Budgeting Financial Accounting For Local And State School Systems 2003 Edition

A major element of financial data activity rests in the act of budgeting. Budgeting is the process of allocating finite resources to the prioritized needs of an organization. In most cases, for a governmental entity, the budget represents the legal authority to spend money. Adoption of a budget in the public sector implies that a set of decisions has been made by the governing board and administrators that culminates in matching a government’s resources with the entity’s needs. As such, the budget is a product of the planning process.

The budget also provides an important tool for the control and evaluation of sources and the uses of resources. Using the accounting system to enact the will of the governing body, administrators are able to execute and control activities that have been authorized by the budget and to evaluate financial performance on the basis of comparisons between budgeted and actual operations. Thus, the budget is implicitly linked to financial accountability and relates directly to the financial reporting objectives established by the GASB.

The planning and control functions inherent to any organization, including schools, underscore the importance of sound budgeting practices for the following reasons:

* The type, quantity, and quality of goods and services provided by governments often are not subject to the market forces of supply and demand. Thus, enacting and adhering to the budget establishes restrictions in the absence of a competitive market.
* These goods and services provided by governments are generally considered critical to the public interest and welfare.
* The scope and diversity of operations in an organization make comprehensive financial planning essential for good decisionmaking.
* The financial planning process is critical to the expression of citizen preferences and is the avenue for reaching consensus among citizens, members of the governing board, and staff on the future direction of the governmental unit’s operations.

The link between financial planning and budget preparation gives the budget document a unique role in governmental organizations. Budgets in the public arena are often considered the definitive policy document because an adopted budget represents the financial plan used by a government to achieve its goals and objectives. When a unit of government legally adopts a financial plan, the budget has secured the approval of the majority of the governing board and reflects * public choices about which goods and services the unit of government will or will not provide,
* the prioritization of activities in which the unit of government will be involved,
* the relative influence of various participants and interest groups in the budget development process, and
* the governmental unit’s plan for acquiring and using its resources.

In an educational environment, budgeting is an invaluable tool for both planning and evaluation. Budgeting provides a vehicle for translating educational goals and programs into financial resource plans-that is, developing an instructional plan to meet student performance goals should be directly linked to determining budgetary allocations. The link between instructional goals and financial planning is critical to effective budgeting and enhances the evaluation of budgetary and educational accountability.

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Objectives of Budgeting 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 state constitutions, it is a cornerstone of budgeting and financial reporting. GASB recognizes the importance of accountability with the following objectives in GASB Concepts Statement 1, Objectives of Financial Reporting, paragraph 77.

* Financial reporting should provide information to determine whether current-year revenues were 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.

Meeting these objectives requires budget preparation that is based on several concepts recognizing accountability. Accountability is often established by incorporating these objectives into legal mandates that require state and local public sector budgets to * be balanced so that current revenues are 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 long-term fiscal health in 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 the approved budget. Through budgetary integration, 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 of funds, 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 not only is an annual exercise to determine the allocation of funds, but also is part of a continuous cycle of planning and evaluation to achieve the stated goals and objectives of the organization.

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Over the past 30 years, governmental entities in the United States have used a variety of budget approaches and formats. The development of more advanced budget philosophies reflects growth in both the scope and the complexity of governmental operations and the simultaneous need for systems that are capable of translating the variety of policy decisions into financial plans. For more information on budgetary approaches, The National Advisory Council on State and Local Budgeting provides additional guidelines. Various budgeting models continue to be commonly used and fall predominantly into categories of (1) line-item, or “traditional,” budgeting; (2) performance budgeting; (3) program and planning (“programming”) budgeting (PPB); (4) zero-based budgeting (ZBB); and (5) site-based budgeting. In addition, many governments use a variety of hybridized versions to address the specific needs of the organization. Although these approaches are considered distinct in terms of the underlying preparation process, actual formats of the prepared budgets may be quite similar; for example, the format of a site-based budget may be quite similar to the format of a line-item budget. Each of the five basic approaches has relative advantages and limitations.

