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How do the various participants in the budget process see the system working?? Are their perceptions coherent? What are the strong and weak aspects of the state’s budget formulat

After reading the case in pdf. 

Answer the following questions in a word document in less than 3 pages (double spaced), with Calibri font, and with 1 inch margins (top, bottom, left, and right).  

  1. How do the various participants in the budget process see the system working?  Are their perceptions coherent?
  2. What are the strong and weak aspects of the state’s budget formulation and monitoring processes? Is the Office of Fiscal Affairs helping or hindering the state’s reorganizations efforts?
  3. How, when, and by whom should the priorities be set for the FY2011 budget?
  4. What changes, if any, would you recommend Mr. Davidson make to the budget system at North Lincoln?
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    lincoln.pdf

North Lincoln If I were a cabinet secretary and could have just one power, I would choose the power of budget review since theoretically it should give me all the clout I need. I just don’t know what happened between theory and reality, but I do know that most of the Secretaries are not very happy with the system.

The speaker was Olin Thomas, Assistant Secretary of Administration and Finance and Director of the Office of State Planning and Management for the state of North Lincoln. He was reflecting on the nature of the changes that had taken place in the state’s executive branch during 2006 and 2007. He continued:

The basic intention of state reorganization was to increase the Governor’s control by having him deal directly with fewer people. Prior to reorganization, there were several hundred agency heads reporting to him, creating a very unwieldy system.

The agencies were organized into ten Secretariats [see Exhibit 1], and the Secretaries were given the power of budget review; that is, they were to review the budgets submitted to them from each agency within the secre- tariat, assure themselves that the budgets were adequate and properly directed, and make whatever changes were necessary before submitting them to A&F for final review. Under reorganization, the Secretaries were also given the responsibility of program evaluation, resulting in the power to create, budget for, evaluate, and dis- pose of both programs and agencies within their Secretariats.

At least that’s how the process was supposed to work. I’m not clear as to exactly why it’s not working that way, but it isn’t.

BACKGROUND In late spring 2009, Mark Davidson had assumed the position of Secretary of Administration

and Finance (A&F) for North Lincoln. One of the principal problems he faced concerned the state’s budgeting system and the many changes that had taken place as a result of the reorganiza- tion of the executive branch into ten Secretariats. It had not taken him long to realize that some sort of drastic action was needed to improve the system.

The process of preparing and implementing the state’s annual operating budget was a long and complex one that had undergone several changes between 2007 and 2009. There were essentially five participants in the process: the Governor and his staff, A&F, the other Secretariats, the Bureau of the Budget (BOB), and the Legislature. The role of each participant had not been well-defined, either with respect to the budget or in relation to the other participants. One of Mr. Davidson’s goals was to develop procedures and systems that would assure the state of effective budgeting and control.

Organization Following reorganization, each of the 10 Secretariats had an average of about 30 agencies re-

porting to it. As Exhibit 2 indicates, each agency comprised several divisions, and each division had several appropriation accounts, each of which was thought of as a major program. As Exhibit 2 also shows, there were some 20 subsidiary accounts, which were the budgetary line items for an appro- priation account.

Exhibit 3 shows how the budget was carried out for a large state agency, the Department of Mental Health. As it indicates, some major programs (i.e., appropriation accounts) were further di- vided into several subprograms. For example, a community mental health center (a major program) could be divided into such subprograms as day treatment, sheltered workshops, and after care.

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As Exhibit 3 also indicates, responsibility for carrying out the budget took place along two di- mensions. One was field operations and facilities, which corresponded to the agency’s organiza- tional structure (the left side of the exhibit). The field operations activity comprised regions at the highest level, followed by facilities, areas, and units within the facilities. Field operations and facility managers received budgets from the account executives (on the right side of the exhibit), and needed to adhere to them while striving to meet the objectives of the programs and subprograms that the budget funded

Account executives could not spend more than the amount in their appropriation accounts. Their role was to determine which regions and facilities could best meet the needs of each major program and its various subprograms. The result, as the exhibit indicates, was that not all regions or all facilities had all programs or subprograms,

The Budget Cycle Budgeting was an annual activity carried out in conjunction with the legislative program activity of

the executive branch. The timing was such that both the budget and the Governor’s proposed legis- lation were submitted to the legislature in January, six months prior to the fiscal year to which they pertained. Exhibit 4 shows the timing of the various activities, which are discussed in detail below.

