MLD-411 Course SyllabusBUDGETING AND FINANCIAL MANAGEMENT

Fall 2015

*DRAFT (this will be updated and always check CANVAS for the latest information)

Mondays and Wednesdays 11:45am - 1:00pm L-140

Professor Linda Bilmes, Belfer 409Email: linda_bilmes@harvard.edu

Office Hours: SignUp Genius**

Faculty Assistant: Patricia Timmons, Rubenstein 110BEmail: patricia_timmons@hks.harvard.edu

Phone: (617) 495-8660

Teaching Fellow:Peter Bacon Peter_Bacon@hks16.harvard.edu

***** Review Sessions on Fridays 11:45am-1:00pm *****

Course Assistants:David Campbell: David_Campbell@hks16.harvard.eduLuke Gilroy: Luke_Gilroy@hks15.harvard.eduTed Sands: Ted_Sands@hks15.harvard.edu

1. Course OverviewThis is an introductory course designed for students who have little or no background in budgeting and financial management. You will learn to create, execute and analyze the basic types of budgets used in public, non-profit, and for-profit organizations. The course will teach specific tools using the case method, in-class exercises, simulations, discussions and on-line tutorials. It is a demanding course that requires a lot of work, both individually and in teams.

We will cover budget analysis, budget development, budget formulation, cost and revenue estimation, budget execution, budget strategies and tactics and evaluation of operating and capital budgets. This course teaches variance analysis, cost accounting, capital budgeting and the balanced scorecard. It does not teach financial accounting, due to limitations of time. Most (but not all) of the material covered is taught using budgets from private sector companies, local governments, sports teams, hospitals, museums and other institutions that are transferable to international settings.

2. Prerequisites

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There are no formal prerequisites, and you do not need to be a “numbers” person in order to do well in this class. However you should be able to use basic Excel. Students who need more help with the mechanics and technical aspects of the course must attend the Friday review sessions, which are held on Fridays at 11:45am. These sessions are carefully designed to supplement the classes and review the homework assignments. If you are not sure whether this class is the right level for you, look carefully at the previous final exams posted on the CANVAS. If you already know this material, then you should not take this course.

3. Requirements This course requires the following:

Class Participation Preparation of case materials Completion of homework assignments Completion of on-line tutorials Installation of RealPlayer (for the tutorials) Team exercises Midterm Exam Final Exam

Approximately two-thirds of the classes will involve case discussions, often using Harvard Business School materials. The pedagogy for these cases is that you need to read them, struggle with them, and crunch the numbers BEFORE coming to class. This is quite different from the regular HKS pedagogy. It is not sufficient to simply skim the cases, and the idea is that each case pushes you beyond where we have gone during class. We use several on-line tutorials which will help you to master the new skills. If you have not used the skill before, you may need to run the tutorial a couple of times. Students will be assigned into teams for team assignments. All students are required to complete the on-line tutorials, to prepare each case thoroughly, to participate in class discussions, to submit individual and team homework assignments and problem sets.

There will be individual or team homework assignments due for most of the classes, which will form the basis for class discussion. You may be "cold-called" at any point. Students may miss one class without penalty. Beyond that, class attendance is mandatory and may only be excused for with a note from the program director or in serious emergency.

Laptops may only be used in class for purposes directly related to the class, and generally I discourage their use. It is highly disruptive to your classmates and to the teaching staff if you are not following the class. The in-class PowerPoints and Excels will usually be posted after class. Reminder that class participation is 15% of the grade and excessive use of laptops inhibits good performance.

4. Assignments, cases, tutorials and readings

You must read and prepare The “Seven Letters” case for the SECOND DAY of class (Friday, Sept. 4th). This is available on CANVAS.

****In most cases you will not be able to do the assignment without doing the critical readings, including the case, instructions, and online tutorial where indicated.

HKS has now adopted the CANVAS system, so the materials for each day will be posted on CANVAS. Announcements will also be posted on CANVAS and you may receive supplementary emails from the teaching team.

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These materials will include: [Not every day has all of these]

Cases and case materials (such as spreadsheets and exhibits) Assignment Instructions and Questions Templates for the case: these are usually formatted excel spreadsheets that will help guide you to

structure your analysis "One-page help": supplementary instructions Online tutorial links* Critical Readings (that you must read in order to complete the assignment) Required Readings (that you also must read, but are not vital for doing the assignment) Optional Readings (for further interest - truly optional, these will be posted on CANVAS along with

various items of interest.)

The readings are drawn from standard textbooks (such as Principles of Corporate Finance, by Brealey and Myers), and materials are from Harvard Business School (HBS) as well as HKS.

* The supplementary tutorials that accompany the cases are helpful learning tools that will enable you to learn the skill at your own pace. You will receive a special code so that you can enter the site to use these tutorials. Do not share this code with anyone outside the course because we have only purchased copies for the students in the class.

The cost of classroom handouts as well as materials purchased from outside vendors (including the HBS online tutorials) and distributed in class will be recovered through a term bill charge at the end of the semester. All students enrolled in the course are billed for these materials.

