BUDGETING AND FINANCE

See attached for instructions.

MPA511 M5D1

The Basics of Public Budgeting and Financial Management

· Chapter 5: Funding State and Local Budgets, pgs. 119-159

Read and respond (approximately 250 words each) 

M5D1: Funding for State & Local Government

(SEE ATTACHED .PDF)

ONE:

Part One:

During a government shutdown, an administration must cut costs as much as practical to offset the reduction in revenue to fund services. This can include delaying items such as delaying benefits approval and payout to citizens and businesses. It can also involve furloughing employees or having them work without pay. Cutting deep limits the number of people working for free to keep administrative costs as low as possible while providing essential services. Between employees being furloughed and cost of living for employees working for free, this puts incredible strain financially and emotionally on government workers. These strains can have lasting effects on employment as people choose to quit government service entirely.

When this shutdown occurred, I was in secondary training in rural Texas. When the shutdown occurred, funding of transfer-related funds was at risk of being halted, which could have prevented me from transferring to Hawaii in January. While this delay would have been inconvenient, I had many colleagues who were affected more directly and with greater impact in other such shutdowns. For them, it prevented smooth transitions in academic years for their children and even as far as causing assignments to be changed entirely. Additionally, individuals who were no longer going to be in the service had job opportunities put on hold.

During the most recent shutdown, the USDA was profoundly affected and was forced to make tough decisions to reduce expenses appropriately. This affected farmers and agricultural producers, as well as forest services (USDA, 2018). Moreover, items such as timber sales, research, and new grants were also halted to reduce as much spending as possible (USDA, 2018). In this specific incidence, an article focuses on a farmer whose budgets was spanning the prior fiscal year and the future year for their expenditures (Boudreau & Crampton, 2019). This was multiplied in complexity by the fact that support services were not available to advise on financial issues and ways to work through the predicament (Boudreau & Crampton, 2019). Overall, shutdowns such as this can cause lasting effects on local governments and citizens that rely on such funding.

Part Two:

I write about Louisiana and New Orleans as I have Hurricane Douglas about to whip through the state. Hopefully, we do not have as much damage that causes a significant budgetary constraint has Louisiana. However, Hawaii has not had a hurricane hit land since 1993, so we shall see how prepared they are. In any case, Louisiana is still experiencing many budgetary issues as of 2018. Some of the services being hit the hardest by the cutbacks in Louisiana include public health programs funded by Medicaid. For instance, Louisiana was considering cutting a Medicaid program that provides residential substance abuse treatment for the city of New Orleans (O’Donoghue, 2018). This cut would substantially impact the local government as this is an essential service; though, this cut would help save the state $10.1 million (O’Donoghue, 2018). However, as this is a federal matching program, this step would cost the state in the long run (O’Donoghue, 2018). Moreover, they expected to cut mental health programs funded by Medicaid as well (O’Donoghue, 2018). Other programs, such as criminal rehabilitation programs, were also at risk, specifically, prisoner housing, which would create shortages of places to put people (O’Donoghue, 2018). Moreover, juvenile offenders and criminal justice support services were also at risk of being cut (O’Donoghue, 2018). Further services children, such as aid to privately-funded schools, foster care services, and creative arts programs, were also on the chopping block (O’Donoghue, 2018).

All of these cuts put more considerable strain on the local governments as it puts more burden on the parish level leaders to address these problems. In the case of the prisoner housing issue, the parishes were responsible for about 50% of the detained persons, and likely this cut would increase that burden both in funding and resources (O’Donoghue, 2018). Moreover, a loss of funding for criminal justice support services places an increased risk of criminal activity that is not adequately monitored and controlled. At the state level, cutting these services allows the government to reallocate funding to restore the levees and other essential structures. However, as noted with the Medicaid services, cutting programs with federal matches will decrease its overall revenue from the federal government. As such, the state needs to raise tax levels to offset this loss while also increasing revenue to close the gap (O’Donoghue, 2018). Loss of jobs and businesses resulting from the damage and increased taxes will adversely impact the state and federal government as well due to a loss of tax revenue (O’Donoghue, 2018). Moreover, all of these programs were essential or opportunity costs. With a potential increase in crime, adverse health outcomes, and loss of educational programs for children, the local, state, and federal governments face compounded strain on their future budgets.

