SD15 - Review of Virginia's Executive Budget Process
Executive Summary: Overall, the executive budget process is a sound one. However, the process can be improved. For instance, partly because of the use of incremental rather than program budgeting, insufficient evaluation of programs in agency base budgets is being conducted by the executive branch. Estimating and reporting of nongeneral funds remains a problem, though first identified by JLARC in the 1980 report, "Federal Funds in Virginia." In addition, more incentives for good financial management by agencies should be considered. The time the legislature has to make appropriation decisions needs to be increased. An earlier submission of the Governor's budget -- by December 20 -- would give the General Assembly almost an additional month for review. Finally, additional information could be provided by the executive branch that would assist legislative decision-making. During this review, many State agencies commented on the improved capabilities and professionalism shown by Department of Planning and Budget (DPB) analysts over the past 10 years. Those same agencies also noted that further refinements in DPB's operations could enhance the budget process. A brief explanation of these and other major findings is contained in this summary. Detailed explanations and specific recommendations are contained in the text of this report. The executive budget process as defined in this study is the means used to develop, execute, and evaluate Virginia's operating budget. The General Assembly, recognizing the importance of systematically assessing the efficiency and effectiveness of the budget process, mandated JLARC's review in the 1990 Appropriation Act (amended and reenacted in the 1991 Act). This is the first comprehensive study of the executive operating budget process since the General Assembly legislated major changes to the process in the mid-1970s. Virginia's Budget Process Has Evolved Over Time Virginia's budget process has evolved substantially since the first executive budget was introduced to the General Assembly in 1920. As late as 1966, the State was still using a private consulting firm to review State agencies' funding requests. The process was a manual one, completed with the aid of adding machines and typewriters. There was little thought given to integrating planning with budgeting because the budget process was a simple one, based on past funding. As the complexity of Virginia's budget has grown, the budget process has evolved as well. During Governor Godwin's first term, a professional budget staff was hired. In the early and mid-1970s, a secretarial system was established to provide policy guidance. Later, legislative staffs were hired to improve legislative oversight of the process. In 1975, the General Assembly adopted program budgeting as a way to integrate planning and budgeting. At the same time, the General Assembly established the Department of Planning and Budget (DPS) to develop and direct the new integrated process. Automation of the process followed, with the development of computerized budgeting and accounting systems. Virginia's Use of Program Budgeting The integrated budgeting process that the General Assembly adopted in 1975 was a comprehensive and rigorous program budgeting model. The executive branch fulfilled legislative intent and for the first two biennia made a sincere and concerted effort to use program budgeting in its model form. This level of program budgeting proved difficult to implement, however, and resulted in excessive paperwork that was often not used during budgetary decision-making. Over time, some excessive requirements have been eased by the executive branch, generally with the acquiescence of the legislative branch. However, the Code of Virginia still reflects most of the initial, stringent requirements. Legislative intent regarding program budgeting could be clarified by amending the Code of Virginia to delete some of its more stringent and unnecessary components, keeping those that are key to a sound program budgeting system. The following recommendation is made in this area: • The General Assembly may wish to clarify legislative intent regarding executive budget development by amending the Code of Virginia to include only the following requirements of program budgeting: identification of common efforts and services; appropriation of funds according to programs; identification of service attainments or lack of attainments; and articulation of program justifications, including goals, objectives, and the authority for the program. Consequences of Virginia's Approach to Budgeting Program budgeting, as first implemented, was envisioned as a bottom-up process where agencies would identify and prioritize their program needs and submit them to the Governor. The Governor would weigh competing needs and determine the amount of funding each agency would receive. Over time, Virginia's process has evolved to be largely incremental - where an agency's previous budget serves as its base for the next year and special attention is normally focused on a relatively narrow range of increases and decreases. There have been consequences to this incremental approach to budgeting. Agency budgets are no longer developed "bottom-up"- that is, based on program needs. In addition, little consideration has been given to rising program costs, including inflation. Executive budgetary attention has consisted primarily of financial assessments of agencies' base budgets. These have been routinely done, as have policy analyses and financial assessments of requests for new programs and services. However, program evaluation of the programs in base budgets has taken place sporadically. Recent budget reductions have required DPB and State agencies to examine opportunities for downsizing and cost savings based on the effectiveness of selected State programs. However, there is no guarantee this type of programmatic examination of agency base budgets will continue when revenues improve. There are several recommendations to improve the evaluation of base budget programs made in this report: • The Director of DPB should develop an appropriate methodology for programmatic examination of base budgets. Programs could be targeted for review in each biennial budget cycle, in consultation with the Governor's secretaries and House Appropriations and Senate Finance committees. Further, the Director should develop a training program on the methodology for DPB budget analysts. • The Director of DPB should ensure that more of the evaluation section's effort is directed to program evaluations of existing State programs. • The Director of DPB should assess ways that agency program information and evaluation resources can be used by the department to increase its program evaluation activities. In addition, line