Budgeting in the twentieth century was characterized by a series of innovations that parallel many of the innovations in management practices. Modern budgeting began in New York City in 1906, when the city’s Bureau of Municipal Research called for all city agencies to use a budget. Since then, what began as an accounting function has become an executive tool for implementing strategic plans and promoting entrepreneurial gov-ernment. Particularly at the local level, the tendency has been to retain those elements of an innovation that work well and to discard those that are less suitable. The result is that local budgeting practices are often layered with elements of various innovations that, much like an archaeological dig, reveal successive stages in budget development.
Budget reforms fall into one of two general categories: (1) innovations designed to improve budget data—that is, the content and presentation of budget information (bud-get focus), and (2) innovations designed to improve the bud(bud-get process (bud(bud-get locus) (Figure 7–1).2 In practice, these categories overlap.
In his classic 1966 article, “The Road to PPB: The Stages of Budget Reform,” Allen Schick traced the evolution of the budgeting function from (1) imposing control to (2) improving the management of operations to (3) improving the prioritization of programs.3 With the transformation in budget focus came an increased reliance on more and different kinds of data, particularly data that help top management and lawmakers better connect the impact of their spending decisions to conditions in their community;
this has led in turn to changes in the organizational location of the budget function to accommodate new informational needs. Thus, the budget has evolved from being a tool for accounting and financial management to being a tool for strategically and logistically positioning a community to capitalize on historical strengths and emerging opportunities.
Line-item budgeting
The line-item (object-of-expenditure) budget, the format most often associated with budgeting, originated in the late nineteenth century in response to the excesses of the political machines that controlled many state and local governments. This format shifted power away from political bosses to legislative bodies, which were more account-able to voters. It is still the most widely used budget format.
The line-item budget collects and reports information on inputs (resources) used in the production of government goods and services (Figure 7–2). It lists the goods or services to be purchased—labor, supplies, utilities, capital items, and miscellaneous. Its
Budget Figure 7–1 The evolving locus and focus of budgeting
focus is the objects of expenditure allowed for each department or agency; once the council appropriates the funds (i.e., approves the proposed budget), department heads can acquire the objects authorized in the line-item budget. The locus of budgeting is the accounting office, where the detailed line-item information is collected and made readily available.
It is clear why a line-item budget format is associated with a control-oriented budget process: the line items correspond to the accounts in the accounting system and make it easy for budget overseers to compare budgeted amounts with actual levels of spending.
The more detailed the objects of expenditure, the greater the governing body’s control over administrative agencies.
Zero-base budgeting In response to pressure to limit government spending, zero-base budgeting (ZBB) emerged in the 1970s as an adaptation of the line-item Figure 7–2 FY 2013 operating budget, Syracuse, New York
Source: Budget for the City of Syracuse for the Period of July 1, 2012–June 30, 2013, 139, syracuse.ny.us/
uploadedFiles/Departments/Budget/Content/Budget_Documents/Final%20%202012-13%20Budget.pdf.
budget. Initially developed in the private sector by Texas Instruments, ZBB quickly spread to local and state governments. Much of its popularity was due to the fact that it relies on existing accounting information and is simple to understand and implement. Although many local governments had moved budgeting out of the accounting department by the 1970s, ZBB reasserted the value of accounting information to budget deliberations.
ZBB focuses on budget inputs (i.e., the resources used by local governments to produce goods and services), organizing them into decision packages that reflect various levels of effort and cost. In theory, each department (or decision unit, which is the lowest level in the organization at which budgetary decisions are made) prepares at least three packages: a base-level package, which meets only the most basic service needs (hence, the term zero base); a current services package, which ensures delivery of services at the current level; and an enhanced package, which allows the decision unit to extend its services to currently unmet needs. Decision units can prepare more than one enhanced package, each representing a different level of expanded effort. Packages from all the decision units are then ranked according to the perceived need for the package;
rankings are based on the subjective judgment of decision makers, who annually evalu-ate each program’s purpose and priority, weighing the program against all other spend-ing possibilities.
As a consequence of this evaluation, decision makers may decide not to renew fund-ing for an existfund-ing program, choosfund-ing instead to fund an enhanced spendfund-ing package for another decision unit or even to provide base-level funding for an entirely new initiative. In fact, however, such reallocation rarely occurs.4 Chief executives quickly found that department heads were unwilling to provide them with estimates of the base package because, as the department heads argued, the estimates were already at the minimum level and any further reductions would make it difficult to continue provid-ing service. Thus, the base-level (or minimum) package has all but disappeared from the scene. But vestiges of ZBB still persist in many local governments, particularly in the use of enhancement packages, which receive separate and more thorough scrutiny from top administrators and lawmakers.
Target-base budgeting Target-base budgeting (TBB), which entered the pic-ture in the 1980s, reversed the trend toward increasingly complex budget innovations.
