Expenditure Budgeting
(from Maine Townsman, October 1992)
by Jo Josephson, Assistant Editor

Expenditure Control Budgeting. Otherwise known as ECB. It's being touted by the town manager and elected officials in Windham the first municipality in Maine to adopt the system and the first in the nation to apply it to their school budget as well as their municipal budget as the way to control rising property taxes, rationally.

Like recent converts to anything, officials in Windham are enthusiastically and aggressively spreading the word through the media and speaking engagements, arguing among other things that ECB:

Takes the politics (read acrimony) out of the local budget process, especially when it comes to dealing with the school budget, and replaces it with a rational approach that calculates through the use of several indices just how much taxpayers can afford.

Reverses traditional municipal budget preparation by determining the amount of taxes to be raised at the start rather than at the end of the budgeting process.

Gives department heads more flexibility and control over their budgets than they have ever had eliminating line items and allowing them to keep what they don't spend by doing away with the "spend it or lose it" way of doing business.

Frees elected officials from dealing with minutiae of hundreds of line items to do what they were elected to do: make policy and solve problems.

Like all converts to a new system, officials in Windham are also subject to the skepticism and criticism of their colleagues in other municipalities.

Such skepticism includes the charge by one manager that what is called Expenditure Control Budgeting is just a Fancy way of doing a tax cap." Other critics charge that ECB ties the hands of municipal officials, moreover, that it pulls numbers out of the air, slavishly following a formula instead of being responsive to needs, that it pits the manager against the department heads, and last but not least that it is an inflexible ap preach to budgeting.

What is this system of budgeting that hat brought such an emotional response frorr advocates and critics?

Armed with the claims of Windham ant the criticism of the skeptics, the TOWNSMAN decided to interview Windham Councilor David McCain and Windham Town Manager Glenn Fratto, in an attempt to explain the system and answer some of the skeptics' questions and charges.

McCain spearheaded the movement to adopt the system after reading about ECB in "an alternative economics text" in l990.

Fratto says he was skeptical when McCain first came to him with the idea, but is sold on it now. He says he was skeptical because he was scared; scared because he wasn't sure what he would get. He says he is sold on the system for all of the above reasons, plus the fact that he gets more in tax revenues from the system than he would have without it.

Like all converts trying to sell a system, Fratto has an analogy he likes to use in describing what Expenditure Control Budgeting is.

"When I go into a supermarket, I check my wallet first. Then I take from the shelves only that which I can afford to pay for. I have to prioritize. I don't fill up the cart first and then check my wallet at the register. My boys would be terribly upset if I told them to put their cereal boxes back because I didn't have enough money.

It's the same with ECB. You look at your resources (tax base) first and then spend (budget) according to what you can pay for," explains Fratto.

Fratto admits it is not the way budgets are traditionally done; he further admits, albeit gleefully, that it takes most of the gamesmanship out of the process. Budgets are prepared based on known resources and not on subjective needs.

With the above summary, this article begins by looking at what propelled Windham to adopt ECB; it then looks at the formula and ends with a response to the skeptics.

The Need

If any municipality needed a new approach to budgeting, it was Windham, says Fratto. Council meetings had become shouting matches; fights between school and municipal officials had become legendary ( Windham has its own school system; it has an annual budget of about $12 million and is comprised of 2,400 students).

At one point, the town manager debated the chairman of the school committee on whether the council should have line item control over the entire school budget.

"The schools were setting budgets based on wish lists and when anything on those lists was cut, the school committee considered it a budget cut. If the schools asked for a $1 million increase and we only gave them a $800,000 they considered it a $200,000 budget cut. Supporters felt that whatever they had requested should be funded and nobody was questioning it'd says McCain.

He notes that in the late eighties, the school budget was increasing 10 percent to 12 percent a year, as the state began shifting the costs of education onto the local property tax.

In 1990, all that was about to change. I was then that Windham Councilor David McCain read about a form of municipal budgeting that was being used in a number of California municipalities. It made sense so he made a few phone calls.

One of the people he spoke with was Ted Gaebler, former manager of the city of Visalia. Gaebler had been working with and fine tuning Expenditure Control Budgeting for a number of years.

If the name Gaebler sounds familiar; it should. Gaebler has since become the author, along with David Osborne, of the widely acclaimed book which was published this past winter entitled Reinventing Government: How the Entrepeneurial Spirit is Transforming the Public Sector.

