Government Financial Planning
Ronald Dennis
Baker College
BUS311: Accounting for Managers
Kalai McHan
February 18, 2015
Abstract
Financial budget planning for many states can be a complex issue. The planners are looking at the large scale of things and tend to extend costs of operations to the agencies that perform the daily operations of state government without their input. This lack of input may affect many programs and daily operations when the budgets are submitted. There are many areas that may be under funded, such as salary increase, specific legislative programs of interest like energy reduction, establishing a tobacco free environment on state property, unexpected spikes in utility costs and the unpredictable revenues gained or lost from natural resources such as Oil and Natural Gas or any other resource specific to a state’s gain in revenue.
Government Financial Planning State Government will spend a vast amount of time planning for upcoming fiscal years and the budgetary requirements needed to sustain the states operations during that particular fiscal year. Unfortunately many planners look at the big picture only and leave the small details to the individual state agencies to overcome the shortages within their operating budgets that were appropriated and distributed to them through legislation. One of the drawbacks is when legislation passes new requirements such as energy reduction, but fails to include how this new requirement are to be funded and how this type of action impacts the budgets of state agencies especially ones that are already operating on a small budget. Financial analysis planning for local and state government may be impacted severely if total inclusions of budgetary items are not forecast in advance. These items may include pay raises, marketing, price drop in natural resources such as oil and gas and increased utility costs.
Purpose of Study Financial analysis planning for local and state government may be impacted severely if total inclusions of budgetary items are not forecast in advance such as pay raises, marketing, increased utility costs and price reduction in natural resources that impact the revenues of the state.
Limitations of Study There are a few limitations to this study; first is the limited experience with dealing with the legislative processes and decisions regarding financial forecast planning for state government. Other limitations to this study are gaining financial plans for other agencies within the state, surrounding states and accurately forecasting costs associated with budgetary impacts such as natural resources like oil and natural gas.

Review of Literature Government legislators often introduce many different bills to be heard that potentially will impact the budgets of many programs and agencies within government entities. These bills presented in legislation are often presented with no funding attached, or they are presented with funding ideals that require funding reduction in other programs. There are a couple of other variables that impact shortfalls in fiscal budget planning and those are “short-term, temporary shortfalls that result from economic cycles or imprecise revenue or expenditure forecasts and structural shortfall that result from expenditure growth routinely outpacing revenue growth” (Eckl, Mackey, Snell, 1998, p. 9).

Further discussion on these two variables needs to happen. The imprecise revenues that some states may endure are from natural resources the state of Oklahoma relies highly on the price of Natural Gas and Oil. When these resources are profitable and the price of natural gas and oil are high two events are evident and those are lower unemployment due to increased jobs in the private sector and the other is increased revenue for the states budgetary planning. These two occurrences have been prevalent in North Dakota where the oil industry has been significantly on the rise over the past few years, resulting in low unemployment and high revenues for private and government organizations. Now the same area is headed towards a recession due to low oil prices resulting in higher unemployment and lower revenues.

When the fiscal budgets are being planned they are forecasts for the future and on occasion future impacts of natural resources revenue may not be predictable due to unforeseen world events that impact these resource needs, when this occurs various states program budgets are reduced along with the various state agencies. When these programs are reduced or agency budgets are impacted the same way this leaves little room for adequate services to be provided for the program services. The state agencies are then also forced to reduce operation costs, these costs may be utilities reduction, withholding promotions or pay raises and hiring freezes on personnel. The later of these may reoccur for several years in a row such as in the state of Oklahoma the Governor just recently renewed several executive orders including the hiring freeze which has been prevalent order for the past 5 years. This of course has not stopped hiring personnel but it has required agencies to formally request and seek specific approvals to do so.

Now even though the reduced revenues from natural resources may not be predictable the prediction of expenditures is controllable by the budget planners. Predicting the budget and planning the budget for state government can be a tasking job when there are significant unknowns such as the natural resources that have been discussed so far. But other issues can cause budgetary planning to be skewed, the unforeseen emergency repairs of critical equipment within a facility or a planned project that has been grossly underestimated or has outdated construction estimates attached. Within the private sector this could be called strategic implications of project portfolio selection (Vitolo, 2014), but in the government sector this would be analyzed as a lifecycle replacement project that takes into account similar aspects of the private sector needs for a project selection. Lifecycle projects are projects that predict the life expectancy of a piece of equipment usually this lifecycle is expected to be 15 to 20 years but many state facilities have equipment in operation that exceeds 30 or even 40 years in age.

