Chapter 3: Budgeting — Budgetary Objectives

Performance evaluation allows citizens and taxpayers to hold policymakers and administrators in governmental organizations accountable for their actions. Because accountability to citizens often is stated explicitly in state laws and constitutions, it is a cornerstone of budgeting and financial reporting.

GASB recognizes the importance of accountability with the following objectives in its Statement 1, Objectives of Financial Reporting:

• Financial reporting should provide information to determine whether current-year revenues are sufficient to pay for current-year services.
• Financial reporting should demonstrate whether resources were obtained and used in accordance with the entity's legally adopted budget. It should also demonstrate compliance with other finance-related legal or contractual requirements.
• Financial reporting should provide information to assist users in assessing the service efforts, costs, and accomplishments of the governmental entity (GASB Statement 1, Paragraph 77).

Accountability is often established by incorporating these objectives into legal mandates that require state and local public sector budgets to

• be balanced (i.e., with current revenues sufficient to pay for current services);
• be prepared in accordance with all applicable federal, state, and local laws; and
• provide a basis for the evaluation of a government's service efforts, costs, and accomplishments. Although some form of a balanced budget requirement is generally necessary to ensure the long-term fiscal health of any organization, variations (such as the use of fund balance reserves to pay for current services) may be appropriate over a short period. Generally, however, all departures from this fundamental objective must be in accordance with applicable state and local laws and policies.

Given the importance of demonstrating compliance with the approved budget, the financial reporting system must control the use of financial resources and ensure that budgetary appropriations and allocations are not exceeded. To demonstrate compliance, accounting systems are usually operated on the same basis of accounting used to prepare the approved budget. Thus, the actual financial information captured by the accounting system is in a form comparable to that in the approved budget. Through integration with the budget, the financial accounting system becomes the primary tool to prove financial accountability.

Finally, the budget is evaluated for its effectiveness in attaining the organization's stated goals and objectives. Evaluation typically involves an examination of how funds were expended, the outcomes that resulted from the expenditure, and the degree to which these outcomes achieved the stated objectives. This phase is fundamental in developing the subsequent year's budgetary allocations. In effect, budget preparation is not only an annual exercise to determine the allocation of funds, but also part of a continuous cycle of planning and evaluation to achieve the stated goals and objectives of the organization.

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