It was intended to simplify budget preparation, mitigate interdepartmental conflict, and reduce gamesmanship in the preparation of budget requests. Under the simplest form of TBB, the budget office gives each department a maximum dollar figure for its budget request,5 basing its targets for each department on revenue estimates for the coming fiscal year and on any changes in policy makers’ priorities (e.g., more for public safety, less for park maintenance).
The more complex part of TBB involves estimating each department’s current ser-vices budget, which is defined according to rules that are sometimes rather elaborate.
Generally, the current services budget is the department’s appropriation for the current year unless it happens to contain funding for one-time purchases or for a position that was filled well into the fiscal year. Once the current services budget is established, the target is typically set at some percentage of that level—for example, 95 percent if the program has a lower priority in the current year or 105 percent if it has a higher priority. Although TBB includes some elements of ZBB, it greatly reduces the level of conflict and the role of subjective judgment found in ZBB: departments know from the outset what their likely level of funding will be for the coming year.
Performance budgeting
While line-item budgets are effective at controlling expenditures, they provide no in-formation on outputs (how much work gets accomplished) or level of efficiency (how much input is required to produce each unit of output). Local governments had already begun experimenting with performance budgeting in the 1950s, when the approach gained popularity after the second Hoover Commission issued a report that recom-mended collecting and reporting output measures in the federal budget as a tool for controlling costs.6 They began to use performance measures to monitor the use of funds and to identify ways to improve productivity and the management of public programs.
In the 1990s, performance budgeting experienced a resurgence in interest as a result of the national performance review undertaken by the Clinton administration. In both its original and more recent incarnation, performance budgeting is designed to improve program efficiency, evaluate the outcomes of program operations, and provide decision makers and the public with better information on what they are getting for their tax dollars. Budgets not only report information at the line-item level but also indicate what is to be accomplished with those funds.
Budgeting has thus become a financial management tool (Figure 7–1), and local governments increasingly locate the budget function where they can ensure that the necessary information on performance and outcomes (actual results achieved) is being provided in a form appropriate to the organization’s needs. The trend has been to move budgeting out of the accounting area and align it with other finance functions that share a broader management focus.
Management by objectives (MBO), an innovation of the legendary management scholar Peter Drucker, had a short-lived courtship with budgeting in the 1960s and early 1970s. MBO is a top-down process: each level in the organization develops perfor-mance objectives for the coming year. Employees negotiate a perforperfor-mance agreement with their supervisors, which becomes the basis for evaluating the employee’s year-end job performance. The intent is for all employees to have a clear understanding of both the organization’s priorities for the fiscal year and its expectations for their individual contributions to meeting those priorities. MBO is more of a personnel management tool than a budgeting tool, but the budget process provided a suitable forum for negoti-ating the performance agreements.
Program budgeting
Performance budgets focus attention on outputs, but they do not address more funda-mental policy questions, such as whether a program is necessary at all or how best to allocate limited resources among competing purposes. The quest to add a policy focus to budgeting gained momentum in the 1960s with the introduction of planning, programming, budgeting systems (PPBS), or program budgeting for short.
Program budgeting organizes government activities into programs—activities or ser-vices with a common goal—and identifies alternatives for achieving each goal, determines the costs and benefits of each alternative, and selects the alternative that maximizes net benefits. In short, it seeks to interject policy analysis into fundamental budgetary deci-sion making—that is, to determine how much to allocate to activity A as opposed to activity B.7
To accommodate this new analytical focus, the budgeting function grew independent of accounting and even of finance, and the independent budget office emerged, reporting directly to the city or county manager or to an assistant manager over administrative services. The newfound autonomy of the budgeting function opened up opportunities
for more independent analysis to guide budget deliberations. The merger of budgeting with management was now complete organizationally (locus) and functionally (focus).
While a few local governments continue to build their budgets using the program format, most have abandoned that format, at least as it was originally designed. Like other budget reforms, program budgeting has morphed into other approaches, one of which is total quality management (TQM).
Entrepreneurial budgeting
As strategic planning gained widespread acceptance among local governments as an ef-fective tool for harnessing and channeling the energy of their organizations as well as for containing their growing costs, managers began to cast about for ways to use the process to prioritize programs and reallocate funds to those priorities. Attention quickly turned to the budget process as the vehicle for merging strategic planning with the indicators of demand provided by a competitive market. The cutting edge in budget innovation over the past decade has been the attempt to transform local governments into entrepreneur-ial enterprises (Figure 7–1); this effort has introduced competition into the process for setting spending priorities—an area where a competitive market does not exist. At the same time, governments have added a community value perspective to budgeting: how do spending proposals achieve the strategic priorities of the city or county to the satis-faction of customers? (Note the transition of residents from “citizens” to “customers of government services.”) Given the new information and management needs, some budget personnel are now finding their duties mingled with those of the chief executive’s office.
