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Contingency Budgeting

Contingency Budgeting Few participate in the development or formulation of th e counterbalanc­ ing revenue aspect which will serve to fund proposed expenditures, and even fewer are involved with the in­ stitutional or governmental balance sheet, which should reflect reve­ nues, expenditures, liabilities, and surplus, if any. Unfunded or contingent liabilities are those costs which, even if not reflected in a budget, have the po­ tential of requiring expenditures at an unforeseen time. Catastrophic property losses could represent such a liability, but since most institu­ tions carry insurance as a hedge against such losses, cost of such re­ placement is not reflected on the balance sheet—nor is the deducti­ ble which the institution may have agreed to bear in order to minimize the premium payment for the insur­ ance. Similarly, the accrued value of employees' unused sick leave, vaca­ tion and severance pay may rep­ CUTTING COSTS resent an unfunded or contingent liability if the budget document does not reflect the cost of such outlays, particularl y where the employee must be replaced before these pay­ ments are completed. Josep h Eisner For those institutions that do not have capital budgets in addition to In times of fiscal stringency, budget the appropriating authority). In many operating budgets, a chief unfunded formulators are often hard pressed instances, the determination is influ­ or contingent liability may be the to reduce expenditures. While the enced more by political factors than potential need for the replacement by the justifications furnished by the requirement to "cut costs" may ini­ or repair of a major building com­ budget's drafters. The latter often tially provide the impetus for public ponent : roof, air conditioning or have little or no influence on such sector managers to find better, more heating system. Thus, institutions that decisions. effective, and less expensive meth­ do not maintain reserve or contin­ ods of achieving operational objec­ These decisions are usually made gency funds as part of their operat­ tives , over the long run similar ing budgets (or if such funds are not withou t reference to accounting solutions will tend to be limited or procedures . Classic methods of accounted for on the balance sheet) nonexistent. Ultimately, the only ac­ eliminating proposed expenditures may find that such costs or expend­ ceptable option may be to reduce in public sector budgets include not itures have merely been postponed hiring new employees or not replac­ budgetary expenditures by eliminat­ to a time whe n those needs have as­ ing employees who leave, reducing ing allocations in various categories. sumed emergency status. services, and postponing or making By definition, a budget represents While the foregoing may seem to no provisions at all for repairs or a spending program for an institu­ b e a philosophical discussion of maintenance. Eventually certain ac­ tion. Normally, budget formulators seemingly arcane accounting pro­ tions create unfunded or contingent take into account foreseeable ex­ cedures with little or no relevance liabilities. These may include inabil­ penses, which are usually catego­ to current budgetary practices, the ity to provide for the payment of the rized as personnel, fringe benefits, Governmenta l Accounting Stan­ unused vacation, sick leave and/or supplies, maintenance, materials, dards Board of the American Insti­ severance pay for resigning or retir­ utilities, insurance, etc. Since bud­ tute of Certified Public Accounts has ing employees, or to pay for the cost gets are generally subject to review under consideration rules requiring of repairing or replacing equipment by higher levels of management, in­ that certain unfunded or contingent for which the cost of maintenance cluding appropriating authorities in liabilities be reflected on public sec­ or repair was eliminated. th e public sector, some kind of tor governmental balance sheets. If agreement has to be reached on what Due to the nature of budget for­ these rules are passed, contingency is perceived as "reasonable" or ac­ mulation procedures, many middle budgeting will not only be relevant, management and even higher level ceptable for inclusion by the major­ it will be quite necessary, particu­ administrators in not-for-profit pub­ ity of the participants (or at least by larly if a certified audit is to be lic institutions are limited to view­ performed. ing the budget document as- an Check with your accountant or Joseph Eisner is Director of the Plainedge Public indicator of potential expenditures. Library, Massapequa, N.Y. budget office about this. = Volume 4, Number 3 THE BOTTOM LINE 41 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Bottom Line: Managing Library Finances Emerald Publishing

Contingency Budgeting

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0888-045X
DOI
10.1108/eb025297
Publisher site
See Article on Publisher Site

