Budget theory in the public sector

BUDGET THEORY
IN THE PUBLIC
SECTOR

Aman Khan
W. Bartley Hildreth
Editors

QUORUM BOOKS


Budget Theory
in the Public Sector



BUDGET THEORY
IN THE PUBLIC SECTOR
Edited by

Aman Khan
and

W. Bartley Hildreth

QUORUM BOOKS
Westport, Connecticut • London


Library of Congress Cataloging-in-Publication Data
Budget theory in the public sector / edited by Aman Khan, and W. Bartley Hildreth.

p. cm.
Includes bibliographical references and index.
ISBN 1–56720–281–0 (alk. paper)
1. Budget. 2. Finance, Public. I. Khan, Aman. II. Hildreth, W. Bartley, 1949–
HJ2005.B7978 2002
352.4'8—dc21
2002023030
British Library Cataloguing in Publication Data is available.
Copyright
2002 by Aman Khan and W. Bartley Hildreth
All rights reserved. No portion of this book may be
reproduced, by any process or technique, without the
express written consent of the publisher.
Library of Congress Catalog Card Number: 2002023030
ISBN: 1–56720–281–0
First published in 2002
Quorum Books, 88 Post Road West, Westport, CT 06881
An imprint of Greenwood Publishing Group, Inc.
www.quorumbooks.com
Printed in the United States of America
TM

The paper used in this book complies with the
Permanent Paper Standard issued by the National
Information Standards Organization (Z39.48–1984).
10 9 8 7 6 5 4 3 2 1


Dedicated to
Marcia Lynn Whicker

Contents

Preface

ix

Acknowledgments

xv

1 Budget Theory for a New Century
Lance T. LeLoup

1

2 Early Budget Theory: The Progressive Theory of Public
Expenditures
Julia Beckett

22

3 The Separation of Powers Principle and Budget Decision
Making
Thomas P. Lauth

42

4 Nonconventional Budgets: Interpreting Budgets and Budgeting

Interpretations
Gerald J. Miller

77

5 A Multiple Rationality Model of Budgeting: Budget Office
Orientations and Analysts’ Roles
Katherine G. Willoughby

104

6 The Principal-Agent Model and Budget Theory
John Forrester

123

7 Responsibility Budgeting and Accounting Reform
L.R. Jones and Fred Thompson

139


viii

Contents

8 Budget Theory for Public Administration . . . and Public
Administrators
Gerasimos A. Gianakis and Clifford P. McCue

158

9 The Theory of the Public Sector Budget: An Economic
Perspective
Merl Hackbart and James R. Ramsey

172

10 Budgets as Portfolios
Aman Khan

188

11 Punctuated Equilibrium: An Agenda-Based Theory of Budgeting
Meagan M. Jordan

202

12 The Impact of Agency Mission on Agency Budget Strategy: A
Deductive Theory
Marcia Lynn Whicker and Changhwan Mo

216

13 Budgeting for Outcomes
Lawrence L. Martin

246

14 Philosophy, Public Budgeting, and the Information Age

Thomas D. Lynch and Cynthia E. Lynch

261

Selected Bibliography

281

Index

287

About the Contributors

293


Preface

Public budgeting, as a field of study, has grown tremendously in recent years
both in form and substance. With such growth comes a need to have a coherent
theory or body of theories that allows one to understand the field, its essential
core that guides its development, and its scope for dealing with real world
problems. V.O. Key recognized this need in 1940 when he wrote his now famous piece, “The Lack of a Budgetary Theory.” Key tried to address the issue
of public budgeting not having a theory of its own by offering a microeconomic
solution to the problem, one that would increase allocative efficiency of government. He based his theory on the same rationale that guided the economists
to search endlessly for a function that would improve the welfare of society
within the broader schemes of Paretian principle.
In a similar vein, Verne Lewis (1952) tried to explain how the traditional
microeconomic theory, in particular the concept of marginal utility, could be

used to determine the relative value of a good or service to justify resource
allocation that in the aggregate would improve social welfare. Attempts by other
economists, such as Arthur Smithies (1955), were not much different from those
offered by the mainstream welfare economists. But, as Wildavsky (1961) reminds us, budgeting is more than allocating the scarce resources between X and
Y activities; it is about meeting the conflicting needs of a society by bringing
about compromises in the political marketplace through incremental adjustment(s) in budget allocation. Not only that, as Mosher (1954) would point out,
it is a measure of bureaucratic behavior and administrative competence. Others
would argue that it is not necessary to have a single theory of budgeting but


