Budgeting Process:
Public budgeting reformers have tried to take a very simple concept and make it complicated, but it doesn't have to be that way
(from Maine Townsman, January 1995)
by Michael L. Starn, Editor

Though the following article may be somewhat dated, it is still believed to include information that may be useful to the reader.

For decades politicians, public ad administrators, business leaders, economists, educators, and concerned citizens have been trying to find the perfect governmental budgeting process. They've come up with zero-based budgeting, expenditure control budgeting, activity-based budgeting, target budgeting, program budgeting, performance-based budgeting, planning-programming-budgeting systems, and many other approaches. But, they haven't found the perfect one. Why? Because there is no one approach to budgeting that works for every federal, state or local government organization.

Budgeting is, and always has been, the single most important decision-making process in a governmental organization. It is the engine that powers the organization.

Simply defined by the Government Finance Officers Association (GFOA) as "the legal authorization for a government to raise and spend financial resources", public budgeting is much more. It is a dynamic and evolving process influenced by politics, economic conditions, public attitudes, laws, and new theories of public management. In addition to being the primary vehicle for setting fiscal and program policy, in recent times the municipal budget has become the principal means for establishing community goals and objectives and for evaluating the performance of government services.

TRADITIONAL APPROACHES TO BUDGETING

For most cities and towns in Maine, the traditional approach to a municipal budget has been incremental, line item budgeting. Incremental means that this year's budget is based on last year's budget and line item refers to the way that expenditures are shown in the budget line-by-line and item-by-item. For larger communities, the expenditure side of the budget is often broken down departmentally, and departmental budgets use the line-item format to present their requests.

While many will say it gets the job done, the incremental, line-item budget has its drawbacks. One problem is that the incremental approach presumes last year's priorities to be this year's priorities, with slight modification. Line item budgeting limits the flexibility of elected officials and administrators to deal with unforeseen expenditure or revenue variations during the year. In other words, cost shifting where you have over-budgeted in one area and under-budgeted in another is not permitted.

"Budgeting is not simply looking at last year's warrant and saying let's add five percent," says John Eldridge, finance director in Brunswick and one of the two instructors for the an MMA-sponsored budgeting workshop held last November. "You can't assume that what you had last year is right."

Ekdridge and Jim Bennett, Old Orchard Beach town manager and the other workshop instructor, agree that while historical data is an important consideration, it is not the only factor to look at when constructing a municipal budget. "The budget reflects what you think is going to happen, based on past experiences and future expectation," say Bennett.

For example, Bennett says that many municipal officials got caught in the early 1990's overestimating excise tax collections because they were looking at projected income based solely on annual data. "If they were tracking their collections more closely (on a monthly basis)," he says, "they may have picked up on the sudden change."

BUDGETING TRENDS

With all that has been written and said about public budgeting, most Maine municipal officials would think, at first glance, that the subject is too complex for this state's local governments. Despite the esoteric language and the complexity of formula-driven budgeting theories, the underlying principles of these approaches -expenditure control, performance, zero-based-are really quite rational and easy to understand. For example, isn't zero-based budgeting just the acknowledgement that last year's budget "is not a given". Shouldn't all municipal services be held to some level of performance based budgeting? And, in its simplest form, expenditure control budgeting is deciding how much you're going to spend before you spend it.

The more recent approaches to public budgeting can be put into two camps: those that focus on limits and those that focus on prioritizing expenditures.

An Era of Limits

Over the last 20 years, there has been a growth of what might be called "automatic control budgeting", in which voters and policy makers have tried to impose statutorily or constitutionally prescribed limits on state and local governments. Some of these have been tax limits, others have been spending limits. In both cases, however, the purpose has been to restrict the amount of funding available to government and thereby to reduce the size and growth of government.

