Government Finance Officers Association

Fundamentals of Local Government Budgeting

October 2021, Day 2:Local Government Budgeting 101,

Why Budgeting Matters, and Different Approaches to Budgeting

What is a budget?o Policy document

o Financial plan

o Operations guide

o Communications device

o Performance management tool

o Values document

Budgeting Simplifiedo Revenues and Expenses

o Dollars and Results “Goals with price tags”

-Wildavsky – 1984

But… what is it?

o Budget as a document?

o Budget as a process?

o Budget as a system?

The Budget as a Documento Policy Guideo Financial Plano Operations Guideo Communications Document

Electronic Posted on website Aggregation of information Summary and detailed

440 pages6 page ToC

465 pages

The Budget as a ProcessDefinitiono The budget process consists of activities that encompass the

development, implementation, and evaluation of a plan for the provision of services and capital assets.

Annual Budget Process

The Budget as a Systemo A system is a set of things working

together as parts of a mechanism or an interconnecting network.

o The budget process does not live in a siloo Budgeting does not re-set every yearo The budget process never ends… So it never really begins either

o Budgeting takes on many different views based on stakeholder

The Budget System

Budget

Strategic Plan

CIP

Master Plan

Accounting / Reporting

Community Priorities• Citizen Engagement• Needs

Asset Management• Infrastructure

General FundEnterprise FundsCapital Budget

Long-Term Financial Plan• Forecasting

Tax Policy• User Fees• Intergovernmental Aid

Monitoring• Accountability• Transparency

Land Use• Growth / Economic Dev.

Reporting• Internal• External• Popular

Performance Measures

The Tragedy of the Commons

The Tragedy of the Commons

The Tragedy of the Commons

The Tragedy of the Commons

Diagram from FSG.org

A New Mental Model

Breakout Discussiono First, get to know each other a bit. Each group member

should state: Name Organization you work for Role within the organization What you find most challenging about local government budgeting

o As a group, discuss how the budget functions in your organization. It is only a document? Is it a process? Is it a system? Something else?

o When we re-group, each group will share key take-aways in a large group discussion. Suggestion: each group assign someone to take notes and report

out

Role of the Budget

First, What is the Purpose of Local Government?

“We’re in the business of solving problems…and services are our means that we have now taken for granted as our end.”

-Rick Cole, former City Manager of Santa Monica, CA (ELGL’s “Gov Love” Podcast, posted May 29, 2020, https://elgl.org/podcast-creating-a-21st-century-government-with-rick-cole/)

Too incremental Too time consuming Too complex Promotes opportunism Encourages “gaming the

numbers” Over-emphasizes

numbers, under-emphasizes performance

Erodes collaboration across an enterprise and reinforces departmental barriers

Focus is too short-term/ too long-term

Designed for controllers Based on unsupported

assumptions Focuses on targets

instead of customers

What’s “wrong” with budgeting?

Alignment of Budget to Community Priorities

Long Term Plan

Budget$

Vision / Goals

Results

Programs / Services

Community Conditions and

Priorities

SMART Goals• Specific• Measurable• Achievable• Relevant• Time Bound

Performance Metrics

Service Levels

Policies / Strategies

Outcomes

More than numbers…

o Planning is articulating a desired future state for where the organization wants to be in the future.

o A budget is a definitive allocation of a local government’s limited resources.

o Monitoring is making sure that the commitments made during planning and budgeting are lived up to and to maintain an understanding of the environment.

Who is the budget for?o Employees of Your Organization

(department heads, program staff, etc.)o Finance / Budget Staffo Executives / Elected Officials o Publico Others?

Why Budget?o Limited resources and unlimited

possibilities Need to make decisions and prioritize

o Legal and contractual requirementso Goal setting and commitment of

governing body o Develop a plano Communicate to stakeholderso Identify weaknesses and work to correct

How do we make budget decisions?o Datao Theoryo Huncho Politicso Consensuso “Loudest”o Avoidance of confrontationo Self-interesto Public Interest

Budgeting within the Financial Foundations Framework

Breakout Discussiono You will have 10 minutes for this break out

discussion. Questions for discussion: How well does your budget reflect community priorities?

Does your local government think about what problems it is trying to solve as part of its budget process? What role, if any, does your organization’s budget play in

identifying community concerns or problems and developing solutions? What pillar could you strengthen to improve how well-

aligned your planning and budgeting processes are?o Discuss as a group and share key take-aways

when we re-group.

How do we evaluate budgets?

Deeper Dive on Equityo Equity Are we delivering services to those who need it

the most? Is provision of services fair?

