Financial crises, such as the Great Reces-sion of 2007–09, drive home the lesson that recessions have widely varying effects on state and local budgets. The collateral damage of a recession, like that of an earthquake, reverberates long after the initial shock wave. And aftershocks con-tinue for many months thereafter, striking unsuspecting communities and states.
Our lack of knowledge about budget causality makes it nearly impossible to gauge with precision the impact of a re-cession on any one government’s budget.
But local governments do control their budget processes, and they can adopt recession-resistant policies that mitigate the financial impact of recessions.
The 2007–09 recession exposed the disconnect between the political forces calling for more and better government services and the political will to finance those services over the long term. Budget analysts provide the key to reconciling these two opposing forces by bringing truth to budgeting estimates. What are the long-term costs of the proposed new program or service? Will the long-term revenue base provide sufficient resources to meet this new commitment? Do the benefits of the new service outweigh the costs? Truth in budgeting means providing public officials and citizens with the full budgetary impact of a proposal and the revenue requirements needed to support it over the long term. It means accurately assessing the impact of the proposal on the current operating and capital budgets and knowing up front what revenues will be needed to support the initiative in prosperous as well as less prosperous times.
Because recessions make state and federal aid highly vulnerable to reduc-tion or eliminareduc-tion, they expose the peril of depending on that aid to balance local budgets. Those local governments most dependent on state and federal aid are also the most vulnerable to its elimination. State revenue structures are not capable of financing both state and local operations.
Recessions reveal that delaying difficult budget decisions only narrows the options available in subsequent years and elevates the magnitude of the adjustments needed to bring about budgetary balance. In the absence of credible analyses and a commitment to truth in budgeting, it becomes politi-cally expedient to defer making difficult spending and taxing decisions and leave them to the next administration. The 2007–09 recession shortened the time line and elevated the urgency to resolve political impasses involving past budget decisions on issues such as federal and state entitlements, unfunded pension li-abilities, and programs that have fulfilled their mission.
Democracies depend on making quality information available to citizens.
The key to better financial decision making is better analyses up front of the short- and long-term budgetary effects of new or expanded initiatives. It means investing in analysts who can provide rig-orous analyses of the budgetary effects of proposals and promoting an organi-zational culture that advocates for truth in budgeting. It means pursuing budget policies and procedures that make local budgets more recession resistant.
agers will likely be uneasy about giving the budget office too much independence because of its central role in managing operations. One possibility is to create a quasi-independent research unit made up of analysts drawn from inside and outside the organization.
Second, progress has been made in evaluating and rating budget information and documentation. A next step may be to evaluate the quality of work performed by bud-get offices, particularly their analyses of policy and administrative issues. Just as criteria have been developed to evaluate budget documentation, criteria would be needed to guide external evaluators of budget analyses.
The key to good budgeting is recruiting good people and providing them with the technology to support their work. Qualified analysts bring an array of analytical and intuitive skills to their tasks, and they must have access to the data and the methodolo-gies needed to accomplish those tasks.
Finally, every local economy is unique, and the mix of revenues and expenditures responds differently to economic cycles. With experience, the budget office accrues institutional expertise in understanding the interaction among the economic factors that influence its budget and is better able to predict how its budget will respond to eco-nomic cycles. That experience must be nurtured and rewarded if the organization is to achieve a reputation for accurate and thorough analyses.
Organizing the budget office
When budgeting first became an accepted financial management tool of government in the late nineteenth century, it typically entailed a clerk in the accounting department who was responsible for preparing a list of expenditures by department; this list was pre-sented directly to the legislature for review and approval. Budget preparation involved tabulating requests and required only a few weeks of attention. As has been described, however, the role of budgeting has since expanded, and responsibility for it has shifted from a subunit in accounting and finance to, in some cases, an independent executive- level agency with a budget director reporting to the chief executive. At the same time, the focus of the budget process has expanded as well—from controlling spending (e.g., by means of a line-item budget) to implementing the strategic plan.
Location, values, and functions The most fundamental issue for the manager is the organizational placement of the budget function. Once again, locus shapes focus, and the budget office’s locus has undergone considerable transformation over the past cen-tury. Figure 7–4 shows the different organizational placements commonly used by local governments today; each has its merits and advocates.
A budget office located in an accounting or finance department focuses on financial controls, reporting, and line-item expenditures; its core values are controlled spending and financial accountability for the use of funds. In smaller local governments, budget-ing responsibility may be assigned to an accountant who, for most of the year, records and reconciles transactions, and for the rest of the time prepares the budget, including a revenue forecast.