x

Preface

rather a set of theories, each unique to the problem budgeting is trying to address
(Schick, 1988).
Ironically, some sixty years since Key’s work, theorists still continue to model
behavior in search for explanations of budgeting in city halls, county court
houses, school district headquarters, state capitols, and in the halls of power in
the capitals of sovereign governments. Perhaps the explanation for this lack of
coherence lies in the field itself. Public budgeting is eclectic; it is multidimensional. As Albert Hyde puts it: “In their voluminous and complex formats, budgets simultaneously record policy outcomes, cite policy priorities and program
goals and objectives, delineate a government’s total service effort; and measure
its performance, impact, and overall effectiveness” (Hyde, 1992:1). Budgeting,
according to Hyde, is partly political, partly economic, partly accounting, and
partly administrative. As a political document, it allocates the scarce resources
of a society among multiple, conflicting and competing interests. As an economic and fiscal document, it serves as the primary instrument for evaluating a
jurisdiction’s redistribution of income, stimulating its economic growth and development, promoting full employment, combating inflation, and maintaining
economic stability. As an accounting document, it provides a ceiling on government spending and makes it legally binding for it to live within the allocated
funds. Finally, as a managerial and administrative document, it specifies the
ways and means by which public services are provided, and it establishes criteria

by which they are monitored, measured, and evaluated. These seemingly divergent roles that public budgeting plays further reinforce the general perception
as to why it is so difficult to have a single theory that can tie all these elements
into a coherent theme.
From a practical point of view, however, this lack of inner cohesion may
serve both as a weakness and a strength. Not having a single framework always
has the danger of the field being overwhelmed by quantity as well as diversity
of perspectives that one may find baffling. While the sheer number may overwhelm some, it may also serve as its strength. For it is this competition between
quantity, on one hand, and the diversity of inquiries, on the other, that will
shape and eventually help develop a comprehensive theory of budgeting, sufficient enough to highlight the eclectic nature of the field and competent enough
to provide a common ground from which to study it. But until such a point
comes, public budgeting will remain an eclectic field, dominated by multiple,
at times, competing theories. This book is a reflection of that diversity.
In the first of these perspectives, Lance T. LeLoup’s “Budget Theory for a
New Century” introduces the field, particularly as it pertains to national budgeting. He traces the history of budget theory from incrementalism (the 1950s
and 1960s characterized by agency and presidential power) through a transition
phase (1970s to early 1990s marked by the conflict between legislative and
executive branches during tough economic times) and into the current period.
This later period, from the mid-1990s forward, is termed the “emerging new
paradigm” and is characterized by coequal branches making tactical, dynamic


Preface

xi

decisions in a fiscally surplus environment. LeLoup examines each era in terms
of several dimensions of budgeting, including: the political and economic environment of budgeting; the policy focus; the nature and scope of budgeting;
budgetary process characteristics; key actors; budget reforms; and legislativeexecutive relations. As the remaining chapters confirm, these dimensions of
budgeting are central to public budget theories.
In the next chapter, Julia Beckett returns to V.O. Key’s classic 1940 paper

on the lack of a budgetary theory and finds a long-overlooked reference. In the
“Early Budget Theory: The Progressive Theory of Expenditures,” she investigates Key’s citation of Mabel Walker’s 1930 book, Municipal Expenditures.
This is important since Walker’s work predates key budget writers, including
Herbert Simon’s performance measurement research in Chicago. Walker’s work
contains a search for the norm of distribution, or proportion. This approach for
a positive budget theory based on marginal utility leads to comparative output
measures, an issue that continues to bedevil us. As such, Walker foreshadows
current issues. Moreover, Walker’s work is an early marker for organizational
learning via the study of expenditures.
Public budgets must traverse the complex nature of executive-legislative relationships. Thomas P. Lauth’s “The Separation of Powers Principle and Budget
Decision Making” uses six court cases—two from the U.S. Supreme Court and
four from state courts—to examine judicial interpretation of executive versus
legislative disputes over budgets. Specifically, he cites as examples the essential
budget principles of separation of powers.
In “Nonconventional Budgets: Interpreting Budgets and Budgeting Interpretations,” Gerald J. Miller returns to the core principles of comprehensiveness.
He focuses on proposals for a “super budget” as a way to coordinate the increasing tendency for policy actors to carve out and define new packages of
activity as budgets in order to assert control over that particular arena. Calls for
a regulatory budget fit this pattern. He examines budget control criteria, including not just economic or political factors but also human interpretation.
Individuals involved in the budgetary process have roles and orientations that
can influence decisions. Katherine G. Willoughby’s “A Multiple Rationality
Model of Budgeting: Budget Office Orientations and Analysts’ Roles” focuses
on the policy, management, and control perspectives of the role of the executive
budget analyst in five southern states. Her research also highlights differences
in executive budget office relationships with the governor and spending departments.
John Forrester studies budget participant behavior in “The Principal-Agent
Model and Budget Theory.” This chapter explores “the seasoned theoretical
framework for assessing relationships,” namely principal-agency economic theory, with its focus on information (exchange). Information is critical in an effective contract between the principal and agent, so this paper examines the
budgetary implication of who controls that information—the legislative body,