Budget Websites: In addition, there are numerous web sites that you should visit, and that will be helpful in class discussions and in preparing your budget paper. Useful Websites include: www.aabpa.org = American Assn for Budget and Program Analysis www.gao.gov = Government Accounting Office www.whitehouse.gov/omb/budget = Office of Management and Budget www.oecd.org = OECD member budgets www.fedstats.gov = selected statistics for US, all levels of government www.cbo.gov = congressional budget office http://www.imf.org/external/pubs/ft/expend/guide4.htm = Guidelines for Public Expenditure Management www.internationalbudget.org = International Budget Partnership www.openbudgetindex.org = issues related to budget transparency www.nasbo.org = National Assn of State Budget Officers

5. Office Hours

Professor Bilmes: My office hours are usually on Wednesday afternoons, 2:30-4:30pm. All students are encouraged to sign up for office hours through the SIGNUP GENIUS portal. The link to SignUp Genius portal will be posted in Canvas to sign-up for office hours. The best time to see me is during those scheduled office hours. If that is impossible, please contact my faculty assistant, Patricia Timmons, to work out alternative arrangements.

6. Question Cards Previous feedback suggests that it is not a good use of class time to review technical material from the homework during the class. The students who already know it can feel bored and those who don’t find it hard to learn this kind of material in front of 75 onlookers. Therefore, if you have a

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question or comment that is not covered in class, please submit a “Question Card”, which will be by the door in every session (which may be submitted anonymously). We will post the answers on CANVAS.

7. Review Sessions and teaching teamTeaching Fellow Peter Bacon will teach most of the review sessions. Peter was the only student (out of 80) in the course last year who received 100% on both the midterm and the final exam so you are in very capable hands. We also have a terrific team of course assistants. David Campbell was also an excellent student in the class last year, and Ted Sands and Luke Gilroy have a lot of experience with budgeting, public finance, Excel and related skills. Please make use of the office hours that are provided every week (posted on CANVAS).

We view this course as a team effort to provide you with a completely new way to view organizations. But it is a demanding course that requires you to put in the time to master new skills. For students who feel uncertain on the numbers, or who wish to review the answers to problem sets and assignments in great detail, it is highly advisable, indeed essential, to attend the reviews. Attendance at review sessions is factored into class participation. Review sessions are taped and streamed on to CANVAS. (However there is a couple of days lag before the media department gets them up and viewable). If there is a change to the Review Session schedule, an announcement will be posted on CANVAS.

8. Individual Assignments Individual homework assignments are graded pass/fail. All that is required for a passing grade is a genuine effort to master the material. However, these assignments are critical for you to learn the material, and the feedback from previous years is that students find them very useful. They also enable us and the course assistants to get a sense of how the students are doing, and what to emphasize during class.

“One Page Help”Some assignments have an optional supplemental set of instructions called “One Page Help.” These short documents are aimed at clarifying intricate mechanical or technical issues in assignments where students in the past have struggled. One Page Help documents do not go over main teaching points in the cases. All assignments can be successfully completed without the One Page Help, so you may choose to challenge yourself first, and only use it if you need them.

9. Team Assignments Students are highly encouraged to work with study partners. You will be randomly assigned into study group/teams. If you have any terribly compelling reason why you must/must not be in team with someone, please let one of the CAs know.

There will be several team assignments in which you will need to work with your team. As of now these will include the following (this may be adjusted):

1. Revenue Forecasting: Teams will prepare revenue forecasts for the city of Sturberry.2. A-Rod: Teams will prepare the valuation from the perspective of the player or the baseball

franchise.3. DUMBO: Teams will prepare the case from one of the four perspectives handed out: A, B, C, and D.

Teams will receive the supplementary information for their perspective, which should not be shared with teams who are not the same letter.

4. City of Parkrose: Teams will prepare a 5-year Capital Budget and Capital Improvement Plan for the city of Parkrose selecting priorities and respecting financial constraints. This is an important keystone assignment that is worth 10% of your final grade.

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5. UNPK: Students will be assigned to analyze the budget execution challenges facing a United Nations peacekeeping forces in an active war zone, and to develop budget contingency plans from a variety of perspectives.

10. Exams.

Midterm: October 7, 2015 in class. Final Exam: December 9, 2015 (reading only period permitted at 8:30am)

IF YOU HAVE A CONFLICT AND CANNOT TAKE THE MIDTERM QUIZ OR THE FINAL EXAM ON THE ASSIGNED DATES, THEN YOU MAY NOT ENROLL IN THE COURSE.

Exam Policy: You may bring one page of your own notes (one two-sided piece of paper – you may write or type up your notes) and a calculator. (No mobile phones permitted as calculators). No make-up exams will be given. In case of illness or emergency, your final exam will count for 65% of the grade

I will hold a review before the final exam, during which I will go over the previous year’s exam. The exams are straightforward and there are no surprises. In addition, the TF will hold a review prior to the midterm and the final. Answers to the midterm will be posted on-line and explained in the review session. Exams will be graded and returned to you with the answers posted on-line. If you have queries about your exam or quiz, you must submit your exam and the query in writing to Patricia Timmons within 1 week of receiving it. The entire exam will be re-graded, so the grade can go up or down.

11. Grading:Grades are assigned on the basis of:

15% Class Participation 10% Homework Assignments 10% Parkrose Assignment 25% Midterm Quiz 40% Final exam

The course will use the standard HKS-required grade distribution.