An alternative model, more often found in mid-sized cities and counties, places the budget office in an administrative services department that brings together a number of other support services, such as purchasing, risk management, tax administration, finance, and information technology. In this organizational scenario, the budget office is a unit on a par with finance, internal auditing, and other finance-related activities. The core value is now productivity improvement: budgeting is seen as an opportunity to improve management performance by optimizing outputs relative to inputs.
A variation on the administrative services model is the independent budget depart-ment, whose head reports to the city or county manager or assistant manager. As an independent unit, the budget office has the most latitude to shape its agenda and can add responsiveness to community priorities as a core value along with productivity improvement. Its budget analysts assume a wider range of duties: measuring and mon-itoring program performance, assessing citizen preferences and satisfaction with public services, determining community needs and their relative priority, and finding ways to better link program and agency goals to addressing those needs.
Some governments opt to locate the budget office in the chief executive’s office. (A quick way to assess a chief executive’s priorities is to examine an organizational chart to see what activities report directly to the city or county manager.) In this setup, it is quite common to find the budget office’s focus on big-picture issues of strategic planning, mission, and vision. Budget analysts may be more directly involved in policy analysis, particularly in those areas that hold political importance for the governing board. Not surprisingly, the budget function in this environment will have a more political focus than it would in a unit located further down in the organization.
In a few rare cases, primary responsibility for budget preparation lies with an elected council or board rather than with the manager; in such cases, a comptroller may assist in preparing the proposed budget. A few governments, most notably at the state level, rely on a legislature-initiated rather than an executive-initiated budget proposal and have a separate legislative budget office with its own analysts.13 Where dual budget offices exist—
one that assists the executive and the other, the legislature—they usually work closely with each other, at least through the budget preparation phase. However, the norm in the United States is for a single budget office that is located in the executive branch.
Organizational location Figure 7–4 Impact of budget location on core values and focus
The focus of the budget office depends not only on the location of the office but also, to some extent, on the size of its staff. Where the budget office consists of just one person, it usually does not carry out any functions other than budgeting—not even finance functions, such as accounting, treasury, purchasing, or internal auditing.
If it employs several analysts, it may include some program and performance evalua-tion funcevalua-tions. In larger governments, the budget office typically employs a larger staff, many of whom hold graduate degrees in public administration. Each staff member may specialize in a particular area of the budgeting process—for example, long-term financial forecasting, revenue estimation, grants administration, or capital planning and budgeting.
Larger governments also have budget analysts to help provide objective assessments of departmental performance and capabilities; these analysts advise departments on policy issues, review their requests for the next budget period, and help them tighten their spending requests. A particular budget analyst may be responsible for several depart-ments. In larger governments, the departments will also have their own budget special-ists, who represent the department head on budget matters and who interact closely with their assigned analyst in the budget office.
Principal duties Regardless of its location or size, the budget office has traditionally collected spending requests from departments and, with the advice of the chief execu-tive, trimmed those requests to meet expected revenue levels. Even though the focus of the budget office has expanded over the years, its main duties remain constant: estimat-ing revenues, preparestimat-ing a budget calendar, reviewestimat-ing and compilestimat-ing budget requests into a proposal, ensuring that total requests do not exceed estimated revenues, monitoring compliance with the budget during implementation, and periodically preparing a status report comparing actual revenues and expenditures with what was budgeted.
In carrying out these duties, the budget office typically assumes a number of roles:
it educates participants about the budget process, adjudicates among participants both within and outside government, manages data processing, promotes accuracy and integ-rity in budget requests, provides information to budget participants, and reports on how well the approved budget plan is being followed.
When the primary function of the budget office is monitoring departmental budget requests, conflict between it and the various departments is inevitable: departments advocate for more resources, but as guardian of the treasury, the budget office scans budget requests for waste and excess. In the past, the budget office’s denial of requests prompted department heads to devise strategies—padding the budget, making partial- year requests, seeking a state mandate or regulatory requirement—in order to outma-neuver the budget office and ensure that their departments got the resources needed to meet the expectations of the community, its elected representatives, and the chief executive. This budget gamesmanship created an adversarial relationship between budget analysts and department heads.
To reduce this conflict, administrators introduced TBB and variations of ZBB to let department heads know up front the boundaries of their budget requests. At the begin-ning of the budget cycle, the budget office gives each department a target that its pro-posed budget cannot exceed. New initiatives that exceed the target may be propro-posed as separate requests for the budget office to consider on a case-by-case basis. TBB enables the budget office to limit total budget requests to expected revenue levels while giving department heads an opportunity to make a case for extraordinary needs.
The budget office of the twenty-first century seeks a collaborative relationship with departments that promotes and models good management throughout the organization.
A clearer division of labor has lessened antagonism, and the budget office provides tech-nical expertise to departments on such matters as strategic planning, developing perfor-mance measures, analyzing policy choices, and even identifying entrepreneurial options for raising needed revenue.