogs right to your e-mail? Find instructions here. Want to be our guest on the Blog? Contact Marie Force, AGA communications director, at mforce@cox.net.