Two different approaches to entrepreneurial budgeting have gained attention in the past few years: the balanced scorecard and budgeting for outcomes. Although the two methods are very different, they both introduce a kind of competition into budgeting and management.
Balanced scorecard Robert Kaplan and David Norton, two Harvard management experts, developed the balanced scorecard as a tool for translating an organization’s mission into a series of action plans that link together financing, customer satisfaction, internal operations, and the learning and growth of employees.8
In a fully operational balanced scorecard approach, a local government begins by developing a mission statement that clearly articulates the organization’s purpose and values. Then it carefully assesses the expectations and needs of its customers (citizens and businesses, presumably) and develops a strategic plan (goals, objectives, and strategies), while the administrator prepares a budget that allocates funds to the strategic priori-ties. In accordance with its mission and strategic plan, the local government leadership develops ten to fifteen key measures of success that the organization will pursue, and each department develops performance measures that show how it will contribute to the expected outcomes.
Since the balanced scorecard was designed for private business, customer satisfaction is a key indicator of success. To fully develop the scorecard concept, a local government must know how a change in performance—for example, the fire service reducing its average response time to top-priority fire alarms by ten seconds—will affect citizen satisfaction. The organization is expected to learn from its experiences and improve its internal processes in order to achieve its key measures of success. One local government that has implemented the balanced scorecard is Charlotte, North Carolina, and Fig-ure 7–3 is an excerpt from the city’s balanced scorecard report for two of its corporate objectives.
Budgeting for outcomes Budgeting for outcomes, also called priority-based budgeting,9 is a relatively recent adaptation of several previous budget reforms. The goal is to provide better information that helps council members make better decisions, provide better procedures to increase the accountability of local governments to their citizens, and thereby increase the efficiency and effectiveness of government. Budgeting for outcomes relies on competition among city departments as well as with businesses and nonprofits outside government to bid on the provision of city services.
Budgeting for outcomes begins with the council articulating the community-wide outcomes, or priorities, that it wants to focus on in the coming year.10 The city council of Fort Collins, Colorado, for example, developed seven such outcomes to which all budget requests are anchored: improve economic health; improve environmental health;
improve neighborhood quality; improve community safety; improve cultural, recreational, and educational opportunities; improve transportation; and create a high-performing entrepreneurial city government.11
The next step involves determining the “price of city government.” This is the percentage of personal income in the city that should go to pay for city services. In
Appendix C- CRC-Balanced Scorecard Report
Reporting Period: July 1, 2010 to November 30, 2010
Corporate Objective KBU Initiative (* indicates Focus Area
(To be completed at mid-year and year-end reporting))
Target YTD Status $
* in KBU initiative column indicates Focus Area initiative
Serve the Customer
C1. Strengthen
Neighborhoods Investigate housing
discrimination Number of fair housing cases investigated.
discrimination Number of fair housing trainings
Collaborative Solutions Increase service capacity through
208,974 Lag 210,000 $100,101.65
Figure 7–3 Excerpt from the balanced scorecard report of Charlotte, North Carolina
Source: City of Charlotte, North Carolina, “Balanced Scorecard,” charmeck.org/city/charlotte/CRC/Scorecard%20 Updates/11_2010_Nov.pdf.
Fort Collins, the city collects about 5 percent of residents’ personal income in taxes and charges to support city operations. The council tries to hold that percentage constant over time. Revenue projections for the biennium are prepared, and that revenue target becomes the spending limit for the budget period. The projected funding is then allo-cated to the seven outcomes based on the council’s priorities.
At this point in the process, city departments and, where relevant, businesses outside the city government prepare bids or requests for results (RFRs) to meet the council’s prior-ities and deliver the targeted results. Most spending requests in a city’s budget have to be part of a bid offer, and each offer has to include quantifiable measures of the results to be delivered. Much like the decision packages in ZBB, RFRs form the city’s budget building blocks. Department and program managers are recast as “sellers” in this budget construct.
Bidders compete with each other on the basis of their RFRs. They may also form partnerships with other units, inside or outside government, to prepare an RFR for a particular service need. If a bidder does not cost out its RFR accurately, it may not meet its performance requirements. The RFRs are then ranked by the budget office and manager, and the manager uses them to prepare a budget for submission to the council based on the revenue target established at the outset. Those proposals above the revenue target cutoff line receive funding; those below the line do not—a process analogous to ZBB’s ranking of decision packages.
Budgeting in the twenty-first century represents a rich blend of all these innovations.
Especially at the local level, where budget format and process are substantially shaped by the chief executive’s management philosophy, the budget is likely to contain some combination of line items, performance measures, and even enhancement packages for new spending initiatives, and departments are likely to be given target funding levels at the outset of budget preparation.