13.1 Public Budget Formulation, Structures & Budgeting Approaches

7.1 Public Budget Formulation, Structures & Budgeting Approaches

Public budgeting lies at the very intersection of constitutional law, political philosophy, public policy, and accounting discipline. A government budget is far more than a mathematical forecast of revenues and expenditures; it is a legally binding political compact that operationalizes societal values, establishes executive priorities, and sets statutory spending ceilings. For certified government financial managers, mastering budget formulation, classification frameworks, and budgeting models is indispensable for ensuring fiscal integrity, legislative compliance, and programmatic efficiency.

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The Public Budget Formulation Lifecycle

Although governmental jurisdictions operate under diverse constitutional charters, administrative codes, and fiscal calendars, public budgeting follows an eight-stage lifecycle that spans multiple calendar years. Financial managers routinely manage three concurrent budgets simultaneously: closing out and auditing the prior fiscal year, executing the current fiscal year's adopted budget, and formulating the budget proposal for the subsequent fiscal year.

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|                             THE EIGHT STAGES OF THE BUDGET LIFECYCLE                               |
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|  1. Executive Guidance & Budget Call  -->  2. Departmental Request Preparation                    |
|  3. Administrative Review & Balancing -->  4. Public Hearings & Citizen Engagement                |
|  5. Legislative Review & Enactment    -->  6. Executive Signature or Veto                         |
|  7. Budget Execution & Allotment      -->  8. Year-End Closeout & Financial Audit                 |
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Stage 1: Executive Guidance and the Budget Call

The budget formulation process formally initiates when the chief executive (the President at the federal level, the Governor at the state level, or the Mayor/County Executive/City Manager at the local level) issues the formal Budget Call via the central budget office (such as the Office of Management and Budget [OMB] federally, or a state Department of Finance). The budget call transmits:

• Macroeconomic assumptions: Inflation forecasts, interest rate projections, unemployment expectations, and revenue elasticity benchmarks.
• Fiscal targets and policy priorities: Directives on whether agencies must submit flat ("maintenance-of-effort") budgets, achieve percentage reductions (e.g., target-based budget ceilings), or accommodate specific executive policy expansions.
• Technical guidelines: Standardized forms, software workflows, cost escalation factors for personnel benefits, and submission deadlines.

Stage 2: Agency and Department Budget Requests

Operating agencies and line bureaus prepare their budget requests. This bottom-up estimation requires division heads to project:

• Continuation/Baseline Budget: The cost of delivering currently authorized services at current operational levels, accounting for negotiated union salary step increases, healthcare cost inflators, and utility rate changes.
• New Initiative Requests (Decision Packages): Justifications for program expansions, statutory mandates, technology modernizations, or additional personnel headcount.

Stage 3: Administrative Review and Executive Balancing

The central budget office consolidates all departmental submissions and compares aggregated expenditure requests against projected general fund revenues. Because agency requests invariably exceed available revenues, central budget analysts conduct administrative review hearings. Analysts evaluate workload statistics, historical expenditure burn rates, and program performance metrics. The budget director and chief executive balance the budget to comply with statutory or constitutional balanced budget requirements, producing the Executive Budget Document.

Stage 4: Public Hearings and Citizen Engagement

At state and local levels, statutory "sunshine laws" and municipal charters require public exposure of the proposed budget prior to legislative enactment. Formal public hearings provide civic organizations, taxpayers, labor representatives, and neighborhood coalitions the platform to comment on proposed tax rates, utility fee hikes, or service reductions. Advanced jurisdictions increasingly employ participatory budgeting, granting citizens direct voting authority over discretionary capital improvement funds.

Stage 5: Legislative Review, Amendment, and Enactment

The executive transmits the proposed budget to the legislative branch, which holds the constitutional power of the purse. The legislative process features:

• Committee Review: Referral to appropriations committees, finance/ways and means committees, and specialized program subcommittees.
• Independent Fiscal Analysis: In-depth review by nonpartisan legislative analysts (such as the Congressional Budget Office [CBO] federally, or state legislative fiscal bureaus) to evaluate the realism of executive revenue and spending estimates.
• Markups and Amendments: Legislative committees draft alternative spending levels, add provisos (specific spending restrictions), or reallocate resources between departments.
• Final Passage: Both legislative chambers debate, reconcile differences in conference committee, and enact the final appropriations bill(s).

Stage 6: Executive Signature, Veto, and Enactment Options

Once enrolled, the appropriations act is presented to the chief executive:

• Full Approval: The executive signs the legislation into statutory law.
• Full Veto: The executive rejects the entire bill, returning it to the legislature, which may attempt an override (typically requiring a two-thirds supermajority in both chambers).
• Line-Item Veto (State/Local): In 44 states, governors possess the constitutional power to veto specific spending lines, programs, or statutory riders while approving the remainder of the budget. Some governors also possess a reduction veto (lowering an appropriated dollar amount). At the federal level, the U.S. Supreme Court struck down the federal Line Item Veto Act in Clinton v. City of New York (1998) as a violation of the Presentment Clause of Article I.

Stage 7: Budget Execution and Allotment

Following legal enactment, fiscal authority transfers back to the executive branch for execution. Central budget authorities establish apportionments (dividing statutory appropriations by calendar quarter or activity) and agency directors issue internal allotments to operational units. Agencies obligate and disburse funds within statutory ceilings, monitored by pre-encumbrance and encumbrance accounting controls.

Stage 8: Year-End Closeout and Financial Audit

At the conclusion of the fiscal year, accounting transactions cease for that budget period. Unexpended annual appropriations typically lapse back to the fund balance or general fund of the treasury. Financial accountants perform accrual adjustments, and independent auditors (e.g., state auditors, GAO, or external CPA firms) audit the records, culminating in the issuance of the Annual Comprehensive Financial Report (ACFR) or federal consolidated financial statements.

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Budget Classification Structures

To establish fiscal accountability, enforce statutory compliance, and generate meaningful management data, public sector accounting systems organize every budgeted expenditure through a standardized multidimensional classification hierarchy. A single expenditure line item contains multiple alphanumeric segments, known collectively as the accounting string or budget account code.

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|                             THE BUDGET CLASSIFICATION HIERARCHY                                   |
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|  FUND                --> Legal and accounting entity (e.g., General Fund, Capital Projects Fund)  |
|  ORGANIZATIONAL UNIT --> Administrative responsibility (e.g., Police Department, Traffic Division) |
|  FUNCTION            --> Broad public purpose served (e.g., Public Safety, Health & Human Svcs)   |
|  PROGRAM             --> Strategic objective grouping (e.g., Traffic Congestion Mitigation)       |
|  ACTIVITY            --> Specific operational task (e.g., Speed Enforcement Radar Patrol)         |
|  CATEGORY            --> Intermediate classification (e.g., Personnel, Operating, Capital)        |
|  CHARACTER           --> Fiscal period benefited (Current Operating, Capital Outlay, Debt Service)|
|  OBJECT CLASS        --> Specific good or service acquired (Salaries, Fuel, Professional Svcs)    |
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