Local government expenditures are revenue driven–
that is, the total amount of available revenue frames budget deliberations throughout the preparation and legislation phases. For this reason, estimating the amount of revenue available for the budget year is one of the first steps in budget preparation. Typically, a revenue forecast is prepared for each major revenue source, such as the property or sales tax and each utility service. For smaller revenue sources, such as license or recreation fees, a forecast is prepared for the combined totals, often based on historical trends.
Because local governments collect revenue from dozens, even hundreds, of sources, they often prepare a revenue manual that provides detailed information on each source: its legal basis, collection and rate his-tory for the past five years, principal payers, and the entity in local government responsible for collection and enforcement.
The methods used to project revenues can be classified into four generic types: informed judgment (professional guess); deterministic, or formula-based, projections; time series, or trend, analysis; and econo-metric, or causal, modeling. Most budget offices use several methodologies in combination, depending on the type of revenue source.
Informed (professional) judgment comes with experience and careful observation and is essential to preparing defensible estimates regardless of what other methodology is used. Even the most elaborate statistical projections require the discerning eye of an experienced budget director. Budget directors and local government managers who have been caught short in the past learn to watch for changes in the local economy or in state and federal laws that could affect revenue yields. In addition, a panel of local experts and business leaders can be recruited to assess the busi-ness environment for the coming budget period and predict its likely effect on local employment and capital investment decisions. The budget office may recon-vene the panel periodically during the year to update projections for the current and future fiscal years. For certain types of revenue, such as from the sale of elec-tric power or water, a local government may tap the expertise of a consultant whose experience provides a better basis for making an informed judgment of the expected revenue for the budget period.
Deterministic (formula-based) revenue projection relies on a simple mathematical formula to provide an estimate of expected revenue. The property tax, which is usually the most important source of general revenue for local governments, is calculated on a for-mula basis (total assessed value x tax rate = tax yield).
The assessed value represents the taxable value of all property—both real and personal—in the taxing juris-diction. Typically, the property tax rate is set concurrent with the council’s adoption of the budget at a level that will generate sufficient tax revenue (yield) to balance the operating budget. Sometimes collection rates fall or estimates of assessed valuation are off because of
delinquencies or bankruptcies, in which case the fore-cast must be adjusted.
Utility charges are also forecast using the determin-istic method (volume of consumption x rates = revenue yield), although forecasting the volume of consump-tion, such as the demand for water or electric power, requires more sophisticated forecasting methods.
Time series (trend) analysis involves looking for trends from prior years’ data. It provides a useful and accurate estimate for some revenue sources, especially those that are less elastic with respect to economic growth–that is, those for which yield does not change much whether the economy is growing or shrinking.
For example, license fees and certain excise taxes, such as those on cigarettes and alcoholic beverages, are relatively stable; thus, because they may depend roughly on population size, a simple trend analysis provides reliable estimates.
For revenue sources that produce more volatile yields but that grow at a reasonably constant rate, a common approach is to average several recent years together to project the next year’s yield. By taking the average of recent years, the budget forecaster smooths out the peaks and troughs and thereby reduces the chance of over- or underestimating revenue yields.
Econometric (causal) modeling is a more sophis-ticated statistical method that can help anticipate turning points in the local or state economy, some-thing that time series methods cannot do. Econo-metric models assume that the yield from a particular revenue source is affected by a number of underlying determinants, such as per capita income, inflation, and population change. Econometric modeling does not work perfectly, but a statistical model can be helpful in showing how the local economy and the tax revenues that come from that economy respond in comparison to a state or regional economy.
The larger and more complicated the economy of a state or local government and the more complicated its revenue sources, the more useful econometric models become. The Texas state comptroller, who is consti-tutionally charged with preparing revenue estimates for the state’s biennial budget, has developed a highly sophisticated series of simultaneous equations whereby one model’s prediction becomes a predictor for another. The comptroller’s forecasts have proven remarkably accurate, strengthening their credibility and influence in the budget preparation process. Modeling can be done at many levels of sophistication, from the simplest correlations to complex multistage models.
In practice, budget forecasters use a variety of techniques concurrently. They combine their expertise and professional judgment with simple or more complex trend analysis. Striving for accuracy, they have a strong incentive to keep their forecasts conservative. It is far bet-ter politically to bring good news midyear of additional revenues coming into the treasury than to have to report that revenues were overestimated and that emergency budget actions will be needed to reduce spending.
Along with the budget guidelines, departments receive their target allocation for the budget period and a reestimate of their current year’s level of expenditures and revenues.
This midyear reestimate reflects changes in the local economy that may alter the budget conditions not only for the current year but also for the coming one.