Abstract

Few participate in the development or formulation of th e counterbalanc­ ing revenue aspect which will serve to fund proposed expenditures, and even fewer are involved with the in­ stitutional or governmental balance sheet, which should reflect reve­ nues, expenditures, liabilities, and surplus, if any. Unfunded or contingent liabilities are those costs which, even if not reflected in a budget, have the po­ tential of requiring expenditures at an unforeseen time. Catastrophic property losses could represent such a liability, but since most institu­ tions carry insurance as a hedge against such losses, cost of such re­ placement is not reflected on the balance sheet—nor is the deducti­ ble which the institution may have agreed to bear in order to minimize the premium payment for the insur­ ance. Similarly, the accrued value of employees' unused sick leave, vaca­ tion and severance pay may rep­ CUTTING COSTS resent an unfunded or contingent liability if the budget document does not reflect the cost of such outlays, particularl y where the employee must be replaced before these pay­ ments are completed. Josep h Eisner For those institutions that do not have capital budgets in addition to In times of fiscal stringency, budget the appropriating authority). In many operating budgets, a chief unfunded formulators are often hard pressed instances, the determination is influ­ or contingent liability may be the to reduce expenditures. While the enced more by political factors than potential need for the replacement by the justifications furnished by the requirement to "cut costs" may ini­ or repair of a major building com­ budget's drafters. The latter often tially provide the impetus for public ponent : roof, air conditioning or have little or no influence on such sector managers to find better, more heating system. Thus, institutions that decisions. effective, and less expensive meth­ do not maintain reserve or contin­ ods of achieving operational objec­ These decisions are usually made gency funds as part of their operat­ tives , over the long run similar ing budgets (or if such funds are not withou t reference to accounting solutions will tend to be limited or procedures . Classic methods of accounted for on the balance sheet) nonexistent. Ultimately, the only ac­ eliminating proposed expenditures may find that such costs or expend­ ceptable option may be to reduce in public sector budgets include not itures have merely been postponed hiring new employees or not replac­ budgetary expenditures by eliminat­ to a time whe n those needs have as­ ing employees who leave, reducing ing allocations in various categories. sumed emergency status. services, and postponing or making By definition, a budget represents While the foregoing may seem to no provisions at all for repairs or a spending program for an institu­ b e a philosophical discussion of maintenance. Eventually certain ac­ tion. Normally, budget formulators seemingly arcane accounting pro­ tions create unfunded or contingent take into account foreseeable ex­ cedures with little or no relevance liabilities. These may include inabil­ penses, which are usually catego­ to current budgetary practices, the ity to provide for the payment of the rized as personnel, fringe benefits, Governmenta l Accounting Stan­ unused vacation, sick leave and/or supplies, maintenance, materials, dards Board of the American Insti­ severance pay for resigning or retir­ utilities, insurance, etc. Since bud­ tute of Certified Public Accounts has ing employees, or to pay for the cost gets are generally subject to review under consideration rules requiring of repairing or replacing equipment by higher levels of management, in­ that certain unfunded or contingent for which the cost of maintenance cluding appropriating authorities in liabilities be reflected on public sec­ or repair was eliminated. th e public sector, some kind of tor governmental balance sheets. If agreement has to be reached on what Due to the nature of budget for­ these rules are passed, contingency is perceived as "reasonable" or ac­ mulation procedures, many middle budgeting will not only be relevant, management and even higher level ceptable for inclusion by the major­ it will be quite necessary, particu­ administrators in not-for-profit pub­ ity of the participants (or at least by larly if a certified audit is to be lic institutions are limited to view­ performed. ing the budget document as- an Check with your accountant or Joseph Eisner is Director of the Plainedge Public indicator of potential expenditures. Library, Massapequa, N.Y. budget office about this. = Volume 4, Number 3 THE BOTTOM LINE 41

Journal

The Bottom Line: Managing Library FinancesEmerald Publishing

Published: Mar 1, 1991

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