Analytical Processes, Essay Example

Operating Budgets vs. Capital Budgets

Operating budgets can be defined as documents that set out the functional income or revenues and expenditures of an organization for a fixed period.

Capital budgets are documents for planned future purchases above a defined cost threshold or longer-term life span. It may include a Capital Investment Plan that sets out the timeline for the capital expenditure and the anticipated recovery of eligible costs from other sources and/or the repayment of debt.

Operating budgets are arguably the most important document a municipality produces.  It is the document that municipal officials the authority to create obligations and pay expenses.  The detail of an operating budget spreads the resources across departments and is an indication of the council or legislature’s policies and priorities, as well as providing limits as to how much may be spent by each department.

Operating budgets should include the municipality’s vision or mission statement, broken down into goals and objectives.  Citizens can then see how their taxes are being spent and can hold elected officials to account by comparing actual expenditure to budgeted expenditure (and whether goals and objectives were met) and current year expenses to previous years (to highlight areas of concern or inefficiencies and value for money or effectiveness). (Municipal Research and Services Center of Washington, 2012)

Capital budgets should include plans and policies for acquiring, maintaining, replacing and retiring capital assets.  These documents are necessary to plan for large expenditures and investments, and to minimize maintenance costs through appropriate asset management during the lifecycle of the asset. (Best Practices in Public Budgeting, 2012)

Warning Signs for Municipality

The warning signs for municipality budget problems can take the form of:

1. A gradual or rapid increase in forecasted costs or reductions in anticipated revenues.
2. An anticipated increase in revenues that requires some investment in order to realize its full potential.
3. Inability to fund liabilities such as pensions and maintenance of infrastructure.
4. Inefficiencies in size and profile of government to provide the priority services expected by citizens.
5. Economic distress at national, state or municipal level evidenced by:
   1. Reductions in property tax collections due to tax assessments catching up with the lower property values from a downturn in the real estate market.
   2. Reductions in income tax collections due to unemployment and lower wages taking effect.
   3. Reductions or elimination of direct state aid, e.g. Nebraska.
   4. Reductions in Federal aid, e.g. Stimulus funding.
6. Inability to raise additional taxes.
7. Reduction in economic competitiveness by too high a level of taxation.
8. Falling municipal bond markets due to unattractive rates of return.

References    

Best Practices in Public Budgeting. (2012, Oct 8). Retrieved from Government Finance Officers Association: http://www.gfoa.org/services/nacslb/index.htm

Municipal Research and Services Center of Washington. (2012, 10 8). Retrieved from Working Together for Excellence in Local Government: http://www.mrsc.org/subjects/finance/budgets/budget.aspx#docs

Smith, R. &. (2004). Public Budgeting in America. Prentice-Hall.