Budget Practices

The budget ultimately creates or destroys fiscal balance. During the initial diagnosis, concentrate on issues that have the most potential for short-term recovery efforts.

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Assess true structural balance Variance analysis Hidden sources of funding

Assess True Structural Balance

Fiscal distress may be at least partially due to a mismatch between recurring revenues and ongoing expenditures. Separating out recurring sources and uses and charting them provides a sense of the problem and reinforces a sense of urgency.

Revenue chart

Check to see how one-time revenues have been used in the past. If there is a history of unsustainable use, a policy governing the use of non-recurring revenue is needed.

Variance Analysis

Analyze variances and understand the reasons behind the variances. According to Jon Johnson and Chris Fabian in “It’s All in the Questions: The Manager’s Role in Achieving Fiscal Health,” the following types of variances should be considered (article provided courtesy of ICMA).
  • Current budget vs. prior budget. Discover what has changed from one year to the next in terms of service delivery needs, increased costs, and anticipated revenues. Look for costs that were only expected to last for a short time, but became institutionalized in the budget.
  • Current actuals vs. prior actuals.  Find changes in spending patterns and revenue collections and identify emerging trends that need to be considered in forecasting. Also, identify volatile revenue or expenditures. This may suggest the need to smooth volatile expenditures or discontinue reliance on volatile revenues to fund recurring expenditures. 
  • Budget vs. actual revenues. Determine why revenues underperformed projections and how this might impact forecasts going forward. 
  • Budget vs. actual expenditures (negative).  Know which areas have traditionally been most difficult to control and which might be in the future. Examine multiple years of history to see where the overruns have been so that control efforts can be focused on areas of greatest need.  
  • Budget vs. actual expenditures (positive).  Understand positive variances. Have efficiencies resulting from positive variances be captured and budgets permanently reduced? Is more precision needed in forecasting areas like position personnel costs and vacancy rates? Are there multiple contingency budgets throughout the organization that can be consolidated?

Hidden Sources of Funding

The budget may have sources of liquidity available to serve as a bridge. For example, departments may each budget their own contingency when one smaller pooled contingency would both cover risk and also free up funds for other uses.

Interfund charges may also be a source of funding. Internal service funds may be examined to see if they are charging appropriately. Other funds that receive services from the general fund might be checked to see of they are supporting the general fund for the full and fair amount. It may be discovered that the general fund (often the fund most in distress) is being overcharged by internal service funds or under-reimbursed by funds to which it provides services, such as enterprise funds.

Continue to Liabilities section of Financial Health Model

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