Financial Management Series Financial Management Series Number 9Number 9

Local Government Budgets:Local Government Budgets:Approaches & TraitsApproaches & Traits

Financial Management Series Financial Management Series Number 9Number 9

Local Government Budgets:Local Government Budgets:Approaches & TraitsApproaches & Traits

Alan ProbstAlan Probst

Local Government SpecialistLocal Government Specialist

Local Government CenterLocal Government Center

UW-ExtensionUW-Extension

What is the Purpose of a What is the Purpose of a Budget?Budget?

What is the Purpose of a What is the Purpose of a Budget?Budget?

An An accounting documentaccounting document (record & control (record & control expenditures)expenditures)

A A management documentmanagement document (determines who (determines who can spend how much)can spend how much)

Decision-making documentDecision-making document (basis for sound (basis for sound decision-making by council & staff)decision-making by council & staff)

Communications documentCommunications document (informing public (informing public of how their money is being spent)of how their money is being spent)

Budget ApproachesBudget ApproachesBudget ApproachesBudget Approaches

Line-Item BudgetsLine-Item Budgets

Program BudgetsProgram Budgets

Performance BudgetsPerformance Budgets

Zero-Based BudgetsZero-Based Budgets

Line-Item BudgetsLine-Item BudgetsLine-Item BudgetsLine-Item Budgets

Most common formatMost common format

Connects & reports information on inputs Connects & reports information on inputs used to produce government servicesused to produce government services

Emphasizes control & oversightEmphasizes control & oversight

Downplays trust, communication & flexibilityDownplays trust, communication & flexibility

Line Item Line Item Operating Operating

BudgetBudget

Line-ItemLine-ItemLine-ItemLine-ItemGENERAL FUND         FY 09/10  

100 Administration Dept 100

Description FY04 Budget FY04 Actual FY05 Budget FY05 Project FY06 Budget Comments

101 Wages & Salaries $1,463,450 $1,461,320 $1,513,880 $152,420 $1,609,210

101-1 City Manager $82,000 $82,000 $84,525 $84,525 $95,000Board directed

increase

101-2 Office Staff $46,000 $46,293 $47,000 $47,442 $49,816Increase 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 $114,816  

             

102 Benefits

Program BudgetsProgram BudgetsProgram BudgetsProgram Budgets

A Program Budget allocates money to major A Program Budget allocates money to major program areas or activities rather than to program areas or activities rather than to specific line itemsspecific line items

More centralized than other approachesMore centralized than other approaches

Focuses on program goalsFocuses on program goals

Examines all alternatives that may achieve Examines all alternatives that may achieve program goalsprogram goals

Program BudgetsProgram BudgetsProgram BudgetsProgram 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)($000’s) OncologyOncology RhinoplastyRhinoplasty CardiacCardiac TotalTotalRevenuesRevenues $40,000$40,000 $ 8,150$ 8,150 $50,000$50,000 $ 98,150$ 98,150ExpensesExpenses 37,00037,000

17,00017,000

46,00046,000100,000100,000

Profit/Profit/(Loss)(Loss)

$ 3,000$ 3,000 $(8,850)$(8,850) $ 4,000$ 4,000 $(1,850)$(1,850)

Program BudgetsProgram BudgetsProgram BudgetsProgram Budgets

Program budgets allocate money to major Program budgets allocate money to major program areas or activities rather than program areas or activities rather than specific line itemsspecific line items

A Police Department might be broken down A Police Department might be broken down as such:as such:

1.1. AdministrationAdministration

2.2. PatrolPatrol

3.3. InvestigationInvestigation

4.4. Community supportCommunity support

Instead of by line itemsInstead of by line items

Program Budget ChallengesProgram Budget ChallengesProgram Budget ChallengesProgram Budget Challenges

Goals can be difficult to formulate and Goals can be difficult to formulate and definedefine

Goals are subject to change; program Goals are subject to change; program structure must be changed in responsestructure must be changed in response

Sometimes difficult to obtain objective Sometimes difficult to obtain objective measures of benefitsmeasures of benefits

Can be difficult to determine inter-Can be difficult to determine inter-program efficiencyprogram efficiency

Performance BudgetingPerformance BudgetingPerformance BudgetingPerformance Budgeting

Under a performance budget approach, Under a performance budget approach, a program budget format is adopted to a program budget format is adopted to the existing organizational structurethe existing organizational structure

A performance budget is essentially a A performance budget is essentially a program budget with performance program budget with performance measurement methodology used to measurement methodology used to make budget decisions.make budget decisions.