xii

Preface

the agency, or the “iron triangle.” It closes with a call for an organizational
perspective on the control and management of the exchange of information.
The information-rich environment of public organizations allows L.R. Jones
and Fred Thompson, in “Responsibility Budgeting and Accounting Reform,” to
make a case for decentralization (or remote control) management. This chapter
melds organizational economics (contract theory of principal and agent) with
managerial accounting principles.
Although Gerasimos A. Gianakis and Clifford P. McCue, in “Budget Theory
for Public Administration . . . and Public Administrators,” do not posit a theory,
they offer an organization-based approach to budgeting, especially for local governments. Specifically, they center on the “resource allocation process” given
the “tightly coupled,” “differentiated” nature of “public organization”—that in
their view is what separates public from private management theory. They note
that the bottom line of a (local) public organization is to improve the economic
base.
Merl Hackbart and James R. Ramsey, in “The Theory of the Public Sector
Budget: An Economic Perspective,” return to Musgrave’s three-function classification of public expenditure theory. In doing so, they reassert the central
questions of why items are included in the budget and which level of government should be responsible.
In “Budgets as Portfolios,” Aman Khan provides a managerial perspective on
budget theory by looking at budgets as portfolios. Khan’s argument rests on a
simple premise that budget requests in government are very similar to portfolios
the finance managers in the private sector deal with on a regular basis. To be
considered acceptable, from their perspective, the portfolios must be efficient.
Not all portfolios will be efficient, but some will, depending on the amount of
risk and return they produce for a decision maker. Likewise, the problem facing
a budget manager in government is how to select the best possible or optimal
portfolio from the set of efficient portfolios. The theory suggests that in selecting

this portfolio, the managers in government behave the same way as the managers
in private firms and businesses; that is, they would select the one that will
maximize their utility subject to a risk-return combination.
Budgeting occurs in a policy agenda environment. Research suggests that an
environment of stability shifts into periods of instability, or non-normalcy. Meagan M. Jordan explores this concept in “Punctuated Equilibrium: An AgendaBased Theory of Budgeting.” Usually, budgets reflect frequent and small
incremental changes, but infrequent and large policy shifts occur. Jordan examines the nature of agenda changes on the budget and the research challenges
that emerge from this perspective.
Budgets are implemented by subunit agencies. Marcia Lynn Whicker and
Changhwan Mo, in “The Impact of Agency Mission on Agency Budget Strategy:
A Deductive Theory,” employ a well-designed set of classification screens to
describe agency budget strategy for achieving the agency mission.
Budgeting, for a long time, has been focusing on outputs, economy, and


Preface

xiii

efficiency, but very little on outcomes and effectiveness. In “Budgeting for Outcomes,” Lawrence L. Martin provides a conceptual frame of reference for thinking about outcome budgeting—not as a new concept, but as an evolutionary
step in the rational approaches to budgeting.
In the final chapter, “Philosophy, Public Budgeting, and the Information Age,”
Thomas D. Lynch and Cynthia E. Lynch suggest that those who study budgeting
ought to look to political philosophy to try to understand what their empirical
work is about. Traversing through the rough terrain of political philosophy from
Burke to Bentham, Stuart Mill to Lindbloom, and from Naisbett to Reich, the
authors segue from the critiques of rational and incremental budgeting to the
argument for entrepreneurial budgeting. The crux of their argument is change:
how budgeting has changed, the philosophies underlying those changes, and
how as professionals we must accept change, respond to it, and exploit its opportunities.
Each of the chapters presented in this book tells us, in its own way, how

