BUDGET STRATEGY: GETTING THE DEAL DONE
With a more sophisticated understanding of budget-making processes, public managers can answer a variety of questions and management concerns:
- How is “managing costs” different from “managing a budget”?
- What’s the best way – financially and politically – to respond to a potential budget cut? To respond to a potential budget increase or expansion?
- How can we structure our budget process to minimize conflict and maximize employee engagement?
- How does the budget timeline, namely when new information is introduced to budget decision-makers, affect how the budget is made?
- What are budget decision-makers key concerns throughout the budget process? How do loss-aversion, incrementalism, and parochialism affect budget-making?
- How does the format and presentation of a budget document affect how staff, clients, and other stakeholders perceive it?
- Why do government’s actual budget processes regularly deviate from their statutory or legal budget processes?
- What are the most and least effective ways to engage citizens and other stakeholders in the budget-making process?
In the late 1990s several dozen people died in major house fires throughout the City of Seattle. Critics blamed the Seattle Fire Department for its slow and insufficient response to those fires. The Fire Chief accepted that criticism, and urged the City’s leaders to invest in a significant upgrade to the Fire Department’s facilities, equipment, and training. Then-Mayor Greg Nickels proposed a new, ten year $197 million property tax levy to pay for that upgrade, and voters approved that levy in 2003. The centerpiece of that levy was a plan to rebuild or refurbish 33 fire stations.
In 2015 the City announced it had spent $306 million to date on those fire station projects. Of the 33 projects included in the plan, 32 had exceeded their original budgets. Many had cost twice their original estimate. And the program is not yet complete. The City expects to spend at least $50 million more from other resources to complete those projects over the next five years.
How did this happen? How can a major city program staffed with many sophisticated budget and finance staff over-run its budget by more than 50%?
The problem is best captured by the late, great Yogi Berra’s adage that “Predictions are hard, especially about the future.” Costs of basic materials and labor change all the time, so it’s difficult to forecast those costs seven to ten years into the future. And indeed, basic construction costs increased by around one-third from early 2005 until late 2007. Moreover, during the ten years of the program, professional standards for fire fighters changed. Under the new standards, fire stations must now have better training and fitness facilities, better information technology, and other upgrades that added costs to the projects.
To others, the problem is politics. According to some accounts, Mayor Nickels’ staff estimated the fire station program would cost around $300 million. The Mayor, however, did not believe voters would approve that large a tax increase. So instead, he proposed the highest possible levy he believed would pass, and he assumed the fire stations could be built at lower costs or that additional money for the program would come from future city budgets. Whether you believe the problem is forecasting, politics, or something else, it’s clear that the legacy of the fire station levy is two-fold: better fire protection and, presumably, closer scrutiny of future long-term capital projects.
This story illustrates the central point of this chapter: How we make a budget is just as important as the revenues and spending proposed within it. Consider, for instance, how changes to the City’s budget process might have produced a different outcome for the fire station levy:
- If the program had not required voter approval, Mayor Nickels might have proposed a much larger levy that better reflected the full cost of the program.
- At the same time, if the City had paid for the full cost of fire stations out of general fund resources that did not require voter approval, then those projects might have crowded out the Mayor’s other high-priority projects in areas like economic development and affordable housing.
- If the City Council had better access to more sophisticated cost estimates earlier on in the approval process for the new levy, they might have supported a higher requested amount, or been willing to spend additional city resources.
- If the City Council members were elected by districts (as they are today) rather than at-large (as they were then), then specific members would have had a stronger incentive to monitor the costs and timing of fire station projects within their districts. That might have produced more substantial changes to the program at both the planning and implementation stages.
- If the City’s capital budgeting process had more stringent accountability features, then the mayor might have reduced the budget for projects scheduled later in the program once it was clear that the first few projects had run over budget.
After reading this chapter, you should:
- Recognize the key components of a public organization’s budget timeline/calendar and formal/legal budget process.
- Know the typical sources of conflict and compromise in the budgeting process.
- Recognize the many different ways that we define “budget balance” and implications of those various definitions.
- Recognize that budgets ensure fiscal accountability, but do not guarantee financial solvency
- Know the basic strategies managers use to expand their budget authority or respond to potential cuts.
- Acknowledge the effectiveness of “doing nothing” as a budget-cutting strategy.
- Recognize when and why an organization’s budget for a service might be quite different from what that service costs.
The Budget Process
Public managers can’t control many of the factors that affect their budgets. Managers in government can’t control the broader economy. Non-profit managers can’t do much to affect the financial health of the foundations that grant them money or individuals who support them through donations. Managers across the public sector can do little to affect rising costs for employee health care, new technology, wages and salaries, and a variety of other factors that drive growth in expenses. The best we can do is understand these trends, forecast them to the best of our ability, and help policymakers understand the trade-offs these trends put in play.
