Manual Local Government Budgeting: A Managerial Approach

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The agency assumes the current level of expenditures is the base level, and the discussion revolves around what increment is going to be cut from the budget. The current revenue picture presents a profoundly different mandate to be confronted. Backcast Budgeting Because of the severity of the downturn—and my belief that this is a long-term problem, not a short-term problem—I believe a new method of budgeting for local governments is needed. I propose we consider Backcast Budgeting, a managerial approach to reducing expenditures in hard times. It involves the development of a vision of the future and works backwards from that vision to the present time.

This process identifies the steps necessary to achieve the vision by working back from the vision. Wikipedia describes this process as follows: Depending on the level of reductions needed, the percent might be higher. The reason for establishing a base budget that is below the forecasted revenues is to allow funding for the continuation of some high priority items. It also establishes the base budget for all organizational subunits. We make the assumption that at the lower level of funding during that past point in time, the organization was performing at some acceptable level of service.

Increases in the level of expenditures from a base budget typically occur over time. A number of factors—including general price inflation not the CPI , salary increases, new programs, and so on— create this situation. Backcasting in this application involves developing detailed information to identify the specific causes of the expenditure increases for each organizational unit for each fiscal period between the base period and the current fiscal period.

Examples of the types of increases identified might be across-the-board items such as the cost of a pay or benefit increase for all employees or department specific items such as the additional cost required for opening a new fire station. All costs associated with a program change should be identified.

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If a rate increase or a new fee was attached to an increased level of expenditure, that should be identified as well. We want to change the focus of the discussion from the justification of the status quo to looking for effective ways to lower long-term costs. Once the Backcast analysis is complete, policymakers can then review the individual budget packages to determine the current priorities of these expenditures.

The fundamental question Backcast Budgeting asks is: Through this process, policy makers will have the opportunity to roll back expenditures by eliminating or reducing the expenditure items that caused the increase. This process also might reveal the need to eliminate other lower-priority expenditures in the Base Budget. It could also highlight the need to build future revenues through rate increases or new fees to pay for the specific expenditures. It is important to point out that in the current methodology, rate increases or new fees are usually justified as necessary to maintain the status quo in services.


In Backcast Budgeting, rate increases and new fees would be justified to pay for specific, albeit ongoing, expenditures. It may also be a useful tool for the future as the economy strengthens and agencies begin to face the need to evaluate requests for new, higher levels of expenditures. These expenditures may include requests to reestablish funding for items cut in the current crisis.

We can rest assured there will be a flood of these requests when the economy hopefully recovers. Chris Hartung Consulting A very conservative process of forecasting revenues for the future budget period. For example, it is possible to perform highly sophisticated modeling on the location of fire stations, calculating how long it will take a fire engine to get to any building in a community.

By employing a variety of scenarios, the models can pose highly optimized options for the location of Fire Stations. Political constraints may hinder optimal decisions. Residents in one community may strenuously object to losing a fire station while another community may strenuously object to receiving afire station. As with other areas discussed, the mix of revenues will vary from state to state and from one local government to others within a state. Each category is briefly discussed below. The challenges in the budget process are the ability to project revenues accurately, to adjust tax rates based on economic conditions, to ensure economic stability, and to promote economic equity.

The most important though not universal source of tax revenue for local governments in the U. This tax is much maligned by the public because it is a tax on wealth i. As assessment techniques have become more sophisticated over the years, concerns about inaccurate assessments become less of an issue, but will never go away because market values are never fixed. Debates will certainly arise in rapidly increasing or decreasing real estate markets that occur cyclically in different parts of the U. Assessed value multiplied by tax rate equals taxes owed. Tax rates are expressed in different ways, but they all arrive at the same point: The sales tax is the other prominent tax source for local governments.

Typically, the sales tax is applied to tangible goods purchased, but may also apply to services. There may also be exceptions, such as for food or medicine. The income tax is generally considered the fairest tax since it is based on actual income that a person has; however, states may preempt local governments from applying this tax.

A local government may tax any number of other items, depending on state authority. These may include meals, entertainment, transactions related to sale of property, cars and boats. Due to low public acceptance of general taxes and due to state constraints, local governments turn to fees and charges to fund many of their services. This makes local governments look more like private companies that charge users for the goods and services that people receive. This approach enables the public to make a direct connection between what they pay and what they get.

In order to apply a fee or charge, the local government must be able to limit those who receive the service and must create a mechanism for collecting payment. The charge does not have to be full cost. Fees are used extensively for water, trash collection, and building inspections. They are also commonly used for a variety of recreation and leisure services. This enables the local government to segregate the revenues and expenses for the service, much like a company would do for a particular product line.

Federal and state governments provide an array of grants to local governments. The grants may offset disparities among local governments in a state based on the revenue producing ability of a local government. This is commonly done for the funding of local public schools. The grants may also be designed to implement state or federal policy priorities at the local level. During the Clinton administration, significant funds were provided for local police officers. During the Bush administration, the most significant federal grants have been for homeland security.

The problem with grants is that they are not dependable. Grants typically are approved for only one year and may or may not continue into the future. All of the preceding discussion has been about annual operating budgets for local governments. Local governments have responsibility for extensive capital investments: Maintenance of these facilities should be part of the operating budget; however, new facilities, replacement, or major rehabilitation of facilities are typically beyond the capacity of an annual operating budget. More expensive infrastructure investment requires financing over multiple years.

Financing the cost of expensive infrastructure that will last over many years will also share the cost across the different generations that will benefit from the investment. This is called inter-generational equity. The development of a separate capital budget is used to decide what infrastructure investments need to be made, in what years, and in what amounts. Capital budgets cover five or six years and may be updated on an annual basis.

