Executive Summary
Budgetary Control within public sector entities can be a difficult task due to the complexity of the system. A budget is a financial plan that contains expected revenues and proposed expenditures for a period of time. Every public sector entity needs an operating budget, which is prepared by an executive board and then approved by legislature. One the approved budget is adopted; it becomes a law and cannot be changed. If an entity exceeds its budget, it can be forced to pay hefty fines. The funding for public sector budgets is usually from taxes, loans, revenues, fines, inflation, donations and grants. When controlling revenues, it is important to record revenues as when they are earned. Unearned estimated revenues should remain as unrealized revenues. Budgetary control over expenditures follows the logical cycle: appropriations are recorded, and then encumbrances are recorded, followed by the expenditures, and then payment is disbursed. Public sector entities face both advantages and disadvantages of budgetary control. It is a challenge for such entities to operate within their proposed budgets due to budget cuts, budget surprises, and unforeseen costs, such as emergencies. This is evident in cities such as Detroit, Michigan; Atwater, California; and Fresno California. The most relevant implication of budgetary control was seen in the government shutdown, which occurred on October 1st, and last 16 days. This paper examines the importance of budgetary control and its challenges.
Introduction
Non-profit and governmental agencies are categorized as public sector entities, with the primary objective of serving the public rather than making money. In America, governmental agencies “exist at the federal, state, and local levels”, and both governmental and non-profit organizations serve a wide variety of functions at levels of society (Wilson, Reck & Kattelus, 2010). Such services include: garbage disposal, school systems, building and the maintenance of roads, hospitals, community development and entitlement programs. Although non-profit and governmental entities operate differently from private sector entities, they still need money to provide goods and services to their customers. So, one might ask, where do these public sector entities get money from to operate The government gets its money through taxes, debt (borrowing money), income (participating as a vendor in the free market), fines and inflation (printing money) (Gardiner, 2009). Non-profit organizations receive its funding through grants distributed by the government, or donations from private sector entities (Gardiner, 2009).
In order to operate, governmental and non-profit entities need to create budgets, so that the entities can operate in an efficient and effective manner. According to Wilson et al., “a budget is a plan of financial operation embodying an estimate of proposed expenditures for a given period and the proposed means of financing them…. the term usually indicates a financial plan for a single fiscal year” (Wilson et al., 2009, p. 744). Once the budget is approved it becomes law. Therefore, budgetary control, as its name implies, involves monitoring budgetary accounts so that expenditures do not exceed allocated budgets. This process compares actuals with budgets (FAO, 2011). In governmental agencies, the budget is prepared by an executive board and then sent to legislature for approval. Once a budget is approved, it becomes a law and cannot be changed; therefore, abiding by the budget is very important. If actuals exceed budgets, the variances are made the responsibility of key individuals who can either exercise control action or revise the original budgets (FAO, 2011). Characteristics of a thorough budget include: standards – based upon established standards of performance; feedback – constantly monitor performance; and analysis of costs and revenues (FAO, 2011). Within such entities, budgetary control is monitored through a responsibility center, which is manager, who is accountable for the activities of a functional unit (FAO, 2011). Throughout this paper I will discuss the relevant aspects of budgetary accounting, advantages and disadvantages of budgeting and budgetary control, the budgetary problems faced in the real world by public sector entities, and the application of budgetary control within public sector entities.