The budget calendar and budget guidelines, as well as forms to be used, are compiled into a document called the budget manual. For department heads and their staffs, the manual provides information needed to prepare and justify budget requests. Budget manuals vary widely in their content and level of detail. Smaller local governments rely on minimal documentation—the basic forms and instructions needed for submitting requests and a narrative from departments explaining any deviations from their historical budget base. Larger governments require more detailed documentation.
Budget offices tend to ask for more information than they need because, in the uncertain environment in which budget decisions are made, data and information are key to the quality of decisions. But at some point, additional information has dimin-ishing value to decision making, and its cost is borne by the departments, which have a limited amount of staff time to devote to budget preparation. An open dialogue among the budget office, department heads, and the chief executive office reduces the risk that the budget office will ask for obsolete or redundant information.
The flip side of the coin is the tendency for budget offices to shower departments with endless reams of data, making it difficult for those responsible for preparing budgets to know what is essential to the process. Again, the information distributed to departments must be clearly linked to the documentation that departments must submit.
A new department head unfamiliar with the jurisdiction’s budget procedures must invest considerable time learning the mechanics of budget preparation. While some elements of the process are fairly common across governments, enough variation exists, especially in data entry and processing, to require significant time and energy from someone learning a new system. Similarly, when a new city or county administrator introduces major changes in the process and documentation, department leaders must spend time learning the new material. Ultimately, the department head skilled in data analysis and written communications will have a competitive edge.
Department budget requests
Once the budget manual is prepared, the budget office typically begins the preparation process with a kickoff event, a somewhat celebratory occasion that brings together department heads, budget analysts, and top management. Participants are briefed on the budget calendar, guidelines, and budget manual; they may also be briefed on targets, either for each spending category in the department’s budget or for the department’s budget request overall. In larger governments, budget analysts are introduced and their departmental assignments announced if different from past years; the number of de-partments that an analyst serves will vary, depending on the size and complexity of the departmental budget.
The kickoff event may be followed by a training session that lasts anywhere from part of a day to two or three days, depending on the extent of changes in the budget process. For example, if a new information management system is being introduced, the training may extend for several days as users become familiar with its features. With new executive leadership often comes new approaches to budget deliberations; these may have catchy titles, such as the “balanced scorecard” approach or “responsibility-centered management” or “budgeting for outcomes.” Wholesale changes in the documentation required from departments and the criteria used to evaluate departmental proposals will
require extensive retooling of the administrative staff, whose task will be to collect and analyze the data and prepare the documentation needed for budget deliberations.
As departments begin to prepare their requests, a number of concerns will surface, some of which may require consultation with the departments’ assigned budget ana-lysts. For example, given the trend toward a more expansive role for budgeting, budget analysts and department administrators must collect and analyze a wider array of data, including performance measures, citizen attitudes, consumer satisfaction levels, and outcome measures. If the government uses a unified budget, departments must prepare capital spending requests alongside operating requests. Further complicating the pro-cess are spending requests that are funded from federal or state grants and that typically require separate documentation, justification, and hearings. Departments inevitably have questions about collecting and reporting all these types of information.
Departmental budget requests must also include information on salary savings—the savings in unpaid salaries that result whenever positions remain unfilled for part of a year because of personnel changes. Some governments estimate salary savings for each depart-ment using historical data and exclude that portion of the salary expenditures from their budget base for the coming year. Others record salary savings only as they occur during the fiscal year and allocate them to a separate account that can be used to fund supple-mental requests or to supplement salary offers where the budgeted salary is below market rates. And still other governments allow departments to keep salary savings, placing limits on how they may be used—for example, to fund a temporary position for an MPA intern.
Another issue involves the use of unused budget authority. In most cases, budget authority lapses at the end of the fiscal year, creating an incentive for year-end spending.
City councils consider money carried over as evidence of budget padding and generally reduce the department’s budget for the next year, especially if funding is tight.
As department heads agonize over their budget proposals, they will carefully scruti-nize the numbers and justification, looking for ways to link each spending initiative to a strategic goal or priority articulated by the council. In some cases, union agreements require the addition of personnel or equipment. In most cases, however, department heads must defend each new spending initiative as well as their current levels of spend-ing. Generally, they must also supply performance measures as part of the justification for spending requests.
Departmental requests vary widely in form and content. The submission require-ments for the City of Plano, Texas, however, are representative of the documentation usually submitted at the end of the preparation phase:
• A transmittal letter to the city manager
• A report on forecasted expenditures for the cost center
• A report on forecasted revenues by cost center (if applicable)
• Budget detail sheets (information on base budget, detailed expenditures)
• Decision packages
• Priority list of supplemental decision packages
• A program-of-services form, covering mission, goals, accomplishments, significant budget changes, performance measures, and more detailed information on full-time equivalent (FTE) positions1
As the budget progresses through the winnowing forks of the legislative approval process, department heads may be called upon to provide additional data or an explana-tion of requests. However, most of the data collecexplana-tion and reporting is now complete.
