Finance and Public Administrators - Research Paper Example

The Mayor A.N. Consultant 26th September Budget Allocation Report Introduction Allocating a budget is not an easy task. There are many competing ends and so expenses have to be prioritized. In allocating the budget of $10 million there are a number of developments in the city that require capital outlay. There are a number of historical buildings that provide revenue for the city that needs to be renovated in order to generate more income. The police department needs to renew some of their fleet and this need to be done on a phased basis starting with this budget. There are also a number of roads that need to be repaired and the plan is to start with the ones that have the greatest need. In addition to those capital requirements the expenses relating to the day to day operations of the city needs to be taken into account. Non-profit organizations play a useful role in the city and so a certain level of funding is normally made available to them so that they can continue to achieve their goals. The Budget According to Horngren et al (2000, p. 178 -180), a budget is the financial plan of an organization which is communicated in quantitative terms. It forms a blueprint for management to follow in an upcoming period and outlines the operational goals for a specific period of time. It states where financial resources will come from and what they will be used for. Planning is achieved through the budgeting process and forms the basis for decisions made by management. Horngren further states that budgets represent a major aspect management control systems. As long as they are administered in an appropriate manner they have the following characteristics. they compel planning they provide criteria for performance; and they promote the coordination and communication of activities in the organization. Planning is a major function of the budget as it seeks to quantify the plan. The plan specifies the type, quantity and quality of services that will be provided, estimating the costs and deciding how they will be paid for. The Council prepares the estimates of income than will be generated from various services provided at a cost by the city. These services include and are not limited to transportation, water and sewage. Other income generators include property tax and corporation tax, and income tax. The expenditure includes both capital and current expenditures. The performance criteria are useful both for staff and for sub-contractors who perform jobs in the city. They set the standard for achieving the goals and objectives of the departments. In coordinating and communicating the plan all the management personnel in these departments coordinate the tasks for their subordinates so that the goals of Council will be achieved. The objectives of the departments are communicated in such a way that they are clearly understood by employees. Controlling and administering the budget helps to ensure that resources are obtained and expended based on plans. Budgets are used to monitor the flow of resources to ensure that they are used as intended and that there are no significant over-runs. According to Chan (2009) the annual budget prepared in the public sector is not only a planning document but also includes projections of revenue collection as the law authorizes well as information on expenditure that has been proposed by executives and approved by the legislature. This implies that the budget is used as tool for management control as well legislative oversight. Any transactions and activities undertaken have to be in keeping with the budget. Chan (2009) indicates that this type of accounting is described as management accounting in business and budgetary accounting in the public sector. It is in this same way that the City Council will go about controlling and managing public funds. Table 2 shows a summary version of the city’s budget for the fiscal year ending 31st March 2012. Summary of Budgeted Expenditure for the Fiscal Year Ending 31 March 2012 Budget Allocation/Revenue $10,000,0000 Capital Expenditure Renovation of historic city buildings $1,000,000 Repairs to Road infrastructure $800,000 Transport Department – Fleet Renewal $700,000 Fire Department – Equipment $200,000 Police Department – Fleet Renewal $300,000 Water Authority - Equipment $200,000 Total Capital expenditure (3,200,000) Operational Expenses Council Office 800,000 Police Department 1,100,000 Fire Department 700,000 Education 1,300,000 Health 1,000,000 Water Authority 700,000 Streets 500,000 Parks 300,000 Subsidies for Non-profit organizations 200,000 Subsidies to Industrial Companies 200,000 Total Operational Expenses ($6,800,000) Total Expenditure ($10,000,000) Table 1 – Budget Expenditure Table 1 indicates the budgeted amounts for each department. This budget assumes that the revenue projections from property tax, corporation tax and other revenue sources will be achieved for this fiscal year. The operational expenses for the departments includes utilities, salaries and wages, stationery, and all other operating expenses to keep the departments going in an efficient and effective manner. The budget is tight and there are other things which need to be done. Most of the operational expenditure for the period have been cut by at least 10% when compared to the last fiscal year and therefore the expenditure included in the summary figures in Table 1 are only those which are critical to the operations of the departments. There is still a need for approximately $5mn to carry out renovations to additional buildings, to provide additional fleet for the police department, fire department, and transportation department. Additionally, funding is required for various educational projects. There is the possibility that federal funding could be obtained but the requirements are stringent. Federal Funding Requirements Federal funding will be required to help stop gaps in the budget and to deal with other critical areas for which funding is required. These include pollution control which will assist the city in meeting federal clean air standards. However, the Council will be required to indicate its adherence to some uniform administrative rules. According to the Department of State (1999), in order to obtain funding relevant application forms for the particular federal funds sought will need to be completed. The programs, functions and activities that will be used to plan, budget and evaluate the work under a grant must be specified and described. The statutes for some of the programs also require the submission of plans before receiving grants. However, these requirements are only for plans that are in statutes or codified regulations. In each plan the Council will need provide the necessary assurance that: the applicable federal statutes in effect for the period for which funding is to be received, will be complied with in order to ensure that this and other assurances are met. The Department of State (1999) indicates that the City Council will be required to do the following: Cite regulatory and statutory provisions requiring such assurances and indicate this by affirming that assurances have been given by those provisions. Repeat the language of assurance in the statute or develop its own language as is permitted by law. These plans can be amended if there are changes to statutes which affect the plan. These plans will need to be amended but only to the extent that they have been affected by changes in the statutes or regulations. The Department of State (1999) indicates that there are certain conditions for high risk grantees. The definition for being high risk includes the following. The grantee has a history of unsatisfactory performance The grantee is not