Budgetary Accounting First, an entity needs to prepare an operating budget, an outline of how revenues and expenditures. At the start of every budget period, the estimated revenues control account is debited for the total amount of revenues predicted to be earned, according to the operating budget (Wilson et al., 2010). Total estimated expected revenues are recorded in subsidiary ledger account, and the detail ledger of the account should equal the debits of the control account, and both should agree with the adopted budget. If there is a carryover balance in the Fund Balance account at the end of the preceding year, it can be made available for appropriation in the current year’s operating budget (Wilson et al., 2010). According to Wilson et al., due to prudent fiscal policy, most government entities attempt to conserve a “financial cushion” of approximately 15-25 percent of a year’s expenditure necessities in their Fund Balance account to cover unexpected expenditures or revenue shortages (Wilson et al., 2010). The purpose of budgetary accounts is to compare actual revenues and expenditures to budgeted amounts. Once the budget has been approved, the first entry to be made is recording the budget of the general fund balance (estimated revenues, appropriations, and estimated other financing uses) to the general ledger (Wilson et al., 2010). Public sector entities must establish accountability for revenues through budgetary control. Actual revenues should be recognized in the general ledger accounts of public funds by crediting revenue accounts, which will offset debits to receivable accounts for revenues that are accrued or by debits to cash for revenues recognized when cash is received (Wilson et al., 2010). The general ledger revenues account is a control account reinforced by the detailed revenues subsidiary ledger accounts. Periodically comparing the estimated revenues subsidiary accounts and the revenues subsidiary accounts throughout the fiscal year is important for monitoring actual revenues derived from each source. If there are any material differences between the estimated revenue accounts and the actual revenue accounts, these should be investigated by administrators to decide if: estimates were made on the basis of assumptions that may have appeared realistic when the budget was prepared but are no longer realistic; or any action needs to be taken so that revenues were estimated with reasonable accuracy are actually realized (Wilson et al., 2010). It is vital that revenues are recorded appropriately; if revenues have not been earned then they should remain titled as unrealized revenues. An appropriation is an authorization for administrators to expend financial resources on behalf of the government, but cannot exceed the amount specified in the appropriation ordinance for the purpose and time period specified by the ordinance (Wilson et al., 2010). An appropriation is considered expended when the authorized liabilities have been incurred. Administrators who expend more than appropriated or who make expenditures for any purpose not covered by an appropriation, or after the authority to do so has expired can face penalties imposed by the law (Wilson et al., 2010). Prudent laws require that every purchase order and contract be reviewed thoroughly before it is signed to ensure that a valid and sufficient appropriation exists and there is an available balance to cover the amount of the purchase order or contract (Wilson et al., 2010). When a purchase order or contract has been issued, it is imperative to record an encumbrance associated with the appropriation in the amount of the purchase order or contract. An encumbrance is an estimate of the liability that will be incurred when the purchase order is filled or the contract executed (Wilson et al., 2010). If suppliers are unable to fulfill purchase orders or perform tasks specified by the contract, then the related purchase order or contract must be canceled (Wilson et al., 2010). When goods and services for which encumbrances have been recorded are received and the suppliers’ invoice are approved for payment, the accounts should record that appropriations haven been expended, showing that an actual liability exists (Wilson et al., 2010). Expenditures and the liability account must both be recorded at the actual amount the government agrees to pay the vendors who have filled the purchase orders. If estimated and actual amounts differ, this causes no difficulties providing that the goods or services are received in the same fiscal year as they were ordered (Wilson et al., 2010). Budgetary control over expenditures must go through the following rational flow: appropriationencumbranceexpendituredisbursement (Wilson et al., 2010). Within all public sector entities, disbursement to vendors must be in the form of vouchers.
Advantages & Disadvantages of Budgeting & Budgetary Control The objective of budgeting and budgetary control is to improve public sector efficiency. This can be challenging because many public sector entities are under pressure to improve public sector performance, while containing expenditure growth. For this reason, budgetary control is essential to these entities. There are a number of advantages to budgeting and budgetary control. The first is it compels administrators to think about the future; to outline detailed plans for achieving the entity’s goals and provide administrators with a plan of which direction the entity should do in. Secondly, it promotes coordination and communication, which ultimately results in efficiency. Another advantage is it provides a basis for performance appraisal through variance analysis; is the entity operating within its budget or is it exceeding its allocated budget? Those that operate within its budget are performing better than those that don’t. Budgeting and budgetary control promotes accountability and responsibility within entities. Fifthly, it forces administrators to be proactive as variances emerge. Lastly, it improves the allocation of scarce resources.
Although the disadvantages of budgeting and budgetary control are minimal compared to the advantages, they do exist. The first disadvantage is that budgets cause many constraints and entities are pressured to abide by its operating budget, thus resulting in inaccurate record-keeping (fraud). The second disadvantage is that it can lead to disputes over resource allocation; as seen with “ObamaCare” and the Government shutdown. Thirdly, waste may occur, because in the public sector you have to spend money to get money. For example, in grant funded non-profit organizations, if a significant amount of the budget is left over administrators must use up the money, because if they do not then their funding is decreased for the following year. Lastly, administrators may overestimate costs so that they will not be held accountable for overspending.