Line-Item Budgeting

Line-item budgeting is still the most widely used approach in many organizations, including schools, because of its simplicity and its control orientation. It is referred to as the “historical” approach because administrators and chief executives often base their expenditure requests on historical expenditure and revenue data. One important aspect of line-item budgeting is that it offers flexibility in the amount of control established over the use of resources, depending on the level of expenditure detail (e.g., fund, function, object) incorporated into the document.

The line-item budget approach has several advantages that account for its wide use. It offers simplicity and ease of preparation. It is a familiar approach to those involved in the budget development process. This method budgets by organizational unit and object and is consistent with the lines of authority and responsibility in organizational units. As a result, this approach enhances organizational control and allows the accumulation of expenditure data at each functional level. Finally, line-item budgeting allows the accumulation of expenditure data by organizational unit for use in trend or historical analysis.

Although this approach offers substantial advantages, critics have identified several shortcomings that may make it inappropriate for certain organizational environments. The most severe criticism is that it presents little useful information to decisionmakers on the functions and activities of organizational units. Since this budget presents proposed expenditure amounts only by category, the justifications for such expenditures are not explicit and are often unintuitive. In addition, it may invite micro-management by administrators and governing boards as they attempt to manage operations with little or no performance information. However, to overcome its limitations, the line-item budget can be augmented with supplemental program and performance information.

Performance Budgeting

A different focus is seen in performance budgeting models. In a strict performance budgeting environment, budgeted expenditures are based on a standard cost of inputs multiplied by the number of units of an activity to be provided in that time period. The total budget for an organization is the sum of all the standard unit costs multiplied by the units expected to be provided. Although this strict approach may be useful for certain types of operations, many organizations require a more flexible performance approach. For example, expenditures may be based simply on the activities or levels of service to be provided and a comparison of budgeted and historical expenditure levels.

The performance approach is generally considered superior to the line-item approach because it provides more useful information for legislative consideration and for evaluation by administrators. Further, performance budgeting includes narrative descriptions of each program or activity-that is, it organizes the budget into quantitative estimates of costs and accomplishments and focuses on measuring and evaluating outcomes. Finally, the performance approach eases legislative budget revisions because program activities and levels of service may be budgeted on the basis of standard cost inputs.

However, performance budgeting has limitations owing to the lack of reliable standard cost information inherent in governmental organizations. Further, the performance approach does not necessarily evaluate the appropriateness of program activities in relation to reaching an organization’s goals or the quality of services or outputs produced. Consequently, the performance approach has become most useful for activities that are routine in nature and discretely measurable (such as vehicle maintenance and accounts payable processing)-activities that make up only a relatively modest part of the total educational enterprise. But in sum, performance budgeting may offer considerable enhancement to the line-item budget when appropriately applied.

Program and Planning (Programming) Budgeting (PPB)

Program budgeting refers to a variety of different budgeting systems that base expenditures primarily on programs of work and secondarily on objects. It is considered a transitional form between traditional line-item and performance approaches, and it may be called modified program budgeting. In contrast to other approaches, a full program budget bases expenditures solely on programs of work regardless of objects or organizational units. As these two variations attest, program budgeting is flexible enough to be applied in a variety of ways, depending on organizational needs and administrative capabilities.

Program budgeting differs from approaches previously discussed because it is much less control- and evaluation-oriented. Budget requests and reports are summarized in terms of a few broad programs rather than in the great detail of line-item expenditures or organizational units. PPB systems place a great deal of emphasis on identifying the fundamental objectives of a governmental entity and on relating all program expenditures to these activities. This conceptual framework includes the practices of explicitly projecting long-term costs of programs and the evaluation of different program alternatives that may be used to reach long-term goals and objectives. The focus on long-range planning is the major advantage of this approach, and advocates believe that organizations are more likely to reach their stated goals and objectives if this approach is used.

