«MUNICIPAL BUDGETING: POSITIVES, PITFALLS, AND POLITICS Razaki, Khalid A. Dominican University Lindberg, Deborah L. Illinois State University ABSTRACT ...»
Proceedings of ASBBS Volume 19 Number 1
MUNICIPAL BUDGETING: POSITIVES, PITFALLS,
Razaki, Khalid A.
Lindberg, Deborah L.
Illinois State University
In this era of plunging municipal revenues, it has become imperative for city governments to use their
financial resources effectively and efficiently. Available city resources must be channeled towards satisfying the critical needs of citizens with minimal wastage. Proper budgeting and its effective implementation can play a vital role in this endeavor. A challenge regarding municipal budgets is that municipal budgeting requires spending public monies based on decisions made by individuals in their roles as mayor, council or board member, administrator, finance director, head of an operational department, and (sometimes) citizens. These people may also have personal agendas, which could lead to conflicts of interest and the ensuing problematic issues of information asymmetry and moral hazard.
This paper discusses several approaches to municipal budgeting, including incremental, performancebased, participatory, zero-based, and hybrid approaches. We also discuss the benefits of municipal budgeting as a control mechanism and communication tool, as well as the effects of GASB #34 on the budget process. In addition, we provide an analysis of potential politics, gaming by various participants, and pitfalls in the budgeting process. Finally, there will be a list of recommendations to ensure the development of an effective and efficient municipal budget.
INTRODUCTIONBudgets are the link between resources and objectives, and are monetary records of the goals to be achieved and the resources allocated to accomplish them. Municipal budgeting is a highly complex enterprise that calls for simplification (Ibrahim and Proctor, 1992). In this era of plunging municipal revenues, it has become imperative for municipal governments to use their financial resources effectively and efficiently. Available municipal resources must be channeled towards satisfying the critical needs of citizens as efficiently as possible; proper budgeting and its effective implementation can play a vital role in this endeavor. Municipal budgeting requires spending public monies based on decisions made by individuals in their roles as mayor, council or board member, administrator, finance director, head of an operational department, and (sometimes) citizens. These actors may also have personal agendas, which could lead to conflicts of interest and the ensuing problematic issues of information asymmetry and moral hazard.
ASBBS Annual Conference: Las Vegas February 2012
This article discusses several approaches to municipal budgeting, including incremental, performancebased, participatory, zero-based, and hybrid approaches. There is also a discussion of the benefits of municipal budgeting as a control mechanism and communication tool, as well as the effects of GASB #34 on the budget process. In addition, the paper provides an analysis of potential politics, gaming by various actors, and pitfalls in the budgeting process. Finally, there is a list of recommendations to ensure the development of an effective and efficient municipal budget.
ROLE PLAYERS IN MUNICIPAL BUDGETING
In most municipalities, the relevant role players include the mayor, members of the city council, city administrators, city finance officers, city department heads, and voters who are also taxpayers. Ibrahim and Proctor (1992, p14) have made a distinction between “spending department officers” and “treasury department officers.” Spending department officers seek to provide better service and greater funding for their areas, whereas treasury department officials and policy makers (primarily mayors, council members and city administrators) are basically “guardians” who have to ensure that available monies are not exceeded (ibid, p14). Thus, there is an inherent conflict between the spenders and the guardians. It is also well-known that there is a tendency on the part of spenders to incorporate “slack” into their budget requests.
It is human nature for each and every budget actor to possess biased agendas, notions of untouchable sacred cows, favorite or disliked projects and municipal services, individual political constraints or desires, and at times a tendency to use public monies that do not impinge on their own personal finances. It is imperative that budget actors are cognizant of and use the ethical precepts embedded in the theories of agency costs, agency responsibilities and moral hazard, and the role of information asymmetry in their decisions and advocacies, so as not to misuse city resources. In the case of private goods, consumers have an economic incentive to protect their investments while maximizing private utility. This is not the case where public goods (like municipal services and projects) are involved. Public contracting always involves “moral hazard”, which arises in any transaction in which the best economic interest of at least one of the parties may be better served by dereliction of duty or outright dishonesty. To ensure that various budget actors are properly playing their prescribed roles as agents of the taxpayers, some mechanism of accountability has to be established and enforced. This process leads to the incurrence of costs defined as “agency costs.” These costs trend upwards as budget actors violate their legal, moral, and fiduciary duties. Finally, city department heads, financial officers, and city administrators possess inside information not available to mayors, council members, and taxpayers. This leads to the phenomena of “information asymmetry.” Those budget actors possessing superior information should not exploit it for their unfair purposes.
Approaches to Municipal Budgeting
There are many ways to approach budgeting for governments such as cities, towns, counties, states, and the federal government. Several of the most common approaches to budgeting for municipalities will be discussed and analyzed in the following paragraphs. The primary emphasis in this paper is on cities, rather than county, state or federal units.
When budgets are prepared based on what was budgeted or spent in the previous fiscal period as a starting point, the budgeting approach is often termed "incremental" budgeting (Franklin & Carberry-George, 1999). In other words, a proposed budget may be prepared using the previously budgeted (or actual) amount as a starting point, then adjusting the budget up or down from the base amount. Such small increases or decreases to the previous budget are based on present circumstances, such as any new statutory mandates or changes in statutory mandates, budgeted revenues, efficiencies achieved, the overall economy, etc.
Incremental budgeting usually follows a "bottom-up" approach, where the budget is prepared by department heads, then sent to the city or county administrators for review and analysis (Franklin & Carberry-George, 1999). The municipal administrators then make budget recommendations to the finance committees of the municipality, who in turn make budget recommendations to the full board or town council of the municipality. The budget process is usually iterative, in that meetings may be held with the department heads, budget adjustments made by negotiation or arbitrarily changed, budgeted amounts may be changed, etc.
Ibrahim and Proctor (1992) quoted incremental theorists who consider that social and political decision making (for example, developing municipal budgets in which a number of vested parties with conflicting agendas play important roles) is usually highly complex. Incrementalism can be used as a method of simplifying this decision process by restricting budget options to a few which differ marginally from their precedents. There is a “base” that remains at the core and incremental analysis leads to relatively small adjustments from that base. Lindblom (1975), quoted in Ibrahim and Proctor (1992), opined that it would require constructing a program ordering function thatwould contain all values relevant to developing a budget. In the case of municipal budgeting, it would take the form of a social welfare function that encompasses all the desires of all relevant budget actors and an economic function that explicates the costs and benefits of each and every option, and all of this in the presence of limited information. