Finance and budgeting in the public sector is a complex and sensitive issue due to political and financial considerations. The entities in this sector have to follow certain budgeting guidelines, including appropriations rules that restrict their spending. The Environmental Protection Agency (EPA) is not exempted from the budgeting regulations, as illustrated in this paper. The analysis of the financial statements indicates that the EPA is stable, which is argued to be the result of prudent budgetary processes. In addition to the financial position, other aspects of budgeting issues examined include investments that do not yield tangible assets. The conclusion reached is that the EPA is a perfect example of effective management of public entities and the resources which are paid using the taxpayers’ money.
Finance and Budgeting for EPA
The entities in the public sector have to follow certain budgeting guidelines, including appropriations rules that restrict their spending. The Environmental Protection Agency (EPA) is an example of such entities whose budgeting is highly regulated by the government. This paper examines the mission and goals of the EPA and several aspects of its budgetary process, including ethical and technological considerations, laws and regulations, and internal factors.
Missions and Goals of EPA
The EPA is a public agency which protects human health and the environment. As a public entity, the EPA is mandated to offer technical assistance to aid in the recovery planning in the public health and infrastructure, including water and waste treatment plants. The mission of the EPA is “to protect human health and the environment” (“Our mission and what we do,” n.d.). This mission is supported by several goals set by the agency.
The goals include ensuring the population has clean air, water, and land, using the best available scientific information in national efforts to reduce environmental risks, and offering environmental stewardship to the United States. Additionally, the EPA develops federal laws that protect the environment and human health and reviews the chemicals in the market to ensure their safety. In summary, therefore, the goals of the EPA include developing and enforcing regulations, giving grants, studying environmental issues, teaching people about the environment, and sponsoring partnerships in environmental protection.
Ethical Considerations
Ethical considerations in the EPA regarding finance and budgeting are not expressly outlined. However, it has been made clear that the EPA has an Office of the Chief Financial Officer (OCFO), which formulates and manages EPA’s annual budget and performance (“About the Office of the Chief Financial Officer,” n.d). Most importantly, the OCFO develops performance and accountability reports, which should explain how the organization used the funds allocated to it by the government and other stakeholders.
It is important to acknowledge that ethics in government financing is a serious issue due to the financial, analytic, and political dimensions associated with it (Smith, 2018). Therefore, the Office of the Inspector General (OIG) can be seen as the one responsible for ensuring ethical finance and budgeting at the EPA. This is because the OIG detect and prevent scam in the organization’s operations and programs, including financial fraud (EPA, 2020b). These efforts intend to increase public trust and to help boost the ethical image of the EPA. The reports published by the EPA can serve as evidence of why its practices can be associated with the pursuit of ethics.
Technological Considerations
Technology in budgeting can be used to improve the efficiency and effectiveness of the process. The digitization of the budgeting process can save time and enhance convenience. According to Bergman et al. (2020), some of the technologies used include business analytics and information technologies. In Report No. 20-P-0015 prepared by the OIG, it is explained that the EPA used two main technologies in the budgeting process (Brevard et al., 2019). These are the Budget Automation System (BAS) and Budget Formulation System (BFS), which are utilized to plan, formulate, and track the performance of EPA’s budget. For a long time, the EPA has been using the BAS as the main technology. However, the BFS, which is a cloud-based system, was first adopted in 2017 (Brevard et al., 2019). These two systems have made massive contributions to EPA’s budgeting process and other operations, including making submissions to Congress and other departments such as the Office of Management and Budget. Budget execution can also be included in the list of the functions undertaken or aided by these technologies.
While the technologies are deemed essential for the effectiveness and efficiency of the budgeting process, it is important to acknowledge the setbacks and risks involved. The report by Brevard et al. (2019) expresses the main problems that face the EPA and the use of the BAS and BFS. The major concern is the security of the systems, considering the vulnerabilities which are associated with all digital systems. According to Brevard et al. (2019), the EPA stores sensitive information in these systems even though it relies on third-party providers for these digital services. Security testing has been recommended as a necessary step towards ensuring the EPA benefits from the technology without compromising the security of the data. The EPA tends to conduct security testing, which is a responsibility of the OCFO. These efforts can be enhanced to improve the system’s security for both the BAS and BFS.
