Public Financial Management

PAD 3003 Intro to Public Administration Module 7 Chapters 13-14

The book is Introducing Public Administration 8th edition by Shafritz, J. M., Russell, E. W., & Borick, C. P.


Overview chapters link


Public Financial Management Chapter 13

The federal debt, as of November 2015, has risen to nearly $19 trillion. Public spending goes toward defense, social security, Medicare & Medicaid, discretionary spending, debt service, and other mandatory spending. With the changes from the Affordable Healthcare Act, the nation is presented with increases in national debt that have no end in sight – assuming a lot of the revenue generation, or taxes, and spending policies remain the same.

At the heart of budgeting is money. Many people tend to make it more complicated than that, but budgeting is arithmetic, adding up the amount of money that comes in and subtracting from that total the amount needed to pay for programs and the operation of the government. It gets more complicated with legislation that makes things mandatory like payments for social security and medicare, and yet at the end of the day, it’s about adding and subtracting the income and expenses.

There are a few underlying considerations for us to understand how financial policies in this country are crafted. First, taxation, or the federal government’s ability to levy taxes on the general public was not intended by the framers of the Constitution. The founders of this nation and authors of the Constitution enabled the federal government, and gave them the supremacy on certain specific areas of government, to levy taxes from the states, not directly from the people.

Article I, Section 2 of the Constitution reads: “The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States.”

The idea of progressive taxation, or taxing more from those with more resources and less from those with less resources, was not intended. Additionally, direct taxation on individuals, what we now call income tax, was a change from federal government taxes imposed on states. The 16th Amendment ratified in 1913 made this change: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

In fact, President Abraham Lincoln was the first person to enact an income tax in 1862 through the passage of the Revenue Act, which was later found unconstitutional by the Supreme Court years later because it imposed a direct taxation on individuals. Until 1913 and the passage of the 16th Amendment, the central government raised revenues primarily through tariffs on goods and services, which was determined to be unsustainable.

In 1913, the passage of the 16th Amendment, direct taxation based on income was approved and we now have a system of direct taxation on people. The idea, at least originally, was that the flow of revenue was to come from the states and be remitted to the federal government, not collected by the federal government and remitted back to the states in the form of categorical grants or grants in aid.

There are two key theorists that impacted our tax theories: John Maynard Keynes and Friedrich August von Hayek. Keynes, from whom we get the term “Keynesian Economics” believed that the government, by virtue of its central power and ability to raise income through taxes, ought to influence markets for economic development and borrow money to stabilize the market during financial decline or crisis. Hayek, on the other hand, proposed what we now refer to as free market economic policy in his book The Road to Serfdom in 1944. The idea that there is “good” government economic intervention and “bad” government economic intervention was rejected. The enemy to economic development in a nation was “collectivism” as he saw it.

As Leo Tolstoy pointed out, economic activities and relationships are much more complex than supply side versus demand side economic theories.

The part of federal taxation in a global economy that is lacking is thinking that tax policy that consists of some 2,600 pages long won’t encourage people to find ways to skirt paying their fair share, especially those with resources worth protecting. The tax code complexity is literally encouraging the economic development of industry experts in filing systems – the more money you have the more you tend to invest in paying accountants to protect as much of it from the government as possible through loopholes and exemptions.

There are different concepts in budgeting that are worth exploring. There are two different types of budgets: operational and capital. The operational budget covers cash flow and day to day operations and is revisited throughout the year; the capital budget covers larger expenses physical improvements and long range investments.

Budgets have “line items” which are what they say – lines of expenses in a spreadsheet with rows and columns. There are different takes on budgeting as well from performance budgeting where an integration of the expected outcomes are input along with each line item. Program budgeting focuses on all of the line items that make up a program and lay framework for incrementalism, which is budgeting increases or decreases by program area. Lastly, zero-based budgeting is scrapping it all and starting from scratch – making executive agencies come to Congress with explanations for everything they receive that is more than “zero.”

We have talked about the direct tax, which is the primary way in which the federal government exacts taxes, but states like Florida rely on the indirect tax of sales tax to fund government operations, while municipalities use ad valorem property taxes. Florida does not make use of an income tax but does collect revenue from user fees, borrowing, grants, public enterprise, bonds to the general public, public-private partnerships, and investment earnings. In Florida, other special taxing districts, such as mosquito control districts, are often funded through inclusion in property taxes.