However, several limitations exist in the actual implementation of this approach, including changes in long-term goals, lack of consensus regarding the fundamental objectives of the organization, lack of adequate program and cost data, and the difficulty of administering programs that involve several organizational units. Yet despite its limitations, program budgeting is often used as a planning device while budget allocations continue to be made in terms of objects and organizational units—a process that has been adopted in many schools throughout the nation. As with performance budgeting, PPB information may be used to supplement and support traditional budgets in order to increase their informational value.

Zero-Based Budgeting

The basic tenet of zero-based budgeting (ZBB) is that program activities and services must be justified annually during the budget development process. The budget is prepared by dividing all of a government’s operations into decision units at relatively low levels of the organization. Individual decision units are then aggregated into decision packages on the basis of program activities, program goals, organizational units, and so forth. Costs of goods or services are attached to each decision package on the basis of the level of production or service to be provided to produce defined outputs or outcomes. Decision units are then ranked by their importance in reaching organizational goals and objectives. Therefore, when the proposed budget is presented, it contains a series of budget decisions that are tied to the attainment of the entity’s goals and objectives.

The central thrust of ZBB is the elimination of outdated efforts and expenditures and the concentration of resources where they are most effective. This is achieved through an annual review of all program activities and expenditures, which results in improved information for allocation decisions. However, proper development requires a great deal of staff time, planning, and paperwork.

Experience with the implementation of this approach indicates that a comprehensive review of ZBB decision packages for some program activities may be necessary only periodically. Additionally, a minimum level of service for certain programs may be legislated regardless of the results of the review process. As a result, ZBB has had only modest application in schools, although the review of program activities makes ZBB particularly useful when overall spending must be reduced.

Site-Based Budgeting

Site-based budgeting is widely considered the most practical for budgeting within the school district environment, by providing greater control and reporting of school-level data. This budgetary approach (which may be used in combination with any of the four discussed above) emphasizes the decentralization of budgetary decisionmaking. Site-based budgeting places local managers and other staff at the center of the budget preparation process, making them responsible for both the preparation and the maintenance of the budget.

Site-based budgeting is popular in many school settings. Within a school system, site-based budgeting generally involves granting increased budgetary authority to the school. Resources are allocated to the site, with budget authority for programs and services granted to the school’s principal and staff. Campuses are normally allocated a certain level of resources that they have the authority to allocate to educational and support services. These budgetary allocations are meant to cover those areas over which campus decisionmakers have control. For example, schools that have authority over staffing decisions may be allocated funds for staff costs using the site-based budgeting approach. In contrast, school districts that make staffing decisions centrally may not allocate funds to the individual school site for staff costs.

The main advantage of site-based budgeting is that those who best understand the needs of a particular organization are empowered to make resource allocation decisions. This decentralization of budgetary authority may also increase local accountability. Another potential advantage of site-based budgeting is the increased level of participation of the public and staff in budget development. Many site-based budgeting systems create committees composed of staff and community members to determine budgetary allocations. These committees give members a voice from the inception of the budget process, rather than merely when the budget is presented for public review and approval.

Although site-based budgeting may provide substantial benefits, it also has limitations. First, organizations with limited resources may not be capable of granting a meaningful level of site-based budgetary authority. Even if an organization does have discretionary resources, it may be difficult to determine the areas of the budget for which local decisionmakers should be held accountable. Finally, site-based budgeting may be burdensome to some local managers, may increase conflict between staff or departments, or may limit the organization’s ability to ensure quality and sufficiency in the services it provides. These problems can be avoided somewhat through the careful design of site-based budgeting guidelines and through training for new budget stakeholders.

Outcome-Focused Budgeting

Consistent with the evaluation objective, government budgeting is becoming increasingly outcome-focused. Fiscal austerity, coupled with intense competition for governmental resources, has precipitated an effort to ensure more effective use of resources at all levels of government. Outcome-focused budgeting is the practice of linking the allocation of resources to the production of outcomes. The objective is to allocate government’s resources to those service providers or programs that use them most effectively.

