Fiscal Administration

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1 SUB Hamburg A/ Fiscal Administration Eighth Edition ANALYSIS AND APPLICATIONS FOR THE PUBLIC SECTOR ' ' 3 John L. Mikesell Indiana University * WADSWORTH CENGAGE Learning- Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States

2 About the Author Preface v iii CHAPTER 1 Fundamental Principles of Public Finance 1 Market Failure and the Functions of Government 3 Public Goods 5 Externalities 7 Failure of Competition 10 Privatization 15 Arguments Supporting Privatization 15 Production/Provision 19 Building Social Decisions from Private Preferences 22 Politics, Representation, and Government Finance 26 The Layers of Government 29 Conclusion 32 Questions and Exercises 33 Cases for Discussion 34 Case 1-1: Market Interplay, Municipal Utilities, and a Common-Pool Resource 35 Case 1-2: Considering Privatization 35 PART ONE Budgeting, Budget Structures, and Budget Reform 39 CHAPTER 2 The Logic of the Budget Process 41 The Size and Growth of Government Expenditure 42 What Is a Budget^ 50 Budget Process and Logic 51 The Parts of the Public Expenditure/Public Revenue Process 52 Budget Classification, Structure, and Presentation Years 54 Functions of the Budget Process 59 Delivering Those Budget Process Functions 63 The Budget Cycle 64 Executive Preparation 65.. Legislative Consideration 67 Execution 68 Audit and Evaluation 70 Governmental Accounting and Financial Reporting 73 Standards 73 Funds 75 Accounting Basis: Cash or Accrual 76 Comprehensive Annual Report (CAFR) 77 Budgets and Political Strategies 78 The Incrementalist Insight 78 Roles, Visions, and Incentives 79 Strategies 81 Conclusion 87 Questions and Exercises 88 vtt

3 viii Contents Cases for Discussion 91 Case 2-1: Strategies in Defense of the Defense Budget 91 Case 2-2: Politics and Budget Strategies in Building the Tenn-Tom Waterway 94 CHAPTER 3 Budget Structures and Institutions: Federal and State-Local 97 The Federal Budget 97 Spending by the Federal Government 98 The Federal Budget Process 100 Fighting Federal Deficit 131 State and Local Budgets 142 Spending by State and Local Governments 146 Conclusion 156 Questions and Exercises 157 Case for Discussion 159 Case 3-1: Pork and Earmarks: A Variety of Options 159 Appendix 3-1: Appropriations, Departments, Agencies, and Budget Accounts 162 Appendix 3-2: An Illustrative State Budget Process: Texas 166 CHAPTER 4 Budget Methods and Practices 170 Growth Rates and Simple Forecasts 170 Preparation of Agency Budget Requests 173 Budget Justification 175 Elements of Cost Estimation 177 Personnel Costs: Paying the Staff 178 Nonpersonnel Costs 180 Screening for Errors 181 Review of Budgets 184 Reviewing a Budget Request 185 The Budget Presentation 189 The Executive Budget: The Plan and the Balancing 190 Phantom Balance and Deficit Reduction 192 Actually Making Budget Reductions 197 Managing Budget Execution 199 Internal Controls 204 An Intra-Year Cash Budget 205 Audit and Evaluation 206 What Audits Need to Prevent: Some Methods of Stealing from Government 207 Conclusion 209 Questions and Exercises 210 Cases for Discussion 218 Case 4-1: Green Felt-Tip Pens, a Tape Recorder, and Embezzlement: Where Did the Budget Process FaiR 218 Appendix 4-1: Budget Preparation, or How to Be a Budget Analyst 220 CHAPTER 5 Budget Classifications, Systems, and Reform: Trying to Make Better Choices 231 Considering the Flow of Provision of Government Services: The Logic of the Service System and Budget Classifications 233 Traditional Budgets: A Flawed Tool for Decision Making (But Pretty Good for Control and Accountability) 237