12. Guest Speakers. We will have a few guest speakers during the semester. Please be courteous, and make a special point to arrive on time for these guests. If possible, I will arrange for guests to be available to meet with students before and/or after class.

13. MLD 412 “Advanced Applied Budgeting” Students who wish to apply the lessons of this course in a real world situation may enroll in the spring module 4 field course, MLD- 412, with permission of instructor. In this course, students assist local communities in a variety of applied budget and operational assignments. See additional information on CANVAS site (forthcoming).

14. Course Pages- CanvasCheck the canvas for announcements and posting of materials. Copies of PowerPoint presentations and spreadsheets used in class will be posted on CANVAS usually after class. (There may be minor changes/additions/subtractions to the materials used in class, as I update them depending on what we covered during the session). The files in Canvas will be organized as follows:

15. STM-411/MLD-411 Facebook Group

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There are some decent-paying jobs available for students who are familiar with budgeting, especially in state and local government, NGOs, and consulting. Students who have successfully completed the module may join this FB group, which is a clearinghouse for my former students to post job announcements and hiring leads.

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MLD-411 SEMESTER OVERVIEW

Class Date Day of the Week

Topic Case In-Class Assignment Due

Class 1 2-Sep Wed Intro to budgeting Lecture Lecture No

Class 2 4-Sep Friday Revenue and Expenditure Frameworks

7 Letters Case, lecture No

No Class LABOR DAY

7-Sep Monday

OPERATING BUDGETS

Class 3 9-Sep Wed Line-item Budgets Bartlett School Case, introduce Variance

Yes

Class 4 14-Sep Monday Variance Analysis Software/Kalamazoo Case, In-class exercise Yes

Class 5 16-Sep Wed Variance Analysis Clinque Nostral Case, introduce ABC Yes

Class 6 21-Sep Monday Activity-Based Budgeting and Cost Accounting

ABC Pen/Bartlett Revisited

Case, In-class Exercise Yes

Class 7 23-Sep Wed ABC in Government Somerville Traffic/Indianapolis

Guest: Mayor Joe Curtatone

Yes

Class 8 28-Sep Monday Revenue Forecasting Readings/in-class exercise

Revenue forecasting , assumptions, probabilities, exercise

No

Class 9 30-Sep Wed National Government vs. Private Sector Budgets

Reading/in-class exercise Guest: The Hon. W. Scott Gould

Yes

Class 10 5-Oct Monday Sub-national/regional budgets

Readings User fees, issues specific to sub-nationals

Yes/team

Class 11 7-Oct Wed Midterm Exam

No Class Columbus Day

12-Oct Monday

CAPITAL BUDGETS

Class 12 14-Oct Wed Intro to capital budgeting

Exercises Basic NPV, IRR exercises

Yes

Class 13 19-Oct Monday Cash Flows A-rod Cash Flows Yes

Class 14 21-Oct Wed Cash Flows and Valuation

DUMBO Cash flows and valuation

Yes/team

Class 15 26-Oct Monday Participatory Budgeting Exercise to be assigned Guest: Michelle Monsegor, City of Cambridge

No

Class 16 28-Oct Wed Budget Execution UN Simulation Guest: Vincent Smith (UNDP)

Yes/team

Class 17 2-Nov Monday Financing /Bonds/leases Athens Ring Road Cash flows, Valuation, Financing

Yes

Class 18 4-Nov Wed Parkrose Parkrose Capital Budgeting/CIP No

Class 19 9-Nov Monday Parkrose Parkrose Capital Budgeting Yes/team

HOLIDAY - VETERAN'S DAY

11-Nov Wed        

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Class 20 16-Nov Monday Integrating Capital and Operating/Endowments

Exercise to be assigned Guest: John Haigh Yes

Class 21 18-Nov Wed Fiscal Transparency Readings No

Class 22 23-Nov Monday Balanced Score Card Boston Lyric Opera BSC, introduction Yes

HOLIDAY - THANKS-GIVING

25-Nov Wed        

Class 23 30-Nov Monday Balanced Score Card New Profit Inc. BSC, venture philanthropy

Yes

Class 24* 2-Dec Wed Course Review St. Xavier No

EXAM DATE 9-Dec Wed FINAL EXAM 9 AM Extra Credit Due

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[*Assignments = required to submit]

(01) – Wednesday, September 2

Topic: Course Overview and Introduction to Budget Theory and Practice

DESCRIPTION: This class will include a course overview, introduction to different types of budgeting, and explanation of the key concepts in of budgeting and financial management of organizations.

CASE: NoneASSIGNMENT: NoneTUTORIAL: None

CRITICAL READINGS: None

REQUIRED READINGS:

Wildavsky, Aaron and Naomi Caiden, The New Politics of the Budgetary Process, Fourth Edition (New York: Addison-Wesley Educational Publishers) 2001, pp. 1-6 (“Budgeting as Conflicting Promises”) and Chapter 3, “The Dance of the Dollars: Classical Budgeting,” pp. 43-68.