Outcome-focused budgeting is closely linked to the planning process in governments. For a government entity to focus on outcomes, goals and objectives must be identified and tied to budget allocations for the achievement of those objectives. This premise argues that mission-driven (synonymous with outcome-focused) governments are superior to those that are rule-driven because they are more efficient, are more effective in producing desired results, are more innovative, are more flexible, and have higher employee morale (Osborne and Gaebler 1993). In the context of increased governmental scrutiny of governmental costs, including schools, this model may receive more emphasis in the future.

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The development of annual budgets is part of a continuing planning process. The advent of site-based decisionmaking in some states has increased the integration of planning and budgeting at the school level; however, state laws generally allow considerable district autonomy in budget preparation. The organizational structure of a district, including the size and complexity of its administration and the degree of centralization, will affect the budgetary approach, the budget development process, and the final budget document. Beyond the requirements for federal and state programs, the budget preparation process and related responsibilities will largely be determined by the local school board and superintendent.

The following chapter contains information related to the significant aspects, phases, and outputs of the school district budgeting process. Although it is not meant to establish standards or requirements for districts, the chapter may be useful in the development of sound budgeting procedures. Given the diversity of budgetary and financial reporting found in the individual states, the process described here may be customized to conform to particular local and state requirements. Additionally, the following discussion is typical of districts that use a site-based budgeting approach.

Roles and Responsibilities

The local school board and the superintendent should establish a meticulous budget preparation process and guidelines. Thus, the delegation of budget responsibilities among administrators (districtwide) and schools (site-based) should be deliberately designed to require consensus at the highest levels of management. Because individuals may serve in a variety of roles in the budget development process, the division of duties may differ among districts. It is important, however, to clearly define the staff assignments and parameters if the budget development process is to operate efficiently. With the advent of site-based decisionmaking, individuals lacking previous budget experience need clear direction in order to provide effective input.

Preparation of Budget Guidelines

Budget preparation guidelines typically are prepared by the assistant superintendent for business and finance or by an employee with similar responsibilities, such as a chief business official or a budget administrator, with direction from the school board, the superintendent, and other district and school administrators. A presentation with subsequent board approval of the budget process, guidelines, and calendar may be legally required or may be a locally imposed procedure. However, as a minimum the guidelines should contain the following elements:

* A budget transmittal letter from the superintendent, which provides the overall context for budget development at the school level
* A budget overview, which explains the budgeting philosophy and approach, outlines the budget development process, and refers to major assumptions and changes in the budgetary process from the previous year
* Fiscal limitations to be observed, such as maintenance of service levels, specific percentage increases or decreases in resource allocations, and personnel hiring guidance
* A budget calendar of critical dates for budget completion, submission, and review
* Instructions concerning expenditure items to be budgeted at the school level and the detail required for submission
* A copy of standard budget preparation worksheets, submission forms, and diskettes
* A list of the account codes necessary for preparing the budget

Many of these elements may be combined into a budgetary overview included in the budgeting guidelines. In addition to these elements, the preparation guidelines may also contain the following: * Guidelines for estimating standard school resource allocations, which are determined by the budgetary approach used by the district and the availability of resources
* Guidelines for estimating the costs of specific expenditure categories, such as salaries and benefits, supplies, or fixed charges
* Instructions for submitting school budgets to the district office, including the number of copies, due dates, and personnel to contact for assistance

Preparation of the Budget Calendar

The budget calendar provides critical dates for the preparation, submission and review of school budgets. It is prepared during the planning process by the district budget office. A variety of simple techniques may be used to build the calendar, beginning with the previous year’s calendar and modifying it for the current year. Problems that occurred in the prior year’s budget cycle should be identified for changes to the current year’s calendar. Additionally, changes in the budget development process should be incorporated into the current year’s calendar. If the process has been substantially altered, creating an entirely new calendar may be necessary. The following steps may be used to prepare a new budget calendar:

* Determine the necessary level of detail. If several calendars are used with varying levels of detail, they should be summarized in a master calendar to ensure that all activities and dates are consistent and compatible.
* Identify all activities that must be included in the calendar and arrange them chronologically.
* Assign completion dates to each activity. Although some districts may assign only completion dates, others may also assign suggested or mandatory start dates for certain activities to ensure their timely completion.