But public managers can control how they make their budgets, also known as the budget process. In fact, process is perhaps the only part of budgeting that public managers can control. In particular, you alone can answer many of the key questions surrounding each of the three main budget process concerns:
- Who proposes the budget? Do you develop and propose your budget on your own? When developing your initial assumptions do you solicit input from program managers or other subordinates, your board/council or other policy leaders, outside funders, or other key stakeholders? Do you ask department heads or other subordinates to develop and submit their own budgets?
- What information is introduced into the budget process, and when? Do you share the key budget assumptions with program managers, line staff, and other stakeholders? Do you connect budgeted spending with key performance targets? If so, do you make those targets available to other stakeholders? If your budget calls for cuts, do you share when and how those cuts will happen? Do you explain why you chose the cuts you chose? Do you share that information with the entire organization at once, or through meetings with individual program managers/department heads/etc.?
- Who decides on final budgeted revenues and spending? Do you afford program managers/department heads/etc. the latitude to propose their own final budget? Does your council/board approve the budget in one action, or in stages? If you have the authority to make budget amendments or re-appropriations? Do you use it, and when? Does your budget include both operations and capital projects, or just operations?
Operating vs. Capital Budgeting
Most state and local government budgets include both an operating budget, or a budget for recurring spending items, and a capital budget for revenues and spending related to long-term assets like buildings, equipment, and infrastructure. Most day-to-day operations of core programs are covered in the operating budget. The capital budget is often part of a three to ten year capital improvement plan (CIP) that identifies long-term capital spending needs. In a well-designed budget process, the operating budget includes spending related to debt service, maintenance, and other near-term parts of the capital budget. Capital budgeting is challenging because it’s less visible, but incredibly expensive. Consider, for instance, that 70% of infrastructure assets are underground, but that it costs $140,000/mile/year to maintain roads
For this and many other reasons it’s important to understand some of the main features of public organizations’ budget processes. This discussion is focused on governments’ budget processes, mostly because those processes are most comparable and are often prescribed by state or federal law. That said, many of the basic features of those processes can also apply to non-profits. Moreover, it’s important for non-profit managers to understand how government budgets are made, given the centrality of government funding to many non-profit budgets.
Basic Budget Timeline
The budget process in public sector organizations share some common characteristics. Most follow these same basic steps:
1. Strategic and Department-Level Planning: This process often begins five to six months prior to the start of the next fiscal year. Program directors, together with department heads and agency directors will need to develop goals and objectives. Ideally, these are connected to the organization’s broader strategic plan. At the same time the executive (governor, mayor, city manager, county administrator, chief executive officer, executive director etc) will transmit his or her budget priorities, together with instructions and assumptions, to agency directors and program managers. They’ll use budget instructions and assumptions to prepare their budget based on executive priorities and on their own spending needs.
2. Revenue Forecasting: In most instances, revenue forecasting is an ongoing process that starts two to six months prior to the fiscal year, and revised throughout the budget execution phase of the cycle. Revenue officials (treasurer, chief financial officer, finance director, development officer etc) will track economic trends and project revenues for the fiscal year. The final revenue forecast is usually the basis for budgeted revenues. Most states and large local governments have a consensus revenue forecast group comprising executive and legislative staff. Others hire consulting firms that prepare, present, and revise multi-year revenue forecasts.
3. Executive Preparation: Once budgets are submitted to the executive office, budget staff will review departmental and program budget requests and use these budget to prepare the proposed budget. That’s not to say that departmental and program budget requests are adopted as is. In fact, department heads and program directors are often asked to present and defend their budgets, especially if budgets are not consistent with the executive’s priorities or exceed budgeted allocations.
4. Legislative Review and Adoption: The legislative review process, which often integrates public hearings, begins one to two months prior to the start of the fiscal year. Legislators will review the executive’s proposed budget, question department and agency heads about their spending plans, and recommend changes that would be included in the final appropriations bill or approved budget. A vast majority of legislative bodies in government will hold public hearings. For states, hearings are part of the regular budget legislative session. For local governments, budget hearings are typically stand-alone public meetings. For non-profits, these are often closed meetings in which the executive director, or the chair of the finance committee, presents the budget to the board of directors. Budgets are often adopted two to three weeks prior to the start of the fiscal year. Once legislators pass a budget, the governor will sign it, or use the line-item veto to change parts of the legislators’ budget and have those changes approved with only a majority vote of the legislature. For city and county governments with a stand-alone mayor or executive, the approval is much like the state. In cases where the executive is appointed, the budget is passed once it is approved.
6. Implementation: Once the budget is approved, department heads and program managers will implement the amended/approved budget over the next twelve months. A majority of organizations anticipate changes in forecasted revenues and budgeted spending. They’ll plan for mid-year adjustments, some of which may require formal changes to the adopted budget. The central budget office will closely monitor the execution processes and adjust next year’s budget instructions accordingly.