Assembling the executive budget
To smooth the workload for budget analysts, mid-size and larger governments stagger the due dates for departmental budget submissions. Usually smaller departments’ requests are due first, followed by larger departments’ requests. As requests filter in, budget ana-lysts verify that all the required information has been submitted, that the estimated costs conform to the guidelines specified in the budget manual, and that measures of perfor-mance and other indicators of accomplishments are appropriate to the departments’
missions and goals. The budget office may verify that mandated costs are included in a department’s request and that the full cost of projects or new staff is also included.
The budget analyst’s initial review usually results in a follow-up with the department for clarification, correction, or further documentation, especially on requests for new initiatives. Often the department is asked to describe the consequences of not funding the proposed initiative. There may also be questions about performance and outcome measures. The budget office will typically push for measures that better reflect the depart-ment’s mission and that provide top management and council members with a better understanding of how the department’s programs address the priorities of the council.
As it refines its revenue forecast for the coming budget year, the budget office merges the forecasts prepared by revenue-producing departments. These forecasts have been organized by fund and type of revenue source, grouped into larger categories, such as property tax, sales tax, other local taxes, general service charges, license and permit fees, fines and forfeitures, investment income, revenue from other governments, and other revenue.
The budget office also begins compiling expenditure data for continuing activities and preparing a prioritized list of proposed new initiatives or of possible areas targeted for reallocation of existing funds. Its staff pays particular attention to the priorities devel-oped by the council, whether that was done through a strategic planning process, citizen focus groups, or some other method. The goal is to fit department-centered information into a framework that responds to the priorities of the legislative oversight body and the citizens it serves.
The budget analyst typically makes field visits throughout the year to observe the department’s activities and the quality of its performance. If an analyst is assigned to a particular department year after year, he or she becomes familiar with that department’s budget and history of requests and thus becomes a critical adviser to the executive on the merits of that department’s requests.
Executive budget hearings
The final step in assembling the executive budget is a series of executive-level hearings involving each department head, the budget office, and a team of top managers. Depart-ment heads meet one-on-one with the budget director, with the manager, or more com-monly with a budget committee comprising representatives from the chief executive’s leadership team (city manager, assistant city manager(s), budget director, human resource director, and finance director). These hearings are not open to the public, and there is no public record of the proceedings. Given the stakes involved, departments expend con-siderable effort developing PowerPoint presentations, honing their speaking points, and justifying their spending priorities. Some department heads role-play the presentation with their staffs, trying to anticipate questions that the budget committee may ask.
Executive budget hearings typically proceed over several days, depending on the size of the organization. Each department has a fixed amount of time to make its presen-tation, describe new initiatives, justify any extraordinary changes in spending requests,
explain new funding options, and answer questions. Larger departments may be allocated more time given the complexity of their operations. The finance director may also be allotted extra time to explain debt service payments or new state or federal legislation that is expected to affect spending choices.
During the question-and-answer period, the committee typically focuses on the more controversial proposals, especially those that involve increased spending. It may again ask about the consequences of not funding a particular item. Department heads with a reputation for fiscal prudence and an innovative management style have an advantage at this point because they tend to be given the benefit of the doubt when it comes to funding a new initiative or reallocating existing spending. Departments that have developed defensible measures of the impact of their programs on community priorities also have an advantage, as do departments that can document an increase in efficiency, have enhanced responsiveness to citizens, or have otherwise improved the delivery of public services. And finally, those departments that are known to have strong support among community groups will also have a competitive advantage even at this stage of the budget process.
Once the executive budget hearings are completed, the executive budget committee makes its recommendations to the city or county manager. Some committees use elabo-rate rating schemes to rank new spending proposals. Others use a simple voting process to identify new initiatives to be included in the budget request, initiatives recommended for possible inclusion should sufficient funds become available, and initiatives not rec-ommended for funding in the current year.
The budget office then prepares a draft of the recommended executive budget and distributes it to each department head. At this point, if the department feels that its proposal was not fully understood or if additional information has become available that would have a bearing on the recommendation, the department head may be allowed to appeal to the chief executive to restore a deleted item or increase its priority. The department head should carefully weigh the wisdom of making such an appeal, however:
failure to succeed may lower the department’s standing among its peers, while success may lay the department open to accusations of making an “end run”—circumventing the normal chain of command to gain support for its agenda. The opportunity for appeal is usually reserved for truly extraordinary matters. If the budget office and budget com-mittee have effectively screened the requests coming from departments, only the most controversial items will be passed on to the manager for resolution.
The budget document
The culmination of the preparation phase is the executive budget, which represents the chief executive’s proposed spending plan for the coming year. The initial version may be
The culmination of the preparation phase is the executive budget, which represents the chief executive’s proposed spending plan for the coming year. The initial version may be