Laws, Regulations, and Policies
In the public sector, the budgetary processes are guided by various regulations and guidelines. They include the generic budgeting rules which include annuality and purpose, as discussed by Di Francesco and Alford (2016). Annuality means that the budgets for public agencies are prepared annually for every financial year. The budgeting process for the EPA has to comply with this requirement. Purpose, on the other hand, entails performing the duties the budgeting process has been intended to. In the OECD, there are accounting standards that have been set for the public entities. The accounting systems and financial reporting have been categorized into four classes: full accrual, modified accrual, cash basis, and modified cash basis (Adamyk & Adamyk, 2017). The budgetary process has to follow these regulations for consistency demanded across the public sector entities.
As with all OECD countries, the United States public expenditure is also governed by the legislation regarding appropriations. An example of such legislation is the Legislative Branch Appropriations Act of 2020. In EPA’s budgets and other documents, the heading “justification of appropriation estimates for the Committee on Appropriations” has featured predominantly, which can be used to argue that EPA financial documents are prepared according to the appropriations legislation. The major aim of the appropriations is to set the limits of spending for an agency or program operated by or on behalf of the government of the United States. It means, therefore, that the EPA has to justify its spending and comply with the limits that have been set by the appropriation laws. Additionally, authorizations for spending and other activities undertaken by an agency require compliance. EPA is a government institution and, therefore, has to adhere to all the legislation affecting the budgeting process.
Internal Factors
The EPA’s internal environment is not fully comprehensible as all information can only be obtained from the published documents. Strategic planning is often a complex issue that can be massively affected by the internal environment. According to Leskaj (2017), strategic planning is action-oriented planning, which becomes useful only when it is linked to implementation. Therefore, a strategic plan for the EPA materializes only when its administration has the motive and commitment to implement it. Therefore, a closer examination of what has been implemented and the challenges experienced throughout the process can help explain the internal factors affecting strategic planning. However, it should also be acknowledged that a government agency or entity lacks the autonomy to develop and implement strategic plans. This means that the external environment has a greater influence than the internal conditions.
However, recent strategic plans can be reviewed to reveal any issues that can manifest themselves. For example, communication of the strategic plans could be a major problem, as illustrated by the revised plans. In September 2019, EPA re-published a plan that updated the language that had been used in a previous publication (EPA, 2020b). The strategic objectives were re-worded, and the result was new meanings and new goals. For example, the first strategic aim was initially stated as “Core Mission,” intended to deliver real results to offer Americans clean land, air, and water, as well as to ensure chemical safety. The new document, however, states the strategic goal as “a cleaner, healthier environment,” which sought to deliver a cleaner, healthier, and safer environment for all Americans and future generations by undertaking the core mission of EPA (EPA, 2020b). These two statements reveal that the agency has internal issues, although minor, which involve identifying the right way to communicate the goals. Other factors that might be considered detrimental to the strategic planning include the fact that EPA has few internal revenue-generating operations, which makes it dependent on government financing.
Annual Financial Report
Annual reporting at EPA follows some of the basic standards adopted by the government entities. The annual financial reports often detail the financial results and present audited financial statements for the fiscal year. These are the purposes detailed by EPA on its website, meaning the purpose of reporting has been met. These documents tend to offer complex details regarding all activities which have occurred and which have financial implications. However, an evaluation should pay greater attention to the financial section. For this document, the annual financial report for the financial year 2020 will be used. The rationale for the selected financial year is that it is the latest complete report on the EPA’s website.
The financial analysis of EPA for the year 2020 is presented in Section I under Financial Analysis and Stewardship Information. The financial conditions and results are presented using four consolidated statements: statement of custodial activity, balance sheet, a statement of changes in net position, and a statement of net cost (EPA, 2020a). In addition, one combined statement named Statement of Budgetary Resources has been presented to further explain the financial situation at EPA. One of the most important observations is the changes in the net position from 2018 to 2020, where a slight improvement has been made (EPA, 2020a). The entity keeps its liabilities lows and owns and manages several assets, which help it stabilize its net position. However, the movements for entries, assets, and liabilities have been similar in that they all increased between 2018 and 2020.
Another important consideration is that the resources and spending in EPA have also been on the rise. A graph indicating the results between 2016 and 2020 show that both budgetary resources and obligations increase almost proportionately (EPA, 2020a). However, the total outlays have been nearly constant, with only a small decrease noted in 2018, after which the figures rose back to normal in 2019 and 2020 (EPA, 2020a). The EPA complies with the Federal Accounting Standards Advisory Board (FASB) in its stewardship investments. Even though the federal government does not, in the end, acquire tangible assets, the investments have resulted in the creation of critical infrastructure that benefits all Americans in the present and future. For example, the Clean Water State Revolving Fund (CWSRF) is one of the largest stewardship programs which offers grants to states to construct water infrastructure. This evaluation reveals that the EPA has prudently utilized the resources made available to it.