7. Audit and Evaluation: This stage starts at the end of the fiscal year and can take many months depending on the size of the organization, complexity of the jurisdiction’s chart of accounts, size and professional skills of budget staff and treasury officers, to name a few. Virtually every organization has to “close its books” and prepare financial statements ahead of a financial audit. They will also engage on evaluation processes on program effectiveness, especially if these were not integrated in the execution phase. The Governmental Accountability Office (GAO) is the audit and evaluation arm of the federal government. It’s tasked with “auditing agency operations to determine whether federal funds are being spent efficiently and effectively” and “reporting on how well government programs and policies are meeting their objectives” to name a few.
Forecasting has increasingly become an important fiscal planning tool. As the name suggests, to forecast is to “predict or estimate of future events.” This is often challenging in volatile economic environments. Finance officers will forecast revenues and incorporate estimates in the proposed and approved budget. For a majority of governments, revenue projections are multi-year forecasts for each unique revenue stream. The proposed or approved budget is then used to create cash flow forecasts – i.e. projections of cash inflows and cash outflows. However, unlike revenue forecasts that are multi-year projections, cash flow forecasts are on a monthly or quarterly basis. Cash flow forecasting is critical, particularly when cash flows are lumpy. For example, cash flows from sales taxes or user fees are monthly, but cash flows from property tax are on a semi-annual basis. Similarly, nonprofits will receive sizeable cash donations year end or following a campaign or special event. Moreover, grants and contracts are frequently on a reimbursement basis. Mangers therefore need to plan when and to what extent they’ll draw on existing cash reserves, liquidate investments, tap their line of credit, or issue short-term notes. Conversely, they’ll use the cash flow forecast to plan how they’ll restore reserves, invest in safe money-market instruments, or payoff short-term debt.
The Federal Government “Budget Process”
The federal government’s budget process is really three processes in one. The president develops and proposes the executive budget, also known as the budget request. In Congress, the House Budget committee and the Senate budget committee pass a budget resolution that identifies the main spending policies and targets for the Congressional side of the budget. The budget resolution allocates budget authority, or the power to incur spending obligations, and budget outlays, or the amount of cash that will flow from the Treasury to a federal agency. Most budget authority must be re-authorized each year, even though many programs and services call for budget outlays that will span multiple years. It’s not uncommon for a project to receive budget authority but not receive adequate budget outlays
The third part of the process is that the House Ways and Means committee and the Senate appropriations committee pass a series of appropriations bills that allow the rest of the government to spend money. Once the appropriations bills are passed, usually following a lengthy conference committee process, and the President signs them, those bills become the federal budget.
The basic timeline for the federal budget process was outlined in the Congressional Budget Act of 1974. That process is as follows, with the goal of passing the new budget prior to the end of the federal fiscal year on September 30:
- November/December (shortly after passage of the current fiscal year’s budget): President’s Office of Management and Budget works with executive agencies to develop their budget requests for the coming fiscal year. Executive agencies includes all the cabinet-level agencies like the Departments of State, Treasury, Justice, Education, etc., as well as the federal judiciary, independent regulatory agencies, and several other parts of the federal government.
- February: President submits the budget request, usually concurrent with the State of the Union address. House and Senate Budget committees, and House and Senate appropriation committees, working through their subcommittees, hold hearings and develop appropriation bills that provide funds for agency operations.
- March/April: Budget committees prepare a budget resolution. This resolution is an act of Congress, therefore does not require the President’s signature. Because the budget resolution does not go to the President, it cannot enact spending or tax law. Instead, it sets targets for other congressional committees than can propose legislation directly providing or changing spending and taxes.
- April/May: House-Senate conference committee negotiates the final budget resolution. Congress adopts that resolution.
- May/June: House and Senate appropriations committees make their 302(b) allocations. These allocations establish the spending cap for each of the appropriations subcommittees
- June/July: House and Senate committees prepare reconciliation bills. These are bills that implement changes in authorizing legislation, or the laws that determine spending on entitlement programs, required by the budget resolution. Most resolution measures are related to entitlement spending like Medicare or to changes in tax law, namely tax cuts. Meanwhile, the appropriations committees debate and prepare appropriations bills.
- July/August: House and Senate pass their appropriations and reconciliation bills.
- September: Conference committees resolve differences in the final appropriations and reconciliation bills. President signs those bills.
- October 1: Fiscal year begins
The Congressional Budget Act of 1974 established the formal rules of the federal budgeting game. However, in the last few decades, the formal budgeting process explains less and less of how the federal government actually spends money. Consider the following:
- If the appropriations bills are not signed into law by Oct. 1 Congress must pass a continuing resolution. This is a temporary measure that extends the existing appropriations bills for a short time, usually 30 to 60 days. For 16 of the past 20 years, Congress has passed at least one continuing resolution. In some years, the government operated on continuing resolutions for most of the next fiscal year.