In the fall of 1930 the council decided to turn the comer on the rapidly increasing school expenditures and hold the line.

"Admittedly we pulled the number out of the air when we told the school committe, not to expect more than $200,000 in net property taxes," says McCain.

The committee ignored the mandate and came in requesting $600,000. Relations with the committee reached their nadir. Pep rallies were held at the school denouncing the council, recalls McCain. But at the 1991 town meeting, the voters backed the council's $200,000 figure.

"This was a crucial moment; we knew then that we had the backing of the town for the kind of target we had set," says McCain.

Building Consensus

While the school committee had gotten the message that the council was prepared to stand firm and that the town was ready to stand firm behind the council, there was still the problem of a lack of trust between between the two elected groups.

If the new budgeting system was going to work, something had to be done to improve the relationship between the two.

The solution was found by bringing the problem to the Effective Govrnance Project. Sponsored by the Maine Development Foundation and the Maine Municipal Association Through the fall of 1991 to the present, the project provided the two groups with a consultant who worked with them to reach consensus on the budgetary process.

In September 1991, the two groups reached agreement on a number of budgetary and budget-related issues, including the following:

Both elected bodies are hurt by criticism from the other group.

Quality education is not assured by high expenditures.

Budget preparation is most efficiently done when resources are clearly defined as early as possible

Tax rate increases should move generally at or below the rate of inflation as determined by the Consumer Price Index (CPI)

A formula to determine increases in property taxes for schools should take into account the following factors:

Increased cost of doing business.

Growth in enrollment.

Changes in state funding formula

A formula should have both a cap and a floor to keep from generating an increase above that which citizens will tolerate and to provide for catch-up in periods of plenty.

Windham's Formula

As designed by the Windham council and the school committee, the formulas that set the target property tax allocation of both the municipal and school budgets take into account the following indices to come up with what they think is an affordable tax levy: the previous year's operating budget; the current regional rate of inflation (CPI); changes in property values; changes in state aid to education; changes in school enrollment. It should be noted that the municipal budget only factors in 75 percent of the CPI while the school budget factors in 100 percent. Fratto explains that the Municipal cost "indicator" has been historically less than the CPI; that the cost of operating municipal government is less than that of operating schools. The box on the preceding page shows the basic formula, with the figures plugged in for fiscal year 1992-93.

WINDHAM'S BASIC FORMULA

Municipal Operating Budget (1992-1993):

(.75) CPI + (.5)% change in state valuation = % change

(.75) 3.1 + (.5)2.08 = E.E7% OF $4,367,952 = $147,200 increase

School Operating Budget (1992-1993):

(1.00) CPI + enrollement growth + (.5)( old state %-new state %) = %change

(1.00) 3.1 + 1.47 + (51.97-54.28)/2 = 3.37% of $10,973,292 = $369,800

According to the formula, in fiscal '93, exclusive of capital expenses, municipal government, which had an operating budget of $4,367,952 in 1991-92 is scheduled to receive $147,000 more in property taxes than the previous year, the schools are to receive $369,000 more in property taxes than the year before. As set by the council, the tax rate increased by 2.85 percent to $17.90. Tax rate increases over the previous four years had averaged about 4 percent a year. Despite the increase in the tax rate, it should be noted that the actual overall expenditures in the town for 1992-93 went down due to a rapid decline in non-property tax revenues of about $300,000.

Projected Municipal Operating Budget: 1993-94

Using the formula to predict the 1993-94 fiscal year, Fratto says he does not see any increase in property tax revenues for his municipal operating budget. In fact, using the formula as it currently exists might result in a slight decrease due to a drop in the CPI from 3.1 to 3.0 and a drop in the town's state valuation, based on preliminary reports.

Using the formula, plugging in preliminary figures, one gets a decrease of about $2,000 in property tax revenues: .75(3.0) + .5 (-4.6)= -.05% of $4,365,000 = -$2,183 (decrease).

Fratto says that under ECB's flexibility provisions, the council has the option of substituting the local assessment for the state valuation, which is two years behind the local valuation. He says the local assessment is a better indicator of current conditions. If they do chose that option, Fratto says they could see an increase of one to two percent in the change in valuation.

McCain and Fratto Respond to the Skeptics

ECB is just a fancy way of doing a tax cap.