But in state government the condition of the equipment being selected for a project may dictate what will be replaced first or if a specific piece of equipment will qualify for energy reduction costs or rebates through the local utility company. All of this has to be figured in to the future planning of budgets simply waiting for something to fail before it is replaced in unacceptable and will typically cost more to repair on short term notices compared to a project that is planned out. One of the largest impacts of fiscal planning is executive agenda’s; this can be virtually any program or specialty program that the executive level of government would like to focus their efforts on. In the federal government this falls under the President programs such as immigration, and medical care for instance and within state government you may have special targets such as energy savings by way of reducing the utilities costs in state operated buildings.

In the state of Oklahoma this action actually has occurred, with an executive order coming from the Governor; but one small piece failed to accompany the order and that was how to pay for this action which happened to occur during a year that the budget was predicted to have a decline. In 2003 the state of California was predicted to “face budget deficits near $7 billion that particular year and that deficit would grow $3billion to $10 billion the following fiscal year unless legislation took action to make budget cuts or increase taxes” ( Allen, 2005, p.29). Some of the issues that were causing the increase were an exploded government and failed planning that would account for the expenditures similar to what has been pointed out thus far. The effects of a budget cut typically start with personnel reductions as this is the one of the quickest means of reducing cost not only salary but benefits, and any risks associated with the person’s job. Now the reverse of this is when budgets can fail to meet the obligations needed to rehire personnel once the budget cuts have subsided. This is when budget planners will lift many restrictions on hiring personnel but fail to ensure the funds are available to the agency so that hiring actions may occur. Additional impact of poor budget planning is the use of old data that some of the planners may overlook; may be market based salary adjustments for their employees.

This is evident within the state of Oklahoma as state employees have not received an across the board pay raise in over seven years, which affects retention of quality employees. Other impacted area of failed budget planning that is prevalent in many states is the educational systems, not only the lack of funds to student ration but also the salaries of the teachers who provide the instruction. So how do these additions to bills and the bills presented to legislation really impact the fiscal planning of government? Discussion in this area needs to be examined more closely.

Take for instance a bill being passed to reduce state operated facilities energy usage by twenty percent by the year 2020 with little guidance on how to achieve this and how this program is to be funded. The only specifics are that there is a central organization that will oversee the program and assist other agencies with developing a plan on how to achieve this new act. The state entities now have to examine their fiscal budgets and review how this will impact their organizations. Immediate impact to the organization may be the addition of personnel to implement this new program. For small agencies this may have to be assigned as an additional task to one or more persons as their budget simply will not allow for a new position. Some of the larger agencies may have the resources to hire new personnel but at a cost of other functions. The associated cost that the agencies now bear is not only the salary expense but the benefits package that usually accompanies the job offer; additional equipment typically will have to be purchased for new employees such as computers, the additional cost of phone service, office space, and furniture. As one can see once the numbers start to add up the addition of one employee can cost an agency a fairly significant sum of money.

The finance personnel now have to tell the story by stacking the numbers in such a manner that the department heads can figure out what and how they would like to proceed with meeting the goals of this new program (Hagel, 2014). Energy reduction is a costly program to follow even for organizations that have the personnel to perform these actions within their staff. Other than staffing issues to reduce energy the cost of materials to do so are significant and can often have a long payback period on the investment. If an organization does not have internal personnel to meet these goals or perform the work themselves then they have to plan to contract the work to be performed. When this course of action is followed the cost compounds if the project is small in nature the contractor awarded to perform the work may charge up to 20 percent additional to the price of the parts required. If the project is large in nature then the time that it takes to involve an outside resource such as contractor is very expensive and involves many people to do so. Scopes of work have to be created, projects solicited for bidding and then awarding the contract and assigning personnel to oversee the work until it is completed of course this is for projects that are large in nature or exceed a specific amount allowed by statutory requirements for a particular state.

As an example if an organization was trying to reduce energy cost in the heating and air conditioning area of their operations and they chose to utilize the geothermal method of doing this; the initial cost of implementing a geothermal conversion is very expensive, but the savings in a relatively short period of time of 5-7 years the cost of the conversion could be paid back in energy savings and years after that would be pure energy savings overall.

Other budgetary oversights are the actual costs of utilities, it can be a misconception that state agencies do not pay utility bills but in fact they do. Seemingly not until budgetary short falls show are organizations worried about utility costs and these costs can be very large depending on the time of year and the cost of fuel. Utility companies charge higher rates during the summer than they do during the winter and there are specific times of the day that these rates during the summer can be very costly. If budget planners are not knowledgeable of this then unforeseen budget shortfalls can be expected resulting in immediate action to enable the budget to carry itself through the end of the fiscal year (Eckl, Mackey, Snell, 1998, p. 9). So management of utility costs and the knowledge of how they can impact a fiscal budget are paramount in many cases.