- For most of the past 20 years Congress has not passed a budget resolution. Without a resolution, the House and Senate usually pass different substitute versions of the budget targets that would otherwise appear in the budget resolution. Those substitute or deeming authorization bills are advisory, rather than binding on the appropriations committees.
- At any point during the fiscal year Congress can impose a rescission that cancels existing budget authority. In fact, the threat of rescission, and in some cases the actual use of it, has become a way to enforce de facto budget priorities that were never written into the budget resolution or appropriations bills. The best recent example is Congress’ persistent attempts to strip funding for the Affordable Care Act (ACA, more commonly referred to as “Obamacare”).
- In 2011 Congress passed the Budget Control Act (BCA). This law established that unless Congress can reduce the annual budget deficit by a predetermined target, then automatic cuts in discretionary and selected entitlement – known broadly as the sequester – will take effect. Unless amended, BCA extends the sequester through 2021. Neither the Budget Act, nor any other piece of federal budget legislation makes mention of anything like the sequester. BCA was the latest of many statutory budget caps designed to automatically limit federal government spending. Those caps are not part of the existing budget process framework laid out in the Congressional Budget Act.
- Many of the federal government’s most expensive activities are now paid for outside of the budget process. The best recent example is the wars in Iraq and Afghanistan. By some estimates, those engagement have cost $1-3 trillion, or somewhere between $2,000 and $10,000 for every US taxpayer. Congress appropriated around $50 billion for “The Surge” of US troops into Iraq as part of the FY2006 Defense Department Appropriations bill. But otherwise, the vast majority of the funding for that war was allocated through supplemental appropriations and budget amendments. Supplemental appropriations are an appropriations bill that adds to an existing appropriation. They are designed to provide resources for unexpected emergencies, such as disaster relief after a hurricane or earthquake. Budget amendments are changes to budget outlays to that same effect. Most of these supplemental/emergency appropriations were financed with debt.
- Since roughly 1990, Congress has used budget reconciliation to pass several major pieces of legislation, including the “Bush tax cuts,” the Medicare prescription drug benefit (“Part D”), and the Affordable Care Act. Reconciliation is a powerful tool because by Senate rules, reconciliation bills are not subject to filibuster. A filibuster is when an individual Senator kills a proposed bill by “talking it to death,” taking advantage of Senate rules that allow for unlimited debate. To end a filibuster, the Senate must invoke cloture with a two-thirds majority vote of all Senators. Given the highly partisan character of the Senate throughout the past few decades, the threat of a filibuster is always present, which imposes a de facto two-thirds majority to approve virtually every piece of legislation proposed in the Senate.
State and Local Budget Process
At the state and local level much of this same basic process applies. Substitute the governor or mayor for the president, and substitute the state legislature or city council for Congress. The same basic tensions among near-term spending needs, appropriations, and budget authority apply.
A vast majority of states prepare and present an annual budget. Washington State is one of a few states that prepares a biennial budget with an annual session. In other words, the states prepares and presents a budget for two years at a time and adjusts that budget at the end of the first year. Many cities, including Seattle, follow a similar model. In concept, biennial budgeting facilitates more effective long-term planning. In practice, revenue and spending estimates are often adjusted, sometimes substantially, after the end of the first year.
In January 2015 the WA legislature debated and ultimately passed a budget for the 2015-2017 biennium (i.e. two-year period). The basic steps to arrive at that budget were as follows:
- June-September 2014: State agencies prepared and submitted budget requests to the Governor. Much of that preparation process is done by the Governor’s Office of Financial Management (OFM). OFM is the state’s analog to the federal OMB, and this process is akin to how OMB gathers budget requests from all the executive agencies.
- December 2014: Governor Inslee proposed a budget to the state legislature immediately before the start of the 2015 legislative session.
- January-March 2015: Legislature debated and prepared its own legislative budget. Specific committees in both the House and Senate have specific responsibilities to prepare parts of the state legislative budget, including: Appropriations, Capital, Finance, and Transportation. Unlike the federal budget, the state budgeting process does not call for separate authorizing and appropriations processes. Legislative budget-writers include both authorizing and appropriations language in the same legislation.
- February 2015: The WA State Economic and Revenue Forecast Council met and determined the final revenue cap for the coming biennium. This is a key part of the budget debate. If the Council increases its expected revenues from its previous forecast, then state budget writers are able to work within a higher spending cap, and vice versa.
- March-April 2015: Legislature debated its legislative budget. Conference committees worked to resolve large differences between the House and Senate versions. A particularly contentious part of this debate was how to fund a $2 billion classroom size reduction measure that voters passed in 2014, an additional $1 billion in court-mandated spending on public education, and a multi-billion statewide transportation funding package. The Democrat-controlled House of Representatives proposed funding for many of these initiatives through a new statewide capital gains tax and an increase in gasoline taxes. The Republican-led Senate proposed diverting money from taxes on newly-legalized marijuana, in addition to cuts and re-appropriations.