Garner, C. William, “The Origins and Purposes of Accounting and Budgeting”, in Accounting and Budgeting in Public and Nonprofit Organizations (San Francisco, CA: Jossey-Bass Publishers) 1991, pp. 1-19. (Posted on course page)

Mikesell, John. Fiscal Administration: Analysis and Applications for the Public Sector, Sixth Edition. (Belmont CA: Wadsworth Group/Thomson Learning) 2003, pp. 613-626 (“GLOSSARY”). [Note: this is a glossary. You do not need to memorize it – just look at the terms, and keep this on hand as we go through the course.]

(02) – Friday, September 4

TOPIC: Basic Revenue and Expenditure Framework

DESCRIPTION: This collection of correspondence highlights the conflict and tension between program managers and budget staff. Although it is not new, it presents typical budgeting issues that arise in many organizations. The purpose of the case is to illustrate how such information can be transformed into the basic budget framework.

CASE: “Seven Letters: A Case in Public Management”

ASSIGNMENT: 1. Read the case and prepare the questions on Canvas.2. Determine what data could be used to resolve the conflict? Is that data provided in the case? What

reasonable assumptions could help you? What do you find if you analyze it systematically?3. What budget framework would enable you to analyze the data systematically?

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TUTORIAL: NoneCRITICAL READINGS: None

REQUIRED READINGS: Bland, Robert L. and Irene S. Rubin, Budgeting: A Guide for Local Governments (Washington DC: International City/County Management Association, 1997) pp. 12-14, “Budget Types and Budget Reform.” [Note: this is an excellent summary of different types of budgets.]

(03) – Wednesday, September 9

Topic: Line-Item Operating Budgets

DESCRIPTION: This case, which bears passing similarity to a well-known School of Government, demonstrates how an ordinary line-item budget is pulled together from a long and somewhat confusing list of information about how the school operates. The case also shows the difficulty of allocating overhead costs

CASE: “Bartlett Graduate School of Business Administration” John F. Kennedy School of Government, 1999.

*ASSIGNMENT: Create a budget for the upcoming year for the BSM. Use the TEMPLATE posted on the CANVAS for guidance. Start with revenues (a fairly straightforward calculation) before tackling the more complex expense calculations. It may be helpful to group expenses by academic program –1st year Masters, 2nd year Masters, Doctoral students, Executive Programs and Research.

Answer the questions posted on CANVAS. Your goal here is to create a line-item budget. You will see that there are some calculations you need to make to figure out how much time the faculty members are devoting to the different expense lines. Use the “one page help” if this is confusing. Ultimately we want to compare the projected revenues and expenses for the upcoming year. The case is intended to be frustrating and we will discuss the budgeting problems it presents during class on Wednesday.

TUTORIAL: Harvard Manage Mentor. This will be available to you throughout the course. Familiarize yourself with the contents, and notice how it proceeds from operating budgets through to the Balanced Scorecard.

CRITICAL READINGS: NoneREQUIRED READINGS: Check CANVAS

(04) Monday, September 14

TOPIC: Introduction to Variance Analysis and Flexible Budgeting

DESCRIPTION: This class will introduce the most common way of monitoring budgets, which is by using variance analysis. It is an essential skill that is required for formulation, analysis, execution and audit of all budgets. Variance permits us to mathematically isolate changes from the expected budget in order to better explain the change. For example, if expenditures for “snow removal” in 2011 are higher than in 2010, is this increase the result of more snowfall, higher cost of snow removal equipment, increased

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wages of snow plow workers, or some combination of these factors? Variance analysis allows us to disaggregate the actual vs. planned budget so we can understand the situation better. This is the first building block tool for budgeting.

CASE: “Software Associates”, Harvard Business School Publishing C 2004. 9-101-038.

*ASSIGNMENT: You will need to do the on-line tutorial, read the critical reading, and work on the case. The first case is a private sector consulting firm. Allow sufficient time to do the reading in detail and to run the tutorial a couple of times through. There are additional variance exercises on the Manage Mentor tutorial. CASE:

Using the Excel Template posted on the CANVAS, prepare questions 1 to 4 of the Software Associates case, covering price and volume variance and flexible budgets. Print out your calculations and hand them in (You do not need to complete Question 5 on mixed variance).

TUTORIAL:Online Tutorial:Do online tutorial before class: Variance Analysis (Harvard Business School Publishing). You must do this tutorial, which you can access at http://www.elearning.hbsp.org/. Any questions/problems should be directed to Patricia Timmons.

CRITICAL READINGS: “Variance Analysis and Flexible Budgeting”, Harvard Business School Publishing Note. 9-101-039, c 2000

REQUIRED READINGS:Robert N., Anthony and Young, David W.; Management Control in Nonprofit Organizations, Sixth Edition (Boston, MA: Irwin/McGraw Hill) 1999, Chapter 13, “Reporting on Performance: Technical Aspects”, pp. 616-635, and Budgeting, pp. 444-461. [This reading covers a wider range of variance uses, including in the private sector].

OPTIONAL READINGS:Bucci, Ronald V. "Budgeting and Variance Analysis." Medicine and Business. Springer International Publishing, 2014. 79-86.

Herzlinger, Regina E. and Denise Nitterhouse, Financial Accounting and Managerial Control for Nonprofit Organizations, pp. 279-298 (top).

