topleft
topright

Category 2 – Internal, Economic/Technical

Use links to navigate page

Budget Development Practices
Poor Task-Related Communication
Management Practices and Skills
Ineffective Management Information Systems
Lack of Innovation and Adaptability
Failure to Fund & Manage Retirement Benefits Prudently
Poor Performance
Deteriorating Infrastructure

   
Back to Long-Term Treatments by Cause of Distress Main Page

Budget Development Practices

Suboptimal budget practices can contribute to financial distress by:

  • Failing to highlight policies that are unsustainable over the long term
  • Institutionalizing spending patterns and failing to periodically re-examine the reasons behind existing expenditures
  • Failing to provide an adequate system for making cut-back decisions.


A cutback environment can severely strain traditional budgeting systems. Treatment involves reforming the budget system to introduce a longer-term perspective into budgeting, defining greater accountabilities for results for dollars spent, and using service and policy priorities to guide spending decisions.


Treatments:

  • Long-term financial planning and forecasting. This counteracts the tendency of government budgets to only consider one year at time. Long-term planning shines a spotlight on choices that may not unbalance the budget in the short term, but are unsustainable in the long term. It also promotes the development of multi-year financial strategies. If you cannot implement a full long-term financial plan, then including a long-term forecast as part of the annual budgeting process can at least provide a multi-year perspective on revenues and expenditures. Best Resources:
  • Full-cost accounting. Full-cost accounting (direct plus indirect costs) makes overheads transparent. Overhead costs are a necessary part of providing any service, so making overhead transparent reveals the true cost of providing a service, which then can lead to better financial management decisions. For example, failure to account for overhead costs may result in fee-based services being subsidized by general tax dollars. Full-cost accounting also can improve trust and communications between support departments and the operating departments they serve. For example, if overhead costs are seen as too high it might prompt a useful discussion of the level of service provided by overhead departments. Perhaps certain support services are provided at a “premium” level, when operating departments would prefer a more basic service level at a lower cost. As result of full-cost accounting, the organization should strive for the following objectives:
    • Allocating indirect costs across the funds and departments that use the services, preferably in accordance with the volume of service used.
    • Indirect costs are fully allocated to programs where some level of cost recovery is expected so that these services are not subsidized by general tax dollars beyond what is acceptable to the governing board. 
    • Look for opportunities to establish internal service funds for departments that exist primarily to provide services to internal customers.


This topic receives an excellent discussion in the context of financial recovery in “It’s All in the Questions” by Jon Johnson and Chris Fabian, which has been graciously provided by ICMA’s PM Magazine.


  • 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. 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 provide departments with incentives to maximize their own program revenues. Clearly define the assumptions driving revenue estimates so that as the conditions supporting specific revenues change, the estimates most accurately reflect those changes as well.  Best Resources:
  • Explore specialized cut-back budgeting techniques. The traditional governmental budgeting system is “incremental” – it uses last year’s budget as the basis for last year’s spending plan and concentrates analytical attention on how to divide up the incremental new revenue. However, in a time of revenue reductions, this does not offer a compelling system for making resource allocation decisions. This explains the prevalence of across-the-board cuts in incremental budgeting environments: across-the-board cuts are seen as “fair” and avoid major controversy. However, across-the-board cuts are not capable of shaping and sizing government to best meet the public policy challenges it faces or to achieve the objectives of greatest value to the public. Hence, governments in financial distress should strongly consider new budget methods that can produce compelling resource allocation decisions in both good and bad times. There are three main alternative systems to choose from:
    • Priority-driven budgeting (PDB). Priority-driven budgeting (PDB) allocates resources according to the degree to which programs will help the government achieve its goals. A priority-driven budget process does not take the existing “base budget” as a given. Rather, any existing program can be called into question if it is not contributing sufficiently to the government’s declared objectives. Read more about PDB.
    • Zero-based budgeting (ZBB). In theory, ZBB requires the managers of decision units (e.g., programs, departments, divisions) to formulate budgets at the “ground level.” 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 providing a greater level of service. These packages are then ranked by central budget authorities (e.g., governing board, mayor, city manager) and funded accordingly. Read more about ZBB.
    • Target-based budgeting (TBB). TBB is a derivative of ZBB. 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”). TBB differs significantly from ZBB in the absence of 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 by the decision unit as well as the central budget authority according to alignment with goals and objectives. Based on the rankings, some decision packages may be added to the target amount and submitted to the board as a complete proposed budget. Read more about TBB.
  • Analyze variances. At year end, variances between budgeted and actual revenues and expenditures should be analyzed and explained. 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? Are there cost control strategies that can 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, where last year’s expenditures become the basis for the next year’s spending plan.
    • Actual vs. prior year actuals. Are there any areas that are particularly volatile? Perhaps 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.
  • Exercise strong budgeting leadership. In a cutback environment, strong leadership will be needed to get the organization through hard choices. Strong leadership does not mean that departments or other stakeholders cannot contribute. Rather, it means that the leader of the budget process should: create a feasible and convincing framework for making budget decisions; set compelling goals for the budget process; provide enough structure to allow the participants to move forward though the process in a compatible direction (but not so much structure as to stifle creativity and innovation); and help the participants make their way through the process and overcome barriers along the way. 
  • Frame the budget as something to vote “for”. A cutback budget can be perceived as step backwards by stakeholders. The leader of the budgeting process should accentuate the positives to get political support for the budget. For example, a priority-driven budget focuses on doing the most important things well, instead of making across-the-board cuts and doing everything that much worse.
  • Improve budget controls. Better budget controls lead to better information for subsequent budget development cycles. For example, better information on where variances are occurring may reveal the need for a different approach to budgeting for those areas. Requiring clear explanations of how specific programs meet the organization’s goals before appropriating funding can help the organization determine how best to use its resources. Committees to review negative variances, certain types of expenditures, or hiring decisions can also create greater peer accountability amongst departments.   Best Resources:
  • Business planning. A business plan translates the governing board’s strategic plan into the staff level 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 more precise, it will be easier to identify and remove spending from the budget that is not aligned with the strategic plan. Also, elected officials with more confidence that the budget is aligned with their priorities will be more supportive of the integrity of the spending plan throughout the year. Best Resources:
    • The City of Coral Springs is a recipient of the Malcolm Baldrige National Quality Award, one of the few public-sector organizations to have received this award. Coral Springs’ business plan is an integral part of its management model. You can learn more about Coral Springs’ approach at its quality site.

