CGFO Budgeting & Fiscal Policy Management 5 — Questions and Answers
Question 1: What is the primary distinction between capital budgets and operating budgets in government finance?
- Capital budgets cover all personnel costs; operating budgets cover infrastructure
- Capital budgets fund long-term assets; operating budgets fund day-to-day expenses (Correct answer)
- Capital budgets require voter approval; operating budgets do not
- Capital budgets use modified accrual; operating budgets use full accrual
Correct answer: Capital budgets fund long-term assets; operating budgets fund day-to-day expenses
Capital budgets focus on major, long-lived investments like buildings and infrastructure, while operating budgets cover recurring costs such as salaries and supplies.
Question 2: A government finance officer notices that actual property tax collections are $500,000 below budget projections in the third quarter. The BEST immediate response is to:
- Issue a tax anticipation note to cover the shortfall
- Inform the governing body and prepare a contingency plan (Correct answer)
- Transfer funds from the debt service fund to the general fund
- Increase the property tax levy for the following quarter
Correct answer: Inform the governing body and prepare a contingency plan
Transparent reporting to the governing body and preparing contingency options is the appropriate first step to address a revenue shortfall responsibly.
Question 3: In the context of government fiscal policy, what does 'tax incidence' refer to?
- The rate at which taxes are collected
- Who ultimately bears the economic burden of a tax (Correct answer)
- The legal entity responsible for filing tax returns
- The frequency of tax audits conducted by the government
Correct answer: Who ultimately bears the economic burden of a tax
Tax incidence describes who actually bears the economic cost of a tax, which may differ from the legal party required to pay it.
Question 4: Which of the following is an example of an 'off-budget' item that can obscure a government's true fiscal position?
- General fund appropriations for police services
- Enterprise fund revenues from a municipal water utility
- Pension obligations accounted for outside the main budget (Correct answer)
- Debt service payments recorded in a debt service fund
Correct answer: Pension obligations accounted for outside the main budget
Pension obligations and other post-employment benefits (OPEB) not fully funded in the annual budget are classic off-budget items that can understate a government's true financial commitments.
Question 5: A government's long-term financial plan projects revenue growth of 2% annually while expenditure growth averages 4% annually. Over time, this indicates:
- Improving fiscal sustainability
- A growing structural gap that threatens fiscal stability (Correct answer)
- A balanced budget position within five years
- Normal cyclical variation requiring no action
Correct answer: A growing structural gap that threatens fiscal stability
When expenditure growth consistently outpaces revenue growth, the cumulative gap grows each year, creating an unsustainable structural imbalance.
Question 6: Under GASB Statement No. 34, governments must present which two sets of financial statements?
- Fund-basis statements and government-wide statements (Correct answer)
- Cash-basis statements and accrual-basis statements
- Operating statements and capital statements
- Budgetary statements and performance statements
Correct answer: Fund-basis statements and government-wide statements
GASB 34 requires both government-wide financial statements (full accrual) and fund-based financial statements (modified accrual for governmental funds) to provide a complete picture.
Question 7: Which of the following best describes the purpose of a 'budget stabilization fund' (rainy day fund) in state and local government?
- To fund ongoing capital improvement projects
- To accumulate reserves for use during revenue shortfalls or emergencies (Correct answer)
- To hold tax collections until they are appropriated
- To finance pension obligations for public employees
Correct answer: To accumulate reserves for use during revenue shortfalls or emergencies
Budget stabilization funds (rainy day funds) are designed to smooth fiscal shocks by saving surplus revenues in good times to draw upon during downturns or unexpected crises.
CGFO Budgeting & Fiscal Policy Management 5
What is the primary distinction between capital budgets and operating budgets in government finance?