Reform the Budget ProcessReforming the budget process is often required to recover from financial distress. The budget is where spending decisions are ultimately made. A reformed budget process puts systems in place to encourage sustainable decisions in times of revenue scarcity as well as other times.
The traditional government budget system is “incremental” – last year’s spending is used as the base and spending is adjusted incrementally. This system is workable (if still suboptimal) in times of revenue growth because it is relatively easy to distribute the growth between competing programs. An incremental system fails in times of revenue decline because distributing decrements is much more contentious. Across-the-board cuts are usually seen as the least objectionable way to allocate the decrements because they may be perceived as “fair” by participants in the budget process. However, across-the-board cuts do not match up cuts with services that are most and least valuable to the public.
Numerous innovations and reforms have been created to better adapt budgeting to times of financial distress.
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Link the Budget to Strategic, Long-Term Financial PlansLinking the budget to long-term plans puts budget decisions in a multi-year context. A long-term plan’s multi-year forecast makes the long-term impact of budgeting decisions more apparent, thereby reducing the likelihood of decisions that look good in this year’s budget but that have negative ramifications over the long term. Long-term strategies impart a consistency to successive annual budgets and define the overarching goals that annual budgets are striving towards. Best Resource:
National Advisory Council on State and Local Budgeting
The National Advisory Council on State and Local Budgeting (NACSLB) framework catalogs best practices across all phases of the budgeting process. The NACSLB positions budgeting as a strategic process that is attuned to long-term financial sustainability. While the NACSLB framework is not a cutback budgeting method, following its four major principles will help any budget process reach more financially sustainable decisions.
- Establish broad goals to guide decision making. A government should have broad goals that provide it with overall direction and serve as a basis for decision making. (e.g., strategic planning, long-range financial planning)
- Develop approaches to achieve goals. A government should have specific policies, plans, programs, and management strategies to define how it will achieve its long-term goals. (e.g., financial policies, business plans, performance measurements, individual performance objectives)
- Develop a budget consistent with approaches to achieve goals. A financial plan and budget that moves toward achievement of goals, within the constraints of available resources, should be prepared and adopted. (e.g,. strategically focused budget: outcome-based, performance based)
- Evaluate performance and make adjustments. Program and financial performance should be continually evaluated, and adjustments made, to support progress in achieving goals. (e.g., quarterly and annual budget and performance reports, performance audits, special evaluation studies, strategic and financial plan revisions)
Priority-Driven Budgeting (PDB)
Under this system, the government identifies its most important strategic priorities, then ranks services according to how well they align with the priorities, and finally allocates resources in accordance with the ranking. “Budgeting for Outcomes” is the most well known variant of priority-driven budgeting, but governments have adapted the philosophy of priority-driven budgeting to fit their own circumstances. Generally, a priority-driven budgeting process consists of at least the following steps:
- Identify available revenues. Instead of first identifying the amount of resources “needed” for the next fiscal year, the organization should first clearly identify the level of resources that are “available” to fund operations as well as one-time initiatives and capital expenditures.
- Identify your priorities. PDB is built around a set of organizational strategic priorities. The “priorities” of PDB are similar to a well-designed mission statement in that they capture the fundamental purposes for which the organization exists and are broad enough to have staying power from year to year. A critical departure from a mission statement is that the priorities should be expressed in terms of the results or outcomes that the public values. These priority results are the foundation for the rest of the process.
- Define your priority results more precisely. The priority results define why an organization exists. The challenge with results is that they can be so broad that it can remain unclear what the results specifically mean for your community. In this step of the process you add another level of specificity to the priority results so that everyone understands a common definition. Strategy mapping is a simple way to better define a complex and potentially ambiguous objective. With strategy mapping you create a picture or map of how that objective can be achieved. Participants in strategy mapping list the factors that lead to the priority result and the cause-and-effect relationship between the factors and the priority result is laid out in graphical form. Below is an example of a strategy map for a priority of high performing support services.
- Prepare decision units for evaluation. At the crux of PDB is evaluating the services against the government’s priority results. Thus, the decision unit to be evaluated must be broad enough to capture the tasks that go into producing a valued result for citizens, but not so large as to encompass too much or be too vague. Conversely, if the decision unit is too small it may only capture certain tasks in the chain that lead to a result and may overwhelm the process with details. There are two basic approaches to this issue: “offers” or “programs.” Offers are customized service packages designed by departments (or perhaps cross-functional teams or even private firms or non-profits) to achieve one or more priority results. Offers are submitted to evaluation teams for consideration against the organization’s priority results. A program is a set of related activities intended to produce a desired result. Those using the “program” method inventory the programs they offer and then compare those to the priority results. You can read more about this topic in this article.
- Score programs/offers against results. Once the organization has identified a set of priority results and more precisely defined those results, it must develop a process by which it can objectively evaluate how the program/offers achieve or influence the priority results. While the scoring process may be approached in several ways, it must ensure that scores are assigned based on the programs’/offers’ demonstrated and measurable influence on the results.
- Compare scores between offers/programs. It is a “moment of truth” when offers/programs have been scored, and information is compiled in order to view the top-to-bottom comparison of prioritized offers/programs. An organization has done everything possible before this to ensure that it is not a surprise, that the results are expected, and that the final comparison of offers/programs in priority order is logical and intuitive.
- Allocate resources. Once the scoring is in place, resources can be allocated to the offers/programs. There are a number of methods for allocating resources, but the key is to keep in mind that PDB is not a mechanistic process. There is still much give-and-take and discussion about how resources are allocated in light of the scoring.