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Financial forecasting is the practice of projecting the quantitative impact of trends and changes in an operating environment on future operations. Therefore, it is an integral part of all ongoing planning efforts. Financial forecasting is important for several reasons:

* Forecasting facilitates planning efforts by quantifying the future costs/benefits of strategic decisions. Thus, budgetary priorities may be evaluated on the basis of their long-term impacts.
* Forecasting clarifies trends, needs, and issues that must be addressed and evaluated in the preparation of budgets. For example, enrollment forecasting may reveal growing student populations and focus attention on the need for increased resource allocations for staff, facilities, or both.
* Forecasting enhances decisionmaking at all levels of administration. Forecasts provide valuable insight into future issues, which allows administrators to be proactive. It creates the framework for anticipatory management.

Although financial forecasting should be a continuing process, it is most important as a component of budget development. Forecasts of projected enrollments, property tax base and revenues, costs associated with salary adjustments, and so on, are important elements in setting baseline budgetary guidelines and creating the basis for the assumptions used to prepare budgets. Additionally, forecasting provides fiscal impact analysis that may be integrated into the budget development process. Thus, current budgetary decisions may be evaluated for their long-term results.

When used before forecasts are prepared, several action steps may increase the reliability of the forecasts:

* Clarify the intended purpose of the forecast. The prospective audience may require a certain set of data and related assumptions.
* Match the time frame with the purpose of the forecast. Time frames for forecasts will vary according to the purpose (i.e., type) of forecast being prepared.
* Ensure the accuracy of basic data. Original source data should be used rather than extrapolated or summarized versions. Sources should be documented and verified if questions concerning data validity arise.
* Specify the underlying assumptions. Assumptions should be explicit in the forecasts with proper documentation based on actual data.
* Be consistent in calculations. Spreadsheet programs are recommended for preparing forecasts to ensure the accuracy and consistency of calculations.
* Examine data critically. A scan of the data may reveal anomalies or errors that may adversely affect forecasts. Further, a comparison of initial values and forecasted values should be completed to ensure the reasonableness of forecasted values.
* Recognize that forecasting requires insight and intuition. Some variables or forecasting assumptions will always be a best guess. However, experience provides a basis for this type of estimation (Miller and McClure).

A variety of financial and related forecasts are necessary to the preparation of a comprehensive budget. These include, but are not limited to, * student enrollment projections,
* revenue and expenditure projections,
* cash flow projections,
* assessed property value projections, and
* debt service cost projections.

Cash Forecasts

The cash forecast is critical to ensuring that a fiscal crisis, such as failure to meet financial obligations, will not result from a cash shortage. An accurate forecast indicates potential cash shortages and thereby provides an opportunity for preemptive corrective actions. It also benefits the investment program by allowing the extension of maturities of investments. Longer investment maturities typically result in higher interest earnings. Projections of operating cash needs should be developed for the fiscal year on a monthly or biweekly basis, depending on the payroll cycle, and should consider the timing of federal and state aid payments, local property tax levies and collections, lunchroom sales, sales taxes, and interest earnings and disbursements. This type of cash flow analysis will reveal the short-term borrowing necessary to address anticipated shortages. The associated cost of short-term borrowing should be included as a budgeted expenditure in the fiscal period in which the interest is scheduled for payment. Cash forecasting is also necessary for activities or programs that extend to multiple operating periods, such as major facilities construction and acquisition. Capital projects are typically financed from proceeds of bonds, loans, certificates of participation, or other long-term debt instruments. Cash projections for the period of activity should incorporate funding proceeds and related capital expenditures based on contractual arrangements with regard for the timing of cash flows.

Fund Balance Forecasts

Fund balance forecasting for governmental funds results from the budget development process. Periodic monitoring of balances is provided through budgetary integration with the accounting system and is necessary to ensure compliance with statutory and contractual fund balance requirements.

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The following steps are basic to the planning process for both annual and multiyear construction and grant programs.

