Suggestions for Reform. Suggestions as to the exact
form our budget should take have not always been the
same, though all have sought to centralize responsibility.
A satisfactory plan, however, should provide for the ac-
complishment of such features as the following. The
preparation of estimates should be made by some respon-
sible member of the executive department, perhaps the
President, or Secretary of Treasury. The estimate should
be considered by Congress, but not in a number of sep-
arate and independent committees. During the legisla-
tive consideration the executive responsible for the recom-
mendations should be called upon to defend his proposals,
and changes should be made only with his consent. The
proposal should be made early hi the legislative session,
and general publicity facilitated in every possible way.
After the budget has been voted upon by Congress it is
incumbent upon the executive department to execute it
properly. In the performance of this duty it should be
held strictly accountable to the legislative department.

Such provisions as these have been embodied in a num-
ber of bills and resolutions which have been before Con-
gress in recent sessions. It is evident that the proposals
are gaining in favor on their own merits, as well as because
of the pressure which is being brought by outside agencies,
and it is not too much to expect that some form of budget
procedure will be in operation in the not distant future.
Congress, in 1920, passed a law which provided for rather
extensive centralized budgeting machinery for Federal
finances. This was vetoed, however, by President Wilson,
because some of the details did not conform to his ideas
of what a budget system should be.

Recent Legislation. Budgetary legislation was one of
the important matters acted upon by the Sixty-seventh
Congress. Under the leadership of Senator McCormick
a budget bill passed the Senate on April 26, 1921, and
under the leadership of Representative Good a similar
bill passed the House on May 5, 1921, One important



434 OUTLINES OF PUBLIC FINANCE

difference was that the McCormick bill centered respon-
sibility in the Treasury Department, while the Good bill
centered it in the Executive Department. An immediate
conference on the bills was arranged so that the new sys-
tem could be put into operation at the beginning of the
fiscal year, July 1, 1921. The conference report was
adopted May 27, 1921.

The McCormick-Good budget bill provides that the
President shall transmit a budget to Congress on the first
day of each regular session. This is to contain estimates
of expenditures and appropriations necessary, in his judg-
ment, for the support of the government for the ensuing
fiscal year. He is to send, as well, an estimate of the
receipts under the existing laws and under the proposals
made by him. A statement of expenditures and receipts
for the previous year is also to be made. The condition
of the Treasury for the last fiscal year, the year in prog-
ress, and for the ensuing year, should the budget be
adopted, as well as all essential facts regarding indebted-
ness, are to be a part of the report. Any other data that
will depict the financial conditions of the government may
also be included. Provision is also made for the trans-
mission of supplemental or deficiency budgets.

No estimate or request for an appropriation, and no
request for an increase in any item of the estimate, and
no recommendation as to how the revenue needs of the
government shall be met are to be submitted to Congress
or any congressional committee by any officer or employee
of any department or establishment unless at the request
of either house of Congress.

The plan adopted, however, is not so wholly an execu-
tive budget as the foregoing statements might indicate.
Section 207 of the law creates in the Treasury Depart-
ment the bureau of the budget. It is to consist of a direct-
or and an assistant director, appointed by the President,
with salaries of $10,000 and $7,500, respectively. This
bureau, under such regulations as the President may pre-

scribe, is to prepare the budget for him, as well as any
deficiency budgets that may be needed. It has the power,
further, to assemble, correlate, revise, reduce, or increase
the estimates of the several departments or establishments.

Modifications are also made in the accountancy work of
the Treasury Department. The offices of Comptroller of
the Treasury and Assistant Comptroller of the Treasury
have been abolished, and in their place has been substi-
tuted a Comptroller-General and an Assistant Comptrol-
ler-General. A general accountancy office has been estab-
lished which is independent of the executive departments,
and is placed under the direction and control of the
Comptroller-General. All books, accounts, etc., are to
come to the general accountancy department.