4 ix Traditional Performance Budgets 242 Program Budgets 245 An Illustration of an Expenditure in Alternative Classifications 253 The Zero-Based Budget System 255 Results Based/New Performance Budgeting 258 Some Challenges for New Performance Budgeting 267 Federal Integration of Performance and Budgeting: Budget and Performance Integration Initiative and the Program Assessment Rating Tool 271 Participatory Budgeting 276 Conclusion 278 Questions and Exercises 279 Cases for Discussion 283 Case 5-1: Following Departmental Lines (and Scores 1?-) 283 Appendix 5-1: Functional Categories of the Federal Budget 284 Appendix 5-2: United Nations Classification of Functions of Government 286 CHAPTER 6 Capital Budgeting, Time Value of Money, and Cost-Benefit Analysis: Process, Structure, and Basic Tools 288 Why Have a Separate Capital Budget Process^ 289 A Process for Managing Capital Expenditure 293 Planning 295 Budgeting 299 Implementation/Execution 300 Audit 301 Problems in Capital Budgeting 301 Accounting for Time: Discounting and Compounding 302 Compounding 303 Discounting 305 The Annuity Formula A Special Case 307 Organizing Information for Choices: Cost-Benefit Analysis 308 Elements in Cost-Benefit Analysis 309 Selecting a Discount Rate 316 Decision Criteria 318 Some Special Problems of Cost-Benefit Analysis 323 Conclusion 326 Questions and Exercises 326 Cases for Discussion 331 Case 6-1: What Does Cost Mean^ 331 PART TWO Revenue Sources, Structure, and Administration 333 CHAPTER 7 Taxation: Criteria for Evaluating Revenue Options 335 Taxation in the United States: A Short Overview of the Systems 336

5 Standards for Tax Policy 341 Adequacy of Revenue Production 344 Equity 350 Economic Effects 360 Collectability 362 Transparency 369 State and Local Taxes and Economic Development 372 Taxes and Externalities 373 Conclusion 376 Questions and Exercises 376 Cases for Discussion 378 Case 7-1: Politics and the Protection of Tax Advantages 378 Case 7-2: Birth, Marriage, Death, and Taxes 383 CHAPTER 8 Major Tax Structures: Income Taxes 386 Some Background 387 The Argument about Taxing Income 391 For the System of Taxing Income 391 Against the System of Taxing Income 393 Individual Income Taxation 396 Defining Income 396 Adjusted Gross Income 398 Personal Deductions 402 Personal Exemptions 405 Taxable Income 405 Tax Rates 405 Credits 412 Effective Tax Rates 414 Indexation 414 Tax Computation 415 The Individual Income Tax Gap 418 Corporate Income Taxation 420 Dividing the Profit Base 425 Integration with the Individual Tax 427 International Harmonization 429 Payroll Taxation 430 Conclusion 431 Questions and Exercises 431 Cases for Discussion 435 Case 8-1: When Marginal Tax Rates Were Really Extreme 435 CHAPTER 9 Major Tax Structures: Taxes on Goods and Services 439 The Equity Question 445 Selective Excise Taxation 446 Luxury Excises 447 Sumptuary Excises 448 Benefit-Base Excises 450 Regulatory and Environmental Excises 452 Other Excises 453

6 xi General Taxes on Goods and Services: Retail Sales and Value-Added Taxes 453 Retail Sales Taxes 457 Exclusion of Producers' Goods 458 Taxation of Services 462 Commodity Exemptions 464 Variation in the State Sales Taxes 466 The Sales Taxes and Internet Commerce: Remote Vendors and Use Taxes 466 Collecting the Retail Sales Tax 470 Value-Added Taxes 471 Value-Added Tax Features 476 Value-Added Tax versus Retail Sales Tax 477 Conclusion 479 Questions and Exercises 479 Cases for Discussion 480 Case 9-1: Girl Scout Cookies and the Snack Tax 480 Case 9-2: Pringles and Preferences from the Value-Added Tax Base-?- 482 CHAPTER 10 Major Tax Structures: Property Taxes 485 Good Tax, Bad Tax 490 The Arithmetic and Application of Rates, Levies, and Assessed Value 492 Doing Assessments: Standards 495 Doing Assessments: Cycles 499 Doing Assessments: Approaches 503 Fractional Assessment and Assessment Disparity 505 Property Tax Relief Mechanisms 510 Exemptions, Credits, and Abatements 510 Circuit-Breakers 514 Deferrals 516 Classification 516 Limits and Controls 517 Tax Increment Financing 521 Conclusion 522 Questions and Exercises 523 Cases for Discussion 528 Case 10-1: Property Taxes and a World-Class House 528 Case 10-2: The Property Tax versus Habitat for Humanity 528 Case 10-3: Property Tax Exemption for Nonprofit Organizations 531 CHAPTER 11 Revenue from User Fees, User Charges, and Sales by Public Monopolies 536 User Fees and Licenses 541 User Charges 544 Advantages of User Charges 545 Limitations of User Charges 547 Charge Guidelines 549