- April 26, 2015: The regular 105 day legislative session ended without a passed budget bill.
- June 2015: The Economic and Revenue Forecast Council released its revised revenue estimates, which called for an additional 3-5\% growth in revenue collections. If the budget process is behind schedule, as was the case that year, the Forecast Council’s revision can impact the final budget bill.
- June 1, 2015: Governor Inslee called the legislature back for a 30 day special legislative session to debate and pass a budget.
- June 15, 2015: The special session expired with no budget
- June 17, 2015: Governor Inslee called a second special legislative session.
- June 30, 2015: The second special legislative session expired without a budget; the legislature passed and Governor Inslee signed a temporary spending measure to keep government from shutting down.
- July 1, 2015: Governor Inslee called a third special legislative session.
- July 9, 2015: The legislature passed a budget.
- July 10, 2015: Governor Inslee signed a $39 billion biennial budget. This concluded the longest legislative session in state history.
- July 2015: New budget took effect.
- January-June 2016: Legislature considered and passed a supplemental budget to adjust the biennial budget for the remainder of the biennium. This process is essentially the same as the legislative budget process, but it is not as comprehensive.
The Importance of Fiscal Notes
One of the most important roles for state budget analysts it to prepare fiscal notes. A fiscal note is an analysis of how a proposed piece of legislation would affect the existing state budget. Most are prepared by staff at OFM, or by non-partisan staff for the legislature’s Ways and Means Committee or other relevant committees. Budget staff in Seattle’s budget office also prepare fiscal notes that pay particular attention to the implications of budget decisions for race and social justice. Specifically, they look at how potential cuts or changes in programs, or the incidence of a new tax or fee, might disproportionately affect people of color or particular neighborhoods within the City.
Cities, counties, schools, and special districts generally follow the same basic process. In Washington State, most local governments follow a January 1 fiscal year. The mayor/executive/superintendent’s staff review departments’ budget proposals throughout the late summer and early fall, and the mayor/executive/superintendent proposes a budget in usually in early September. The Council/Board debates the budget and revises it throughout the late fall and early winter. At the City of Seattle those proposed changes are articulated in Green Sheets that suggest a change to the Mayor’s proposed budget. State law requires a passed budget by December 2. Most local governments do not have the same executive-legislative tensions as the state and federal government, and local budget processes are rarely as formal, but the same basic processes, institutions, and incentives are at play.
Making a Change
When spending on a capital project is expected to exceed its budget, the party responsible for the project – usually a private partner or contractor – must request a change order. If the government approves that change order the project budget is amended and the additional costs are incurred. Change orders happen for a variety of reasons, but most commonly for increases in commodities or other basic construction costs, and for unexpected challenges with excavation and other site preparation during the early stages of construction. An effective capital budgeting process includes a procedure to quickly evaluate change orders and, if necessary, require governing body approval.
Budgeting in the Nonprofit Sector
Budget process in the nonprofit sector are comparable to those of government, except their processes are not as protracted. For the average mid-sized nonprofit, program directors will often submit a wish-list budget to a budget or finance officer, who then scrutinizes their budget in relation to the organizations strategic plan and policy priorities. Larger nonprofits will provide program directors with specific guidance on policy priorities, budget format, and key assumptions. For a vast majority of small to medium sized nonprofits, budget preparation is generally a responsibility of the executive director. The executive director, together with the finance officer, will finalize the budget and present the proposed budget to the finance committee, a committee delegated by the board, or the full board. Adoption of a budget by the full board should make it unwavering policy. Like most governments, budgets are frequently revised to reflect changes in revenues and expenses. Board members will frequently receive monthly or annual budget reports detailing year-to-date revenues and expenses, budget variances, and key changes in programs or policies that affect the operating budget.
Budget Balance, in Theory and Practice
By definition, state and local government budgets must balance. But perhaps surprisingly, there’s no uniform definition of “balanced budget.” A budget can be balanced by several different definitions. Each state and locality is subject to a different mix of state and local laws that define balance. Some of the most common definitions are based on different ideas about solvency. For instance:
- Cash solvency. The budget is balanced if short-term assets cover short-term liabilities. In other words, does this government have the resources on hand to cover its short-term liabilities as those liabilities come due?
- Budgetary solvency. The budget is balanced if budgeted revenues are greater than budgeted expenditures. For some governments this means budgeted revenues must equal or exceed budgeted revenues when the budget is passed. This is also known as balance “at adoption.” For others, it means budgeted revenues and expenditures must equal actual revenues and expenditures, also known as balance “at conclusion.” In some governments budgeted revenues and expenditures must equal or exceed actual revenues and expenditures at periodic intervals throughout the fiscal year. Some balanced budget laws require these definitions be applied to just the general fund, where others apply them to all governmental funds or total government revenues and spending.