Yes and no. It is more than just a limit on expenditures, as it provides a comprehensive approach to the departmental budgets, qiving the departments authority to raise nontax revenues over and above their budget and at the same time encouraging them to save what they have received by allowing them to carry over their savings from one year to another, explains Fratto. In the first year the system was in effect more than $119,000 was saved by department heads and carried forward.

ECB is just a form of targetting and many towns already do that.

True. But this form of targeting focuses on the tax rate and not on the bottom line or total budget, says Fratto. In fact, as noted above, total expenditures in Windham decreased this year because non-tax revenues fell sharply.

The rate of spending should be justified by need; ECB ignores need.

It's hard to define need, says Fratto. In the past, wants and wishes have been viewed as needs, which are more basic. If there is a want that is not funded by taxes, the system encourages the departments to locate alternative sources of revenues other than taxes such as grants and increases in user fees. It also encourages the setting of priorities and the saving of funds.

ECB pulls numbers out of the air and tries to rationalize them; it is just voodoo budget making.

On the contrary, with a formula, we are less apt to pull numbers out of the air, says McCain. The indices in the formula: consumer price index, state valuation, school enrollment, state aid to education are rational.

EB ties the hands of the elected officials.

You're right. You are paying administrators and department heads to manage municipal affairs. Elected officials are elected to make policy not to haggle over the best price in tires or where to buy them, says McCain.

When it comes to department heads we are giving them tremendous freedoms to manage the bottom line including the freedom to raise additional forms of revenues. For example, the recreation department has dramatically increased its in-come and expenditures by increasing its users fees. Department heads say they feel that for the first time they are being treated as adults.

ECB does not allow for flexibility.

That is not so and there are numerous examples already on the books to substantiate our statement, point out McCain and Fratto.

For example, the actual tax rate that is set is not necessarily dictated by ECB. As policy makers the council can adjust it. In fact, for this first fiscal year, under the ECB formula the tax increase under ECB would have been 3.29 percent; the council adjusted it to 2.85 percent, saying the town did not need as much of an overlay as had been planned reducing it by $40,000.

Another good example of ECB's flexibility can be seen at the departmental level. This year the public works director found a really good deal in sand and decided to go ahead and buy two year's supply and stockpile it. He will not be penalized for overspending the line item; nor will he suffer a reduction in next year's sand account.

While the council decides salary increases and capital improvement programs, department heads have ultimate control over how their operating budgets are implemented: how much they spend, how much they wish to save and carry over to the next year.

And if there is an emergency such as hurricane Bob or if federal funding should be cut off, the council respond. As policy makers the council has more time to focus on policy issues.

Emergencies aside, when it comes to new programs, say if the school department wants $50,000 to fund a new computer course and the town says it can't afford it, there is nothing preventing the school committee from making cuts elsewhere or seek-ing alternative funding sources or drawing upon its savings from previous years.

As stated in the resolution the town passed when adopting the new system, "The Expenditure Control System shall be viewed as a flexible system. As such, it should be looked at for adjustment and fine fuming each year, depending on its success as perceived by the Town Council."

How does ECB take care of the instability in school funding?

"Our objective is to tell the school department what we can afford," says McCain. "If the department gets less state aid than it did the year before, don't blame us; we shouldn't be expected to pick up the state's shortfall. What the formula tries to do is to level out the peaks and valleys from year to year," he explains.

What we are trying to do is to create stability by taking into account the changes in state aid; that is not the same as saying if there are cuts in that aid we will make them up 100 percent; that's why the formula divides the changes in state aid by two," says McCain.

"Remember, if the school department wants to raise additional monies by seeking grants or attracting more tuition paying students, it is free to do so," he adds.

Fratto notes that while Windham has used the system with its own school department, school administrative districts (SADs) can self-impose the ECB system on themselves as a way of controlling expenditures.

How does ECB take care of the times when there are insufficient revenues?

Under the adopted ECB guidelines, the town manager shall trigger a socalled "deflator" mechanism when town revenues are insufficient to handle the operating budget. The deflator causes each department to be reduced in size proportional to each department's share of the revenue deficit. Departments have the option to maintain current budget levels by using departmental reserves (savings); the town council has the option to maintain current budget levels by deferring capital improvement outlay.

According to Fratto, "ECB is a simple, straightforward, rational approach to budding budgets. If it were not for Windham's success in implementing it, I'd be a skeptic too."