financial management series number 9 local government budgets: approaches & traits alan probst...
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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