7 xii Contents Public Monopoly Revenue: Utilities, Liquor Stores, and Gambling Enterprises 553 Government Utilities 553 Liquor Stores 554 Government Gambling Enterprises: Lotteries and Offtrack Betting 554 Conclusion 559 Questions and Exercises 559 Cases for Discussion 561 Case 11-1: User Charges for Correcting Externalities: London Congestion Charge 561 Case 11-2: Charging for Firefighting: A Reasonable Financing Option^ 564 CHAPTER 12 Revenue Forecasts, Revenue Estimates, and Tax Expenditure Budgets 567 Revenue Forecast (or Baseline) 568 General Guides for Revenue Forecasts 569 Alternative Methods for Forecasting 571 Choosing the Method 578 Forecasts for the Long Term 579 Wrong Forecasts 580 Revenue Estimating 581 Tax Expenditure Budgets 585 Conclusion 590 Questions and Exercises 590 Appendix 12-1: The State of Minnesota Tax Expenditure Budget: Criteria and Measurement 592 CHAPTER 13 Intergovernmental Fiscal Relations: Diversity and Coordination 597 Correspondence and Subsidiarity 598 Is Bigger Better^ 600 Fiscal Disparity 601 Coordination and Assistance: Tax Systems Coordination and Assistance: Grants Categorical Grants 611 Block Grants 615 Revenue Sharing (General-Purpose Fiscal Assistance) 616 States and School Aid 618 Coordination and Assistance: Mandates 620 Conclusion 624 Questions and Exercises 624 Cases for Discussion 625 f Case 13-1: It Worked Once, But Would It Work Againi 625 f Case 13-2: Correspondence, Subsidiarity, and the Term-Tom Waterway 626 I

8 xiii PART THREE Administering Debt, Working Capital, and Pension Funds 627 CHAPTER 14 Debt Administration 629 Federal Debt 629 State and Local Government (Municipal) Debt 634 Municipal Bonds and the Tax Reform Act of A New Municipal Bond Option 640 Appropriate Debt Policy 640 The Mechanics of Bond Values 641 Debt Structure and Design 643 Ratings 646 Credit Enhancements 653 Underwriting, Interest Rates, and Ownership 655 Lease-Purchase Finance and Certificates of Participation 661 Conclusion 663 Questions and Exercises 663 Appendix 14-1: General Principles of State Debt Management 665 CHAPTER 15 Managing Public Funds: Cash Management, Employee Retirement, and Sovereign Wealth Funds 667 The Cash Budget and Cash Management 667 Elements of Cash Management 670 Investing Public Employee Retirement Funds 683 Critical Issues in Public Employee Retirement Fund Management 689 Sovereign Wealth Funds 692 Conclusion 694 Questions and Exercises 694 Cases for Discussion 695 Case 15-1: Managing Cash for the Sheriff's Interest^ 695 Case 15-2: Tapping the Pension Fund Piggybank 699 Index 705

INTERNATIONAL ACCOUNTING

A Seventh Edition INTERNATIONAL ACCOUNTING INTERNATIONAL EDITION Frederick D. S. Choi New York University Gary K. Meek Oklahoma State University Boston Columbus Indianapolis New York San Francisco Upper