THE STEPS OF THE BUDGET PROCESS

Make sure your foundational elements are relevant and update as needed. This might include: 

• Refining strategies. Perhaps conditions have changed such that your underlying assumptions are less certain or more certain. Or maybe there are new opportunities or new problems to be considered. An example of the former might be a new grant that makes a strategy more cost-effective than it was before. An example of the latter might be that one of your strategies is not producing the results you thought it would. 
• Confirming tactics. This should flow from your refined strategies. Determine which programs/services should be considered in the budget to make progress on the strategies. 
• Reaffirming policy boundaries. Make sure your financial policy boundaries are still relevant. Recognize where you may be outside of the boundaries. The budget can be used to get back in bounds. For example, if reserves are too low, perhaps one-time revenues can be programmed toward building the reserves up. 
• Reaffirming the service baseline. Using service inventory as the starting point, reaffirm where the current level of service is acceptable and where there might be a case for change. For example, if there is a groundswell of community demand for more frequent trash pickup, that service may need to be expanded. 
• Identifying key financial risks the budget must mitigate and manage. Long-term financial planning identifies the most important risks to ongoing financial health. The budget should be developed in a way that reduces or mitigates those risks. For example, if unaffordable pension liabilities are a risk, then the budget might set aside funds to pay down the liability. 

A final part of reaffirming the bedrock is to make it clear to budget participants that: 

• The objective of the budget is to find the best way to allocate resources to vital public services and to achieve critical goals of the local government. 
• Allocating resources involves questioning past patterns of spending. 
• A “fair” distribution of resources is not necessarily defined as all stakeholders getting an equal increase. 

As a local government moves away from a traditional, incremental budgeting process, it may find that old habits die hard, so repetition of these themes of budgeting is necessary. As participants in a rethought budget process learn how it works, it becomes likely that they will be willing and enthusiastic participants in it. 

First, recognize that most members of the public will be better able to understand and more interested in the service implications of budgeting. Thus, public engagement in the budget will not be a discussion only about finances but rather a discussion about the services the public wants and what they are willing to pay. This means that successful public engagement in the budget will often be about making trade-offs. Participants must consider what they are willing to give up to get something else. 

Second, consider the scope of community engagement. Perhaps there is a hot topic where public engagement could be valuable for helping to reach better budget decisions. This “hot topic” might or might not be the entire budget. Local governments are complex organizations. The budgets are measured in millions of dollars, and operations can span a wide scope of activities. Though there are cases where it is useful to get the public’s perspective on the entire budget, it could be that there is some specific topic that is of great interest to the community such that time and energy on public engagement should be focused there. 

There are advantages and disadvantages to using public engagement to address the budget versus focusing on a narrower issue. The budget officer, as the decision architect, will need to weigh the pros and cons of a wide versus narrow scope of public engagement. The budget officer will also need to assess if the issues most likely to be of interest to the public are ripe for community engagement. 

Third, know the goal of public engagement within the scope you have selected. The goal could range from informing the public of a decision that has already been made to empowering the public to make the decision themselves. Most public engagement in public finance will be in the middle of these two, where the public’s involvement is used to help make the decision but is not the final word. This is often known as “deliberative democracy.” There are cases where the public might have the final word. For instance, participatory budgeting is a public engagement method where the public makes the final decision about how to use a pool of funding for their neighborhood. In any event, knowing the goal is important for setting participants’ expectations for what they will accomplish by taking part in public engagement. 

Fourth, design the approach to public engagement. In some cases, the design can be quite simple. Perhaps all that is needed is to hear from the community about their satisfaction with services and their preferences with respect to a few spending options. In this case, a survey could do nicely. In other cases, the goals of public engagement might be more extensive, requiring a different design including equipping participants with the basic facts of an issue before deliberating on it. GFOA’s Rethinking Public Engagement describes 10 principles for designing public engagement to fit various circumstances and challenges. No matter which method of public engagement is used, the design must consider timing. If public engagement does not happen early enough in the budgeting cycle, the full potential to influence local government decisions may not be realized. 

Finally, recognize when public engagement is not a good fit with the budget. Bad public engagement can increase public cynicism and ill will toward local government. For example, if the topics that the community is concerned about are not a good fit for public engagement and/or the capacity for engaging the public in a high-quality manner does not exist, then it may be better to forgo extensive public engagement (and perform only legally required steps). 