Part Three:

Revenue is the lifeblood government. Without revenue, a sustained governmental operation is impossible. According to Menifield (2017), the government has a few sources of revenue from which to choose, and the source that makes up the bulk of revenue is taxes. At the national level, they are mostly reliant on individual income and payroll taxes (Menifield, 2017). States rely primarily on income taxes, but they can also elect to utilize sales taxes, insurance trust revenues, and intergovernmental transfers (Menifield, 2017). States can also utilize user fees for services residents can elect into, such as toll roads (Menifield, 2017). State and local governments can acquire revenue through fines and forfeitures (Menifield, 2017). However, this relies on people breaking laws or engaging in policy infractions that are not necessarily predictable in terms of yield Finally, local governments derive revenue primarily from property taxes but are also highly reliant on intergovernmental transfers (Menifield, 2017).

Texas’ state-level government acquires revenue predominately through sales tax at 54.5% annually (Comptroller of Public Accounts [CPA], 2019). The next significant revenue form includes fees and other non-tax revenue at 11.7% (CPA, 2019). Moreover, the state collects revenue through motor vehicle sales and rental taxes at 8.1% (CPA, 2019). The remainder of the revenue is through minor miscellaneous taxes (CPA, 2019). Overall, this government gains about $125 billion annually through these sources (CPA, 2019). Texas also estimates its revenue on a biennial basis (CPA, 2019).

Meanwhile, California appears to have a much more diversified revenue stream for their cities. Additionally, the state has restricted and unrestricted revenues these cities can collect and spend (Coleman, 2016). Per the state’s laws and policies, restricted revenue can only be spent on specific programs as designated by law (Coleman, 2016). The majority of Californian cities’ incomes come from utility and other fees at 43% (Coleman, 2016). The cities also gain about 21% of their revenue through property and sales taxes (Coleman, 2016). Furthermore, the cities benefit from various grants and funding from state and federal levels (Coleman, 2016).

When comparing the two states’ rules and regulations of how municipalities and other governmental organizations spend their revenue, California seems to have reduced flexibility as they designate certain funds’ uses, such as with utility fees (Coleman, 2016). This leaves only 36% of their overall revenue as discretionary to the cities (Coleman, 2016). Meanwhile, Texas does not necessarily restrict the spending of revenue but does have state-directed collection restrictions. For instance, they recently voted to restrict the localities’ ability to set property taxes higher (McCrary, 2017). Additionally, only some cities in Texas can take part in sales tax revenues, making it difficult for other cities to raise revenue (McCrary, 2017). Overall, a locality’s ability to collect taxes is imperative to its functioning. However, having limitations and guidance ensures that the government is still functioning within its citizenry’s best interest and not merely trying to attain revenue as if it were a private business.

References

Boudreau, C. & Crampton, L. (2019, January 17). Farmers cut off from their federal lifelines as shutdown persists. Politico. Retrieved from https://www.politico.com/story/2019/01/17/government-shutdown-agriculture-farmers-usda-fsa-1106977

Coleman, M. (2016, November 1). A primer on California city revenues, part one: Revenue basics. Western City. Retrieved from https://www.westerncity.com/article/primer- (Links to an external site.)california-city-revenues-part-one-revenue-basics

Comptroller of Public Accounts (2019). Biennial revenue estimate. Retrieved from

https://comptroller.texas.gov/transparency/reports/biennial-revenue-estimate/2020-21/

McCrary, C. (2017, March 13). Texas lawmaker files bill to limit property tax increases. Community Impact Newspaper. Retrieved from

https://communityimpact.com/austin/georgetown/city-county/2017/03/13/lawmaker-files- (Links to an external site.)property-tax-bill/

Menifield, C. E. (2017). The basics of public budgeting and financial management. [eCampus]. Retrieved from https://ecampus.vitalsource.com/#/books/9780761869764/

O’Donoghue, J. (2018, June 2). Louisiana budget: What programs still don’t have funding. NOLA. Retrieved from https://www.nola.com/news/politics/article_cd15cc0d-f80c-575b- (Links to an external site.)89b0-c57846fc0017.html

USDA (2018, December 31). How does the government shutdown affect the USDA? Retrieved from https://www.agriculture.com/news/business/how-does-a-government-shutdown- (Links to an external site.)affect-the-usda

TWO:

How do you manage revenue in a government shutdown?

You have to start with realistic “belt tightening” and the ability to make the hard decision.  This would include having to prioritize employees and creating a plan to furlough, layoff or even terminate if that is the only option.  If it is not the workforce that has to be affected, then a decision will have to be made about programs that may have to be shuttered.  This could include programs that many people rely on for food or shelter.  For that reason, finding a way to survive through staff reductions should be the first order of business.