Tax caps got their impetus from Proposition 13 in the State of California in the late 1970's. By restricting the amount of money that could be raised from local property taxes (1% of assessed value) and by restricting the rate of growth in assessed value, property tax revenue in California was effectively controlled. With their principal revenue source shutdown, California municipal officials had to find ways to dramatically reduce expenditures and/or to find other options for funding local government services. A subsequent proposition in California placed limits on other revenue sources which could be used to help fund municipal budgets.

In Maine, tax and spending caps have not worked. The City of Saco, in the early 1980's, came to the brink of having to declare bankruptcy because of a tax cap. Citizens repealed the cap soon thereafter and in South Portland and Rockland, later in the 80's, spending caps were tried and then done away with by the citizenry. During the 80's and 90's, several proposals to institute local tax or spending limits failed to gather enough signatures or did not win voter approval in referendum. The City of Bath and Town of Whitefield are presently the only Maine communities with voter approved tax or spending limitations.

From a policy standpoint, tax or spending limits can be self-imposed, or predetermined by elected officials or the chief administrator before departmental budgets are requested.

The Windham Town Council in the early 1990's decided they needed a new approach to budgeting - it was called expenditure control budgeting (see MAINE TOWNSMAN, October 1992). Using a formula that is based in part on the CPI (Consumer Price Index) and other indices, such as school enrollment and state aid, the revenue side of the Windham budget is determined before department heads make their requests.

Expenditure control budgeting starts with the legislative body setting explicit parameters for budget requests. This part of the budgetary process is very much top-down, rather than bottom-up as is often the case under traditional budgeting where department heads submit budget requests to the manager who then submits a request to the council or board of selectmen.

A trade-off that often accompanies this top-down approach is more flexibility in the way that funds are spent. In Windham, town councilors and the manager give department heads more flexibility and control over their budgets by eliminating line items. This budgeting approach also permits departments to carry over unspent funds into the next fiscal year without constricting that year's budget request.

Performance Measurement

In the 1940's and 1950's, performance budgeting emerged as a management-oriented system heavily focused on efficiency and relating costs to measured outputs. In the 1990's performance measuring is making a comeback. Spurred in part by public skepticism about government, difficult economic conditions, and initiatives to reinvent government, public officials have become increasingly committed to demonstrating what is being accomplished with tax dollars.

Performance measurement is government's way of determining whether it is providing a quality product at a reasonable cost. "Performance measurement may be a sophisticated, modern approach to public management, but it is rooted in common sense," said Diane Feinstein, then mayor of San Francisco, in the introduction of the book Using Performance Measurement in Local Government..

Performance measurement is a general term that covers any systematic attempt to learn how responsive a local government's services are to the needs of the community and to the community's ability to pay.

Techniques to measure the effectiveness and efficiency of services are employed to see which programs get funded and at what level. Often used in tandem with the "limitation" budgeting approaches, performance based budgeting is a triage approach to spending finite revenues based on the needs, desires and pocketbooks of the community.

Before performance measures can be integrated into the budgeting process in a meaningful way, agreement must be reached on program goals and priorities. Decisions must then be made on which measures adequately reflect whether progress is being made toward achievement of these goals. Allocating resources based on performance improves the linkage between goals and the budget.

Analogous to the philosophy of business, performance measurement is government's way of determining whether it is providing a quality product at a reasonable cost. "Performance measurement can be used to improve decision making, service performance and public accountability," said Feinstein in Using Performance Measurement in Local Government.

Instead of making "seat of the pants" budget choices, performance measurement provides local government decision makers with the appropriate data that will assist them in prioritizing municipal services. Four types of performance measures are commonly considered. input, output, outcome and efficiency.

Input measures address the amount of resources (dollars, employee-hours, materials, etc.) used in providing a particular service. Output measures describe the activities undertaken in providing a service or carrying out a program (e.g., how many storms and how many miles of road were plowed and sanded). Outcome measures are used to evaluate the quality and effectiveness of municipal programs and services (e.g., how well were the roads plowed and sanded). Efficiency measures relate inputs to units of output (e.g., what did it actually cost to plow and sand a mile of road).