much we have traveled over the years to where we are. They also tell us, in its
own way, how much more we need to travel and of the endless journey we will
have to make along the path that will only grow richer.
REFERENCES
Hyde, Albert C. “The Development of Budgeting and Budget Theory: The Threads of
Budget Reform.” In A.C. Hyde (ed.), Government Budgeting: Theory, Process,
Politics. Pacific Grove, CA: Brooks/Cole Publishing, 1992: 1–6.
Key, Jr., V.O. “The Lack of a Budgetary Theory.” American Political Science Review,
34 (December 1940): 1137–1140.
Lewis, Verne B. “Toward a Theory of Budgeting.” Public Administration Review, 12
(winter 1952): 43–54.
Mosher, Frederick C. Program Budgeting: Theory and Practice. Chicago, IL: Public
Administration Service, 1954.
Schick, Allen. “An Inquiry into the Possibility of a Budgetary Theory.” In I.S. Rubin
(ed.), New Directions in Budget Theory. Albany: State University of New York
Press, 1988: 59–69.
Smithies, Arthur. Budgetary Process in the United States. New York: McGraw-Hill,
1955.
Wildavsky, Aaron. “Political Implications of Budgetary Reform.” Public Administration
Review, 21 (autumn 1961): 183–190.



Acknowledgments

We feel a tremendous sense of gratitude to a number of individuals who took
time to read many of the chapters that appear in the book, in particular to
Professor John Wanat at the University of Illinois at Chicago; Professor John
Mikesell at Indiana University; Professor Irwin Morris at the University of
Maryland, College Park; Professor Jyl Josephson at Illinois State University,

Normal; Professor Robert T. Smith at Clemson University; Professor James W.
Douglas at the University of South Carolina; Professors Clarke Cochran, Charles
Fox, Brian Gerber, and Brian Collins at Texas Tech University; and Dr. Terry
K. Patton at the Governmental Accounting Standards Board (GASB). Also,
many of the contributors gave their time by reading, commenting, and providing
valuable suggestions on many of the chapters. To each one of them, we extend
our sincere appreciation.


Budget Theory
in the Public Sector


1

Budget Theory for a New Century
Lance T. LeLoup

National budgeting in the United States underwent dramatic changes during the
last third of the twentieth century. As the costs of health care and social programs expanded and deficits grew, politicians tried to adopt long-term macrobudgetary strategies to control fiscal balances. The environment for budgeting
shifted markedly from expectations of growth in the 1960s to one of constraints
and cutback management in the 1980s and 1990s. As the environment changed,
agency strategies and the norms of budgeting shifted as well. Power in budgeting
seemed to shift upward from agency officials and congressional committee members to the president and top advisers, and a small cadre of party leaders in the
House and Senate. However, with greater interbranch conflict, the president’s
budget became more of an opening bid in negotiations than a definitive policy
statement. With severe constraints because of deficits, budgeting became the
central governing process. Budgeting became less closed and insider-oriented
and, instead, more public and plebescitary, with political parties battling for
advantage and support in opinion polls. What would happen to the dynamics of

national budgeting in the new millenium when the deficits disappeared and record budget surpluses were recorded?
Microbudgeting—low to intermediate level decisions on agencies, programs
and line items, usually made from the bottom up—characterized the stable and
predictable budget processes after World War II described by Fenno (1965) and
Wildavsky (1964). Macrobudgeting—high level decisions on spending, revenue,
and deficit totals and relative budget shares, often made from the top down—
became increasingly prevalent because of the historically large, chronic deficits.
These budgetary developments also took place around the world with evidence