IN CLASS EXERCISE:Kalamazoo Zoo Case

(05) – Wednesday, September 16

Topic: Variance Analysis use in Formulating Budgets

DESCRIPTION:

CASE: Clinique Nostral

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*ASSIGNMENT: TUTORIAL: None

CRITICAL READINGS: REQUIRED READINGS:

(06) – Monday, September 21

Topic: Activity Based Costing

DESCRIPTION: Activity-Based Costing is a fundamental skill in budgeting. Budgets are essentially meaningless until you learn how to unravel them using this cost accounting technique. We will first learn the basic skill in the tutorial and then examine how activity-costing can be used to develop better budgets in various settings.

CASE: Classic Pen Company: Developing an ABC Model, HBS Case 9-198-117.

*ASSIGNMENT: Prepare Classic Pen Company using the answer key template on CANVAS in Excel spreadsheet format. You will not be able to do this assignment correctly, without the ABC Pen Factory tutorial

TUTORIALS: There are two tutorials that are required: the ABC Pen tutorial (needed for the ABC Pen case) and the Cost Accounting Systems Tutorial (for general introduction to this skill).

1st Tutorial: ABC Pen Factory Tutorial This requires use to download Real player. Use one of these links:

Windows: http://realplayer.en.downloadastro.com/OSX: http://realplayer-gold.en.softonic.com/mac

2nd Tutorial. Introductions to Cost Accounting Systems Tutorial (HBS) You must do this tutorial before class #6. Go through slides 1-33. Pay particular attention to the "Greenwich Greenstuffs" example.

CRITICAL READINGS: “Brief Introduction to Cost Accounting”, Harvard Business School C 1993 (9-192-068) “Introduction to Activity-Based Costing”, Harvard Business School C 2001 (9-197-076)

READINGS: “Activity Accounting – Another Way to Measure Costs”, Harvard Business School C 1992 (9-193-044)

In- class Exercise: Bartlett Revisited

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(07) Wednesday, September 23

Topic: Activity Based Costing (ABC) and Activity Based Budgeting

GUEST: Mayor Joseph Curtatone, Mayor of Somerville MA

DESCRIPTION: These two cases show how ABC budgeting has been used successfully to transform the way organizations collect, track, monitor and understand financial information. The Somerville Traffic Case (see assignment) offers an opportunity to apply this budget technique to the cost of re-deploying city police. The Indianapolis case shows how Mayor Steve Goldsmith used ABC to reduce the cost of city services while improving the quality.

CASES: Somerville Traffic Unit, Indianapolis (A) Read and prepare for discussion

*ASSIGNMENT: (See detailed instructions on CANVAS)

The Mayor of Somerville has charged you with determining how much it would cost to expand traffic enforcement, net of any new revenue generated. In other words: if the City spends more money on traffic enforcement, how much of the cost of doing this is likely to be offset by revenues from additional citations that would be issued? In any government where resources are scarce, this is a critical budget trade-off. Answer the questions in the case in order to figure out if it is sensible to expand this activity or not, using the Excel template provided.

REQUIRED READINGS:Blanton, Kimberly, “Best Places to Live 2012”, Boston Magazine. Available online http://www.bostonmagazine.com/articles/2012/02/boston-best-places-to-live-2012/4/

Browse: City of Somerville, Fiscal Year 2014 Somerville Budget Overview:http://www.somervillema.gov/sites/default/files/FY14-MayorBudgetFinalWithCredits.pdfhttp://www.somervillema.gov/sites/default/files/FY14FINALBUDGETMASTERRECAP_0.pdf

Keane Jr. Thomas M, “The Model City”, The Boston Globe, May 14, 2006. Available onlinehttp://www.somervillema.gov/sites/default/files/Best%20Run%20city%208-12.pdf

“Using Activity-Based Costing to Manage More Effectively”, Michael Granof, David Platt and Igor Vaysman, Department of Accounting, University of Texas, PricewaterhouseCoopers Endowment for the Business of Government. This reading is available online at: http://www.businessofgovernment.org/sites/default/files/ABC.pdf (posted on course page).

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(08) – Monday, September 28

Topic: Revenue Forecasting, Estimating Revenues and Tax Expenditure Impacts

DESCRIPTION: Predicting revenues is a key budget skill. In this class we will examine the major different methods by which revenues may be estimated in budgeting, how to deal with uncertainty, and how the type of revenue forecasting affects the budget. This will be focused primarily on large government budgets, drawing primarily on the US federal budget, outlining US spending patterns, revenues and expenditures and the appropriations process, as well as current budgetary issues.

Case: None

*ASSIGNMENT: Readings and Short Problem Set

CRITICAL READINGS: Mikesell, chapter 13, “Revenue Forecasting, Revenue Estimating, and Tax Expenditure Budgets”, pp. 480-504.

REQUIRED READING:

Konigsberg, Charles. Chapter 2-9, “Key Budget Concepts” pages 75-90. America’s Priorities (Washington DC, AuthorHouse)

Kyobe, Annette and Stephan Danninger, “Revenue Forecasting – How is it done? Results from a Survey of Low-Income Countries,” IMF Working Paper/05/24, c 2005, http://www.imf.org/external/pubs/ft/wp/2005/wp0524.pdf

Lee, Robert, Ronald Johnson, and Philip Joyce. “Chapter 4. Budget Preparation: The Revenue Side.” In Public Budgeting Systems, Lee, Johnson and Joyce, Jones and Bartlett Press, 2004.

OPTIONAL READING: “Budgeting: Forecasting Your Company’s Financial Future”, Chapter 7, in Harvard Business School Essentials: Finance for Managers. Harvard Business School Press, c 2002, pp. 109-128. (This is an easy read focused on private sector forecasting.)

(09) Wednesday, September 30

TOPIC: Government vs. Private Sector Budgets

Guest: The Hon. W. Scott Gould, former Deputy Secretary of the US Department of Veterans Affairs; Captain, US Navy; former Senior VP of IBM Corporation

DESCRIPTION: This class will focus on the differences, similarities and particular challenges and skills of budget formulation and execution in government organizations compared with private sector firms. There will be an in-class simulation.

ASSIGNMENT:

CRITICAL READINGS: (browse)

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IBM Annual Report 2014 US Department of Veterans Affairs Budget 2016

REQUIRED READINGS: Short UCSF Summary if Differences Merchant, "The Design of the Corporate Budgeting System"

OPTIONAL: Schick, Allen. The Federal Budget: Politics, Policy, Process, Revised Edition (Washington DC: Brookings) 2000, Chapter 3, “The Budget’s Shifting Boundaries”, pp. 36-45,;Chapter 5, “The President’s Budget”, pp. 74-104,

(10) Wednesday, October 5

TOPIC: Sub-national, Regional and Local Budgeting

DESCRIPTION: This class will focus on some of the specific issues related to local and regional budgeting, including national transfers, reliance on user fees, and revenue issues. CASE: Town of Sturberry (Team Assignment)

*ASSIGNMENT: Based on the information provided, historical trends, and any other method you think makes sense from the readings, prepare the revenue estimate for the Town of Sturberry on the template provided. These must be submitted electronically and we will review the results in class.

REQUIRED READINGS:

Mikesell, John L. “Fiscal Administration in Local Government: An Overview.” In Local Budgeting, Anwar Shah, ed. The World Bank, 2007, pp.15-51.

Mikesell, John: Revenue from user fees, user charges, and sales by public monopolies. 

Mullins, Daniel R. “Local Budget Process.” in Local Budgeting, Anwar Shah, ed. The World Bank, 2007, pp. 213-267.

OPTIONAL READINGS

Poftak, Steve. Guide to Sound Fiscal Management for Municipalities. Boston, MA: Pioneer Institute. http://pioneerinstitute.org/better_government/new-municipal-guide-provides-tools-for-local-budgeting/

(11) Wednesday, October 7 MIDTERM IN CLASS (to cover budget theory, variance, ABC, revenue forecasting) One page of your own notes permitted (2-sided) Calculators required (NO CELL PHONES for calculating)

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(12)Wed, October 14Topic: Time Value of Money; Intro to Net Present Value, IRR, ARR for Budgeting

DESCRIPTION: Budgets need to incorporate both annual operating revenues and expenditures and long-term capital expenditures and income. This requires use of standard financial cash flow evaluation techniques such as payback, NPV and IRR. Many students are already familiar with these techniques but for those who are not, it is essential that you learn this material and do some of the extra exercises that are posted on CANVAS.

CASE: Investment Analysis (and Lockheed Tri Star) Harvard Business School, c 1993 (9-291-031)

*ASSIGNMENT:

Using the formulas and information from the Brealey and Myers chapter, complete questions 1-2 in the case. You may do this by using Excel or manually, but be sure to lay out all the relevant cash flows. We will do question 3 together during class.

TUTORIAL: “Buying Time” tutorial, HBS e-learningYou must do this tutorial, which you can access: at http://www.elearning.hbsp.org/

CRITICAL READING:

Richard Brealey and Stewart Myers, Principles of Corporate Finance, 8th edition, Chapter 5,5.1 ”A Review of the Basics” (pp. 85-89) and Chapter 6, 6.1 “What to Discount” (pp. 113-118).

REQUIRED READING: Hammond, John S.; Introduction to Accumulated Value, Present Value, and Internal Rate of Return, HBS 173003

(13) –Mon, October 19Topic: Capital Investment Analysis using Discounted Cash Flows

DESCRIPTION: This is a fun case that will focus on laying out cash flows, timing, and the importance of understanding assumptions and probabilities.

CASE: A-Rod: Signing the Best Player in Baseball, Harvard Business School C 2003 (5-203-091)

In 2000, the Texas Rangers, (a professional baseball team previously owned by George Bush), had an opportunity to sign a long-term contract with arguably the best player of all time, Alex Rodriguez (A-Rod). The total cost of contract would be $252 million, which would have made A-Rod the highest paid player of

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all time. In this case, you will examine A-Rod’s contract using probability analysis to determine the winning/cost ratio and a discounted cash flow estimation to determine true value of A-Rod.

* ASSIGNMENT Prepare A-Rod case using an answer key template on the CANVAS in Excel spreadsheet format.Case Questions:

(1) What is the pre-tax present value of the incremental costs of signing Alex Rodriguez?(2) How many extra tickets do you expect the Rangers to sell each year if they sign Rodriguez? What

is the PV of those additional sales? (Please use the regression charts provided in the key template.)

(3) What is the change in the probability of the Rangers of participating in the American League Championship Series and the World Series? What are the expected pre-tax cash flows and the associated pre-tax PV? (Please see the information on the playoff probabilities provided in the answer key template.)

(4) Should the Texas Rangers sign Alex Rodriguez? If you find the PV of incremental costs exceeds the PV of incremental benefits, how much would ticket prices have to increase for the Rangers to break even?

(14) Wed October 21

TOPIC: Discounted Cash Flows, Valuation, Probabilities and Laying out 5-year capital budgets

Description: Integrating operating and capital budgets, further practice on capital budgeting and project financing. Why do decisions look different from the perspective of different stakeholders?

*CASE: “The Greening of DUMBO” Harvard Business School Publishing C 2010. 9-410-079.

The Down Under Manhattan Bridge Overpass (DUMBO) neighborhood is a thriving urban community in Brooklyn NY. The DUMBO Business Improvement District (BID) is in the process of deciding what sustainability initiatives to pursue. We will use this case to learn how to value and prioritize competing projects.

*ASSIGNMENT (Team) DETAILED INSTRUCTIONS ON CANVAS:

This is a capital budgeting case where your assignment is to evaluate 4 environmental capital projects and then to prepare a simple 5- year capital budget. The case itself is a nice read, but the first 8-9 pages or so are background - you can skim them. For our purposes the assignment is towards the end, with the capital projects beginning on Page 11. Focus on the project options you are given and the detail instructions in the supplemental case information that is posted on the CANVAS.  You will use a 3% discount rate. There are 4 projects, and each alternative project is designed to make a different point.

1. The LEED certification deals with a long term project where the benefits are received by the community, but the costs are paid by the BID.  This is the most complicated and time consuming project for student analysis. 

2. The second one (trash cans) illustrates the impact of a relatively small project that will be incurring costs in perpetuity.

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3. The third option (small benefits) illustrates the problem of probability adjusted cash flows and the difficulties of budgeting for them.

4. The fourth project (open space conversion) requires you to consider what will make it feasible, considering the potential impact of a federal grant, and what is the impact of the timing of this project on the other projects.

Your assignment is to answer the case questions and prepare a 5 year capital budget for the DUMBO BID. Make sure that your budget proposal considers the constraints for BIDs. Using the supplemental information on the four alternatives that is posted on the CANVAS, answer the following questions (use the Excel template provided or prepare your own):

1. How should Kate Kerrigan prioritize the four options available to her neighborhood? 2. How much would each project cost? (Show the relevant cash-flows in each case) 3. What option should Kerrigan recommend the DUMBO BID undertake (if any)? Why? 4. How can the DUMBO BID finance the option you have selected? 5. How did the financial crisis change the planning process in DUMBO?6. Prepare a 5 year capital budget.

READINGS: Richard Brealey and Stewart Myers, Principles of Corporate Finance, 7th edition. McGraw-Hill Irwin, c2003. Chapter 2, 2.1 pp. 14-21 and Chapter 3, 3.1 – 3.3 pp. 33-45.

Richard Brealey and Stewart Myers, Principles of Corporate Finance, 7th edition, pp. 105 (bottom) to 107 (top)

(15)Mon, October 26Topic: Participatory BudgetingGuest: Michelle Monsegnor (Cambridge City Budget Office; Leland Cheung, Cambridge City Council

(16) Wed October 28Topic: Budget Execution Guest: Vincent Smith, Chief UN Peacekeeping Operations, Afghanistan

(17)Monday, November 2Topic: Cash Flows + Valuation + Financing (Capital Budgeting)

Case: Athens Ring Road (Attiki Odos), Darden Business Publishing, University of Virginia (2008) UV 1067

This case describes one of the most significant infrastructure projects in southeastern Europe during a time when the legal and financial framework for project financing was in its infancy (early to mid-1990s).

*ASSIGNMENT:

Prepare cash flow projections for the Athens Ring Road Project using the template suggested on exhibit 10 and answer the following questions.

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1. What are the risks associated with the Athens ring-road project? Do you believe that the concession structure proposed by Mr. Papadopoulos, as shown in case Exhibit 8, can ensure mitigation of those risks? Would you recommend any modifications to the concession structure, and if so, what would those be?

2. How do the cash flows and the structure differ from a conventional project evaluation? What are the financial returns to the private and public sectors? What are the key drivers of the returns? If you were a fund manager would you invest in the project?

3. What are your concerns with your IRR estimate from the previous question? If it was an all equity investment (assume that no debt is used and that in lieu of debt, all funding is provided by equity sponsors), what would be the project’s IRR? Does it make it more or less attractive?

4. Assume again the base case that you estimated in question 2. Would the project be attractive for the equity sponsors if the cost of debt were 10%? What would the government’s options be in such a scenario? What if the sponsors could push the DSCR down to 1.5?

One Page Help is available for this assignment on the CANVAS.READINGS: Bruner, R; Campbell, A & Langohr, H; Project Financing: An Economic Overview, Darden School of Business, University of Virginia (1995) UV 0101

(18-19) Wed, November 4 and Monday November 9th

Topic: DCF, Capital Budgeting, Bonds, and Financing

**TWO-DAY TEAM ASSIGNMENT One of the biggest challenges for governments is to balance long-term capital projects and ordinary operating expenditure. Capital budgets should be constructed and executed differently from operating budgets, but in practice, governments often mix them together which produces budget problems. The objective in this case is to develop a budget for the City of Parkrose, including estimating revenue, capital and operating budgets, and to determine the city’s financing needs.

CASE: “Capital Budgeting in the City of Parkrose”, in Practical Exercises in Local Government Finance: Concepts and Practices (Chicago: Government Finance Officers Association).

*ASSIGNMENT (TEAM)This is a team exercise. On the first day, teams need to have laid out the cash flows for each of the capital items in the case, and bring these to class (do not submit). Strongly suggest that you bring your laptops and teams sit together. We will discuss and review a few tricky items, and how to do the financing, focusing on bonds and repayments. Then teams must do the second half of the exercise – to prepare a 5-year capital budget.

READINGS:

Robinson, Susan G., “Capital Planning and Budgeting”, in Petersen, John E. and Dennis R. Strachota, Eds. Local Government Finance: Concepts and Practices (Chicago: Govt Finance Officers Assn). 1991, Chapter 5, pp. 65-84.

Capital Budgeting in Government (Part II) Presentation Session

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Presentation of Capital Improvements Plans: All teams must bring their capital improvements plans to class including a short 7 Slide Presentation. In class, some teams will be selected at random to present their recommendations and receive live feedback from the class.Assignment Due: Parkrose Exercise 5-year capital improvements plan.

(20) Monday, November 16Topic: Integrating Operating and Capital Budgets

Case Study: Harvard University and Harvard Kennedy School Budget

Guest : John Haigh, HKS Executive Dean

Harvard University is a large non-profit institution that manages a complex set of operating budgets as well as long-term investments (in Allston and hundreds of other capital projects, buildings and facilities) and the largest university endowment in the world.

In this lecture we will examine the Harvard budget.

READING: Harvard University Fact Book, available online at: http://www.provost.harvard.edu/institutional_research/factbook.php (link posted on course page.)

Additional readings will be posted

(21) –Wed November 18Topic: Fiscal Transparency, MTEFs, Open Budget Index

(22) Monday, November 23Topic: The Balanced Scorecard

Topic: Beyond Budgeting: The Balanced Scorecard

In the next two classes we will be focusing on a very useful tool for gaining control over budgets and outcomes: The Balanced Scorecard. This framework launched in the corporate world in 1992-93, transformed business’ ability to monitor quantitative and qualitative measures. It is a versatile tool that can be used effectively across all sectors.

Read the material on the Balanced Scorecard and the case. Focus on: lead/lag indicators, integration of financial and qualitative measures, cascading objectives.

CASE: Boston Lyric Opera, Harvard Business School c 1999 (9-101-111)

INSTRUCTIONS FOR ASSIGNMENT:

Answer the following questions:1. Why do for-profit companies measure and analyze non-financial performance metrics? In what

environments is this measurement beneficial?

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2. What is the aim of the Balanced Scorecard? What are the pros and cons of this approach?3. The BLO working group has selected 8 customer objectives for its three strategic themes (see

bulleted items on pages 5-7 of the case, also summarized in the Customer row of exhibit 5). a. Develop loyal and generous supportersb. Build reputation on national and international opera scenec. Reach the Boston-area community

What measures should the project team select for these 8 objectives?4. What changes were required to adapt the BSC to a nonprofit organization?5. What are the benefits from developing the BSC at the BLO? What are the challenges that Del Sesto

and Dahling-Sullivan must overcome to capture these benefits?6. Are the departmental managers, artistic leaders and employees at the BLO more empowered or

less after the BSC has been put in place?a. What do you think about the process that the BLO used to develop the

READINGS: “The Balanced Scorecard: Measures That Drive Performance”, by Robert S. Kaplan and David P. Norton, (Harvard Business Review Classic, July 2005) (posted on CANVAS)

“Putting the Balanced Scorecard to Work” by Robert Kaplan and David Norton, (HBR, September-October 1993). (posted on CANVAS)

(23) Monday, November 30

Topic: Adapting the BSC to Non-profit and governmental organizations

CASE: New Profit Inc., Harvard Business School c 2001 (9-100-052)

READING:Kaplan, Robert and David Norton, “Strategy Scorecards in Nonprofit, Government, and Health Care Organizations” HBSP, ISBN-13:978-1-4221-1615-9 1615BC

Kaplan, Robert S., "Strategic Performance Measurement and Management in Nonprofit Organizations", Nonprofit Management and Leadership, 11(3), (New York: Jossey-Bass Inc., Publishers, © 2001), pp. 353-370. (posted on CANVAS)

(24) - Wednesday May 2 Topic: Comprehensive Budget Analysis and Review

CASE: The St. Xavier Healing Touch Hospital (c Bilmes 2003) (posted on course page)

PRACTICE ASSIGNMENT:Your assignment is to create a new operating budget and financial management strategy for next year for the Healing Touch Hospital. In order to do it well, you need to use variance analysis, activity costing, and to understand the capital budget. You will need to draw up a balanced scorecard for the institution.

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FINAL EXAM: DEC 9th, 2015 9AM-12PM

You may arrive beginning at 8:30 AM for "Read Only" time

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