Given that the news has been littered with stories associated with the common man’s experience as it relates to the government shutdown; please consider sharing how this national crisis has in some way impacted you. Be mindful that the impact could be indirect.

In the last round of government shutdown, I was managing an “essential” work center that had myself and twelve others as the staff.  We were told that the six technicians (or civilian paid workers) that we had were to be sent home in a “non-paid” status and the work center would have to be manned by the six that remained.  Based on nothing but patriotism and love of country, the six technicians worked their normal shifts without pay.  As a supervisor of Airmen, I could not have been prouder.  In the end, all that worked were compensated accordingly, made whole and then all converted to active duty.  This meant that this situation would never have to be encountered it the Command Post again.

Share an article of an organization or government entity impacted by the government shutdown.

I was going to pick how the military was impacted, but to be honest I feel like I write about that experience in most of my discussion posts.  So instead I thought about the small businesses across the country and how they were impacted.  It was as simple as I thought it was, “The clearest problem for small businesses was the drop off in customers, as many federal workers or contractors — or those with federal workers in their family — were suddenly less willing or less able to spend money” (Wronski & Cohen, 2019).  This is the “trickle-down effect” and often is what is not considered when discussing the situation.  With less workers in each respective communities’ workforce, the local businesses are the ones that are suffering.  This can be seen today in the Covid-19 reality as well.  So many small businesses are never going to reopen their doors because of the prolonged loss of customers.

Discuss the challenges New Orleans is still experiencing and the impact on their budget (local, state, and national).

New Orleans like many other places is still dealing with the effects of the most recent government shutdown.  One of those ways that they are still struggling is through those still requiring food assistance.  This is requiring local and state agencies to have to budget larger figures to ensure that the members of their communities can eat.  “The Associated Press reported that U.S. Department of Agriculture Secretary Sonny Perdue asked states to issue February SNAP benefits no later than Jan. 20.  “Louisiana residents receiving SNAP will spend these limited February dollars much earlier than normal,” Melanie McGuire, Second Harvest chief impact officer, said. “This means many families will run low on food much earlier than normal” (Warren, 2019).  This situation has caused the local and state government food assistance programs to spend more money to help, or to execute their funds earlier than budgeted.  Either way, this sets up New Orleans for even more issue and potential future budget crisis’.

Let’s compare the revenue management of a couple of states. You may elect to compare Texas and California, or you may elect to choose your state and compare to one of the others. Discuss the differences or similarities in how the states have elected to apply standards to revenue collection.

States must have revenue to operate.  Without a way by which to make money, there would be no way to pay for even the most basic of functions within the state.  In most cases, this revenue is brought in by way of taxes.  Sales tax is the most common of these taxes and applies to most goods and services offered in the state.  Texas is a good example of sales tax collection, with a current figure of 6.25 percent as the 2020 rate.  This sales tax is on “all retail sales, leases and rentals of most goods, as well as taxable services.  Local taxing jurisdictions (cities, counties, special purpose districts and transit authorities) can also impose up to 2 percent sales and use tax for a maximum combined rate of 8.25 percent” (Comptroller of Texas, 2020).  With a figure like this, it is not hard to see how Texas receives the majority of the revenue for the state.  California on the other hand relies heavily on taxing the wealthiest citizens.  “California’s tax system, which relies heavily on the wealthy for state income, is prone to boom-and-bust cycles. While it delivers big returns from the rich whenever Wall Street goes on a bull run, it forces state and local governments to cut services, raise taxes or borrow money in a downturn” (Lin, 2018).  The biggest difference between the two states is the burden that they put on the people that live there.  Texas spreads the responsibility across the board with a percentage of goods and services paid by all that live there.  California focuses on the wealthiest of the residents to pay the lions share to cover a large percentage of the population that is not capable of paying the taxes.