Management Practices and Skills

Management practices and skills greatly impact financial condition. Management practices can compound external or internal difficulties or even create problems. For example, managers in operating departments may not know how to access financial information and incorporate it into their decision making.

Treatments involve taking steps to improve management skills or to put more capable managers in place.
Treatments:

  • Team-based management. With a team-based approach to management, there are multiple perspectives on problems, individual weaknesses can be offset by the strengths of others, and a positive sense of peer pressure helps encourage follow through on shared commitments and duties.
  • Change personnel. It is essential to clearly articulate expectations and qualifications for staff; identifying each role’s responsibilities and the skills necessary to achieve them. In some cases, a specific manager simply may not be the right person for the job. 

Lack of Innovation and Adaptability

Innovation and adaptability are essential for adjusting to changes in the financial environment. Lack of adaptive behavior hastens decline in an environment of financial distress. Governments should be conscious of developing a process that generates new ideas and sees them through to successful implementation and diffusion to the entire organization.


Treatments:

  • Make innovation a discipline. Innovation is a discipline just like strategic planning or budgeting. As such, you need to develop in your organization an innovation process and lifecycle. The cycle starts with idea generation – coming up with new ideas to improve performance or to reduce costs. After ideas are generated you need to select the best one. Once selected an idea needs to be refined and executed. Often, it is helpful to execute an idea as a pilot or demonstration project. This shows that the idea can succeed and that benefits accrue to those that try something new. Finally, the idea should be replicated and spread throughout the organization. The documents below discuss the discipline and process of innovation in more detail, as well as how to structure your organization to support innovation. Best Resources:
  • Increase your innovation capacity. Three factors appear to be crucial for enhancing the innovation capacity of local government: leadership credibility, team management, and a well-functioning governing board. Evidence indicates that local governments that practice and emphasize these factors innovate more often and more effectively. These factors reduce the risk associated with bringing up new ideas and create a more supportive environment for trying new things. Leadership skills can be learned, teamwork enhanced, and steps taken to help board members work better together and with staff. The document below describes these factors in more detail and how they support innovation capacity. Best Resources:
  • Create funding for innovation. You often have to spend money to save money. Develop methods to fund innovations that will save money. Options include:
    • Provide flexibility to managers to reallocate funds across budgets. However, have mechanisms to define and assign accountability for results for spending.
    • Create an innovation fund. An innovation fund is like a revolving loan fund where the savings from innovations repay the fund.
    • Provide savings incentives. If departments can keep part of the savings from successful innovations, innovations will be more likely.

Poor Performance

Contributed by Kristin M. Howlett and Robyn L. Raschke, PhD


Inefficiencies in operations create higher work volumes and lower productivity, often requiring more personnel to do the work. Inefficiency can also sap the public’s confidence in government – if services are perceived to be badly delivered, citizens might be unwilling to pay taxes.