Time will test the wisdom of some of the provisions of
the law, such as the combination of the Executive with
the Treasury Department. With Congress and the Presi-
dent so heartily in favor of budgetary procedure, there is
every reason why a marked improvement will result.
That President Harding was favorable toward budgetary
legislation is indicated by the following quotation:

I need not emphasize to you, gentlemen, the anomalous situation of
the government heretofore in having a great number of spending com-
mittees, apportioning moneys to various purposes, without any study
of the relationship between these various purposes, and regardless of
the relationship of these aggregated spendings to the revenue in sight.
No business, no humblest household, could be thus conducted without
leading into disaster. Establishment of a budget system is the founda-
tion upon which reorganization must be based. It is hardly conceiv-
able, indeed, that a proper budget system could be established and
carried on for any considerable time without forcing attention to the
evils and effecting the reform of many deficiencies in the present
system. 1

220. The Budget System of Fiscal Administration Is
Found in Many American States. The recommendations
which were made by President Taft's Commission on

1 President Harding, in a speech delivered before the Academy of Polit-
ical Science, at the Hotel Astor, May 23, 1921.



436 OUTLINES OF PUBLIC FINANCE

Economy and Efficiency created much interest among
the various states, and soon began to bear fruit in these
political units, although the report was not adopted by
Congress. The question of the budget soon acquired an
important place in state politics and became a plank in
many party platforms. The systematic procedure which
the budgetary proposal emphasized presented a strong
appeal to those states that were financially embarrassed,
and many states quickly legislated some form of budget
into law. In fact, the adoption has been almost too rapid,
for frequently the plan hit upon was not adapted to the
needs of the state, or did not give the desired centralized
responsibility. So rapid was the principle accepted, that
by the end of 1919 there were less than half a dozen states
in which some form of budget had not been adopted.
In some cases, of course, the plan was very unsatisfactory,
but it represented a start toward more efficient fiscal
management.

Forms of State Budgets. While the budget laws of the
states vary greatly in their requirements, yet it is possi-
ble, in a general way, to classify them. The type which
has been most in favor might be called the executive bud-
get. More than half of the states have this form, and it
is particularly significant that really all budgets which
have been recently adopted have been of this type. As
indicated by the name given to this class of budget, the
responsibility is placed upon the Governor. In some states
a designated group of the administrative officers is made
responsible for the budget. The Governor is usually made
a member of this group. Still another scheme which is
used to some extent is to have the budget prepared by a
joint committee of representatives from the legislature
and administrative officers. In two or three cases, more-
over, the responsibility for the formation of the budget is
placed upon a legislative committee.

Maryland Budget. It would take us too far afield to
examine the details found in the budget systems of the



THE ADMINISTRATION OF PUBLIC FUNDS 437

various states. As an example, however, of a compre-
hensive executive budget, and one which has been widely
copied, the scheme used by the state of Maryland deserves
notice. The form and classification of all estimates are to
be determined by the Governor, while he is given the
power to revise all the estimates except those of the
legislature, the judiciary, and the public schools. Two
budgets must be prepared, one for each of the two suc-
cessive years. If the Governor has held office for one year
the budget must be submitted within twenty days after
the opening of the legislative session. If he has not held
office for one year, he is given thirty days to submit the
budget. The budget bill is presented to the presiding
officer of each house by the Governor, and these officers
are required to introduce it immediately to their respec-
tive branches of the legislature. The Governor, however,
and such administrative officers as he may designate have
the right to appear and be heard with respect to the bill
at any time it is under consideration. They are required,
furthermore, to appear at the request of either branch of
the legislature.

The Maryland law goes farther than most states m
limitations upon the legislature and hi the details which
are required in the budget bill. No amendments may be
added which would change any obligations required by
the constitution, or the funds for public schools. The
legislature may either increase or decrease items which
relate to the judiciary or general assembly. All other
items may be reduced or eliminated, but cannot be in-
creased. No special appropriation bill can be considered
until the general budget bill has been finally passed. When
special appropriation bills arise they must be limited to a
single purpose, while the bill must provide some form of
tax, its method of levy and collection, for the purpose of
securing the necessary revenue. Such bills must receive
the majority vote of the elected members of each legisla-
tive branch, and are subject to the veto of the Governor.



438 OUTLINES OF PUBLIC FINANCE

The items in each of the budgets presented at the open-
ing of the legislative session are divided into two parts
those for governmental appropriations and those for gen-
eral appropriations. The governmental appropriations
contain estimates of expenditures for the general assem-
bly, executive department, the judiciary, principal and
interest of the state debt, salaries allowed by the constitu-
tion, and other purposes sanctioned by the constitution.
All other estimates fall under the general expenditures.
The bill, moreover, must outline a definite plan for all
contemplated expenditures and revenues, and show how
any anticipated surplus or deficit of funds is to be han-
dled. The bill must contain, in addition, statements
showing revenues and expenditures for each of the two
preceding years, a balance sheet, funds and debts, an
estimate of the fiscal condition at the end of each year
covered by the budget, and any explanations the Governor
may wish to make.