References:

Comptroller of Texas (2020).  Sales and Use Tax.  Comptroller of Texas.  comptroller.texas.gov.  Retrieved from https://comptroller.texas.gov/taxes/sales/

Lin, J. (2018).  The open secret about California taxes.  Cal Matters.  Calmatters.org.  Retrieved from https://calmatters.org/explainers/the-open-secret-about-california-taxes/

Menifield, C. E. (2017).  The basics of public budgeting and financial management.  [eCampus].  Retrieved from https://ecampus.vitalsource.com/#/books/9780761869764/

Warren, B. (2019).  Caught up in shutdown, New Orleans area federal workers turn to food banks, pop-up pantries.  NOLA.  nola.com.  Retrieved from https://www.nola.com/news/northshore/article_5f247e1f-9d0f-5039-92ac-5a5734ca9d2c.html

Wronski, L. & Cohen, J. (2019).  A reality check on how small businesses were really affected by the government shutdown.  CNBC.  cnbc.com.  Retrieved from https://www.cnbc.com/2019/02/11/a-reality-check-on-small-businesses-and-the-federal-shutdown-impact.html

THREE:

Funding for State and Local Government

State and local government funding is an important element in revenues collected by these governments. The federal government provides funding for state and local governments in the form of mandatory and discretionary funds. These funds account for a significant portion of state and local government revenues. Funding from the federal government is used to finance critical programs and services. Mandatory funds are established in continuous federal law and depends on eligibility requirements and formulas set in the law (Lav & Leachman, 2017). On the contrary, discretionary funds are appropriated annually and cover areas of transportation, housing for low-income families, and outcomes for low-income students. Effective management of funds from the federal government is essential to enhance public service delivery. Now one would ask why the federal government under this administration is making this a big issue to fund the state and local government with the ongoing uptick of this pandemic (COVID-19). Listen to the experts and provide the additional mandatory and discretionary funds.  

Part 1 – Managing Revenue in a Government Shutdown

Since state and local governments obtain a large share of their revenues from the federal government, a government shutdown generates a lot of inconveniences. A federal government shutdown has both political and economic effects that stretch beyond the actual apparatus of the government. The biggest economic impact of a government shutdown is felt by federal employees. Additionally, a shutdown affects public service delivery as some government services are not provided. According to Wessel (2018), a federal government shutdown contributes to nearly $2 billion a week in lost economic output for as long as it persists. Businesses operating in the private and public sectors are also affected by a federal government shutdown because of its significant economic impact. For instance, the recent federal government shutdown contributed to approximately $25 billion loss for Delta Airlines in a month (Matousek, 2019). Therefore, managing revenue in a federal government shutdown is essential for the public and private sectors.

One of the measures to manage revenue in a government shutdown is to negotiate delayed or reduced payments with contractors. This strategy can be employed by public service and private sector organizations. For public service agencies, the strategy would entail renegotiating for reduced or delayed payments for capital projects whose funding has not yet been dispersed. Renegotiating payment terms for such projects would help maintain revenue by ensuring the state or local government has money to cover the shutdown period. In addition, such agencies could consider halting some capital projects until the end of the shutdown period. For private sector businesses and organizations, payment terms can be renegotiated with vendors and creditors to ensure flexibility and more cash on hand or revenues during the shutdown period (Uzialko, 2019).

The second measure that can be employed to manage revenue in a government shutdown is reducing expenses in order to slow capital outflows. State and local government could re-examine their budgets and identify any expenses that could be halted during the shutdown. Some of these expenses could include the purchase of new equipment, some capital projects, business trips, or costs of expansion.

Part 2 – Challenges Facing New Orleans and their Impact on the Budget

New Orleans is faced with challenges that have significant impacts on its budget from a local, state, and national perspective. One of the challenges that continue to affect New Orleans is Hurricane Katrina that caused a significant amount of damage. As one of the most destructive natural disasters in the history of the United States, Hurricane Katrina has had long-term impacts on various cities in the country including New Orleans. Gibbens (2019) states that the city of New Orleans remains significantly altered more than 10 years after the storm. New Orleans embarked on a rebuilding journey but continues to feel the effects of the disaster, which affects its budget. This challenge affects the city’s budget from a national perspective with respect to funding from the federal government. It has increased economic relief funds provided by the federal government, which has in turn increased national expenditure on economic relief for states and counties. The federal government has increased financial resources and funding for the city in the aftermath of the disaster and to aid its rebuilding efforts (McCrory, 2020). State budgets have been characterized by budget reductions in spending proposals. O’Donoghue (2018) states that the Louisiana Legislature has faced budget reductions worth $200 million.

The other major challenge affecting the city is the coronavirus pandemic, which has affected people’s lives and businesses across the globe. Coronavirus has affected New Orleans’ budget by taking approximately 14% of its budget. As a result, the city of New Orleans has been forced to cut programs across the board to maintain its operations and deal with the effects of the global pandemic. Moreover, New Orleans is facing the challenge of a lack of income from taxes, which forced Mayor LaToya Cantrell to put a hold on tax payments (McCrory, 2020). Due to this challenge, the city is expecting a budget deficit of over $100 million. The move by Mayor Cantrell is expected to have a heavy burden on the city’s budget because of the huge deficits.