The budget architect will need to decide which dimension of self-skepticism will be appropriate for the circumstances. To illustrate, imagine that a government has adopted an ambitious new strategic plan. Policymakers are eager to use the budget to fund activities to further the plan’s goals. The lens of “Why are we doing this?” might be most appropriate to identify the spending that is most and least relevant to furthering the plan. Or imagine there is great concern about inefficiency in government. In that case, the lens of “What are we spending on this?” might be best. 

In addition to what dimension to pick, the budget architect must decide how broadly to apply that dimension. Applying a high degree of self-skepticism to the entire scope of government operations could be exhausting. Also, there could be sharply diminishing returns from applying the same level of self-skepticism to the same services year after year. It may be wise to look for the leverage points where a decision-makers’ and analysts’ limited time and energy will be best directed. Such leverage points might include: 

• Topics that cut across functional areas. An example would be to look for efficiencies in how employee benefits are provided, like health care. Examining cross-cutting topics has multiplier effects because gains realized will be felt throughout the organization. 
• Large areas of expenditure. Applying scrutiny to larger areas of cost will usually provide greater benefits than smaller areas. 
• Areas of rapidly increasing cost. Compounding cost increases can cause rapid areas of cost growth to become unmanageable. 
• Topics that have not received scrutiny in a long time. If an area of spending has not been scrutinized in a while, the time may be ripe. 
• Constituencies that do not often have a way to get their views across to government. This might be important if a government is exercising skepticism about how or why it is providing certain services. It may find that constituencies that are not normally heard from may have insights into how existing services could be more useful or what other services they would prefer over what is currently provided. 
• Topics and issues not normally discussed during budgeting. This could be useful when exercising skepticism about why and how services are provided. It is normal and understandable that the current way of doing things is taken for granted most of the time. It can be useful to view the government and its services from a new perspective. A good strategic planning process can facilitate this by using exercises, like scenario planning, that are designed to help participants envision futures that are different from the status quo.

Level 3: Are we doing the right things? 

• What is the risk? That the services we are spending money on are not the ones the community needs. This highlights the risk that government is not currently providing the right services, regardless of the efficiency, productivity, etc., of those services. The consequences can be profound. If a given service is not the right one for the community, then it should be replaced with a better option. Discontinuing a service will often be threatening to some people, but the potential benefits of redirecting the resources to the right service are great. 
• Decision unit: Outcomes, which is whether constituents’ lives are made better off by local government. Using outcomes does not require abandoning programs as a decision unit; in fact, outcomes are usually produced by programs. However, outcomes expand the perspective of budgeting beyond programs. The outcomes the public wants are often related to complex problems like ending homelessness, increasing feelings of safety in public, etc. Delivering these outcomes often requires concerted action not only between different programs in a local government but also between local government and other public, private, and/or nonprofit organizations.

The hierarchy represents a progression. Level 3 represents an ideal state, but it does not mean that governments are doing budgeting wrong if they choose to focus on Level 1 or Level 2 of the hierarchy. For example, imagine a new budget officer comes into a community where wasteful spending and financial distress have been pressing problems. In that case, the budget officer would be right to focus on the Level 1 risk of making sure budgets aren’t overspent and balance is maintained. Or perhaps the local government is just starting to improve upon a basic line-item budget. Perhaps Level 2 of the hierarchy is a more realistic place for the budget process to strive for than Level 3. 

We should also recognize some important nuances when it comes to navigating the hierarchy. 

Under Level 1, not all expenditures are controlled in the same way. For example, personnel costs are typically subjected to tighter controls because personnel often have more important long-term ramifications than commodities or contractual services. 

Discretionary versus nondiscretionary spending calls for distinctions to be made. For example, a local government must give more attention to making sure debt gets repaid than to making other types of expenditures. Failure to repay debt could result in a long-term, potentially crippling inability access the credit needed to make infrastructure investments.

Some costs may be subject to greater volatility, making spending control challenging. Fuel costs may be an example of this. It may not be practical to stop buying fuel if the fuel budget is exceeded. This may call for savvy risk management of volatile expenditure categories. 