agencies should share internal program evaluations with DPB. • The Director of DPB should proceed with plans to develop performance measures for some base budget programs on a pilot basis, and should ask for legislative input into decisions on the measures developed and their implementation. Budgetary Responses to Revenue Declines Have Been Timely No matter what type of budgeting is used, a good process will directly relate revenues to budgeted amounts. An examination of the executive branch's budgetary responses to the declining revenue forecasts for the 1990 and 1991 fiscal years shows that budgetary responses to these declines have been timely. One way to improve the level of knowledge regarding forecasts would be to continue the interim forecast (a forecast in addition to the annual forecast to be produced in times of declining resources). The interim forecast was adopted by the 1991 General Assembly partly because of a JLARC recommendation in a previous report, "Revenue Forecasting in the Executive Branch: Process and Models." The following recommendation is made in this area: • The General Assembly may wish to consider further amending Part Four of the Appropriation Act to require that the formal re-estimation of general fund revenues be done for future biennia. Improvements Need to be Made in the Estimating, Reporting, and Collecting of Nongeneral Funds For nongeneral funds, the relationship between estimates and budgeted amounts is not direct or clear. Nongeneral fund revenues can vary considerably from agency estimates. For fiscal year 1991, State agencies received an additional $477 million in nongeneral funds over estimates. Part of the problem is that estimating practices in the agencies vary considerably, and DPB is not meeting its responsibility to review the accuracy of agency estimates. Problems with the capture of nongeneral revenues by the State's accounting system also makes it difficult to compare revenues with estimates. The following recommendations are made in this area: • The Director of DPB should comply with Part Four of the 1991 Appropriation Act to ensure that the accuracy of nongeneral fund revenue estimates by agencies are reviewed and evaluated. • The Department of Accounts (DOA) and DPB should examine ways to improve the reporting of nongeneral fund revenues to ensure that accurate evaluations of agency estimates against actual collections can be made and report their findings to the House Appropriations, House Finance, and Senate Finance committees. • The General Assembly may wish to amend Part Four of the Appropriation Act to require the Governor to report annually on the receipt of additional nongeneral funds, their sources, and the amounts for all State agencies. In addition, for the 1994 Session of the General Assembly, DPB and DOA should conduct a study to identify sources of nongeneral fund revenue that might more appropriately be included in the general fund. Executive Branch Appropriation Transfers Largely Comply With Legislative Intent Appropriation transfers made by the executive branch inthe1989 and 1990 fiscal years were largely consistent with legislative intent at that time. In the 1991 Session, the General Assembly limited executive branch authority to transfer appropriations to 15 percent of the appropriation. However, the 15 percent limitation has not been effective in limiting the executive branch's transfer authority, if such a limitation was the legislature's intent. There is one recommendation in this area: • The General Assembly may wish to amend Part Four of the Appropriation Act to strike the 15 percent limitation on transfers or strengthen the language to effectively restrict transfers, if such a limitation was the original intent. Central Controls Provide Adequate Safeguards Over Expenditures, and Some Controls Could be Relaxed Overall, central controls by DPB and DOA provide reasonable assurances that legislative intent regarding the type and level of expenditures is carried out by State agencies. In some areas, these controls could be relaxed to allow agencies greater flexibility. Recommendations in this area are listed below. • The Director of DPB should promulgate the written guidelines that would allow systems of agencies to make appropriate operating budget appropriation transfers without DPB's prior approval. • The General Assembly may wish to amend the Code of Virginia to reflect the current practice of annual allotments, deleting the requirement for quarterly estimates and allotments. Agency Financial Management Appears Sound Even Though There Are Few Incentives for Sound Management Agency directors are "to be responsible for all expenditures pursuant to appropriations," according to the Code of Virginia. A review of selected State agencies found that agency financial management appears sound and State funds appear to be spent appropriately. For the most part, agencies have adequate internal controls over their own expenditures. Agencies carefully monitor their expenditures to avoid deficits. In addition, there do not appear to be common financial management problems in agencies. Good management occurs despite the fact that there are few incentives for agency directors to practice sound financial management. Currently, however, not all agency directors are formally evaluated on the financial management of their agencies. Since 1988, the General Assembly has authorized the use of management standards. Meeting these standards would allow agencies such incentives as carrying forward a portion of their unexpended fund balances. However, these standards have been implemented only for higher education institutions. Without the management standards, there is a lack of incentive for sound financial management. There is anecdotal evidence that some agencies spend as much as possible at the end of a fiscal year to prevent reversion of their monies to the general fund. As the General Assembly intended, management standards should be implemented for all State agencies, with additional incentives for sound financial management explored. Suggested recommendations in this area include: • The General Assembly may wish to consider requiring the executive branch to implement the financial management standards that are currently authorized in the Appropriation Act. In addition, the General Assembly may wish to consider allowing agencies the following incentive options: encumbrance of unexpended funds for specified purposes and the ability to keep a portion of funds from the reprogramming of their base budgets. • The Secretary of Finance should study additional incentives for sound financial management, especially for agencies with significant amounts of nongeneral funds. The Secretary should report his findings on these incentives to the House Appropriations and Senate Finance committees prior to the 1993 