From its beginning, the theory of public budgeting has recognized that shaping choices is of central importance. In 1940, political scientist V.O. Key, Jr. framed the central question of budgeting by asking, "On what basis shall it be decided to allocate X dollars to activity A instead of activity B." Performance measurement presents a rational, non-political basis for making such budgetary choices.

Standards By Which To Measure

Performance measurement of public services is not an end in itself. If local officials do not use the performance information they receive, it's not worth the cost to collect, organize and analyze the data.

Out of necessity, budgetary decisions are based on factors other than program costs and performance. Accordingly, performance measurement should not be viewed as the only tool to determine resource allocation. If performance is key to allocation decisions, however, the budgetary process can help to reinforce the use of performance measurement in management and planning functions. With all the above caveats, what do you do with performance data once it has been gathered? What do you use for comparative data?

Historical data is one source of comparison. How much did we spend last year, the year before that, five years ago? Another source of comparative data can be obtained from similarly situated communities. What are they paying to plow their roads? Additionally, you might ask yourselves, what would it cost to privatize the service? (see article in this issue on "Privatization " of municipal services). Regardless of what you do with the data, the learning process in establishing measurement and improvement efforts can get people thinking more creatively about the service they provide.

MMA's Resource Center may be a good starting place for comparative data on other communities. MMA publishes an Annual Fiscal Survey of Maine municipalities that breaks down expenditures by categories. If you're interested in this data, call the Local Government Resource Center at 1-800-452-8786.

"Maine municipalities need to do more in the area of quantifying (performance measuring) services," says Brunswick's Eldridge.

He cautions, however, about making community-to-community comparisons, which can be misleading because individual communities often account for their costs differently. "It might be an apples to oranges comparison," he says.

COMMUNICATING THE BUDGET

"A budget is a policy document and should be prepared and presented so that it facilitates public understanding, taxpayer scrutiny, and communicates important economic issues and fiscal policies," said former MMA Financial Management Services Director Robert Reny in a March, 1989 TOWNSMAN article.

A good budget, like a road map, enables users to reach their objectives in the shortest, most efficient way.

Old Orchard Beach's Jim Bennett says he tries to give the council and citizens as much information as he can about the budget. "It is incumbent upon me to have as many people have as much information as I have to make informed decisions," he says. "If they make uninformed decisions, and outcomes are different that what they thought they would be, I've failed them."

One of the points stressed by Bennett and Eldridge in their budgeting workshop is that the budget should be connected to the town meeting warrant. For example, if you have a warrant article that appropriates a specified amount for winter road maintenance, then you should have a line item in the budget that reflects this expenditure, preferably with some historical data (previous year's cost) included.

Some communities confuse town meeting goers by presenting warrant articles with "net" amounts rather than "gross" amounts. An article or budget that is "net" shows the property tax appropriation, but not the total (or actual) cost of the program. For example, the "net" cost of winter road maintenance may be $50,000 (after excise tax revenues are subtracted out), but the "gross" cost of the service may be $75,000. MMA has handouts from the Municipal Budgeting Workshop that illustrate the difference between a "gross" and "net" budgeting and how to change your town meeting warrant to reflect the actual costs of programs.

SUMMARY

Practically speaking, many Maine communities have been using a form of "limitation" budgeting (i.e., at town meeting, residents let you know how much they're willing to spend) and performance measurement (i.e., if your an elected road commissioner and you slack off on the job, then you don't get reelected) without the aid of a sophisticated, budgeting system. This is not to say, however, that Maine municipal officials have mastered the art of public budgeting and therefore have nothing to learn.

Budgeting reform in the governmental arena has taken many twists and turns over the years and many feel that theorists and public administrators have taken what is basically a very simple concept and turned it into a complicated process driven by formulas and massive data collection and analysis. However, if municipal officials are able to find their way through the budget reform maze to the underlying principles of these budgeting approaches and apply them to their unique situations, then they will have gained some useful information that should help them improve their budgeting process.