Other States. Many states have not gone to such a
degree of detail as is found in Maryland; in others the
required details differ, while still others have gone even
farther in the reorganization of the fiscal department.
Illinois illustrates one of the best examples of an attempt
to reorganize thoroughly the fiscal machinery. In this
state all administrative offices, except two elective boards,
and those provided for in the constitution, are consoli-
dated into nine departments. A director, appointed by
the Governor, with the approval of the Senate, heads each
of the departments. The finance department has pro-
vided for a uniform system of accounting to be used in
each department. It examines all accounts and approves
or disapproves all vouchers. A list of the anticipated ac-
tivities of each department, together with their estimated
cost, must be presented to the finance department before
appropriations become available. This department is
further required to prepare the budget, and in the per-
formance of this duty is given extensive investigating



THE ADMINISTRATION OF PUBLIC FUNDS 439

powers to enable accurate estimates to be formed. The
budget goes from this department through the Governor
to the legislature, upon which no restrictions have been
placed as to rejecting or changing the items.

Budgetary procedure in the states has been of too short
duration to draw any sweeping conclusion as to its suc-
cess in accomplishing the desired results. As might be
expected, many deficiencies have appeared in the laws,
which a little time and experience will modify. The con-
sensus of opinion is that the use of the system has been a
marked success and is saving the public much in the form
of taxes. Whether it is but another example of a "new
broom sweeps clean' 7 remains to be seen, but one is con-
fident in predicting continued favorable results from such
a detailed budget as the Maryland system, and such cen-
tral supervision as exists in Illinois.

221. The Administration of Municipal Finances Is Re-
ceiving Much Attention. As much importance has been
attached to the proper administration of municipal
finances hi recent years as to that of any political division.
A number of circumstances may be found to account for
this situation. Municipal expenditures have increased
more rapidly than those of other divisions. The increase
has been more rapid than the growth of wealth or popula-
tion, consequently the burden has been increasing. The
gradual expansion of the tax rate was viewed with appre-
hension by property owners, and soon they began to inquire
if there were no method of relief. In cities where the tax
rate was limited, borrowing was resorted to until the limit
of indebtedness was reached, when the difficulty encoun-
tered was a periodic shortage of funds. It was such prob-
lems as these which led the public to demand something
better in the methods of handling municipal funds. This
awakening of civic interest has found expression in the
formation of civic organizations, such as bureaus of
municipal research, citizens 7 unions, and national associa-
tions and leagues, such as the National Municipal League.



440 OUTLINES OF PUBLIC FINANCE

Municipal Accounting. One of the first demands which
the aroused citizenship made was a more accurate system
of accounting. The Bureau of the Census has defined
municipal acounting in a way which is comprehensive
and complete. It says that it is

the art of applying accounts as aids in administration of business, or
the science of analyzing, recording, and summarizing data relating to
business in such a way as to disclose its condition or state at any time,
to express the results of its operation for any given period, and to
furnish all other information that such analyzing, recording, and sum-
marizing can provide for its systematic and most successful ad-
ministration. 1

The need for better accounting methods was evidenced
by the laxity which generally prevailed in handling
municipal finances a few years ago, and which still pre-
vails in many cities. Absolutely no uniformity existed
The comptroller's memory was often the only record of
receipts and expenditures, while a comparison of resources
and liabilities could not be made. Comptroller Metz of
New York City, in 1909, described the situation which
prevailed in a large number of cities. He said that "the
comptroller is practically helpless to protect the city ex-
cept there be a reorganization of the department of finance
and complete revision of the city's administrative and ac-
counting methods," and that by hard work the comptrol-
ler has been able to "catch a few things here and a few
things there, but the mass of details is so great that with
all the vigilance one man can exercise, the city treasury
is being plundered from all sides." 2

One organization which has been particularly active in
securing reform in methods of municipal accounting is
the Committee on Uniform Municipal Accounting and
Statistics, which was organized by the National Munic-

1 Special Reports of the Bureau of Census. Statistics of Cities, 1908,
p. 13.

2 This statement was made in an address before the City Club of New
York in 1909.



THE ADMINISTRATION OF PUBLIC FUNDS 441

ipal League. It is the duty of this committee to investi-
gate systems of accounting used in different cities, and
make suggestions which will increase efficiency. No uni-
form system is drawn up for general adoption, because
the requirements of the individual cities, while similar,
will not permit of the exclusive use of any one system.
The committee aims to design a practicable scheme which
will meet peculiar individual needs. Many other organi-
zations have been active in securing the same results,
while the favorable response from the cities indicates
that they are entering upon an era of more efficient fiscal
administration.