- Long-run solvency. The budget is balanced if total long-term assets cover total long-term liabilities. This definition is based on accrual accounting. It’s designed to ensure that the government does not incur a structural deficit.
- Service-level solvency. Some local governments take a longer view of solvency, defining balance as when revenue-generation capacity covers expected future service obligations.
Incrementalism and Budget Reforms
Budgeting is many things to public organizations. It’s a mechanism to plan and develop strategy for the coming year. It’s a tool to evaluate how well managers manage. It’s a way to evaluate if and how an organization’s resources are connected to it’s priorities. It’s a tool to get feedback from key stakeholders about an organization’s successes and failures. For governments, the budget is a legally binding document that commits it to a spending plan for the coming year(s). But fundamentally, budgeting is a form of politics. Resources are scarce, and budgeting is the process by which organizations allocate those scarce resources. As such, budgeting is about managing conflict.
Budgeting in governments, and most large bureaucratic institutions, is an incremental process. That is, the focal point for each year’s budget is an incremental increase or decrease over last year’s budget. Put differently, there’s an old adage: “most budgets are last year’s budget plus three percent.” Since the Great Recession most budgets have been last year minus three/five/ten percent. For budget policymakers, conflict and compromise is often around that annual percentage change, or increment. This assumes, of course, that last year’s budget – or base budget – was a fair representation of the organization’s goals and priorities. If this is not true, then debating incremental change will only amplify that disconnect between resources and priorities. In fact, for most public organizations, that disconnect is persistent and pervasive.
Historically, governments have prepared line-item budgets that place significant emphasis on inputs. Unfortunately, line-item budgets do not present information in a format that connect its mission to its money. A vast majority have experimented with various budgeting models designed to “reform” the line-item format and incrementalist tendency. One of the most popular reform strategies is to allocate resources not through political bargaining, but in a more mechanical or formula-driven way that’s driven by priorities or goals. For roughly fifty years one of the most popular strategies to this effect is performance budgeting. In this format, the organization allocates resources not according to inputs or line items like salaries or supplies, but rather according to the level of overall resources, regardless of inputs needed to achieve some desired goal or outcome. Some governments extend this model into a Price of Government or Priorities of Government approach. Under this model citizens identify the levels and outcomes of government services most important to them, and the government allocates packages of resources to achieve those outcomes.
Performance budgeting and the “Priorities of Government” approach are not mutually exclusive. Cities like Redmond, WA and Somerville, MA have implemented performance-based budgeting programs that are tightly connected to strategic priorities. In the Somerville model, departments orient their budget requests around outcomes rather than budget inputs or line items. For example, the library system requests its budget in terms of the cost per library patron served, not just in terms of payroll, commodities, equipment, and other line items.
A few state and local governments have experimented with versions of zero-based budgeting (ZBB). Under ZBB the organization assumes there is no such thing as a base budget. Each year departments and programs must justify everything in their budget. Much of the money state and local government spend is “required by law” or “necessary for public safety,” so a large portion of a government’s budget cannot be cut through a ZBB process. Some versions of ZBB require departments/programs to connect their non-required spending to the organization’s strategic goals or priorities. Proposed spending most closely connected to those goals is most likely to make its way into the final budget, and vice versa. In some ZBB models departments and programs must present decision makers with “scenarios” or “decision packages” that identify what will happen if their department/program does not receive a portion of its base budget. All these innovations are designed to remove some or all of the pure political bargaining from budgeting.
That said, the vast majority of governments and non-profit organizations continue to practice traditional, incremental, line-item budgeting.
“Creating” Budget Balance
One of the main criticisms of state and local budgets is that “balanced budgets” might actually hide structural deficits. There are two reasons for this. First, most governments prepare their budgets on a cash basis rather than an accrual basis. This masks the long-term effects of current budget decisions. Second, managers and policymakers can employ a variety of tactics to create “phantom” budget balance. They include:
- Inter-fund transfers and fund sweeps. Moving resources in and out of governmental funds just before or just after budget approval for the sole purpose of presenting a balanced budget.
- Under-estimate revenue collections. Budgeting for less revenue than you expect to collect will produce an end of year “surplus.”
- Over-estimate expenditures. Budgeting for more than you intend to spend also produces an end of year “surplus.”
- Shift revenue collection dates and due dates. This changes when revenues are recognized, and that can change the complexion of budget balance in a given fiscal period.
- Under or overestimate property tax delinquency. Overestimating delinquency is akin to underestimating revenue collections, and vice versa.
- Use of one-time revenues such as capital asset sales and leases, privatizations, and contract arrangements. This is why one-time revenues should never be used to fund the operating budget.