The challenge is balancing which investments need to be made with how much debt a local government can afford to pay.

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A local government that acquires more debt will have less revenue to pay for services. Local governments borrow money for infrastructure through the bond market. A local government will first determine how much debt it can support. There may be limits imposed by the state; regardless, a local government will set its own affordability limits.

These limits typically include the following:.

Explicit limits enable the local government to set targets for its investment program. For large governments, this will require sophisticated, multi-year analysis that includes the annual reduction of existing debt from repayment, the annual increase in revenues available, and annual increase in operating costs. A local government may use one or all three agencies to rate its bonds, a service for which the local government will pay a fee to the rating agency.

The local government then releases its bonds for competitive bids on the interest rate it will pay. Private investment institutions that buy the bonds use the independent bond ratings to determine the interest rate they will bid based on market conditions on the day of the bond sale.

Local governments use a highly complex process for the development, approval, and implementation of their local budgets. They involve every manager in the local government and solicit extensive input from the public. The following outlines the major steps. The process begins with a set of guidelines that identify budget objectives and establish how much money a program may request. Budget requests are developed by the managers for each of the programs within the local government.

Local government budgeting : a managerial approach

These requests are then compiled by each department director. The budget office reviews the budget requests and submits recommendations to the chief executive. Chief executives hold meetings with the department directors and the budget staff in order to understand fully the implications of the requests. Ultimately, the chief executive compiles all the requests into a recommended executive budget that is submitted to the legislative body. The budget development process can take up to six months. Approving the budget is one of the most important responsibilities of local legislative bodies.

In large local governments, especially those with large legislative bodies, the legislative body may be organized into committees, each with oversight for different parts of the government such as public safety, public works, or education. The budget hearing provides an opportunity for anyone to address the legislative body on budget concerns.

Budget hearings will draw a wide range of interests. People who want more government support for programs may ask for more money. People who believe in a minimal role of government will testify that taxes should be reduced. In a politically calm, stable community, the budget hearing may last only be a few hours or less. When there are complex budget issues and competition for resources, the budget hearing could last many hours, span several days, and involve dozens of speakers.

After work sessions and the public hearing, the local legislative body will adopt a budget, usually 30 to 60 days before the beginning of the new fiscal year. The legislative body will spend days in its review process. Once a budget has been adopted, the chief executive implements the budget. How much discretion a chief executive will have in shifting funds will vary based on both local and state laws. Discretion within appropriations at the departmental level is common.

If a chief executive wants to reallocate funds across departments, approval of a budget amendment approved by the legislative body may be required. Over the course of the fiscal year, the budget office will monitor expenditures and ensure that funds are spent as intended and within the authorized amounts.

Elaborate systems exist for review, approval, and auditing of personnel levels and for all purchases. It is expected that all funds spent by a local government can be tracked to a specific transaction and documentation on the person who approved each transaction.

They will also approve the continuation of purchases and incomplete activities that span fiscal years. These actions modify the budget for the current fiscal year. A private sector, competitively procured, independent auditor will then review a sample of the transactions of the closed fiscal year and determine whether or not the local government is in compliances with expected standards.

For local governments in the U. We conclude where we started: Budgets are built from the ground up. Hundreds if not thousands of decisions are made along the way, with fewer decision points at each subsequent step. Modern budgeting systems can provide quality information that help local leaders exercise judgment.

Over time all of the various budget decisions add up to the community in which one lives. Perhaps the greatest challenge for local government leaders is deciding what kind of community people want for tomorrow. Where is the local government headed and how do current budget decisions affect the future? It is only with the review of multiple localities that one can begin to grasp the similarities and many points of departure for local governments in the U.

Arlington, Virginia is presented as an example of a local government in the U.

Arlington is a county government in the state of Virginia, but has no cities or towns within its 26 square miles. Geographically, it is rather small; however, it is resident for a population of approximately , and has approximately , jobs. This makes Arlington one of the most densely populated counties in the U. Arlington is sometimes referred to as part of suburban, northern Virginia; however, its highly urbanized characteristics are more reflective of Washington, D.

Executive authority is vested in the County Manager, who is appointed by the County Board.

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The County Manager is responsible for managing the government operations. Administratively, the current County Manager has two deputies and has organized the government into twelve departments, one of which is the Department of Management and Finance DMF. DMF coordinates the budget process for the County Manager and manages purchasing, accounting, and revenue functions.

The County Manager develops a recommended annual operating budget and biennial five-year capital improvement program.

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The County Manager recommends the budget in February of each year. The County Board conducts multiple work sessions with the County Manager and his senior staff as part of its budget review. The County Board conducts two public hearings. One public hearing receives comments on proposed government expenditures and a separate hearing receives comments on taxes and other revenues. This separation of expense and revenue hearings is mandated by Virginia state law. The County Board adopts the budget in April of each year, over 60 days in advance of the beginning of the new fiscal year on July 1.

The County Board officially appropriates the budget at the department level. This provides the County Manager with the discretion to make budget adjustments at the departmental level. Budget reallocation across departmental boundaries requires authorization by the County Board and is subject to a public hearing. Budget reconciliation occurs in November, approximately four months after the end of the prior fiscal year. Arlington provides a full range of public services that are representative of what both counties and cities provide in the U.

Arlington imposes a wide range of other taxes that include sales tax, business income taxes, and taxes on cars. Some services are also funded as enterprises that rely on direct charges including water, sewage treatment, and building inspections. Arlington receives a large amount of grants funds from the state and federal governments. Arlington holds a referendum on capital borrowing every other year. For more information on Arlington County, go to its web site at http: For more information on the structure of local governments in the U.