* Review the stated goals and objectives to determine that they are the basis for the entity’s activities and operations. Although normally developed during the strategic planning process, the goals and objectives should be periodically reviewed for appropriateness.
* Conduct formal or informal needs assessments or both. Most strategic plans include one or more needs assessments. The criteria used are normally developed locally; however, some granting agencies may require the use of certain criteria. A methodology that provides objective measurement of the needs of the unit under review is necessary and should include financial and other forecasts in order to properly identify those needs.
* Design programs to attain the goals and objectives on the basis of the results of the needs assessment(s). The assessment process should identify and prioritize needs. From the results of this process, program plans should be developed that meet the organization’s needs. Program planning should use an integrated approach to prevent the duplication of efforts, ensure the efficient use of resources, and ensure that all identified needs are addressed.
* Prepare program budgets to support the implementation plans. With a program plan in place, a budget can be developed. The traditional budgetary approach has been to appropriate only those monies necessary for the costs of the program or project in its first fiscal year. At year-end, the appropriation expires and monies must be reallocated for each subsequent year of the program or project. This approach is unnecessarily complex and may distract administrative and board focus from important budgetary issues. To avoid these problems, the development of multiyear program budgets, whether for capital or special programs, is recommended if state and local statutes permit multiyear budgeting.

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The development of multiyear construction budgets has two fundamental stages. The first stage involves extensive planning to identify facilities needs. This may be accomplished through the process outlined in the previous chapter on financial forecasting and planning. A committee may be created specifically for capital planning or as part of a strategic planning effort. Identification of capital needs may also come from maintenance staff or from a contracted evaluation. The evaluations should identify the costs for a particular program, and from these inputs, a determination can be made regarding whether to pursue a construction project. Once this decision is made, the second stage involving budget development can begin. This process does not necessarily need to be incorporated into the annual budget process.

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Following the decision to initiate a capital acquisition program, funding mechanisms should be explored. This often involves some form of bonded indebtedness; however, building programs may be funded with accumulated operating funds. Alternatively, capital leases and installment payments may be used. In situations in which bond financing is used, the bond initiative must be reviewed and approved by the governing board before it is placed on the ballot. The size of the bond initiative for a particular program may be determined by estimates of aggregate costs generated during the planning process and may not include detailed project budgets until funding has been secured. However, depending on the local political environment, bond initiatives may require detailed cost estimates that specifically identify the projects to be funded from the proceeds before the bond issue can be placed on the ballot.

Financial advisers and bond attorneys may be consulted on the size, applicable tax regulations, marketing, and selling of bond issues. Other considerations include tax rate limitations or debt ceilings that may affect the amount of bonded debt that can be undertaken.

When funding has been secured, detailed project budgets should be developed. Individual budgets covering the life of each project are necessary for the proper monitoring of the related activity. Although cost estimates developed during the planning process may be used to determine the size of the bond initiative, actual project budgets must contain more detailed information. Architects, contractors, and staff should be involved in budget preparation, and it will be necessary to identify factors such as shifts in student populations, additional facility or site requirements, and so on, which may cause significant differences between the actual project budget and the cost estimates developed during the planning process. Construction project budgets using a multiyear format should be reviewed periodically by administrators with regular reports provided to the board on the progress of each project. Bond attorneys and financial advisers also need to be informed periodically of the progress of projects using debt funds.

In summary, the budgeting process is an integral part of the sound financial management of any organization. Adequately planning and managing the entity’s resources play important roles as the movement for greater accountability expands in importance. Sound budgeting techniques, such as site-based budgeting, are being emphasized as school district administrators and funding agencies require a heightened level of justification for annual expenditures and decentralized decisionmaking. Site-based budgeting gains its popularity among administrators for its unique ability to effectively target funding because campus management largely makes the resource allocation decisions. However, regardless of which budgeting technique is adopted, some benefits of preparing and managing a budget remain the same: greater control and accountability over financial resources as well as the demonstration that administrators are actively planning for future needs.

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