- Delay intergovernmental payments. This is a common tactic because governments have limited ability to collect revenues from each other.
- The “Magic Asterisk.” This tactic was made famous by President Reagan’s long-time budget director David Stockman. He would routinely budget for higher spending without an concurrent increase in revenues. Resources to cover the new spending would come from vaguely-described “projected savings” and “efficiency gains” in existing programs. Programs expected to produce those new resources were identified with an asterisk in President Reagan’s budgets, hence the name the “Magic Asterisk.”
Within the formal budget process, there are budget politics. For most public managers the politics and strategy of making a budget are just as important, if not more important, than the formal budget process. Here we briefly discuss some of the most common budget-making strategies. Some of these strategies are more appropriate if the goals is to limit spending, while others are more appropriate if an department or agency wants to expand programs, or at the very least maintain status quo. They include:
- Cultivate a clientele. Effective public managers understand who “uses” and who “benefits” from their programs and services. They also understand that those users are the best advocates for a program. This is especially true for programs that benefit children, the disabled, and other vulnerable populations. A simple anecdote about a program from one of its clients can be exponentially more powerful than a well-done differential cost analysis.
- Make friends with legislators. Legislators are much more likely to support a program when they understand that program and who benefits from it. This is particularly true when that program benefits their constituents, and when they played a role in creating, expanding, or protecting it. Of course, this strategy comes with risks. Governors, mayors, and other executives often try to limit department heads and program managers’ access to legislators to prevent staff relationships with legislators that might undermine their own budget priorities.
- “Round it Up.” This is especially true on the spending side. Rounding up caseloads, spending estimates, interest expenses, and other costs will expand budget authority and, if actual spending falls short of budgeted spending, create an end of year “surplus.” The risk is that persistent over-budgeting for spending can undermine a budget-maker’s credibility.
- “We have a crisis.” Some managers like to project that major revenue shortfalls or spending cuts are imminent, even if they aren’t. Staff who believe they might face difficult budget cuts are more likely to manage their programs with careful attention to spending discipline and timely collection of revenues. Of course, this can also lead to staff burn-out and ruin a manager’s credibility if said crisis never happens.
A few strategies are most effective when a manager is asked to trim their budget.
- “Across-the-Board.” Some managers prefer to respond to budget cuts by cutting all their programs equally, or “across the board” (ATB). To staff, ATB cuts appear fair, transparent, and simple. Cutting all programs equally assumes those programs have identical cost structures, current staff openings, and capacity to generate revenues. That’s rarely true. The result is that ATB often affects different programs and services in quite different ways, even though the intent is to bring about a uniform impact. Sometimes those differential effects can themselves be valuable to managers.
- “Do Nothing.” An unchanged budget is, in effect, a budget cut. If a program is given no new resources it must find other ways to address cost inflation, growth in caseloads, staff cost of living adjustments, and other growth in spending. Sophisticated managers argue, often successfully, that a “steady state” budget (i.e. no new resources, but no cuts) is a fair way to take a budget cut.
- Lean on precedent. In a cutback environment, what happened in the past can be a powerful tool for managers. No manager wants to have to choose how to cut his or her program. But if they can say “I didn’t really choose these cuts, we’re just following past precedent” they’re afforded some degree of political cover. Whether past precedent really dictated those cuts, or whether there even is a past precedent, are often debatable.
- “It’s essential for public safety.” Managers can try to position their program as vital to public health or safety. Sometimes these connections are obtuse, at best. For instance, during the Great Recession, many local libraries protested cuts to library hours by pointing out that libraries are a safe and supportive gathering place for teenagers. Unsupervised teenagers roaming the streets would create, they argued, a serious public safety concern.
- Propose a study. Public organizations can rarely predict, or so they say, exactly how a budget cut will affect their clients, staff, and overall mission. So in response to a cut, managers routinely propose to “study the issue.” A study allows for more time to either identify potential cuts, or, for the political or economic environment to shift in ways that will obviate the need for a cut at all.
- “Cut the main artery.” One way to respond to a requested cut is to cut the largest program that’s most central to your mission (i.e. the “main artery”). Cutting that program is, in effect, threatening to cripple your program. Some policymakers will respond with a request for a smaller cut or to a cut to a program that’s less mission-centric. The danger here is what happens if policymakers agree to allow a manager to cut the main artery.
- “Just take the whole thing.” If a program was cut recently, managers can take the request for an additional cut as an opportunity to offer to end the program. They’ll ask: “We’ve already been cut to the bone, so what’s the point of staying open?” or something to that effect. Whether additional cuts would really harm the program is often incidental to the argument.