In July of each year, the 300 or so state agencies began to prepare their budgets for the next fis- cal year. In late summer, the budgets were submitted by the agencies to their Secretariats, where they were reviewed and sometimes modified by each Secretary and his or her staff, usually in con- sultation with the submitting agency. They then were sent to A&F for final review.

A&F reviewed the budgets, also making modifications.1 Once the A&F review was complete, the Secretary of A&F notified all other Secretaries of the changes he had made. If a Secretary wished to appeal the A&F changes, he or she could do so, and A&F and the Secretary attempted to reach a compromise. Where a compromise could not be reached, the questions were taken to the Governor and his staff for final resolution. Once the difference had been resolved, the Governor submitted the final budget to the legislature as “House of Representatives Bill 1,” commonly known as HR1.

Revenue estimates were also included in HR1, but received minimal treatment. By law the Gov- ernor was required to submit a balanced budget, although to do so he or she could draw on the available balance of 17 different revenue funds. As a result, it was not necessary for the revenue collected in a given year to equal the expenditures for that year. However, all the funds had specific uses, and there was no transferability among them. Therefore, if one fund had a large surplus, that surplus could not be used to finance a deficit in another fund.

Of the 17 revenue funds the two most significant (compromising approximately 90 percent of total revenues) were the General Fund and the Highway Fund. The General Fund included federal reimbursements, state income taxes, and other revenues not associated with one of the special-pur- pose funds. The Highway Fund included gasoline taxes, fees from the Registry of Motor Vehicles, and other highway-related revenue. Although most state expenditures were from the General Fund, many line items in HR1 contained references to one or more special-purpose funds, since, by stat- ute, revenues from these funds were to be used for certain specified purposes.

HR1 went to the Ways and Means Committee of the House of Representatives, where it was re- viewed, and where various officials of the executive branch were called on to testify. Every Secre- tary participated along with a representative of the Bureau of Fiscal Affairs. Frequently, agency heads and their staffs from within the Secretariats were also called on to testify.

The Ways and Means Committee made whatever modifications it deemed necessary and then brought a full budget before the House for passage. This document contained the committee’s total recommendations, and a final figure. Debate took place, amendments frequently were made from the floor, and ultimately the budget was passed.

After the budget had been passed by the House, it was sent to the Senate Ways and Means Committee for review. This committee made amendments to the bill, frequently of a fairly substan- tive nature, such as changes in appropriation levels, increases or decreases in personnel levels in programs, and occasionally the complete elimination of an expenditure item. Significant changes also could be made to the wording of the budget, such as the number of hours a teacher must work at a state-supported university, or specification that state funds could not be spent until federal re- imbursement was received. 1 Administration and Finance reviewed the activities that took place in the office of the Secretary of A&F, the of-

fice of the Deputy Secretary of A&F for Fiscal Affairs, and the Bureau of the Budget (BOB). The responsibilities of each are shown in Exhibit 5. Exhibit 6 contains information about personnel in the latter two organizational units.

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The Senate Ways and Means Committee sent its version of the budget to the full Senate, which also could make changes. Ultimately the Senate passed its version of the budget. Differences be- tween the House and Senate versions were resolved in a conference committee, and a revised budget was returned to both houses. When the two houses reached agreement, the budget was sent to the Governor for signature. The Governor could line-item veto or line-item reduce whichever appro- priation accounts2 he wished, as well as veto the budget in its entirety. Generally, he made whatever line-item changes he wished and signed the budget into law.3

At this point the funds were appropriated to the Governor, and he in turn allotted them to the Secretariats through A&F. There were three allotments a year, each of which could contain what- ever portion of the budget the Governor deemed appropriate, although each allotment ordinarily consisted of one-third of the budget. This process forced the Secretaries to conform to the cash flow schedule determined by A&F in that they were not allowed to spend more than their allotment for any four-month period. Additionally, with the exception of the state’s public higher education institutions, which were fiscally autonomous agencies and were required to receive their entire ap- propriations, the Governor could refuse to allot the total amount appropriated if he deemed it neces- sary to do so.4

If, as the fiscal year progressed, the Governor determined that it was necessary to spend more than the legislature had appropriated, he could prepare a supplemental budget for the additional funds. This was submitted to the House, where it followed the same course as the original budget, There were two types of Supplemental budgets: Corrective and Deficiency. The Corrective Budget anticipated shortfalls in funding and attempted to deal with them before they occurred; the Defi- ciency Budget did not anticipate shortfalls, but rather dealt with them “after the bills had been received.”