financially stable the grantee’s management system does not meet the requirements of the awarding agency The grantee has not conformed to terms in previous awards The grantee will not be responsible if the agency decides to award the grant if considered high risk and so special conditions and restrictions will be laid down including payment on a reimbursement basis; withholding authority to continue with the project until adequate evidence is received; more detailed financial reports; additional monitoring of projects; requiring the grantee or sub-grantee to obtain the necessary management or technical assistance that may be required. It must be noted that if such conditions have been imposed then the Council would be made aware of them, in terms of their nature, the reasons for imposing them; corrective actions necessary for their removal; and the methods for making requests for reconsiderations. The Department of State (1999) also indicates that there are certain post award requirements that have been laid down by the federal authorities. These include standards for financial management systems. The requirements are as follows: 1. The Council is required to expand and account for grant funds in accordance with the laws of the state and procedures for expending and accounting for its own funds. The fiscal accounting by the Council and its subcontractors must be sufficient to: facilitate the preparation of reports required and the statutes authorizing the particular grant; and also to facilitate the tracing of funds to the related expenditure so as to ensure that the funds have not been used in violation of restrictions and prohibitions of the applicable statutes. 2. The financial management systems in place at the Council (the grantee) and its subcontractors (sub-grantees) must meet certain standards. These standards relate to financial reporting, accounting records, internal control, budget control, allowable cost, source documentation, cash management, 3. Awarding agencies may also carry out a review of the adequacy of the systems relating to the financial management of applicants for financial assistance at anytime – whether before or after the award. Additionally, the Department of State (1999) has also indicated that there are various methods and basic standards that the federal agency will follow in making payments to grantees. These relate to advances; reimbursements; working capital advances; effect of program income, refunds, and audit recoveries on payment; withholding payments; cash depositories; and interest earned on advances. It must be noted that only certain costs are allowed to be charged to the funds received. They include payments to fixed price contractors and reasonable fees or profit to cost type contractors. These costs do not include any fees above allowable cost to grantee (in this case the Council) and sub-grantee. The funds are available for a set period and all obligations need to be cleared no later than 90 days after the end of the funding period in order to coincide with the submission of the annual Financial Status Report. This deadline however, may be extended if a request is made. Only costs that results from obligations during the funding period should be charged. Additionally, a cost sharing or matching requirement may not be met by costs borne by another federal grant, except where the Federal statute has made provisions for it. The Department of State (1999) has also encouraged grantees to earn income so that the cost of the program could be defrayed. The responsibility to obtain audits in accordance with generally accepted government auditing standards which covers financial audits. Where the results of the audit are unfavorable the Council would have to ensure that the appropriate corrective measures are taken within a period not exceeding six months after receipt of the report. The Council would also be required to determine whether audits of sub-grantees are necessary by noting the amounts expended by them. An expenditure of $300,000 is the qualifying expenditure for the Council to require the subcontractor to carry out an audit of its financial records. The Council is required to determine if the results of the audit will necessitate adjustments to its records. Other requirements by the Department of State (1999) include the city Council to determine by way of the audit is whether the sub-contractor utilized federal assistance funds in accordance with statutes. On disposition of property acquired with the use of federal funding, permission is required from the awarding agency. There are also regulations related to supplies, copyrights and procurement. Procurement is a very important aspect of the guidelines provided. grantees and sub-grantees will be saddled with the tasks of ensuring that a contract administration system is in place as well as a written code of standards that governs the performance of employees engaged in the administration as well as the award of the contract. There are additional requirements in relation to procurement, sub-grants, monitoring and reporting program performance, Financial Reporting and other matters. In terms of financial reporting, the Department of State (1999) has indicated that forms are available form the submission of financial information which will be due 30 days after the reporting period for quarterly and semi-annual reporting. The Standard Form 272 – Federal Cash Transactions Report should be used to record grants paid by letter or credit, Treasury check advances or electronic transfer of funds (The Department of State (1999). Differences between Public and Private Sector Accounting Principles According to IFAC (2005) the International Public Sector Accounting Standards (a board of IFAC) provide guidelines in relation to government financial reporting requirements. However, according to Chan (2009), the public sector is slow in responding to these guidelines and so cash accounting is still in common use instead of accrual accounting. Budgeting does not require the use of double entry accounting as is required for private sector business that are required to prepare financial statements in accordance with International Financial Reporting Standards (IFRS) and Security and Exchange Commission requirements. Conclusion In addition to preventing public sector departments from overspending budgets are a useful means of financial control. However, they do not require the use of double entry accounting principles. Government departments are required to ensure that their expenditure is evidence by supporting documents just as in the case of private sector funds awarded to them. They are required by the federal agencies to provide audit report on how they use the funds awarded to them. This places them in the same position as companies in the private sector. Therefore, the city has to put in place financial management systems to control use of funds. It is by doing so that a matching $10mn can be obtained from federal agencies. References Chan, J.L. (2009). A Comparison of Government Accounting and Business Accounting. International Journal on Governmental Financial Management, p. 29-38. Department of State. (1999) Part 135: Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments. Retrieved on 25tth Sept 2011 from http://www.access.gpo.gov/nara/cfr/waisidx_99/22cfr135_99.html IFAC. (2005). International Public Sector Accounting Standards (IPSASs) and Statistical Bases of Financial Reporting: An Analysis of Differences and Recommendations for Convergence. USA: IFAC Retrieved on 25th Sept 2011 from: http://frank.mtsu.edu/~smitty/MODUL/05-Research-Report-IPSASB.pdf Horngren, C.T., Foster, G and Dakar , S.M(2000) Cost Accounting: A Managerial Emphasis. 10th ed. USA: Prentice Hall. Read More