Budgetary Control Problems The main task of budgeting is to estimate the level of resources that will be needed in the future to fund the work of established agencies, programs, and activities (Redburn, Reuter & Majmundar, 2011). It also involves the important task of identifying and evaluating alternative ways that resources can be used more effectively to accomplish the entity’s goals (Redburn, Reuter & Majmundar, 2011). Federal departments and agencies develop budgets by first estimating the amount of resources needed to execute authorized or proposed activities, while staying consistent with legal mandates and policy objectives (Redburn, Reuter & Majmundar, 2011). These factors contribute the problems faced in budgeting and budgetary control. In addition, since the budget is based upon estimates prepared well in advance - typically 18 to 24 months- entities must abide by these estimates in an attempt not to surpass them (Redburn, Reuter & Majmundar, 2011). For instance, estimates for low-income housing subsidies, the funding needed to sustain a given level of service is readily, will be calculated by applying an inflation factor to rents and utility payments and a growth factor to average income of the eligible population (Redburn, Reuter & Majmundar, 2011). But how much should these estimates be inflated by? Like mentioned previously, administrators will overestimate, because they do not want to pay penalties for exceeding their budget. However, one thing administrators cannot estimate or control is budgets for emergencies; they cannot predict the severity of the emergency or the recovery process.
Those responsible for budgeting, allocating funds, and controlling budgets usually face a number of problems within government systems, due to their complexity, dynamism and uncertainty (Redburn, Reuter & Majmundar, 2011). For example, budgeting and budgetary control for the U.S. Department of Justice is a rigorous task, which is hampered by the systems complex nature (Redburn, Reuter & Majmundar, 2011). Budgeting personnel can face a range of problems such as: budget surprises – unanticipated service demands that require additional budget resources, while operating on an already constricted budget; and budgetary control – monitoring budgets to report budget choices with better information; analyze the possible effects of alternative resource uses; and aid analysts and policy makers with better ways to apply resources to meet the policy goals of an entity, and not only its current program needs (Redburn, Reuter & Majmundar, 2011).
Applications of Budgetary Control In an already unstable economy and due to the reasons stated about, budgetary control can be a challenging task. With budget cuts being made every fiscal year, public sector entities are faced with tighter budgets, but are still expected to accomplish their duties and goals with their these budgets. According to Phil Oliff, Chris Mai and Vincenet Palacios, “…the latest state budget estimates continue to show that states’ ability to fund services remains hobbled by slows economic growth” (Oliff, Mai & Palacios, 2012). The budget gaps that states have had to close for fiscal year 2013 totaled $55 billion in 31 states (Oliff, Mai & Palacios, 2012). These budget gaps result primarily from poor tax collections. As of the first quarter of 2012, state revenues remained 5.5 percent below pre-recession levels, and are not growing fast enough to recover fully (Oliff, Mai & Palacios, 2012). However, states’ education and health care obligations continue to grow, while their budgets are not. States are predicting to educate 540,000 more K-12 students and 2.5 million more public college and university students in the upcoming year (Oliff, Mai & Palacios, 2012). In addition, approximately 4.8 million more Americans are expected to be eligible for subsidized health insurance through Medicaid, due to cancellations of their former coverage by employers or loss of jobs and wages (Oliff, Mai & Palacios, 2012). States have addressed their large budget deficits through spending cuts, in public services such as education, health care and human services, and other measures to meet balanced-budget requirements (Oliff, Mai & Palacios, 2012). Additional cuts will result in state budgets affecting the national economy; threatening thousands of private and public sector jobs, reducing job creation that otherwise would be expected to occur (Oliff, Mai & Palacios, 2012). Prospective strategies to reduce the impact of extensive spending cuts include more use of state reserve funds in states that have reserves, more revenue through tax-law changes, and a greater role for the federal government (Oliff, Mai & Palacios, 2012). Some states are better performing than others, for example, resource rich states like New Mexico, Alaska and Montana experience revenue growth in the beginning of the recession due to increased oil prices. Florida projected a $1 billion budget deficit for fiscal year 13, which was 4.1% of their FY13 budget (Oliff, Mai & Palacios, 2012). California had the highest budget deficit, amounting to $15.0 billion – 16% of their FY13 budget, out of the 31 states that made predictions (Oliff, Mai & Palacios, 2012).
Many of California’s cities are facing bankruptcy due to the lack of effective budgetary control. In Atwater, California, the city declared fiscal emergency in October 2012 with a $3 million deficit. A new water treatment plant sent the city into shock, because the project exceeded its costs by $85 million (Welch, 2013). Fresno is suffered from a $16 million deficit during FY12, and the city held a referendum in June, asking voters to approve privatizing garbage collection, which would produce a cash windfall of more than $10 million plus $2.4 million a year in franchise fees (Welch, 2013).