Session of the General Assembly. • The Secretary of Administration in conjunction with the Secretary of Finance should develop a uniform system for evaluating the financial management performance of agency directors. The General Assembly Needs More Time to Consider the Executive Budget The General Assembly has an extremely limited amount of time to consider the executive budget when compared to other state legislatures (see figure, on page vi of the report). There are a number of options the General Assembly could consider to increase the amount of time for budget consideration. An earlier submission of the Governor's budget to the General Assembly would be the most straightforward of several viable options. Therefore, the following recommendation is made. • The General Assembly may wish to amend the Code of Virginia to require submission of the Governor's biennial budget on December 20th. A similar change could be made to require the Governor's amendments to the Appropriation Act by December 20th as well. Information in Agency Budget Proposals is Accurate and Timely, but its Appropriateness Varies The Code of Virginia requires the Governor to have agencies follow a uniform format when submitting their biennial budget proposals. This practice allows comparisons of program needs across agencies. Although the majority of the agency budget proposals examined did follow a uniform format, there were exceptions. The separate format required for higher education institutions is necessary due to their unique reporting requirements and does not prejudice budgetary decisions for or against any institution. However, the modification of the format for individual agencies is not in compliance with legislative intent. The Code of Virginia also requires that agencies be allowed to submit all addenda they deem necessary to meet their program needs. However, in some cases, agencies have not been given this opportunity because Governor's secretaries have restricted addenda submissions. Recommendations in this area include: • The General Assembly may wish to consider amending the Code of Virginia to reflect current practice and allow for a separate budget proposal format to be followed by all higher education institutions. In addition, the Director of DPB should ensure compliance with the Code of Virginia and require agency budget submissions to be in the uniform format prescribed by the Governor. • The secretaries and the Director of DPB should ensure compliance with the Code of Virginia by ending the practice of restricting the addenda State agencies can submit. Additional Budgetary Information Could Assist Legislators During this review, legislators have indicated that additional information would assist them in making budget decisions. Some legislators would like information on funding for aid to localities contained in the Governor's budget. Other legislators would like information on discretionary and nondiscretionary funding in the Governor's budget. Information on total agency appropriations is also not readily available to legislators. This information is not provided in the budget bill or the Appropriation Act because agency line items do not include regrades and other central appropriations. Information currently provided in the budget bill for systems of agencies can be especially misleading. Among the recommendations made in this area are the following: • The General Assembly may wish to amend the Code of Virginia to require that the Governor's budget document include an identification of the portion of each State agency's budget that is direct aid to localities. • If the General Assembly determines that the executive branch should provide information on discretionary and nondiscretionary funding, the director of DPB should work with the staff of the House Appropriations and Senate Finance committees to produce a definition of "discretionary" spending that can be agreed upon. • The Comptroller should provide information concerning every agency's total appropriation for the current fiscal year in the existing Monthly Report to the Governor produced by DOA. • The Governor may wish to consider modifying the way systems of agencies are currently reported in the budget bill by combining all agency codes within a system of agencies into one agency code. Refinements to DPB's Operations Could Enhance the Budget Process Many State agencies commented on DPB's professionalism during this review. Over the last 10 years, DPB has made significant strides in strengthening its staff capabilities. Agencies did identify several areas where refinements to DPB operations could enhance the budget process. Therefore, it is recommended that the Director of the Department of Planning and Budget should: • Formally articulate the role of DPB analysts in the budget process, paying particular attention to their role vis-à-vis State agencies. • Promote continuity in analysts' assignments during a biennial budget cycle. • Encourage analysts to visit their assigned agencies by adopting an agency-wide policy that fosters these visits, and include the requirement for agency visits in the model performance expectations and position descriptions for analysts at all levels. • Ensure that semi-annual training on the budget process is made available to agency directors and fiscal staff. The training should be structured so as to allow agencies an opportunity for providing input into DPB budget instructions and the budget development calendar, as well as an opportunity for providing DPB with feedback regarding the budget process. • Provide guidance to DPB staff and agencies concerning what sections of the Commonwealth Planning and Budgeting System Manual are still in effect. If the general guidance on the budget process included in the manual is no longer current or in effect, the director should provide alternative guidance to agencies. • Continue to pursue the acquisition of personal computer analytical resources for all DPB budget and evaluation analysts. The director should also ensure that problems with the Program Budgeting System identified by DPB analysts during this review are addressed in the agency's information technology plan or as part of the agency's current effort to improve the system. Note: On December 16, 1991, the Chairman of JLARC announced that a comprehensive budget reform bill was prefiled to implement the recommendations from this report. Among the bill's provisions is a requirement that the Governor submit his budget to the General Assembly by December 20, rather than after the legislature convenes in January. The budget reform bill, as well as other legislation resulting from this study, will be considered during the 1992 Session of the General Assembly. Copies of this proposed legislation are included in Appendix D. |
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