System in New York City. New York City furnishes a
good example of a city with a thoroughly reorganized
accounting system. With an annual expenditure of more
than $100,000,000, the need for systematic fiscal proce-
dure is apparent. Before the reorganization the finance
department consisted of a series of separate jurisdictions,
which were presided over by practically independent divi-
sion chiefs. These were theoretically responsible to the
city comptroller, but in practice each exercised complete
control in his district. The accounting and auditing func-
tions were so broken up that one department found itself
forced to duplicate records kept hi other departments,
which, of course, resulted in confusion, inefficiency, and
waste of time. Under the present plan the accounting
and auditing functions have been centralized the former
separated bureaus have been brought together under one
control. Each step in the process is definitely outlined,
while all fiscal information is kept on file in one place for
the common use of all. It is, therefore, much easier to
know the exact fiscal standing at any particular time and
to keep in touch with exactly what is being done with the
public funds.

Municipal Budgets. Another mark of progress which
has been gaining prominence in municipal fiscal adminis-
tration is the use of some form of budget in calculating



442 OUTLINES OF PUBLIC FINANCE

expenditures and revenues. The general plan has been
for the city council to follow much the same scheme as
has been described in connection with our national
finances. The increased use of commission and city man-
ager forms of government made it easier, of course, to
centralize responsibility. In many cities the estimates of
revenues and expenditures are carefully drawn up and sub-
mitted, and the program is definitely acted upon. The
public is given opportunity to know just what the city
expects to do, and can much more easily guard its funds.
The accuracy with which the estimates are made is, of
course, a factor which will help determine the success of
the budgetary method.

Municipal Indebtedness. A question which has con-
fronted municipal fiscal authorities, particularly in recent
years, is the enormous growth in indebtedness. The big
problem, of course, with the ever increasing pressure for
funds, is to be able to meet the indebtedness when it falls
due. The system which was most in favor for a number
of years was the establishment of a sinking fund. Many
factors have combined to make this method unsatisfac-
tory. It necessitates the investment of the funds which
are set aside, and the addition of interest to the fund.
The authorities who have been intrusted with the proper
investment of the fund have often failed to do all that was
expected. Funds have been lost from poor investments,
or have been invested primarily for the benefit of particular
individuals. City authorities have failed to set aside the
required amount, and have often miscalculated as to what
should be set aside to meet the debt. The result has been,
in a large number of cases, in spite of carefully planning
the sinking fund, that funds have not been available to
meet the debt when it matured.

The situation just described has led many modern fiscal
authorities to favor the use of serial bonds instead of the
sinking fund. By this method a part of the bond issue
becomes due in successive years, and is met from taxes.



THE ADMINISTRATION OF PUBLIC FUNDS 443

For instance, one tenth of a particular issue might be
paid each year for ten years. Other adjustments, of
course, are possible, so that the burden of principal and
interest would be exactly equal for each year of the loan,
or so that some years would escape with comparatively
little or no burden. This plan has the advantage of dis-
charging the debt and interest charge as funds are avail-
able. It does away with accumulations of funds and the
possibility of unwise investments, followed by a lack of
means to meet the indebtedness when it is due. The
chance for miscalculation is minimized, and the tempta-
tion to use public funds for private gain is removed. As
a whole, the serial bond method has proved more eco-
nomical and satisfactory than the use of sinking funds.

222. The Outlook for Proper Fiscal Administration Is
Encouraging. With the adoption of a Federal budget
system and the extension of the plan among the states,
the public will have a better opportunity, at least, to know
what use is being made of its funds, and upon what grounds
charges of graft and inefficiency are made. The United
States is no longer in the stage of youth, as described by
Ambassador Bryce, with a superabundant revenue, so
that it may commit fiscal wrongs without feeling the evil
effects. The magnitude of the present indebtedness with
its interest charge, together with the immense reconstruc-
tion expenses, is making the public more insistent upon
proper fiscal procedure, and demands the use of every
device that will make for honesty and efficiency.

The recent action of Congress and the rapid adoption
of scientific budget and administrative systems by the
states has been gratifying, and there is no reason to be-
lieve but that the systems will speedily be modified into
more efficient conservators of public funds. The neces-
sity that has driven some cities to seek better fiscal pro-
cedure with gratifying results will no doubt lead others
to seek relief through the same channels. The many or-
ganizations that are exerting influences to secure better-

ment will be able to accomplish more after the successful
start has been made, and there is little doubt that the
adolescent stage in the growth of our fiscal administrative
policies has been passed.