Article

Understanding public budget processes

0 86 Government

Over the years construction contracts have been cancelled and then re-issued with changes to specifications being cut back due to budget issues. In most large organizations, the procurement is built into the overall business management process.
Stephen Bauld
Stephen Bauld

Procurement Perspectives | Stephen Bauld

Over the years construction contracts have been cancelled and then re-issued with changes to specifications being cut back due to budget issues. In most large organizations, the procurement is built into the overall business management process.

As part of the annual budget cycle, each department prepares a needs assessment, relating to what it expects to spend during the coming financial year.

The items covered will range from routine expenditures (i.e., for office supplies, printing, the existing staff complement etc.) to major capital expenditure.

For any departure from the norm, a business case will be required, which includes both a market analysis relating to the type of item that is being proposed for expenditure, and a supplier/vendor analysis. The latter is of particular importance where dealing with highly specialized products for which there is a small market.

A general budget can be prepared using publicly available price information. The dollar thresholds identified dictate both the appropriate level of approval and the permissible method for carrying out the purchase.

The general strategic implications of the budget process have already been touched upon and need to be considered again here.

The strategic element in the budget process is to determine the portion of municipal resources that will be devoted to a particular aspect of municipal operations. A budget has, of course, a very important role to play with respect to internal corporate governance.

It authorizes expenditure, yet at the same time places a lid on the amount that may be expended.

Since money may be expended only where approved in a budget (or where specially sanctioned at council level outside the budget process) a brake is placed on the ability of delinquent members of municipal administration to misuse municipal funds.

Although there is an obvious corporate governance benefit in fixing clear limits on spending in a budget, it is inadvisable for budgets to provide no leeway for expenditure above which is anticipated.

American studies of municipal bond ratings have revealed that the maintenance of an adequate free case level (i.e., an adequate contingency or reserve) is a necessary component in the maintenance of good municipal fiscal health. The availability of free cash within a budget plays an important role in influencing a municipality’s bond rating and reducing consequent borrowing costs.

Although it may occasionally be necessary to draw against reserves to meet an unanticipated expenditure that must be made, or an expected expenditure that turns out for some reason to be greater than was anticipated, there is no general authority to spend funds in a way that has not been approved by council, whether directly or as part of the budget process.

The term “spending authority” generally describes the designation of a person who may give signature authorization to approve payment of a budgeted expenditure.

Generally, this authority will be conferred on senior levels of municipal management and departmental general managers may be empowered to designate additional employees for this purpose up to some pre-set limit.

A common procedure for designating such employees is to complete a signature authorization form, naming the responsible person and describing the authority conferred.

The completed form is then returned to accounts payable before transactions can be processed against the new code and authorization of the person named.

In all too many cases, supply contracts, and construction projects can “run out of money” because the amount of the contract underestimated the funds needed for the length of the contract. The general rule is that once out of money, invoices cannot be processed until additional funds are added to the contract. Even with the best will in the world, it can be problematic to place a dollar value on a contract.

Stephen Bauld is Canada's leading expert on government procurement. He can be reached at stephenbauld@bell.blackberry.net.

by Journal Of Commerce

Leave a comment

Or register to be able to comment.