- “You pick.” Instead of proposing cuts, offer policymakers a range of options and ask them to decide which option the program should pursue. Like with “lean on precedent,” this allows managers to avoid direct responsibility for specific cuts to his or her staff and other resources. This strategy is prone to backfire when policymakers respond by saying “It’s not my job to pick. You know your program better than anyone. You pick.”
- “Washington Monument.” In 1994 the federal government shut down after President Clinton and House Speaker Gingrich could not agree on a continuing resolution. President Clinton responded by ordering the National Park Service to close all of the key historic sites in Washington, DC. One of the first to close was the Washington Monument. As the shutdown dragged on, President Clinton was able to frame the closed Washington Monument as a symbol of Congressional intransigence. The essence of the Washington Monument strategy is to propose cuts to a small, but highly visible program.
And finally, managers often deploy a different set of strategies when attempting to expand their program’s budget:
- “It pays for itself.” Managers can sometimes argue that investing in a program will “pay for itself” through cost savings later. For instance, public health advocates have long argued that expanding childhood immunization programs pays for itself by reducing the incidence of communicable diseases like tuburculosis, measles, and rubuella that place enormous strain and expense on public hospitals.
- “Spend to save.” Investments in technology, equipment, and infrastructure can save staff time, reduce paperwork, collect revenues faster, etc. Or, at least, that’s how managers sell those investments in the budget process.
- “Foot in the Door.” Many large, long-standing, popular public sector programs began small. An effective way to expand a program is to run a small pilot program, study, or demonstration project. Legislators and board members are generally willing to appropriate small amounts of money to try “innovative” approaches. With time, many of those small experiments morph into large-scale programs.
- “It’s just temporary.” Like “small innovations,” legislators and board members are much more willing to provide temporary funding for a program or project than they are to provide permanent funding or budget authority. Crafty managers are able to convert temporary funding into either “ongoing temporary funding” or even permanent authority.
- “Finish what we started.” This approach is especially popular with respect to capital projects. Many capital projects begin with an appropriation to analyze, plan, and design a capital project. With that planning in place, managers can make a compelling argument that it’s necessary to appropriate more money to “finish what we started,” often without regard for whether the plans are complete or whether the analysis suggests the project is even necessary.
- “Re-categorize.” Sometimes shifting a program to a different part of the budget is a necessary step toward expansion. For example, public health advocates have successfully argued that many public health activities like smoking cessation or diabetes prevention are actually education or outreach programs. Within the education budget they have access to a much wider range of funding sources and constituent champions. We’ve seen a similar dynamic with homeland security. Many programs in areas like crime prevention and cybersecurity were once local public safety initiatives, but have since migrated to far more lucrative state and federal homeland security budgets.
- Pick three US states and compare their balanced budget requirements. How do those requirements define budget balance? Does the balance requirement apply to the enterprise funds? To the government as a whole?
- The following are proposals legislators are considering for balancing the 2016 budget. You’ve been asked to identify whether the proposed strategy is appropriate (yes or no). Briefly discuss the policy implication(s) of each strategy.
- A proposal by a legislator to increase the revenue forecast provided by the staff in the comptroller office.
- A proposal to issue $10 million in bonds. Proceeds from the debt issue will be used to close the gap in the operating budget. The treasurer projects the bonds will paid off in full in FY 2030.
- A proposal to draw down on existing reserves and limit contributions to the reserve fund through FY 2020.
- A proposal that projects savings in key initiatives that could materialize in the next three to five years. The savings are based on current estimates for demand for services and improvements in technology used to deliver the services and is contingent on the programs receiving funding for the initiatives.
- A proposal to cut base funding for all programs by 5 percent.
- A proposal to limit intergovernmental transfers to local governments (e.g., county, city, school districts etc.).
- A proposal to lease out parking garages to a private vendor for a 10-year period (FY 2025). The one-time lump-sum payment from the private vendor will be used to close the current year budget gap.
- A proposal to delay improvements on public buildings and local infrastructure as well as limit purchases of new equipment through FY 2018.
- A proposal to provide competitive funding (e.g., $100,000 up to $1,000,000) to programs or department to develop projects that would streamline service, improve efficiency, and achieve cost savings.
- A proposal to privately operate highway rest stop areas. While the vendors will be expected to make regular payments to the Department of Transportation (DOT), ownership of the properties will not transfer to the private operator.
- What are some of the potential advantages and disadvantages of a biennial budget compared to an annual budget?
- What are some of the most popular alternatives to traditional, line-item, incremental budgeting? What are the advantages and disadvantages of those models, compared to incremental budgeting?
- Portions of the following discussion are quoted and adopted from the Governing Guide to Financial Literacy, Volume 1↵
- Other states include Connecticut, Hawaii, Indiana, Kentucky, Maine, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oregon, Virginia, Washington, Wisconsin, and Wyoming. States with biennial budget and biennial sessions are some of the smallest in the nation -- Montana, Nevada, and North Dakota. Texas is the exception here. ↵