THE BEDROCK OF THE BUDGET PROCESS

A good strategic planning process focuses participants on the future and how they might shape it to increase community well-being. It does not focus on producing a detailed planning document because the document becomes obsolete when the world changes. Key design principles for strategic planning begins with accepting uncertainty.

The approach to planning and strategy must be to accept our limited knowledge of the future. This idea is expressed by the “time cone” depicted below. The left end is closer to the present where the near future is more predictable. To the right is the far future, which is less predictable. The time cone shows us that tactics, strategy, and vision are simultaneously part of strategic planning but receive different emphasis based on how far you are looking into the future.

The vision is what the future might look like in response to specific actions. It is an aspirational state for the community. It should be broad enough that it has room for changes in strategy. For instance, when elected officials change, the strategy may need to shift. At the same time, the strategies should not be so broad as to be meaningless. To illustrate, a community vision might call for: 1) reducing street-level violence, as measured by homicide or aggravated assault rates; or 2) an increase in park facilities, as measured by capital improvement expenditures per park. Either of these could be broken down to measure how different neighborhoods or populations are doing. 

As part of strategic planning, local governments often face complex problems like degradation of the natural environment, increasing economic opportunities, drug addiction, and more. Strategic planning should define the problem, seeking to identify the root causes. This makes it easier to find strategies with the best chance of working. To illustrate, our earlier examples had to do with street-level violence. If a community’s most important challenge with violence was domestic violence, then the solutions would look very different. 

This sets the stage for a savvy strategy—one that addresses the right underlying causes of the problem, has a coherent underlying logic for how the problem will be solved, and defines what success looks like in a way that success, or lack of, can be verified later. 

A risk in strategic planning is trying to cover too much. For example, there may be a belief that every department must be covered in the plan. Or there may be many issues facing the community with a wish to address them all. However, a local government only has so much capacity to act. A planning process needs to identify the most important strategies and the ones that give the local government (and its partners) the best chance for success. You can provide focus by introducing constraints on what the strategic planning process will consider. Constraints can be a filter to remove some strategies from consideration and highlight trade-offs between different strategies. For example, outside mandates from higher levels of government could be considered a constraint. 

Effective strategy considers the assets available, starting with fiscal resources but also including community support, staff expertise, and elected official support. There will always be some limit on the assets available, which forms a constraint. 

Veteran budgeteers may wonder how a focused strategy could serve as a filter for deciding where to allocate money in the budget. If strategies should be focused on a limited number of critical problems, then much of the local government’s operations will not be related to the strategy. If that is the case, how do you evaluate budget requests, many of which will concern operations that fall outside of the strategic focus? First, if a strategy is focused, it helps identify the most valuable budget requests. It helps prevent “strategic alignment” from becoming a box-checking exercise, where every request is related to the strategy in some way. 

That said, local government will always have responsibility for day-to-day services, and those services may not necessarily be “strategic.” Budget requests that do not support the strategy could be evaluated on their potential for maintaining acceptable standards for day-to-day services. We’ll have more to say on this in the section on service baselines. 

Strategic plans should: A) welcome adjustments based on recent experiences; and B) avoid over-specifying long-term goals that may be made obsolete by changing conditions. Further, the time cone tells us that strategy cannot be viewed as a straight line. Rather, adjustments will need to be made to respond to changing conditions. 

A rolling planning process should precede budgeting to update strategies and tactics. The goal is not to produce a new “strategic plan” but to guide the budget process about where resources should be allocated. A rolling planning process could become burdensome if it tries to do too much. It only needs to guide what to fund in the budget and make sure that the strategies stay relevant to changing realities. With that in mind, the goals of a rolling plan are twofold. 

For planning to have a positive impact, it must be collaborative. The reason is simple: If people are involved in planning, then they are likely to be committed to the strategies that planning produces. If they are simply handed the strategies and told “do it,” then their commitment may be half-hearted. Further, bringing multiple viewpoints into strategic planning offers the best chance of accurately defining the problems the community faces and identifying solutions.

If the process is not perceived as fair, the resulting plan is less likely to receive support. The two core elements of fairness are procedural justice and distributive justice. 

Identifying all the services/programs a government provides requires an investment of time and energy. A program/service inventory can take place at several levels of detail. The most basic inventory is a list of program names and descriptions of what the programs do. 

Beyond that, a program/service inventory could include descriptive features of the service and characteristics of the program that can be adjusted to modify service cost and performance. Such features include but may not be limited to: 

• The external (or self-imposed) mandates governing how the service is provided. This could include contractual requirements (e.g., labor agreements) as well as professional “best practices.” 
• How many people or customers are served. Is the service for the entire population of the  jurisdiction or a subset? 
• The extent to which the clientele for a program must rely on government for the service. Are there other places to get the service? 
• Whether demand has been increasing or decreasing over time. 
• The cost of the service. 
• The revenue the program produces (e.g., user fees). To what extent do the revenues cover the costs of the service? 
• The performance measures demonstrating efficiency of the program with its resources, how satisfied clientele are, and/or how effective the program is at achieving its purpose.  
• Data from third-party studies on program effectiveness are becoming more widely available. The Results First Clearinghouse is a good example. A program inventory could show what third-party studies have found on program effectiveness, where study results are available. If outside research suggests that a given program is not effective, it may call into question if continuing to fund that program is the best use of resources. If research suggests a program is effective, then it may suggest the government emphasize rigor in program implementation in order to realize the program’s potential. 
• Whether the service responds to needs in an underserved community.