Part 3 – Revenue Management in Texas and California

Revenue management is an important part of public administration as it directly affects public service delivery. States adopt different measures for revenue management depending on their specific objectives, unique circumstances, and available financial resources. Texas and California are examples of states with different measures of revenue management. Texas and California revenues come from different sources including federal and state grants, taxation, fees, and other sources. The revenue management framework employed by these states focuses on ensuring public money is spent appropriately and in line with existing policies or laws. In essence, revenue management in Texas and California is similar on the basis that laws have been enacted to limit the use of revenues for certain purposes (Coleman, 2016). Finance departments in state and local governments in Texas and California separate revenues and expenditures into different funds or accounts that are classified as the General Fund, special revenue funds, and enterprise fund.

However, there are differences in how these states have elected to apply standards to revenue collection and management. Since city and local-county governments in Texas rely heavily on property taxes, the state has elected to apply revenue collection standards by imposing limits on property tax increases (McCrary, 2017). Texas has imposed a property tax revenue cap to help limit tax increases. In California, property taxes can be increased with a two-thirds vote to fund a general obligation bond (Coleman, 2016). Therefore, any increases, extensions, or enactment of any kind of local tax in California requires voter approval. Secondly, California’s State Legislature is prohibited from lessening the local portion of the sales and use tax rate or changing its allocation method. On the contrary, Texas State Legislature has set sales and use at 6.25% and granted local jurisdictions the discretion to impose such taxes of up to 2% for a total of 8.25% (McCrary, 2017).

In conclusion, revenue collection and management are an important part of the operations of state and local governments in relation to public service delivery. State and local governments obtain revenue from a variety of sources including the federal government. These governments need to put proper measures in place to ensure effective management of revenues. However, revenue management is affected by various factors at the state and local levels as well as the federal government level including a shutdown. As evident in the case of Texas and California, states have enacted different measures and standards for revenue collection and management.

References

Coleman, M. (2016, November 1). A Primer on California City Revenues, Part One: Revenue Basics. Retrieved July 27, 2020, from https://www.westerncity.com/article/primer-california-city-revenues-part-one-revenue-basics

Gibbens, S. (2019, January 16). Hurricane Katrina, Explained. Retrieved July 27, 2020, from https://www.nationalgeographic.com/environment/natural-disasters/reference/hurricane-katrina/ (Links to an external site.)

Lav, I.J. & Leachman, M. (2017, March 13). At Risk: Federal Grants to State and Local Governments. Retrieved July 27, 2020, from https://www.cbpp.org/research/state-budget-and-tax/at-risk-federal-grants-to-state-and-local-governments

Matousek, M. (2019, January 15). Delta’s CEO Said the Airline Will Lose $25 Million This Month Due to the Government Shutdown (DAL). Business Insider. Retrieved July 27, 2020, from https://www.businessinsider.com/delta-ceo-government-shutdown-will-cost-25-million-january-2019-1

McCrary, C. (2017, March 13). Texas Lawmaker Files Bill to Limit Property Tax Increases. Retrieved July 27, 2020, from https://communityimpact.com/austin/georgetown/city-county/2017/03/13/lawmaker-files-property-tax-bill/

McCrory, C. (2020, March 31). New Orleans Faces ‘Catastrophic’ $100 Million Deficit. 4WWL. Retrieved July 27, 2020, from https://www.wwltv.com/article/news/health/coronavirus/coronavirus-slashes-budget/289-43a9a9d1-cb78-48f4-836c-795fae264b9 (Links to an external site.)e

O’Donoghue, J. (2019, July 12). Louisiana Budget: What Programs Still Don’t Have Funding. The New Orleans Advocate. Retrieved July 27, 2020, from https://www.nola.com/news/politics/article_cd15cc0d-f80c-575b-89b0-c57846fc0017.html

Uzialko, A. (2019, January 14). Small Business Survival Guide: How to Sustain Cash Flow During a Government Shutdown. Retrieved July 27, 2020, from https://www.business.com/articles/government-shutdown-small-business-survival-guide/

Wessel, D. (2018, January 22). The Economic Impact of a Government Shutdown. Retrieved from The Brookings Institution website: https://www.brookings.edu/blog/up-front/2018/01/22/the-economic-impact-of-a-government-shutdown/

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