Take for instance the summer time rate of a utility company in Oklahoma for instance the high rate of operation comes between the hours of 2:00pm and 7:00pm Monday through Friday, so operations for the facilities need to do what they can to reduce costs this may be allowing the temperature of a building space to be higher than it normally would be. To make this abbreviated it becomes important for budget planners to know and expect the unexpected costs of operating their facilities across the state not just the building that they reside in or work from. Other causes of budget shortfalls are economic performances; it may be that expected revenues from income taxes or taxes from spending have been low.

These shortages could be a result of the state’s marketing ability, meaning that their budget was reduced which in turn reduces the ability to market the various attractions that a state may have to offer visitors, from surrounding states or abroad. When tourism is reduced then expected revenues from taxation are reduced resulting in yet again budget shortfalls. Then there the environmental effects of a budget and by this we mean disaster occurrences or known predicted occurrences that usually happen in the area like tornados, and in a great deal of areas today droughts. Droughts alone can impact agriculture needs and revenues that a state budget planner would typically rely on but must know and predict events that will impact the budget.

Discussion There may be no definite way to encompass every aspect of budgetary fiscal planning within federal or state government, or even local municipalities, but there does need be a more inclusive plan of getting the information together so that a solid budget can be planned and forecast more accurately than what is currently being used. Financial planners should be held responsible to look more deeply into total inclusion of expenses rather than just the broad view of budgetary planning that often leaves out expenditures that individual organizations are left to manage. The larger departments of government planning need to actually seek vested knowledge of what their sub-component agencies needs really are before simply proposing their budgetary needs based on old data.

Review of Findings

During the process of this report the areas focused on have presented themselves as significant impacts on state budget were planning or in this case the lack of including many of these areas in the budget planning for upcoming fiscal years. Through the readings on this topic and experience of actual executive decisions presented from more than one political party it has been found that old habits continue to re-emerge from one policy maker to the next and in recent years has had little to no effect on the fiscal budget plan in this state. The legislation continues to introduce measures of interest that ultimately increase costs but in doing so reduce the revenue needed in other areas ultimately proving no clear gain in revenue or services that need to be provided, or real reduction of costs. Budget planners should actively seek the input from all of the financial planners requesting the actual needs of the organizations so that a more accurate understanding of needs can be understood and planned for.

Interpretation/Analysis of Findings Personal experience has witnessed a legislative move to consolidate a number of state agencies to be managed by one measure of control rather than the decentralized version at the time. It was expressed in legislation that this consolidation would save significant money in the years to come however this has yet to be seen. Through recent events that have occurred overseas there has been a reduction in revenue from the natural resources that the state of Oklahoma relies on for a large amount of its revenue this impact is projected to result in an estimated 10% reduction across virtually all agencies. Further findings are that even in a time of threatened revenues significant amounts of salary increases continue to happen indicating that real control over budget spending or planning is overlooked. The actions that have occurred with the current administration have through historical rotation have previously been experienced through other administrations and is expected to revert back to decentralization this very same method. Until a real budget plan can be put in place and personal interest of legislators are removed from the equation the apparent revolving door of politics will continue to rule the outcome of the budget with little thought vested in the whole plan.

Summary and Conclusions Budgetary planning should be viewed more closely by all levels of government to include the underlying organizations that seemingly claim to never have the funding that is needed. Without a well thought out plan there will continually be a need to cut programs to fund others of seemingly more importance and leave many programs operating on minimal funding until they become so dysfunctional that they then become the important program to fund. Without the input from all levels of government and their true financial needs there may never be a well-balanced plan of actual expenditures needed during any given year.
References

Allen, B. C. (2005). What's new is old. California CPA, 73(7), 29. Retrieved from http://search.proquest.com/docview/213816991?accountid=8473

Eckl, C., Mackey, S., Snell, R. (1996). State Strategies to Manage Budget Shortfalls, National Conference of State Legislatures, Retrieved from http://files.eric.ed.gov/fulltext/ED418486.pdf

Fallin, M. Governor (2014), Executive Budget for Fiscal Year Ending 2015, Retrieved from, http://www.ok.gov/OSF/documents/bud15.pdf

Hagel, J. (2014). How to better connect planning, forecasting, and budgeting. Journal of Accountancy, 217(4), 20-21. Retrieved from http://search.proquest.com/docview/1512880846?accountid=8473

Vitolo, G., & Cipparrone, F. (2014). STRATEGIC IMPLICATIONS OF PROJECT PORTFOLIO SELECTION. Accounting & Taxation, 6(2), 11-20. Retrieved from http://search.proquest.com/docview/1561957583?accountid=8473