Abstract
For governments, the greatest financial risk is running out of money before the end of the fiscal year. Therefore, the tendency to underestimate revenue as a buffer against error and/or adverse events is pervasive and empirically verified across governments. However, there remains an outstanding and little researched issue as to whether that same risk-averse behavior extends to overestimating forecasted expenditures. Since appropriated funds allow expenditures to be designated by agency, it seems to create a moral hazard when expenditures are overestimated at the agency level to add an even larger buffer against forecast errors. Agencies generally spend more at the end of the fiscal year to avoid cuts in future forecasted expenditures and are unlikely to be the source of found savings. On the other hand, central budget offices, rather than agencies, control certain expenditure categories, allowing public officials rather than agency heads to retain discretion over this source of potential savings. This chapter examines the question as to whether there is evidence that centrally controlled expenditure accounts are overestimated while line-item accounts distributed to public agencies are not.
Savings, according to de Blasio, will materialize through several measures including a cap of city health care increases of 3.5% next year and 3% the following year. These savings, said the mayor, are guaranteed and enforceable through arbitration…. “It doesn’t seem like a budget-buster,” said Howard Cure, director of municipal bond research at Evercore Wealth Management. “It seems like they overbudgeted in health care costs and then made the numbers work and called it savings.”
(Burton 2018)
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Notes
- 1.
Commonly, this practice is labeled “line-item budgeting”; however, here we explicitly refer to appropriating because budgets can be built using line-item detail, but then appropriated by aggregated programs or departments.
- 2.
In a variant that allows some central executive discretion while denying it to lower ranking executives, the budget ordinance may appropriate to line items but permit some degree of budget modifications (also known as reprogramming) to the central executive or designee. Regardless of the unit of appropriation, it is likely common, but not universal, that the central executive has some reprogramming authority. This variant would not achieve the Goodnowian legislative budget control.
- 3.
It is commonly said that line-item budgets are a thing of the past. This view may have its origins with Schick (1966). However, unsystematic observation finds line-item budgeting at the local level among smaller jurisdictions. We have found no authoritative empirical source concerning the distribution of possible units of appropriation across local governments. The most likely sources—GFOA, GASB, ICMA and the Census of Government branch of the U.S. Census—all report that they do not collect these data. While this research has been in progress, we have learned that GFOA has (as of October 2018) a list of 231 localities that report that they use line-item budgeting; however, this matter is further confounded because the term “line-item budgeting” may be used to refer to either the budget presentation or to the appropriation ordinance.
- 4.
Governments may need to be clever about these categories, for example, when negotiating with unions, it may be contrary to the negotiation strategy to overfund pay increases.
- 5.
The New York City CAFRs are available at https://comptroller.nyc.gov/reports/comprehensive-annual-financial-reports/ and its budget documents are available at https://www1.nyc.gov/site/omb/publications/publications.page.
- 6.
The Rocky Mount data are available at https://www.rockymountnc.gov/government/city_hall/budget_office/documents/.
- 7.
The Harrisonburg data are available at https://www.harrisonburgva.gov/budget.
- 8.
For New York debt service, the amount shown as appropriation is the appropriated amount plus funds available within the debt service account (primarily the prior year balance). This reflects the city’s actual practice as described in Williams and Onochie (2013).
- 9.
The surplus is calculated as budget minus actual. Where it is negative it is a deficit. For the debt service category, there is a separate debt service account; the surplus for this category is funds available in the debt service account (primarily the carryforward from the prior year) plus the budgeted transfer to this account from the general fund minus the expenditure during the year (thus, it is the carryforward to the next year).
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Calabrese, T., Williams, D. (2019). Bias Associated with Centrally Budgeted Expenditure Forecasts. In: Williams, D., Calabrese, T. (eds) The Palgrave Handbook of Government Budget Forecasting. Palgrave Studies in Public Debt, Spending, and Revenue. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-18195-6_10
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