The way the government taxes has been an ongoing issue in this country. Taxation without representation was the battle cry in 1773 at the Boston Tea Party. It has now become the call of the Tea Party Movement in this country believing that the federal government has become like the oppressive British government before the Revolutionary War.

Program Audit and Evaluation Chapter 14

William Bligh was a lieutenant in her majesty’s royal navy around the turn of the 19th century. He went on an expedition to Tahiti with over 40 men and stayed there six months – his men enjoying their time there, especially enjoying the native women. His account of how his men mutinied as they prepared to leave Tahiti and sent him adrift on a “life raft” to his expected death was starkly different than what was described by his men. If his men had not had a chance to tell their story, William Bligh would have been hallmarked and esteemed in perpetuity as the admiral he was born to be. However, history portrays captain Bligh as a hard man – verbally with his men, contradictory in his orders, and perhaps engaged in an unwanted homosexual relationship with Fletcher Christian. In the end, the royal navy was enlisted by businessmen to procure a food crop for use in another place that led to mutiny of Bligh and eventually – a food product that was even so rejected by the Jamaican slaves for which it was requested.

What Captain Bligh’s story illustrates is how the government can become enlisted by private enterprise to perform functions such as research or in this case, naval involvement, to enhance the profitability of the private industry. This is undertaken because of successful lobbying, but also because the government administration perceives the benefit of a rise in taxes from a rise in profitability. What this story also illustrates is effective “spin” in public administration. Because Bligh was first to get back to England to tell his story, he was effective in gaining the political favor and public opinion he needed to avoid trouble.

Today, the same is true as government, but slightly different as the news has become almost instantaneously delivered to people and technology has advanced communications. However, what hasn’t changed is the fact that program evaluation is something that is written best when written by those favorable to the person or program, and written worst when the converse is true. During program evaluation, professional evaluators question the methodology and experience of the “other” side in an effort to stifle criticism about their program outcome.

Audits are professional reviews of government activities according to their finances, but they can also include management audits or performance audits that focus on features other than money. At the national level, President Teddy Roosevelt led the charge for increased responsibility that led to the passage of the Budget and Act of 1921, which created the Bureau of the Budget, now the Office of Management and Budget and the Government Accountability Office as a congressional institution to keep tabs on the expansion of the power of the presidency in the aforementioned institution.

There are three types of audits that the Government Accountability Office, or GAO, performs. The first is financial and compliance that determines whether the financial statements are reflective of the actual financial position of an entity and if the audit itself was performed lawfully and in line with generally accepted accounting practices. The second is economy and efficiency audits that determines the efficiency with which an entity is making use of their personnel, property, space and resources. The third is the program results audit that determines how a program has achieved results and if there were cost savings or could have been cost savings.

There is a difference between policy, which is generally developed by political will and opinion and the programs that they birth. Likewise, there is a difference between policy analysis and program evaluation. There are different forms of program evaluation such as impact studies or ex ante facto (Latin for before the fact) or impact evaluations (Latin for after the fact). Some have argued that evaluation is a field of study in its own right, with general and generic features and components such as compliance, efficiency, and effectiveness and relevance, but it is never free from the political environment.

Evaluation is often manipulated internally too by management who want to protect their positions and are aversive to change. This can be crippling when the fear is over a reduction in salary as the management and administration might be pressed even further to protect their interests in the evaluation process. If they are protecting their turf, they are going to argue and fight to protect it from overly being portrayed in a poor light during an evaluation. Remember Captain Bligh’s “spin”?

Program evaluation can also become corrupted through the democratic process. For example, the election of the United States president who is against Medicare based on the notion that the country can’t afford it and personal freedom dictates private health insurance choices. He will review every cent spent on Medicare in light of the framework – it’s not a good program so every outcome will be measured similarly. In business, when you grow, you are rewarded financially with increases in revenue, staff, and influence. In government, such as with Medicare, when you grow you become more expensive and even more – you become clutched to so tightly by some that you can’t ever imagine letting go.

When we began this course, we talked at length about public trust, duty and the ultimately high ethical standards for which public administrators must submit. As we close, we examine one final way in which the framework in which governing takes place can be manipulated. While knowledge is important and an understanding of governing documents and policies are requisite, nothing may be more important than a strict adherence to high standards of professional conduct throughout a career in public administration.

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