Under Level 2, the amount of detail compiled for the program inventory/service baseline (one of the foundational components of the budget) will determine how well the risk of spending money on programs that aren’t productive enough can be mitigated. For example, if the program inventory has measures of how many people are served and how much each program costs, then it is possible to develop a cost per person. This could provide valuable insight into cost effectiveness. 

At both Levels 2 and 3, the capacity of the local government’s computer information systems to administer program and/or outcome information should be considered. Certainly, it is possible to administer them outside of the primary system of record (i.e., an ERP or financial information system), though this is suboptimal. Developing a programmatic structure outside the system of record may involve using MS Excel or other third-party software. This can still provide value because it shows how money is allocated to different services rather than just line items. The downside is that there is a disconnect between the system of record and the programmatic structure.

These measures can be difficult to construct. Outcome measures are notoriously difficult, but other measures are not without their challenges. Even if measures can be constructed, it may not be clear what action should be taken based on the result. For example, department managers may feel that their activities are only one factor among many that contribute to better outcomes. 

Further, it may not be self-evident if a measure result is “good” or “bad.” For instance, is a year-to-year change due to a substantive difference in performance or is it just normal variation? Even if it is accepted that a given result is undesirable, the course of action still may not be clear. For instance, should a program that is ineffective be stopped, or should attempts be made to fix it? 

These challenges are not meant to discourage governments from integrating performance into the budget. But the challenges do highlight that integrating performance considerations into the budget is more challenging than it might appear. The budget architect can address this challenge through our three principles: using leverage points, taking smart shortcuts, and avoiding burnout. 

The first leverage point is to focus performance measures on priority spending called for by the strategic plan. Much of the spending associated with the plan might be for new ideas. These new ideas may be short of details, though. Thus, during consideration of budget requests, it may be best to focus on: 

• An estimate of how many people will be served, the project cost per person served, and how this compares to other service options to achieve the same strategic priority. This provides a faster way to compare the potential of different spending proposals to attempting to project outcomes. 
• Whether the program idea is supported by rigorous third-party evidence of effectiveness, including effectiveness after the program scales beyond a pilot program. This is a shortcut to anticipate if a program is likely to have a positive outcome. 
• Whether the proposal includes a solid plan for how program effectiveness will be measured should the budget request be approved. For example, a “logic model” or “theory of change” describes the levers that a new program will act upon to achieve its desired outcome. This allows not only the desired outcome to be measured but also allows the program’s progress on pushing or pulling the levers to be measured—focusing the budget decision on whether a solid logical model/theory of change defers the work on deeper investigation of spending effectiveness until it becomes practical to do so.  

If the strategic plan will only cover a portion of what government does, what about applying performance measures to the rest of the budget? We can look for leverage points and smart shortcuts within the rest of the budget as well.

• Presentations. Presentations convey information and provide opportunities for feedback. Important presentations in a budget might include: forecasts, overview of key financial risks, program/service descriptions, results of strategic planning (e.g., goals, indicators of success), results of community engagement, or an orientation to the budget process.
• Collaborations. Collaboration is needed for fair and inclusive decision-making. Collaborations typically take place in meetings. Meetings are often derided as a waste of time but can be made worth the time with the right design. Good meeting design can be applied to staff meetings and meetings of the governing board. For example, governing board budgeting hearings can be organized around strategic goals rather than departments. 
• Reports. Reports keep people updated with information they need to be effective participants in the process. Important reports might include budget calendar and schedule updates, data that budget participants can use to support their decisions, and draft budgets. Budget information systems can also produce reports on missing data, budget approval status, anomalies in budget data, and more. The budget process design should be intentional about the information provided via reports. For example, reports should be consistent with the decision units, the dimension of self-skepticism applied to the budget, and the performance measures that will be of greatest value to decision-making. 
• Supporting analyses. Though this could be considered part of the items above, the budget process should be informed by analyses such as revenue forecasts, a program inventory/service baseline, performance measures, review of the results of last year’s decisions, and other analyses that may be needed to help reduce decision-makers’ uncertainty around the most important decision they need to make as part of that budget cycle. 

A principle to keep in mind while building the budget process is Parkinson’s Law of Triviality, which posits that people devote a disproportionate amount of time to trivial issues. This can be observed in a budget process when hours are spent discussing the line item for office supplies in one department while a multimillion-dollar asset acquisition is approved with a fraction of the scrutiny. Budget officers can counteract this tendency with smart design choices.