2

Budget Theory in the Public Sector

of macrobudgetary adaptation among many industrialized nations (Schick,
1986). In the last decade, the same trend has been identified among democratizing countries. The fall of the Berlin wall in 1989 and the collapse of communism forced a heavy emphasis on macrobudgeting among the former eastern
bloc nations (LeLoup et al., 1998). Monetary union among European Union
members and the accession criteria for prospective members required strict deficit control. This emphasis on macrobudgeting transformed budgeting in the
United States and around the world in the last century. But what is likely to
take place in the new century?
Today, in the early 2000s, the deficit situation around the world is vastly
improved compared with the 1980s and 1990s. Following an unprecedented U.S.
economic expansion, the outlook has brightened. Today, despite the catastrophe
of the terrorist bombings of September 2001 and its economic fallout, the United
States faces the prospects of surplus budgets for the foreseeable future. What
are the implications for national budgeting? After the dramatic transformations
of the past three decades, will there be an emerging new paradigm in budgeting?
To try to answer this question, three eras of budgeting are reviewed, two that
we have experienced, and one that is just taking shape.
The first era, the post–World War II period through the early 1970s, was

characterized by the dominance of “incrementalism.” It emphasized stability,
growth, and focused on bottom-up microbudgeting as a broad explanation of
how the government makes public policy. The second era, beginning in the
1970s and running through the 1990s, was characterized by the shift toward
macrobudgeting in response to chronic deficits, but it did not witness the emergence of a single theory to replace incrementalism. Major institutional changes
in the United States that marked this era include the Congressional Budget and
Impoundment Control Act (1974), the Gramm-Rudman-Hollings Balanced
Budget and Emergency Deficit Reduction Act (1985), the Budget Enforcement
Act (1990), encompassing pay-as-you-go requirements and discretionary spending caps, and the Balanced Budget Act (1997). The third era is just emerging.
This analysis attempts to describe and explain the most recent trends in budgeting to suggest what a new budgeting paradigm for the twenty-first century
might look like.
To do this, the following dimensions of budgeting are examined:
• key actors in the executive and legislative branches
• the balance of legislative-executive power in budgeting, rules procedures, and budgetary processes
• changing budgetary norms and values
• the scope of policymaking in budgeting and main policy emphases
• the nature and consequences of budget reforms

In addition, the analysis is guided by several key questions in order to help
define what an emerging new paradigm of budgeting might look like.


Budget Theory for a New Century

3

If surpluses continue, how will budgetary behavior and norms adjust? Will
policymakers be able to strike a better balance between microbudgeting and
macrobudgeting than occurred during the period of high deficits? Will agencies
and appropriators regain some of the prerogatives lost during the deficit wars?

What will happen to the balance of power between Congress and the president, and the setting of budgetary priorities for the nation? Will budgeting in
this new century be characterized by a powerful Congress able to challenge the
president and negotiate as a coequal? Or will presidential power reassert itself
and the president’s budget regain some of its former status as a definitive policy
statement?
Will budgeting continue to move away from the closed, routinized, insiderdominated process that it was in the 1950s and 1960s toward the more public,
politicized process seen in the 1980s and 1990s? Will the plebescitary aspects
of budgeting characterized by battles for public opinion continue to be a central
element of the competition between branches and in defining budget success?
In an era of surpluses, will budgeting remain the central governing process
that it was during the 1980s and 1990s, or will budgeting go back to being
more separable from major national policy debates? To what extent will policy
issues continue to come under broad scrutiny for long-term budgetary consequences?
Will agencies—having had to orient themselves to management cutbacks, privatization, deregulation, and reinventing government—return to more of a
growth and expansionary orientation? How will national budgeting balance new
program initiatives with debt reduction, tax cuts, and entitlement control?
What kinds of budget reforms are likely to be most relevant to the emerging
new paradigm of budgeting? Will reforms shift away from the macrobudgetary,
deficit-reduction orientation (such as Gramm-Rudman-Hollings) back toward
more “rational” budgeting reforms, such as Planning Programming Budgeting
(PPB), Management by Objective (MBO), or Zero-Based Budgeting (ZBB), or
further process reforms such as biennial budgeting?
INCREMENTALISM: THE OLD PARADIGM
“Budgeting is incremental, not comprehensive,” Aaron Wildavsky wrote in
1964. “The beginning of wisdom about an agency budget is that it is almost
never actively reviewed as a whole every year. . . . Instead, it is based on last
year’s budget with special attention given to a narrow range of increases or
decreases” (Wildavsky, 1964:15). Wildavsky’s work, amplified by Richard
Fenno’s study of Congress and the appropriations process, became a powerful
paradigm not only for budgeting, but for how government makes policy. Charles

E. Lindblom’s (1959) notions of “muddling though” formed a coherent basis
for the theory of budgetary incrementalism. The theory received empirical support from the regression models of Davis, Dempster, and Wildavsky (1966)
based on data for federal agencies from 1946 to 1963. The budgetary process