- Create accountability. In PDB there can be a sort of moral hazard wherein the owners of the programs/offers being evaluated may over-promise or over-represent what they can do to accomplish the priority result. Create methods for making sure that programs/offers deliver the results that were the basis for their positive evaluation. Establish standards of evidence against which the performance of the programs/offers will be judged.
Zero-Base Budgeting (ZBB)
In theory, ZBB requires the managers of decision units (e.g., programs, departments, divisions) to formulate budgets from “the ground up” (a base of zero). The intent is to force a rational and comprehensive re-examination of the way in which services are provided. Under ZBB, alternative methods of performance and service (called “decision packages”) are put forward for consideration by unit managers. The packages usually represent various tiers of funding/service ranging from the minimum required for the decision unit to remain viable, to maintaining the status quo, to perhaps even increasing service levels. These packages are then ranked by central budget authorities (e.g., governing board, mayor, city manager) and funding allocated accordingly. The long history of ZBB (its heyday was in the 1970s) has revealed that the “zero-base” aspect of ZBB is seldom realized in practice. Rather, decision packages are developed at various cutback levels such as the minimum required for the decision unit to remain viable (often defined by an arbitrary reduction percentage) and some level that is greater than the minimum but less than the status quo. Hence, ZBB, in practice, focuses on the margins of government spending, but it is at least a more rational way of allocating cuts than traditional incremental budgeting and across-the-board cuts. Experience has shown that ZBB is effective for controlling and cutting spending, however, it has largely been eclipsed by other budgeting methods.
Target-Based Budgeting (TBB)
TBB is a derivative of ZBB. TBB makes no attempt to comprehensively re-examine base spending. Rather, each decision unit (e.g., program, department, division) is given a target spending amount and is asked to submit a budget for that amount. In addition, the unit may submit requests above the target amount (“decision packages”). A significant difference from ZBB is that there are no decision packages for cutback spending levels (i.e., the target spending amount) – rather, scrutiny is focused on the single target budget and decision packages are only formed for additional spending. The decision packages are ranked, according to alignment with goals and objectives, by the unit that is submitting the package as well as the central budget authority. Based on the rankings, some decision packages may be added to the target amount and submitted to the board as a complete proposed budget. TBB places a higher premium on revenue projections than ZBB because available revenues are used to determine the target budgets as well as the amount available to fund decision packages (the difference between the target budget and the revenue projection is the amount available to spend on decision packages). TBB also provides better and earlier direction to managers in the decision units on how to design their budget requests. Managers have a clear target budget and are told the priorities that decision packages should be aligned with.
Start Budget Discussions with Available Revenues
An incremental budget process starts budget discussions with last year’s expenditures. Instead, first figure out how much revenue you have for the upcoming year. You can then have discussions about how to use the revenue you do have or whether the local government should seek additional revenues from the community. For example, you could ask departments to provide spending “decision packages” that present decision makers with different service-spending options to stay within available revenues. As part of this treatment, strongly consider making a clear distinction between one-time and ongoing revenues so that the budget is truly structurally balanced. Also consider distinguishing between general revenues and revenues generated directly by program activities and consider how to incentivize departments to maximize their own program revenues. In times of declining and/or unstable revenues, it is beneficial to look at multiple scenarios for the budget year as well as the following year at a minimum. In volatile times, it is difficult to project accurately but the discussion will expose assumptions and factors influencing how projections are developed, allowing greater refinement. Best Resources:
Improve Variance Control and Analysis
Consider developing tools to better monitor and control short-term variations in your budget. This helps identify small deviations from the plan before they become major problems. Variances will often expose those areas where assumptions are no longer in tune with reality and where the underlying operational dynamics have changed. This is often the case when cuts in one area have an unintended impact on another cost area. It can also sharpen long-term forecasting by revealing the beginnings of important trends that could impact the long term. Microsoft Excel is an affordable, yet powerful tool for monitoring the budget. GFOA’s MuniCast is one example of an Excel-based tool for budget monitoring.
Also, more in-depth and systematic analysis of variances may uncover opportunities for savings. Consider the following forms of variance analysis.
- Budget vs. actual spending. Do any areas consistently have a positive or negative variance? Can the budget be reduced to take out positive variances? Can cost control strategies be focused on areas that consistently overspend?
- Budget vs. prior year budget. Have any expenditure budgets increased noticeably without a good reason? For example, perhaps a temporary expenditure spike in a prior year was erroneously included in successive years’ budgets. This situation is a particular danger in incremental budgeting systems, in which last year’s expenditures become the basis for the next year’s spending plan.
- Actual vs. prior year actuals. Are there any particularly volatile areas? Consider whether a policy is needed for volatile revenues to direct peak revenues to non-recurring expenditures. Perhaps there is a way to smooth out volatile expenditures. For example, a long-term asset maintenance and replacement schedule could smooth out maintenance costs.
A business plan translates the governing board’s strategic plan into the staff actions and accountabilities needed to implement the strategies. A business plan makes it much easier to translate a strategic plan into a budget. When the translation is smoother and more precise, it will simplify the process of identifying and removing spending from the budget that is not aligned with the strategic plan. Also, elected officials will have more confidence that the budget is aligned with their priorities, and will be more supportive of the integrity of the spending plan throughout the year. Best Resources:
- The City of Coral Springs, Florida, is a recipient of the Malcolm Baldrige National Quality Award, one of the few public-sector organizations to have received it. Coral Springs’ business plan is an integral part of its management model. You can learn more about Coral Springs’ approach at its quality site.
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