Design the budget process to encourage the use of forecast information. The traditional budget process tends to emphasize expenditures because budget discussions begin with the question: What did we spend last year? Another approach to budgeting starts by asking: What resources are available? You may even engage public officials in a discussion on whether tax and fee levels are appropriate given the service demands of the public. This difference in approach emphasizes revenue forecasts as a tool to reveal the level of resources available as the starting point for budget discussions. A budget process that takes a clear, structured approach to weighing competing uses of resources against each other is more likely to get value out of revenue forecasts. Further, the forecast should highlight a short list of the choices that need to be made based on the forecast results, along with the boundaries that the solution must stay within. 

Financial policies should require the use of forecasts to make decisions. For example, a structurally balanced budget policy would require that recurring expenditures remain within recurring revenue. 

The presentation of the forecast should coincide with points in the budget process where the information is most relevant. One key point is at the early stages of budget development—to determine how much can be spent. Another key point is at the end of the budget process—to verify that the budget is likely to remain balanced over the budget period. 

Share a clear and credible set of forecast assumptions. Show the assumptions about the financial and economic environment that underpin the forecast. The assumptions should rely on objective information on factors that drive revenue yield. To the extent possible, the assumptions should be compared to forecasts or analyses performed by credible third-party experts such as professional associations, consultants, or universities. Decision-makers should understand that the key assumptions underpinning the forecasts are subject to change. If and when they change, the government should be prepared to adapt by updating its forecast and financial plan and sharing it with decision-makers. 

To accomplish this, the budget must: 

• Identify the critical choices to advance measurable goals. For example, are there certain programs or projects that could be funded to make progress toward strategic goals? Is there a need to change the quantity or quality of day-to-day services? Do new revenue sources and/or higher taxes need to be considered? 
• Identify the trade-offs inherent in the critical choices. For instance, funding a new project or program often requires not funding something that was funded last year—or raising new revenue if the budget is to be structurally and intergenerationally balanced. 
• Highlight whether the choices made remain inside the budget’s boundary conditions. The most obvious boundary condition is that projected expenditures might be equal to or less than forecasted revenues for the budget period. Other boundary conditions include remaining compliant with financial policies and long-term financial strategies. 
• Highlight whether the choices made have reduced or exacerbated risks. Risks like long-term pension liabilities and deferred infrastructure maintenance are obvious financial risks. Less obvious risks might include poor quality of life, which makes the community unattractive to taxpayers; or poor public opinion of the local government, which makes people less willing to pay taxes or work with government to solve community problems. Explicit consideration of these risks is essential to the long-term viability of a local government and the ability of its community to thrive. 
• Counter Parkinson’s Law of Triviality. There is only so much time and energy available, and the truly important things are often crowded about the trivial. This phenomenon is called “Parkinson’s Law of Triviality” and is operative in many kinds of decision processes—not just local government budgeting. Fortunately, there are many ways to break the Law of Triviality. 

When making choices, the budget should focus on the leverage points we mentioned. This means that the budget process must focus decision-makers’ attention on a small number of issues to economize on the time spent on budgeting and to preserve the quality of decision-makers’ decisions. That means that the shortcuts for the less important decisions might be entirely appropriate. For example, imagine a service that is generally satisfactory and agreed to be important to maintaining day-to-day quality of life. In this case, deciding to continue the same spending as the last budget might be wise.

Even for the more consequential decisions a local government will only have so much time and energy available to analyze the choices it faces. Therefore, the budget should use analytical leverage points and short-cuts that help reduce uncertainty about the best course of action. Examples of leverage points and short-cuts include: 

• Per-unit measures. Deciding between competing options for spending can be assisted by comparing the options on per-unit basis, like cost per person served. Besides being easy to calculate (long division) it provides for an apples-to-apples comparison. 
• Focus on marginal costs and benefits. Decisions are often better when we examine the change in costs or benefits associated with changing the amount of a service produced. For example, pilot projects often do not scale up to serve larger populations nearly as well as they served the smaller pilot group. Even for established programs, an expanded program will probably have diminishing “bang for the buck” as the program gets bigger.

Communicating the Adopted Budget and Monitoring the Budget are the next sections of this GFOA series on The Process of Budgeting as Envisioned by Rethinking Budgeting.