There are many causes of poor performance within any organization. The key is to identify symptoms and create solutions to counteract negative implications. Poor performance may be related to individual motivation. Once these motivation drivers are understood, poor performance remedies can be developed and implemented.

 

Treatments:

  • Continuous process improvement. Just as performance plans are developed to measure employee performance, top performing organizations establish, monitor, and adjust performance metrics.One process improvement methodology that holds particular potential for local government is Lean process improvement. GFOA’s Lean whitepaper describes the benefits local governments have realized from Lean, the roles people plan in a Lean initiative, and the steps involved in a Lean process improvement event. GFOA’s consulting website has additional information on Lean, including how to get assistance with Lean for your organization.
  • Communication. Top-down and bottom-up communication is critical. Everyone wants to be treated with respect; communication from management to employees is the most visible sign of respect and contributes to positive morale. It also makes it more likely that employees will reciprocate by bringing ideas and issues to management’s attention.
  • Ownership in process change. Particularly when change is inevitable, employee contributions to the process are vital to the success of the change. Not only will the end product be better, but employees are more likely to support the transition to the new process. 
  • Employee incentive programs. Although governments cannot offer the same type of monetary incentives found in the private sector, incentive programs can be implemented to reward and acknowledge exceptional work. Simple identification and praise of particularly successful projects and innovative ideas can carry a great deal of positive reinforcement and cost the manager nothing but time and effort.
  • Regular feedback to employees. Managers should give their employees feedback on how they are doing relative to their work goals and standards at least once a month or once a quarter. Feedback can take place in an informal environment to make it less threatening.
  • Vision and strategic plan. Every organization needs a vision and strategic plan to articulate goals and objectives. These goals and objectives then guide what specific projects and investments are of the most potential value. 
  • Training. Training is key for transferring to employees the information that they need to do their jobs. This includes training on new processes and technology, orienting new employees, and developing existing employees with the skills they need to be most productive. For a consistent transfer of information, training tools should be documented. Documentation guarantees that processes will remain intact even as staff changes.
  • Periodic revaluation of roles and process. As times changes, so should business processes and the job descriptions that accompany the work. Former requirements may become outdated, resulting in the need to redesign processes and assign new skill sets to a particular position.
  • Change organizational culture. The organizational culture in a poorly performing organization likely does not emphasize results or accountability. It is necessary to articulate new values and model and reward the behaviors that exemplify the new culture.

Poor Task-Related Communication 

Contributed by James Garnett

 

Task-related communication during fiscal distress is difficult to achieve and often faulty. Failure to communicate broadly with employees shortchanges their potential contribution to solving the problems.

Miscommunication among departments and public officials leads to inefficiencies that increase costs and reduce revenues. Particularly dangerous are blocks on upward and lateral communication that might bring early warnings of revenue shortfalls or cost overruns.

Lack of communicating with external networks of collateral public agencies, professional associations, nonprofits, and other organizations limits options for sharing costs, risks, or innovations.

 

Treatments:

  • Level with employees about the nature and extent of fiscal stress. Withholding or soft-peddling bad news is typically counterproductive. Research and experience show that uncertainty is usually harder to take than certain knowledge about future unpleasant events. Employees who are not informed tend to spend too much time and effort imagining worst case scenarios and spreading rumors about them.
  • Help employees understand the implications of acting or not acting. Employees who understand the full picture and the stakes involved are more likely to support managerial actions—and are in a better position to contribute ideas and solutions.
  • Open communication among departments, central administration (including the finance officer), and staff is critical for making sure cost control is taken seriously and for cost-saving innovations to be openly discussed and take hold once initiated.
  • Supply supervisors and others with enough information so they can be credible sources. This helps supervisor and staff morale and diminishes the likelihood of destructive rumors.
  • Bring the public information officer or other communication professional into the loop so he or she can help devise strategy for communicating internally and externally about financial problems or actions. This usually requires explaining any financial complexities in basic ways that can then be conveyed to the public and other stakeholders.
  • Communicate with peer agencies or professional associations since these can be sources of cost-saving innovations or lead to direct interagency cooperation.

Ineffective Management Information Systems

Limited access to timely personnel, payroll, and budget control data and reports impedes management’s ability to make sound decisions. Modern information systems can provide this information, automate control systems, and reduce time spent on routine transaction processing.

