Instructor- Tim
Firestine (timfire@umd.edu)
Teaching Assistant –
Rui Sun (rsun@umd.edu)
The purpose of this course is to present the key concepts in public finance and to stress analytic techniques commonly used in finance generally. The concepts presented will discuss both the theoretical underpinnings of public finance as well as their practical applications. The analytic techniques will use Microsoft Excel as a standard for creating models to analyze alternative courses of action.
In all cases we will “follow the money” from its source in the hands of individuals, families and corporations to its use in operating and capital budgets to its investment both long and short term and finally to its reconciliation in accounting systems. In reality, there are two separate flows - money and information. We will primarily track the flow of cash but at the same time we will ascertain what the expenditures have produced and what the revenues have cost.
There are Six Major Processes that will be the focus of this course:
· Revenue/Taxation- Determining the sources, the method of projection, the incidence and impact of levy and the collection of current and delinquent taxes and other revenue.
· Expenditure- Operating budgets focusing both on objects of expenditure and purposes, capital expenditures focused on the costs and benefits of individual projects and the funding of entire programs.
· Debt- Long term debt primarily associated with capital projects.
· Cash Flow- Projection, investment, and borrowing to manage current resources.
· Investment- Both of revenues and debt proceeds until they are needed and long term investments of pension funds.
· Accounting- Income statements and Balance Sheets.
Calculations
The following calculations are associated with these processes:
· Compound Interest- This represents the future value of a single deposit made today at a single interest rate. Example: $1,000 is deposited today and left for twelve years compounded annually at 6%. The future value after twelve years is $2,012. Excel Formula: =FV(rate, nper,pmt,pv)
· Present Value of a Single Future Payment- We want to determine what an amount due in the future is worth today. Example: A payment of $20,000 will be made in 24 years with a rate of 6%. Its present value is $4,939. Excel Formula: =PV(rate,nper,pmt,pv)
· Present Value of a Stream of Payments- We want to determine the value of series of equal payments made over several years. Example: Loan payments of $500 are made for 60 month at a rate of 8%. The present value of these payments is $24,659. Excel Formula: =PV(rate,nper,pmt)
· Future Value of a Steam of Payments- Example: A payment of $500 per month is made for 60 months at 8%. At the end of the period it is worth 36,738. Excel Formula: =FV(rate,nper,pmt)
· Amortization- How much will I have to pay each period to pay off a loan?
Example: A mortgage of 30 years at 7% in the amount of $100,000 has a monthly payment of $635. Excel Formula: =PMT(rate,nper,pv)
Additional calculations derivative from these basic formulas such as bond price, yield to maturity and internal rate of return will be introduced through out the semester.
Texts
Fiscal Administration – John Mikesell, 7th Edition (ISBN 0495007404)
Additional Materials will be available on line or as hand outs during the semester as indicated in the course outline.
The text should be available at the University Bookstore and at Amazon.com
Course Grading
Completion of Assignments- 20%
Class Participation- 20%
Mid-Term- 30%
Final- 30%
Week One August 30:
Introduction
Key Concepts: Introduction to Course Structure, Definition of Public Finance, Six Major Processes, Use of Excel, Introduction to Calculations
Assignment 1 for Week Two: Creation of an Excel table based on
Calculation Due Week Two: FV (Future Value)
Week Two September 6:
Taxation Who Pays and How?
Key Concepts: U. S. Tax System, Standards for Tax Policy: Equity, Adequacy, Collectibility and Economic Effects, How are revenues estimated?
Assignment 2 for Week Four: Five Year Revenue Projection
Calculation Due
Week Three: PV(Present Value)
Week Three September 13:
Types of Taxes
Key
Concepts: How is Income Taxed? What are
the bases for Sales tax and are they regressive? What is a value added
tax? How are property taxes
computed? What causes inequities in the
property tax? How are user charges used
to increase both the equity and the adequacy of a revenue system?
Calculation Due
for Week Four: PMT(Payment)
Week Four September 20:
Operating Budgeting
Key Concepts: What is an operating budget? How are budgets prepared focusing on objects of expenditure and why? What is break even analysis? What tools or concepts are used in review the budget? What are some “Budget gimmicks”? How are budget and performance integrated in a budget?
Assignment 3
for Week 5: Balanced Operating Budget
Calculation Due Week 5: Problem Set to be distributed on FV, PV, and PMT
Week Five September 27: Capital
Programming
Key
Concepts: What is the purpose of a capital budget? Why doesn’t the federal government have
one? Why have a multi-year plan for
capital? Analyzing projects for a
capital budget. Cost benefit analysis
and discounted present value.
http://www.montgomerycountymd.gov/ombtmpl.asp?url=/content/omb/FY07/ciprec/index.asp
Assignment 4 for Week Six: Capital Budget and Program
Week Six October 4: Financing
the Capital Program
Key Concepts: Pay as you go. What is a capital expenditure and how should it be financed? Appropriate use of long term debt. Leasing and other instruments.
Week Seven October 11: Mid-Term
Exam
Week Eight October 18: Issuance
of Long Term Debt
Key Concepts: What is the proper role of long term debt? How are bond sales conducted? How does the rating process work? How are bids evaluated? What are the roles of the various parties?
Assignment 5
for Week 9: Developing a Rating Agency
Presentation
Calculations due Week 9: Price; YTM(Yield to maturity)
Week Nine October 25: Bond
Math, Cash Management and Short Term Debt
Key
Concepts: How is debt service
calculated? How does short term debt differ from long term debt? What investment vehicles are available to
governments? How does a cash flow
projection work?
Assignment 6
for Week 10: Constructing a Bond Issue
Calculation Due Week 10: NPV(Net Present Value); IRR(Internal Rate of
Return)
Week Ten November 1: Investing
and Pension Funds
Key Concepts: Defined Benefit vs. Defined Contribution Plans. Actuarial liabilities. The effect of the stock market on state and local budgets. Status of Social Security and Medicare Systems
Assignment 7 for Week 11: Problem Set on IRR & NPV
Week Eleven November 8:
Accounting and Financial Reporting
Key concepts: Nature of fund
accounting, fund types, basis of accounting.
Week Twelve November 15: Economic
Development and Public Finance
Key Concepts: Relationship of Finance and Economic Development, evaluating economic development projects, tax incentives to attract businesses.
Assignment 8 for week 14: Evaluating an Economic Development Proposal.
Week Thirteen November
22 ****NO CLASS****
Week Fourteen November 29:
Federalism and the Federal Budget
Key Concepts: Balance. Mandatory versus discretionary spending. Outlays versus obligations. Determining roles.
Week Fifteen December 6: Course
Review
Final Examination – Take
Home -- December 8 - 13