THE LAST THREE YEARS

The fiscal year (FY) 2008 budget was the first one submitted after the creation of the Secretari- ats. Since the budget was almost complete when most of the new Secretariats came into office, it was sent to the legislature without their input. Generally, the Secretaries used the FY 2008 as a ba- sis for gaining a better understanding of the agencies under their jurisdiction.

The budget preparation process for FY 2009 and FY 20105 was marked by a number of chan- ges, including the introduction of the secretarial review procedure, which began in 2009, and the ex- periment with budget targets. The FY 2009 budget was prepared with each Secretary reviewing the budget for each of his or her agencies. In so doing, the Secretaries were operating under two man- dates from the Governor: (1) to structure their budgets along the lines of the proposed reorganiza- tion plan for their secretariat, and (2) to maintain their budgets at specified target levels established by A&F.

The Secretaries and their staffs modified many of the agencies’ requests and rearranged the ac- counts (including subsidiary accounts in some instances) according to each Secretary’s proposed reorganization plan. Additionally, in preparing the budget for submission to the Legislature, the BOB omitted the column showing what each agency had requested, and included only the Secretar- ies’ (Governor’s) recommendations.

Two difficulties emerged from these actions. First, many of the agencies whose budgets had been cut at the secretariat level went directly to the House Ways and Means Committee saying that the budget recommended for them by the Governor was not enough. Second, the legislature indi- cated that since full state reorganization had not been approved, the budget in the form submitted was not acceptable. Not only did the legislature require the resubmission of the budget in the old

2 House Bill 1 did not contain subsidiary accounts. Subsidiary account breakdowns were made by the House Ways and Means Committee, and were released after the budget had been signed into law. Thus, the appropriation ac- counts constituted budget line items.

3 The Governor actually received the Appropriations Act which consisted of the budget plus a number of other sections related to it. These other sections placed limitations on the way the Governor could implement the budget. For example, one section of the act gave the Ways and Means Committee authority to regulate the num- ber of personnel positions available to each agency as well as the pay grades of those position. The Governor could not veto a section of the Appropriations Act without vetoing the entire act.

4 Higher education expenditures constituted approximately 7 percent of both total budgeted appropriations in FY 2009 and total budgetary recommendations in FY 2010.

5 Fiscal years ran from July to June. The FY 2009 budget, for example, was for the year beginning July 1, 2008 and ending June 30, 2009. (see Exhibit 2).

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format, but it also increased the appropriations for many agencies above the Governor’s recom- mendation and indicated that in the future it would not consider a budget that did not contain both requested and recommended amounts.

The FY 2010 budget was prepared under the supervision of the Office of Fiscal Affairs. The Deputy Secretary for Fiscal Affairs, Michael Edwards, and his staff worked closely with the Secre- tariats to define programs and priorities. No target figures were given to the Secretaries, however; instead they were asked to rank their requests in discrete programmatic packages, in priority order.

To bring the total budget figure in line with what the Governor wished to submit, the Fiscal Af- fairs staff then eliminated one or more low-priority programs. At that point, the Secretary of A&F, Charles Williamson, reviewed the policy requests of the Secretariats and decided himself on a num- ber of priorities. He then sent letters to both the agencies and the Secretariats outlining his deci- sions. The Secretaries and agency heads were allowed to appeal any decisions they did not like, and Mr. Williamson made some changes as a result. He then prepared a formal letter outlining his final decisions and notifying the Secretaries that they could appeal his decisions to the Governor if they chose to do so.

Five Secretariats—Education, Human Services, Elder Affairs, Manpower, and Community De- velopment— appealed Mr. Williamson’s decisions. Of the $125 million in dispute some $80 mil- lion was conceded to the Secretariats by the Governor. Two documents emerged at the end of this effort: The Budget in English, which was a new document that presented the budget by major pro- grams (appropriation accounts), and the standard line-item request sent to the legislature as HR1.

Exhibit 7 contains a complete breakdown of the FY 2010 budget. As it shows, some $2.7 bil- lion was requested by the Secretariats, of which about $2.5 billion was recommended by the Gov- ernor. A $2.4 billion budget finally was passed by the legislature (about $61 million less than that recommended by the Governor).