 

Treatments:

  • IT governance. Research has shown IT governance to be essential to getting the best returns on technology investments. “IT governance” is a broad term for a system of collaborative decision making designed to link the IT strategy with the business strategy. Via IT governance, you can develop a clear system for defining decision-rights over how technologies are used and invested in, what the expected return on investment is, and define the accountabilities for getting the anticipated return on those investments. In order for the public sector to get the most out of technology investments, the finance officer and technology leader must work together to connect budget processes with an IT governance structure. This will cultivate leadership behaviors that lead to business-driven, financially savvy technology decision making. Best Resources:
  • IT needs assessment. Conduct a formal evaluation to see where the system weaknesses lie, to set forth your options for overcoming those weaknesses, and the associated costs and benefits of each option. A formal needs assessment provides the basis for decision making that can garner a wide basis of support. Begin by diagramming processes and determining the sources and efforts of retrieving the information necessary to complete daily processes. Best Resources:
  • Reporting software. If the financial system of record cannot produce the needed reports, it is sometimes possible to use a specialized reporting tool to get data out of the system. Examples of these tools include data warehouses and business intelligence systems. However, the value of these tools is limited by the quality of the data they are accessing.
  • Formal training program. Many governments find that existing technology is underutilized, sometimes severely. A formal training program has many benefits, including increased value from existing technology, uncovering and modifying ineffective processes, and improving data integration. Consider developing department experts to help mentor other employees and extend the availability of IT resources.
  • Alternative delivery models. Application service providers (ASPs) and software-as-a-service (SaaS) are two ways by which to access modern software without having to purchase the licenses and technology infrastructure, and maintain it. Sourcing the application to a third party can free up the government’s IT staff to help users get business value out of the technology, rather than being consumed by technical maintenance.

Failure to Fund and Manage Retirement Benefits Prudently

Contributed by Girard Miller

 

Some retirement plans now face financial stress because they promised too much; others have promised reasonable and competitive benefits, but their management was insufficient: they failed to fund the benefits properly and control abuses of their benefits.

In the case of OPEB plans for retiree medical benefits, the vast majority of public employers nationally have relied on pay-as-you-go financing, which worked just fine in the early years when the number of beneficiaries was very small. But as Baby Boom workers near retirement, the prospects of benefits payments doubling or tripling in the next ten years is a clear sign that the plan is unsustainable. For employers that offer a substantial retirement medical benefit, only an actuarial funded plan will be sufficient.

In the pension world, a variety of actuarial techniques have been employed to defer costs. For example, in the experience of the author the average public pension plan amortizes its unfunded liabilities over 20-25 years, and some go as far as 30 years under current accounting standards. Yet very few public workers serve a full 30-year career.

All pension and OPEB funding dilemmas ultimately come down to this problem: pay now and earn the investment returns (especially when financial markets are still depressed and prices are lower than when the economy recovers), or pay more later.

Finally, there are issues with plan management, such as pension spiking. Likewise, some jurisdictions have unreasonably high rates of disability retirements, in which safety officers exploit the tax incentives to retire on disability to avoid income taxes.

 

Treatments:

The first step for most finance officials to take is to hold a confidential and candid discussion of local retirement plan practices with the actuary. Most firms have multiple governmental clients and can provide a comparative sense of the magnitude of the problem with your plan. Likewise, you can ask the actuary to address the specific symptoms you are experiencing and offer suggestions and cost estimates.

In the end, the remedies to problems identified will require action. In some cases, the added costs of shorter amortization periods should be borne equally by employees, which will require a labor relations strategy to achieve.

To accomplish the objective of eventual full actuarial funding, it may be necessary to “ramp up” employer contributions from current levels to the full ARC. This will of course result in a higher ARC because of the contributions shortfall in the initial years, so the actuary should be asked to make a revised projection based on an incremental funding-increase schedule.

An additional policy tool to consider: dedicate a percentage (e.g., 20-25 percent) of future revenue increases and budget surpluses to the retirement trust funds in order to reduce unfunded liabilities and ultimately reduce the ARC. This way the bond rating agencies, investors, employee organizations, and service recipients will know that these prior claims will be addressed systematically when higher revenues return in the next economic up-cycle.

Deteriorating Infrastructure

Infrastructure is vital to fiscal health because it provides direct services and supports wealth creation in the community. Deteriorating infrastructure can lead to fiscal distress as maintenance needs compound, requirements for new infrastructure mount, and existing facilities become increasingly unsafe and unsound.

 

Treatments:

  • Develop a maintenance policy, strategy, and plan. Since infrastructure is vital to the community, consider involving citizens in setting the maintenance standards and developing the policies and strategies to fund those standards. You can read more about developing a strategy in the article "Public Stewardship," which is provided below. Also, consider developing a maintenance and replacement plan for less expensive assets (vehicles, computers, etc.) in order to smooth out maintenance and replacement costs from year to year. Best Resources:

 

Back to Long-Term Treatments by Cause of Distress Main Page