Budgeting and Financial Planning 

• Definition of a structurally balanced budget. Local governments are often subject to legal requirements to have a balanced budget, where sources equal uses. However, such a budget may not be balanced over the long term. For example, if reserves are used to pay for ongoing expenditures, then they will eventually run out. A policy can provide for a more rigorous, local definition of a balanced budget, where ongoing revenues are matched with ongoing expenditures. A policy should also recognize role of long-term liabilities, like pension debt. A policy could direct that a “balanced budget” is one where contributions towards benefits already accrued as well as new benefits earned in the current fiscal year are being sustainably funded. 
• Consolidated budget. The budget process should be inclusive of all funding available to the local government. If some funding is exempted from the scrutiny of the budget, then, at best, there will be lost opportunities for synergy. At worst, dysfunctional funding “silos” could develop, leading to duplicative and wasteful spending. A non-obvious example is spending requests made outside of the normal budget cycle, such that they avoid comparison to other options to use limited resources. That said, large governments in particular, may need to consider if a fully consolidated budget would be worth the additional complexity and administrative burden. A reasonable alternative to a fully consolidated budget might be to identify those areas that would benefit most from a consolidated approach and define those as minimum number of participants in a consolidated approach. 
• Long-term planning. A policy should commit the local government to producing a long-term financial plan and a forecast for its operations. Long-term planning and forecasting are discussed in more detail later in this document. 

These are the most universally salient policies to the operating budget. There are other policies a government should consider adopting to support financial management, such as debt policies or policies for long-term capital planning.  

You can access information about the policies described in this section, and more, in the GFOA book Financial Policies. You can also download policy examples from local governments as part of the Financial Policy Challenge. 

There may also be policies a government may wish to adopt to put boundaries on the budget that go beyond financial management. For example, there could be a policy about engaging the public in important decisions or using the budget to serve communities in need. 

Finally, state governments can benefit from research conducted by Pew Trusts. Many of Pew Trust’s recommendations for states are aligned with the recommendations GFOA has made here in this series. 

Identify a minimum time horizon but customize it to current needs. Many governments used five years as a minimum time horizon for long-term planning/forecasting, but the length should depend on the issues that challenge the local government’s financial condition. For example, if a local option tax that provides 25% of local revenue is scheduled to sunset in six years, a five-year plan and forecast might not be useful. Or, perhaps there are important foreseeable economic, demographic, and/or technological factors that will meaningfully impact revenue or expenditures in the long-term. The forecast should be of a sufficient time horizon to help the local government plan for these.

Identify a minimum scope but be open to looking beyond the general fund. The scope of a long-term financial plan can span from the general fund to the entire government. The interrelationships of a government’s funds influence which funds are included in the plan. For example, if there are material interfund transfers between the general fund and other funds, then the plan’s reach should include these other funds. Consider developing time horizons for different parts of the plan. For example, capital intensive operations might require a longer time horizon. 

Identify a manageable frequency for planning. It may not be necessary to do a long-term financial plan and forecast every year. It might be wise to do a comprehensive financial plan every few years and a streamlined update to go along with the budget. Each update should show how the government is doing in its efforts to achieve and maintain structural balance calculations and explain the direction in which government is trending.  

A plan that includes more than a forecast. A forecast is a necessary component of a long-term financial plan, but a forecast alone is often not enough. A long-term plan should provide a narration that explains why the government’s financial trajectory is headed in the direction it is. This helps elected leaders understand potential problems and possible solutions. 

The financial plan should also identify risks to the financial condition and may need to include an analysis of those risks. Particularly important examples include: 

• Long-term debt. High levels of indebtedness relative to ability to repay and backloading of debt repayment schedules are examples of risks that should be highlighted.  
• Pension liabilities. The long-term financial plan should have projections of employer contributions based on current policy and expected investment returns. In addition, municipal governments that administer their own pension benefits should also consider incorporating risk analysis and pension stress tests that show the same forecasts for potential costs under different future investment and economic scenarios and other changes in plan assumptions (e.g. demographic shifts, inflation, etc.). 
• Infrastructure. A long-term financial plan should reference a comprehensive asset inventory and management system. This should include an assessment of accumulated past unmet infrastructure preservation needs and annual future spending on capital maintenance needed to maintain infrastructure in a state of good repair.  
• Other risks. A long-term financial plan should raise risks that could disrupt the local government’s finances. The plan should identify and assess the financial implications of risks arising from demographic, environmental, and technological shifts sources.  Examples include aging populations, exposure to natural catastrophes, or exposure to cyberattacks.