A GUIDE TO DESIGNING A LOCAL BUDGET

The budget is, arguably, the most important policy document that a local government produces. The budget decides how the community’s resources will be allocated between services like public safety, health, mobility, education, and more—all of which are needed for a thriving community.

To design a budget, let’s start with how most local governments budget: the incremental, line-item budget. “Incremental” means that last year’s budget is used as the starting point for next year’s budget, with incremental changes at the margin according to how revenues change. “Line item” means that the essential building block of the budget are line items, which are categories of inputs that go into delivering public services, such as personnel, commodities, and contractual services. These categories break down into detailed categories like salaries, fuel, etc. These categories aggregate up to divisions and departments.

The traditional budget has long been criticized for being slow to adapt to changing conditions and not doing enough to best size and shape the government addressing the problems it faces and the resources it has available. Recently, there has been pervasive decline in trust in major institutions and widespread desire for major reform of government systems. If the budget is the most important policy document that a local government produces, then it follows that the budget, if done well, can build credibility with the public. Responding to the public’s desire for reform requires rethinking traditional budgeting and the ways governments communicate and engage with the public on the budget.

However, the traditional budget also has strengths that account for its staying power:

• It is simple.
• It provides easy-to-understand accountability in the form of line-item spending controls.
• It has predictable results in terms of how much is allocated to what purposes.
• It is flexible to accommodating changing political priorities.

Even governments that have improved upon the traditional budget are still challenged. For example, a 2018 survey conducted by GFOA identified respondents who described their budget process as neither line item nor incremental and who were largely satisfied with their process. Even this group identified a long list of desired improvements to their budget process, such as higher quality involvement from public officials; more time spent on the most meaningful decisions; more focus on the long term and the big picture; and greater efficiency of the budget process itself.

The need for reforms suggests that a wise budget design must correct for the weaknesses of traditional budgeting, while providing enough benefits to offset the costs of moving away from the traditional budget. But, as our survey results showed, just moving away from a line item, incremental budget does not mean there are no more opportunities for improvement. GFOA’s Rethinking Budgeting invites you to explore four perspectives on developing a modern budget that open up new ways to budget and serve communities better. Each of these are summarized below. The details can be accessed from the main Rethinking budgeting page.

The most fundamental reason a local government budget exists is to pool the community’s resources to purchase public goods and services. Pooled resources, like a local government budget, are often bedeviled by a “collective action problem”. Put simply, a collective action problem occurs when individuals, because of immediate self-interests, fail to achieve an outcome that would make everyone better off.  To illustrate, a pooled resource often produces a zero-sum competition, where one person’s gains come from another person’s losses. Zero-sum competition characterizes much of how the traditional budget process takes place. This can be seen, for example, where one department is pitted against another in competition for resources or one neighborhood against another.

Financial Foundations for Budgeting, based on Nobel Prize winning research, shows how to solve collective action problems, which GFOA translated to local government and validated its effectiveness. It provides a different mental model for how public finance systems should operate and is, thus, at the foundation for a modern budget.

A budget officer is responsible for architecting a budget process that creates the best chance of producing savvy and wise decisions. But decision-making is messy. It is done by humans, so it comes with the myriad well-documented cognitive biases and inconsistencies in human thought. Budget officers can help government officials reduce the negative impact of bias and noise in decision processes. Helping people avoid bias and noise is called “decision architecture.” Based on Nobel Prize-winning research, the budget officer as decision architect describes four skill sets that budget officers should bring to budgeting.

A budget process is the series of steps and actions that lead to a decision on how to allocate resources. One of the essential organizing ideas of Rethinking Budgeting is that GFOA should help local government budgeteers “be chefs, not cooks.” This means that budgeteers understand:

• The underlying challenges of budgeting,
• The principles for addressing those challenges, and
• Ideas for how the principles can be applied under different circumstances.

GFOA will not provide hard-and-fast rules for how budgeting should be conducted. The process we present is not a “brand name” budget process that provides detailed instructions for every step to final budget. Rather, we describe principles that can be used to design a budget process that is a fit to local needs and addresses the fundamental reasons of why we budget. We supplement this with links to detailed examples and stories about how to put the principles into action.

Rethinking Budgeting is in competition with a local government’s current method of budgeting. That means that there must be a compelling reason to change the budget process. A Guide for Changemakers provides resources to those looking to make a change in the budget process. This guide includes the following:

The best intentions for better budgeting can crash into the realities of power politics. Power, Politics, and Budgeting: Don’t Hate the Player, Don’t Hate the Game, Change the Game shows how finance officers can ethically exercise power to redirect the energy of power politics to more constructive ends.

1. Many governments follow a traditional budget because it offers certain strengths. The guide shows how Rethinking Budgeting can offer comparable advantages.
2. One primary strategy for changing a system is to identify sources of dissatisfaction with the status quo. The guide shows how Rethinking Budgeting can address common pain points associated with budgeting.
3. The guide includes an interactive needs assessment tool to help you identify the best opportunities for change.
4. The guide addresses politics, power, and how the budget officer cannot just survive but thrive in this environment.