Performance BudgetingPerformance Budgeting

Initiative in budget preparation lies with Initiative in budget preparation lies with performance unitperformance unit

Government activities are divided into major Government activities are divided into major functionsfunctions

Each activity must yield an identifiable Each activity must yield an identifiable outputoutput

Management, administration, and overhead Management, administration, and overhead costs are distributed among the various costs are distributed among the various activities of the performance unitactivities of the performance unit

Purposes of Performance Purposes of Performance BudgetingBudgeting

Purposes of Performance Purposes of Performance BudgetingBudgeting

Better evaluates results of program Better evaluates results of program operationsoperations

Provides decision-makers and public Provides decision-makers and public with better information on quality of with better information on quality of public servicespublic services

More popular as citizens lose More popular as citizens lose confidence in governmentconfidence in government

Zero-Based BudgetingZero-Based BudgetingZero-Based BudgetingZero-Based Budgeting

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

varying levels of effort and costsvarying levels of effort and costs

Zero-Based BudgetingZero-Based Budgeting

In theory, each department prepares at In theory, each department prepares at lest three (3) packages:lest three (3) packages:

A base-level, meeting the program’s minimum A base-level, meeting the program’s minimum requirementsrequirements

Current-level fundingCurrent-level funding

Enhanced package – to address unmet needsEnhanced package – to address unmet needs

Zero-Based BudgetingZero-Based Budgeting

Packages from all departments are then Packages from all departments are then ranked according to perceived need for ranked according to perceived need for the packagethe package

Unlike PBB, which uses more objective Unlike PBB, which uses more objective criteria, ZBB relies on subjective criteria, ZBB relies on subjective judgment of decision-makers in ranking judgment of decision-makers in ranking packagespackages

Incremental vs. Zero-Based Incremental vs. Zero-Based BudgetingBudgeting

Incremental vs. Zero-Based Incremental vs. Zero-Based BudgetingBudgeting

Incremental budgetingIncremental budgeting starts with current starts with current revenues and projects next year by revenues and projects next year by adjusting for inflation, volume, adjusting for inflation, volume, efficiency, technology, etc.efficiency, technology, etc.

Incremental vs. Zero-Based Incremental vs. Zero-Based BudgetingBudgeting

Incremental vs. Zero-Based Incremental vs. Zero-Based BudgetingBudgeting

Zero-Based Budgeting:Zero-Based Budgeting: calls for a total re-evaluation of all calls for a total re-evaluation of all

programs and activitiesprograms and activities requires that decision packages be prepared requires that decision packages be prepared

for each separable activity or level of activityfor each separable activity or level of activity Ranks the packagesRanks the packages Selects packages for adoption or rejectionSelects packages for adoption or rejection

Why the “zero” in ZBB?Why the “zero” in ZBB?Why the “zero” in ZBB?Why the “zero” in ZBB?

In theory, decision-makers conduct an In theory, decision-makers conduct an annual evaluation on each program’s annual evaluation on each program’s purpose and priority, weighing it against all purpose and priority, weighing it against all other spending possibilitiesother spending possibilities

As a result, decision-makers may decide not As a result, decision-makers may decide not to renew funding for existing program and to renew funding for existing program and shift those funds to another, possibly entirely shift those funds to another, possibly entirely new, programnew, program

In reality, this reallocation rarely occursIn reality, this reallocation rarely occurs

ReferencesReferencesReferencesReferences

““Management Policies in Local Government Finance” Fifth Management Policies in Local Government Finance” Fifth Edition, ICMA, 2004Edition, ICMA, 2004

MPA 752 “Public Budgeting and Finance” Professor Craig Maher, MPA 752 “Public Budgeting and Finance” Professor Craig Maher, University of Wisconsin-OshkoshUniversity of Wisconsin-Oshkosh

““Performance Measurement: Getting Results” Harry P. Hatry, The Performance Measurement: Getting Results” Harry P. Hatry, The Urban Institute Press, 2006Urban Institute Press, 2006