MONITOR THE BUDGET

THE PURPOSE OF MONITORING THE BUDGET

Monitoring the budget refers to observing the extent to which what happens during the fiscal year matches what was planned for in the budget. Monitoring the budget has two purposes:

Make sure the budget is adhered to. This means making sure spending remains within bounds. Local government revenues are largely fixed, so spending must remain within the forecasted revenue estimates. This also refers to making sure the local government gets what it was paying for. For example, if a program was expected to serve 1,000 people during the year, is that actually happening? The information made available for monitoring the budget should be in a format consistent with how the adopted budget was initially communicated. For example, if the adopted budget was organized by programs, then monitoring should take place at the level of programs. 

Adjust to changing circumstances. Expectations change. Opportunities arise. Things go wrong. A budget must be adaptable to an evolving environment. 

The purposes above are in tension. The first purpose we showed represents “accountability”; the second represents “flexibility.” Accountability versus flexibility is the classic dilemma of public administration. 

A monitoring system that provides for strong accountability has the following design elements: 

  • Easy to understand. Budget monitoring reports and dashboards are used by managers in operating departments for whom finance may not be a first language. Stoplight style visual indicators (red/yellow/green) could draw the eye to areas of concern. Managers can’t be accountable to a system of monitoring that they don’t understand. 
  • Frequent and timely. Managers must have access to budget information often and soon enough to correct potential problems. Quarterly reports are a good standard to start with, but the frequency of spending reports may vary for different parts of the budget. Large and/or volatile areas of spending or revenue merit more frequent monitoring than smaller and/or stable items. 
  • Accurate. The figures shown in budget reports must accurately represent what has happened. Perhaps less obvious is putting those figures in an accurate context. For example, if a given department spends 70% of their budget in the first half of the year due to the nature of the demand for the service they provide, then the budget reports should put actual spending in that context. Another department may spend less than half of their budget in the first half of the year, so their monitoring mechanisms would need a different context. 
  • Encourage self-monitoring. A monitoring system should encourage managers to take corrective action without additional prompting from budget/finance staff. For example, a computerized financial management system could incorporate budget controls that disallow spending requests that would result in exceeding the spending threshold. A low-tech incentive would be to share a summary of spending for the entire organization with the elected board and senior management team. The desire to look good in front of these audiences would inspire most managers to stay within their budget boundaries. 
  • Use the social influence of peers. As our previous point implied, the influence of one’s peers can be a powerful accountability tool. If participants in the budget process see the successes of others and face the prospect of disappointment or even rebuke from peers for not living up to their commitments (e.g., staying within budget, completing some task), then they are more likely to live up to those commitments. 

DON'T GO IT ALONE: POOLING BUDGETARY RISK TO SAVE MONEY IN YOUR BUDGET

A monitoring system that provides for flexibility to adapt to changing conditions has the following design elements: 

  • Options for adapting to changing conditions are tuned to a manager’s skill. Some managers are better at managing than others. Skilled managers can be given the flexibility to move money between areas as needed. For skilled managers, the only distinction they may need to adhere to in their budget may be personnel costs versus Less skilled managers may need more constraints on their available options. 
  • The monitoring system is supported by a budgetary contingency. A budgetary contingency provides a pool of funding for unplanned, unavoidable costs. Without such a contingency in place, departments have an incentive to “pad” their budgets to protect themselves against the risk of unplanned, unavoidable costs. Governments can realize significant savings by pooling this risk across departments. 
  • Counteracts “use-it-or-lose-it” spending. Use-it-or-lose-it is when departments scramble to spend remaining funds in their budget as the end of the year approaches. If budgets lapse at the end of the year, departments lose the chance to use those funds. Use-it-or-lose-it discourages efficiencies and encourages rash spending decisions at the year’s end. The budget system should provide constructive options for use of funds. For example, perhaps the funds could be directed to funding an equipment replacement schedule for the department. Funding these noncurrent liabilities and eliminating pressure to spend out the annual budget increases the flexibility of the budget system.