Detroit, Michigan actually filed for Chapter 9 bankruptcy protection on July 18, 2013. The city is the largest municipality in U.S. history to declare bankruptcy (Bomey, Snavely, and Priddle, 2013). Through poor budgetary control the “once-proud city” is no longer able to fulfill its duties, because it is in debt (Bomey, Snavely, and Priddle, 2013). The city had an $18 billion budget deficit (Bomey, Snavely, and Priddle, 2013). The city is now negotiating with creditors and constructing plans to restructure its debt to improve its financial condition and reshape government operations (Bomey, Snavely, and Priddle, 2013). Relevancy of Budgetary Control Budgetary control is an essential part of public sector funding. This was evident in the recent government shut down which began October 1, the first day of Washington’s 2014 fiscal year, and lasted for 16 days (Plumer, 2013). The government shut down occurred because President Obama wanted to introduce a new affordable health care system; however the conservative congress members opposed. They saw the new health care system as a proposal that would only increase the mountain of debit the country is already in ($17 trillion) (Plumer, 2013). The lack of budgetary control due to the cost of the country’s inefficient government on the federal, state and local levels is driving the national debt to record levels (Plumer, 2013). The Affordable Care Act, also referred to as “Obamacare”, was proposed to give government-subsidized health care benefits to tens of millions, and is expected to be funded by taxpayers. Conservative Congress members disagreed with the Act because the predicted costs of the plan will be astronomical if implemented. Entitlement programs are inefficient, costly and nearly impossible to terminate once instituted.
Each year, the house and Senate are supposed to agree on 12 appropriations bills to fund the federal agencies and set spending priorities (Plumer, 2013). Since the Republican-controlled House and Democratic-controlled Senate could not agree on the Act, because of the budget, they declined to pass the bill; consequently, the government shutdown. However, those public sector employees that are essential such as national security, public safety and social security programs still carried on. Out of these essential employees who had to continue working during the government, it was predicted that many would see their next paycheck delayed if the shutdown extended beyond October 15th, 2013 (Plumer, 2013). The National Institutes of Health stopped accepting new patients for clinical research and stopped answering hotline calls about medical questions. The Centers for Disease Control and Prevention stopped seasonal flu programs and have significantly reduced capacity to respond to outbreak investigations (Plumer, 2013). The Department of Housing and Urban Development was not able to provide local housing authorities with additional money for housing vouchers (Plumer, 2013). The nation’s 3,300 public housing authorities stopped receiving payments (Plumer, 2013). The Department of Homeland Security did not operate its E-Verify program, so during the shutdown businesses could not check the legal immigration status of prospective employees (Plumer, 2013). Approximately 400 national parks and museums were closed during the shutdown (Plumer, 2013). Because of budgeting disputes between Congress, many agencies, employees and civilians were affected by the government shutdown.
Conclusion
Budgetary control is faced with many challenges, such as budget cuts, budget surprises, and unanticipated costs like emergencies. Since the 2007 recession, many states have struggled to close their budget gaps. It is difficult for public sector entities to operate within their budgets and maintain budgetary control, while accomplishing their goals. Budgetary control is challenging because it pressures entities cut spending; if an entity exceeds their budget it can be forced to pay penalties imposed by the government. Public sector entities provide the public a wide variety of services, such as: education, entitlement programs, health care, parks and recreational facilities, garbage disposal, road maintenance, and correctional facilities. In budgetary accounting, it is important for entities to record revenues when they are recognized; estimated unearned revenues should be recorded as unrealized revenues, so that revenues are not overstated. When recording expenditures, it should first be recorded as an appropriation, then an encumbrance, then an expenditure when it is incurred, followed by disbursement of payment to the vendor. Budgets act as a financial plan for entities and proper budgetary control provides efficiency within an entity; improving communication and coordination. Budgetary control forces administrators to think about and plan for the future, while promoting accountability and responsibility. It also acts as an appraisal method; the public sector can be measured according its budgetary control. A city like Detroit would not be a well performing city if measure by its budget, because it filed for bankruptcy. Other cities who are not well performing based on their budget include Frenso and Atwater, both located in California. The most recent case of budgetary control was seen in October with the government shut down. Congress could not agree on the projected budget for the Affordable Care Act proposed by President Obama. The government shut down led to some federal entities shutting down, affecting many agencies, employees and civilians. Although budgetary control faces many challenges, it is vital part of budgetary accounting and public sector entities.

References
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