FISCAL YEAR 2011 The FY 2010 budget went into effect in July 2009. As the Secretaries and agencies began to

turn their attention toward preparation of the FY 2011 budget, they learned that A&F had estab- lished a slightly different set of requirements. The principal change was the return to target levels, but this time combined with the programmatic requests. Essentially, the Secretariats were being asked to specify which programs they would like to include if their total budget were 10 percent be- low that for FY 2010, and what they would do with a variety of increments above the target should additional funds be available.

Since the base level was set at an amount below the FY 2010 level, the Secretariats effectively were being forced to put some of their existing programs into the incremental levels. This change caused some concern on the part of some of the Secretariats and their staffs, particularly since many of them were not yet clear on the nature of the relationship between themselves, the Office of Fiscal Affairs, A&F, the BOB, and the Governor. In fact, a number of issues remained unresolved at this time that impaired the smooth functioning of the budget process.

OUTSTANDING ISSUES There were six unresolved issues that related to the budget process: policy guidelines, target

budgeting, the role of A&F, the role of the BOB, the role of the Legislature, and the use of the budget as a management tool. Much of Mr. Davidson’s success in achieving a more effective budgetary system depended on how he resolved the issues that were under his control, and how he approached the constraints created by issues that he could not control.

Policy Guidelines

With regard to policy guidelines for use in budget preparation, many of the Secretaries felt that they received no clear direction from the Governor as to his priorities. David Johnson, Assistant Secretary for Manpower Affairs, described the problem from his perspective:

In the U.S. Government, the political priorities tend to get laid out early in the budget process. Programs that are necessary for political reasons and must be included in the budget are specified. Then you send the troops out to prepare the budget. Here we don’t know what the Governor’s political priorities are in any detail until af- ter we’ve prepared the initial budget. Then we have to begin the process of reshuffling programs.

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Thomas Stevenson, Special Assistant to the Governor, commented on the problem the Gover- nor faced with his political priorities:

I realize the Secretaries may feel that they get no direction in the early stages of budget preparation, but I think they ignore the problem of the budget cycle in relation to the political cycle. [See Exhibit 2.] Currently [July 2009] the agencies are preparing their 2011 budgets, yet we’re still in the middle of the 2009 legislative ses- sion. In the best of years, we’re three months behind the agencies.

This is extremely important because many of the legislative proposals prepared by the agencies have mas- sive fiscal implications. For example, the Department of Public Welfare wants to file legislation increasing the cost of living allowance for all Family Assistance Programs, which implies several million dollars of increased expenditures. Since we don’t know what the Governor’s legislative proposals will be prior to the time the agencies begin preparing their budgets, we tell them to plan to spend what they spent last year—we call this the zero-based budgeting approach. Effectively it deals with the problems of specifying priorities.

Harold Edmunson. Director of the Bureau of the Budget (BOB) added still another point of view:

The Governor does not outline his objectives to the various state agencies, which means that they can request just about anything they want. Then the Governor can cut their requests and go to the Legislature saying that he has cut the budget.

Steven Charles, the state’s first Secretary of Administration and Finance, who had become a senior budget analyst with the state’s Taxpayers’ Foundations, added still another perspective:

The Secretaries’ role in the budget process is one of working with their agencies to assure appropriate disci- pline. As things stand now there is little discipline either among the Secretaries or between the Secretaries and their agencies. The Governor has got to make his priorities known to the Secretaries in order to resolve the first problem, and the Secretaries need to develop a system that will prevent their separate agencies from promoting their programs without consideration for the Governor’s overall fiscal plan.

As things stand now, the Executive Branch is not unified, and this lack of unity is best typified in the dis- crepancy between the two sets of figures in the budget: requested and recommended. The Legislature has required that two sets be submitted, but there is nothing to say that the two sets have to be different.

Mark Roberts, a staff assistant to Mr. Edwards, commented further on these issues:

You would think the Executive Branch would be a team—a rather collegial group of individuals working to- gether for essentially the same ends. But that’s not the case. Many Secretaries, for example, are rather closely allied with the legislature, which is like a sales manager going to the Board of Directors and saying “my boss says we don’t need this money, but we really do.” The situation is further complicated by the fact that the Gov- ernor is always in the position of trying to balance the conflicting demands of the electorate. His interest in fis- cal matters consists of looking for ways to get the funds he needs to implement the programs he wants.

