Financial Management Series Number 9 Local Government Budgets: Approaches & Traits Alan Probst Local Government Specialist Local Government Center UW-Extension

What is the Purpose of a Budget? An accounting document (record & control expenditures) An accounting document (record & control expenditures) A management document (determines who can spend how much) A management document (determines who can spend how much) Decision-making document (basis for sound decision-making by council & staff) Decision-making document (basis for sound decision-making by council & staff) Communications document (informing public of how their money is being spent) Communications document (informing public of how their money is being spent)

Budget Approaches Line-Item Budgets Line-Item Budgets Program Budgets Program Budgets Performance Budgets Performance Budgets Zero-Based Budgets Zero-Based Budgets

Line-Item Budgets Most common format Most common format Connects & reports information on inputs used to produce government services Connects & reports information on inputs used to produce government services Emphasizes control & oversight Emphasizes control & oversight Downplays trust, communication & flexibility Downplays trust, communication & flexibility

Line Item Operating Budget

Line-ItemLine-Item GENERAL FUND FY 09/ AdministrationDept 100 DescriptionFY04 BudgetFY04 ActualFY05 BudgetFY05 ProjectFY06 BudgetComments 101 Wages & Salaries$1,463,450$1,461,320$1,513,880$152,420$1,609, City Manager$82,000 $84,525 $95,000 Board directed increase Office Staff$46,000$46,293$47,000$47,442$49,816 Increase per labor contract Secretary$12.75 per hour $26,520 Insurance clerk$11.20 per hour $23,296 Total $49,816 Total$108,000$108,293$111,525$111,967$114, Benefits

Program Budgets A Program Budget allocates money to major program areas or activities rather than to specific line items A Program Budget allocates money to major program areas or activities rather than to specific line items More centralized than other approaches More centralized than other approaches Focuses on program goals Focuses on program goals Examines all alternatives that may achieve program goals Examines all alternatives that may achieve program goals

Program Budgets Program budgets include both revenue and expenses for the major activities of an organization. Helps managers focus on sources of profits and losses of programs that could be expanded or discontinued. ($000’s)OncologyRhinoplastyCardiacTotal Revenues$40,000 $ 8,150 $ 8,150$50,000 $ 98,150 Expenses 37,000 37,000 17,000 17,000 46,000 46,000100,000 Profit/(Loss) $ 3,000 $(8,850) $ 4,000 $(1,850)

Program Budgets Program budgets allocate money to major program areas or activities rather than specific line items Program budgets allocate money to major program areas or activities rather than specific line items A Police Department might be broken down as such: A Police Department might be broken down as such: 1. Administration 2. Patrol 3. Investigation 4. Community support Instead of by line items

Program Budget Challenges Goals can be difficult to formulate and define Goals can be difficult to formulate and define Goals are subject to change; program structure must be changed in response Goals are subject to change; program structure must be changed in response Sometimes difficult to obtain objective measures of benefits Sometimes difficult to obtain objective measures of benefits Can be difficult to determine inter- program efficiency Can be difficult to determine inter- program efficiency

Performance Budgeting Under a performance budget approach, a program budget format is adopted to the existing organizational structure Under a performance budget approach, a program budget format is adopted to the existing organizational structure A performance budget is essentially a program budget with performance measurement methodology used to make budget decisions. A performance budget is essentially a program budget with performance measurement methodology used to make budget decisions.

Performance Budgeting Initiative in budget preparation lies with performance unit Initiative in budget preparation lies with performance unit Government activities are divided into major functions Government activities are divided into major functions Each activity must yield an identifiable output Each activity must yield an identifiable output Management, administration, and overhead costs are distributed among the various activities of the performance unit Management, administration, and overhead costs are distributed among the various activities of the performance unit

Purposes of Performance Budgeting Better evaluates results of program operations Better evaluates results of program operations Provides decision-makers and public with better information on quality of public services Provides decision-makers and public with better information on quality of public services More popular as citizens lose confidence in government More popular as citizens lose confidence in government

Zero-Based Budgeting Zero-Based Budgeting (ZBB) organizes information into decision packages, i.e. incremental spending levels that reflect varying levels of effort and costs

Zero-Based Budgeting In theory, each department prepares at lest three (3) packages: A base-level, meeting the program’s minimum requirements A base-level, meeting the program’s minimum requirements Current-level funding Current-level funding Enhanced package – to address unmet needs Enhanced package – to address unmet needs

Zero-Based Budgeting Packages from all departments are then ranked according to perceived need for the package Packages from all departments are then ranked according to perceived need for the package Unlike PBB, which uses more objective criteria, ZBB relies on subjective judgment of decision-makers in ranking packages Unlike PBB, which uses more objective criteria, ZBB relies on subjective judgment of decision-makers in ranking packages

Incremental vs. Zero-Based Budgeting Incremental budgeting starts with current revenues and projects next year by adjusting for inflation, volume, efficiency, technology, etc.

Incremental vs. Zero-Based Budgeting Zero-Based Budgeting: calls for a total re-evaluation of all programs and activities calls for a total re-evaluation of all programs and activities requires that decision packages be prepared for each separable activity or level of activity requires that decision packages be prepared for each separable activity or level of activity Ranks the packages Ranks the packages Selects packages for adoption or rejection Selects packages for adoption or rejection

Why the “zero” in ZBB? In theory, decision-makers conduct an annual evaluation on each program’s purpose and priority, weighing it against all other spending possibilities In theory, decision-makers conduct an annual evaluation on each program’s purpose and priority, weighing it against all other spending possibilities As a result, decision-makers may decide not to renew funding for existing program and shift those funds to another, possibly entirely new, program As a result, decision-makers may decide not to renew funding for existing program and shift those funds to another, possibly entirely new, program In reality, this reallocation rarely occurs In reality, this reallocation rarely occurs

ReferencesReferences “Management Policies in Local Government Finance” Fifth Edition, ICMA, 2004 MPA 752 “Public Budgeting and Finance” Professor Craig Maher, University of Wisconsin-Oshkosh “Performance Measurement: Getting Results” Harry P. Hatry, The Urban Institute Press, 2006