Received a PM asking me to respond; said there's quite a debate going on with this one!

I'd love to weigh in but I wasn't able to find the author of the problem - can you please cite the source? Then I can respond!

Vineet's right about why the answer is B, though.

Also, Vineet:
1) there's no rule that says the pronoun can't be far away from the noun
2) the regular noun "administration" is not present in this sentence; only the possessive "administration's" is present. That possessive functions as an adjective (modifying the noun "demand"), so it is not a candidate to act as the antecedent of a pronoun - only a noun can do that.

Okay, great - that's an approved source.

Here's the core for the correct answer:

The budget reflects the demand that the money be controlled, but it allows them to spend...


Overall, we've got two independent sentences connected with a comma + coordinating conjunction (", but"). The first independent sentence uses a "bossy" verb ("demand") followed by "that" - so we need subjunctive. I demand that everyone study tonight! She demands that her boyfriend give her flowers every Tuesday!

In both cases, the verb in the latter part of the sentence is subjunctive ("study" and "give"). Subjunctive is constructed by taking the desired verb in its infinitive form (eg, "to study" and "to give" are the infinitive forms) and chopping off the "to."

So, in this sentence, what verb are we trying to use for the subjunctive part of the sentence? The verb "to be." So chop off the "to" and use just "be."

Only answer B does this. A and C use "is" and D and E use "are." So if you know this issue, you can eliminate all 4 wrong answers just based on this.

Now, a little more about the pronouns; I know people had questions about that. Look back at the core structure again (above). Remember the two independent clauses? What's the subject of the first one? "budget" Okay, what's the second one? "it" Hmm. Because that pronoun is the subject of the second clause, the most obvious structural expectation is that it should match the subject of the first clause. We also have to check the logic. Does it make sense for "it" to refer to "budget?" "<the budget> allows them to spend the money only on..." Yes! So, boom, we're good.

Check the others. A would say "the budget can only be spent on teachers..." The budget itself isn't spent. The money is spent. The budget just tells us how we can spend the money. C doesn't even give us an independent clause after the ", but." D is fine as far as the pronoun goes. E uses "it" twice, but each instance refers to a different noun. That's definitely ambiguous - no good.