Target Budgeting

Mr. Edwards described his feelings about the target budgeting approach used in FY 2009:

In general I don’t believe in the target system, and it was used in FY09 only for the sake of expediency, since Chuck Williamson and I came to the state in October 2007 and budgets were due in January 2008. The target system limits the choices available to the Governor by eliminating competition among the Secretari- ats for funds. On the other hand, a target system has the distinct advantage of forcing a Secretary to elimi- nate some programs in favor of others; this in turn creates some interest in cutting old programs and devel- oping new ones.

For FY11 we are adding an element to the target approach that helps the Governor make policy deci- sions that are consistent with his views and the Secretaries’ priorities. Each Secretary has a base budget fig- ure as well as a number of increments which are to contain programs in priority order with dollar amounts attached. If the Governor wishes to add programs he can pick them according to the Secretaries’ priorities, knowing how much each discrete package will cost. Since the base figure is set at an amount below the cur- rent budget level, the Secretaries are forced to put some of their current programs into the increments. Thus, they are forced to be very careful in working out their priorities, and the Governor is not locked into all of the existing programs.

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Mr. Johnson outlined the way he, as an Assistant Secretary, viewed budget targets:

Budgeting is much easier with targets, but you have to recognize that the Secretariats make most of the budget allocation decisions within their Secretariat-wide budget targets, and A&F only really reviews the budgets at the margins.

Scale of operations is a very significant factor in this process, however. You cannot apply the same rules across the board—that’s like saying that foot soldiers and fighter planes can be evaluated in the same way since they’re both defense items. Our secretariat has only about $14 million a year, while Human Serv- ices, for example, has about $1.4 billion, about a half of the state’s entire budget. It’s relatively easy for me to say without consulting any of our agencies what the implications are of a 10 or 20 percent cut in funds. But in Human Services, the exercise is one of making complex tradeoffs. Thus, different sets of political “rules” for making budget decisions are applied to different areas of government.

Mr. Roberts added some perspective to the question of making tradeoffs within a target budget framework:

One problem with target budgeting, particularly when we talk about asking the Secretariats to come in with budgets below the level of the prior year, is that approximately two-third of the budget is non discretionary. It consists of pensions, retirement funds, certain welfare payments, and so forth, all of which must be included.

To resolve this problem, we excluded these sorts of items when we calculated the targets. But there’s an even more serious problem, and one for which we could not correct when we calculated the targets: there are statutes on the books that require enforcement; that is, the Legislature has passed laws and expects us to enforce them. When we require agencies to come in at targets that are below their total budget levels of the prior year, we may be putting them in a position of deciding which laws to enforce and which to not. A good example is the Department of Public Utilities (DPU). Laws have been passed that require the DPU to analyze and review the fuel adjustment clause. But the DPU is sorely understaffed, and if they’re to meet the statutory intent of the Legislature they must have sufficient funds in their budget to carry a larger staff. By forcing them to meet tar- gets, we make this very difficult.

The Role of A&F

Owing to the changes that had taken place in the state over the past three years, the relationship between A&F (and its Office of Fiscal Affairs) and the other Secretariats was still evolving. Lionel Lewis a staff assistant to Mr. Edwards, commented on some of the directions being taken in that re- lationship:

It is paramount to understand what the Executive [i.e. the Governor and his staff] does. Without this under- standing, it is difficult to comprehend the budget process. For example, in some states, the Governor meets regularly with his fiscal advisers to review budget priorities and requests. Any proposed new programs affecting the budget are always cleared with the fiscal staff.

In this state, the Governor doesn’t deal with all of his Secretaries directly, although he occasionally uses them as inputs to his speeches. Most of the direct contact with Secretaries is handled through the Governor’s staff—people like Tom Stevenson. Chuck Williamson could always contest a decision made by Tom Steven- son, but he didn’t always win. Yet, win or lose, he was still responsible for balancing the budget.

In essence, then, the question is whether A&F should be a funnel for the budget or whether it should exist in a parallel relationship to other Secretariats. Currently the funnel approach is theoretically used, but the actual process is much more informal.

Mr. Charles put the situation in some historical perspective:

Part of the problem with all of this, as I see it, is that reorganization is not fully understood. Governor Vickers, [2002-04] who had the original idea, conceived of the Secretaries as members of a cabinet who were to be the Governor’s representatives. But, in fact, the Secretariats have become advocates of the agencies under them, i.e. advocates of spending. Under the reorganization plan, there is really no strong central authority to look at the total budget and recognize that there are priorities outside each secretariat’s own domain. As a result, too little em

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