Article in February 2021 Government Finance Review: “The Basics of Equity in Budgeting” https://www.gfoa.org/materi

als/gfr-equity-in-budgeting-2-21

Equality vs. Equity

Why the new focus on equity?o U.S. has the highest level of income

inequality among the top 7 largest industrialized democracies

o “American Dream” not attainable for many families

o Zip code at birth more indicative of adult health outcomes than other individual attributes For more info: https://time.com/5608268/zip-

code-health/

Practical Concernso Tension between equality and equity is

related to fairnesso Without a perception of fairness, any

decision-making system is likely to failo As an organizing principle for budgeting,

equality provides a simple and straightforward definition of fairness: everyone is treated the same

o Equity is more nuanced and comes practical concerns about measurement and allocation of resources

Equity in Opportunity vs. Outcomeso Is equity intended to “level the playing field” or

“even the scoreboard?” o Type and scale of government intervention would

differ, depending on the government’s goalo Changing the scoreboard will lead to hard

questions about fairness

Applying Equity in Budgeting

Systematic Approach

Program Inventoryo Can enhance deliberations on how to apply equity to

budgeting o Can be developed in a short period of time (weeks)o Expressed local government activities in units (programs)

that are directly relevant to how citizens experience public services

o Instead of focusing the budget on a department like public works, a program inventory identifies a program or service that the department provides, such as removing snow

o Allows a local government to ask how a proposed expenditure expands opportunity and access to needed government services

Questions & Conversation Starterso As part of your planning process, have you

identified goals that clearly describe why your local government exists? Have you described how your budget enhances, maintains, and supports the quality of life of the community?

o As part of your planning process, have you established equity as an important consideration in how the goals are achieved?

o Have you developed a program inventory to give you better insight into what your government does now and what it might do differently in the future?

o When cutting back the budget, are you considering how those cuts could worsen inequalities?

Common Approaches for Budget Development

o Traditional, or line-item budgetingo Target (Envelope) budgetingo Program budgetingo Zero-Base Budgetingo Priority-Based Budgeting

Line-item Budgetingo Widely usedo Historical basis o Control oriented – Where did the money

go? – fund/function levelo Reports information on inputs used in the

production of government serviceso Reports by organizational unit

Target Budgetingo Top administrators set limits on the

budgets that agencies may requesto Driven by revenueso Focus on resources available – e.g.

Executive/Council determines total spending before budget requests are submitted

o Only $X per “envelope” / spending category

o Changes focus from department to programo Program: organized set of related activities

directed towards achieving a common purpose or goal that an agency or department undertakes to carry out its responsibilities

o Budget decisions made at greater level of detail

Program Budgeting

Inputs Activities Outputs

Programs

Zero-Base Budgetingo Start at $0 o Justify programs annuallyo Operations divided into decision units;

aggregate into decision packageso Ranks programs (decision packages)

which tie into goals of the governing bodyo Identifies programs for elimination and/or

modificationo Asks, “Can we justify what we are doing?”

Performance budgeting includes discussion on results

o Approaches resource allocation priorities from a citizen (customer) perspective

o Focuses the process on how best to spend the revenue (on what) we have rather than just on what to cut

o Much greater transparency in what was funded and what wasn’t

Inputs Activities Outputs Results

Programs

$$

Performance

Priority-Based Budgetingo Cleano Greeno Safeo Thrive

Supporting GoalsOrganization Fiscal

Priority-Based Budgetingo https://www.gfoa.org/school-budgetingo https://www.gfoa.org/materials/anatomy-

of-a-priority-driven-budget-process

Case Study: Duluth, MN

https://www.gfoa.org/materials/duluth-gfr0421

Most Expenditures are People-Related

Structural Imbalance

Structural Imbalance

Closing the Gapo For many years, Duluth had a status quo, line-

item budget with no new initiatives and no additional staff

o When the city had a deficit, it would hold positions vacant, ask for volunteer cuts, or make cuts across the board

o 2018 budget required $1.7 million in cuts in the general fund

o City made across-the-board cuts and most of the departments had to come up with reductions

But what about the plan?

Implementing Priority-based Budgeting

A closer look at the process…o Strong support from executive management

was very importanto Mayor of Duluth made it clear that PBB was the

direction the city was going ino She understood the process was going to take

time and effort, but that it needed to happeno The city’s chief administrative officer and

finance director joined the mayor in supporting the effort

Changing how decisions are made

Alignment with City Priorities

Changes and Results

o City used PBB for its 2020 budgeto Led to several partnerships AmeriCorps Duluth Library Foundation Housing and Redevelopment Authority

o PBB help make decisions in response to COVID-19

o City regularly introduces new initiativeso City is more agile and resources more

aligned to priorities

Zoom Poll: How would you describe your current budget process?

o Traditional/line-itemo Targeto Program-basedo Zero baseo Priority-basedo I’m not sure.o Other (enter in chat)

Group Discussion

o Do you think local governments should move away from traditional line-item budgeting? Why or why not?

o What are some barriers facing local governments that would like to move away from this type of budgeting?

o Discuss in breakout session and share your main take-aways when we re-group.