The strategic element in the budget process is to determine the portion of municipal or private sector resources that will be devoted to a particular aspect of 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 expanded only where approved in a budget or where specially sanctioned at council level outside the budget process, a break 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 that which is anticipated.
American studies of municipal bond ratings have revealed the maintenance of an adequate free cash level (i.e., an adequate contingence 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.
On the subject of spending authority, it is a more difficult one to explain. Generally, a municipality’s budget provides the authority for all expenditures.
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.
Usually this authority will be conferred on senior levels of municipal management and developmental general managers may be empowered to designate additional employees for this purpose up to some preset 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 budget code and authorization of the person so named.
The accounts payable department will use the form to verify that the employees who have signed an invoice to direct that payment to be made are authorized to do so and that their signatures match the signatures on the signature authorization form.
The intent behind this procedure is to protect the municipality from the possibility of unauthorized or fraudulent expenses posting to accounts.
In all too many cases, supply contracts 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 funds are added to the contract. Even with the best will in the world, it can be problematic in certain cases to place a dollar value on a contract.
To assist municipal staff in doing so, it is advisable to establish clear rules in valuation within the context of the purchasing policy.
For instance, a municipality might adopt rules along the following lines: In the case of construction works contracts, the value would include the cost of supplying of all goods and the provision of services related to the construction process.
Whenever methods of valuation may be used, care must be taken to ensure the selection of the valuation method is not used with the intention of avoiding the application of laws or policy.
Clear rules and procedures for securing necessary dollar value extensions must be in place.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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