Revenue Sources
The EPA uses funds it receives from the government and from other investments that might generate revenues. The composition of the organization’s assets for the financial year 2020 reveals that 59% of the resources comprise a fund balance with the treasury and 32% from investments (EPA, 2020a). In the 2020 financial report, the entity states that all investments are backed by US government securities meaning funds from the government (EPA, 2020a). The fund balance, on the other hand, could be interpreted as the funds remaining from the financial year’s operations, which are held by the country’s treasury. As such, it can be seen that the EPA is almost entirely dependent on the government for funding. The financial report does not indicate the revenue sources and, therefore, it is easy to assume that as a non-profit organization, EPA initiates projects that do not have any monetary returns.
It can be argued that the taxpayer is the major revenue source. However, the use of the term revenue in this context can be misleading because of the question of how it is defined. If the idea of revenue is used to imply the sources of money that the entity spends, the term funding source can be more appropriate. In this case, the EPA is funded through the federal government budget alongside other major government functions such as defense, social security, and Medicare, among others. On average, the American taxpayers an estimated $26 per capita each year, which comprises around 0.21% of the total federal budget (“How much do environmental protections cost taxpayers?” n.d.). This figure is deemed too small, and there are some calls to increase funding for EPA because of the importance it holds for the environment and wellbeing of the Americans.
However, several other agencies or organizations make payments to the EPA, which can be considered sources of revenue. These sources have been termed in the 2020 financial year annual report as dedicated collections. Though not precisely defined, these revenues are collected in the form of appropriations or fees charged by the EPA to major businesses or organizations that have massive environmental implications. Examples include the Pesticide Registration Fund, which allows for certain pesticide tolerances in food and animal feeds. Tolerance Revolving Fund, on the other hand, is fees paid by the industry to set pesticide chemical residue limits. The last example is the Inland Oil Program Account, which is simply an oil spill liability fund paid to the EPA. These funds are accounted for by the EPA, which makes them revenues.
Expenditures
The expenditures of the EPA can be examined from the annual financial report. In the 2020 financial year, accounting for the costs and receivables can give a general idea of how the EPA spends the money. First, environmental cleanup is a major responsibility of the entity, and the financial statements show how these costs and their accruals are accounted for. In this case, however, it can be seen as an expense for the EPA alongside all other operational expenses incurred. Second, the agency makes several investments, which could also be regarded as expenditures, including grants offer for various infrastructural developments. Even though not expressly stated, most operations of the organization, including salaries, wages, and other payments, comprise the major outlays.
The annual financial report for the financial year 2020 only shows the changes in expenditure where the term used instead of expenditure is outlays (EPA, 2020a). These have been fairly stable, with only minor fluctuations in the year 2018 (EPA, 2020a). In comparison with the budgetary resources, it can be seen that the expenditure is only a fraction of the revenues. However, the total liabilities for each financial year have followed a trend similar to the revenues. Therefore, it is apparent that EPA strives to spend within its budgetary resources.
Financial Condition
The financial position of an entity can be defined by the assets it owns and operates and the liabilities they have. As explained above, the financial year 2020 indicates that the EPA is in a fairly strong position considering that the budgetary resources are higher than the liabilities (EPA, 2020a). However, combining the outlays and liabilities could offset this position but only if their sum becomes larger than the assets. Some of the assets owned and operated by EPA do not have monetary returns meaning that if the assets are defined as those objects or items that generate revenue, then most would be disqualified. The stewardship investments are those expenditures that may result in the creation of assets but do not lead to the government acquiring any tangible assets.
The main question, in this case, is whether these investments and the resulting infrastructure are deemed to be assets or expenditures. The definition of stewardship funds and investments, however, hint that these are entered into the EPA’s books as expenditures. Overall, the financial situation at EPA can be considered stable because of the budgetary policies of appropriation where the expenditures and liabilities are confined within the allocated funds.
Conclusion
The finance and budgeting for the EPA, a public sector entity, has been examined in detail. The paper finds that not many details are made available publicly, and that much of the information regarding these processes can be derived from the organization’s published documents. However, the evaluation of the agency reveals that the appropriation and other legal obligations confine EPA’s budgetary and spending activities within the allocated or available funds. Therefore, the financial position has been described as fairly stable because the entity does not take many risks in its investment decisions.
References
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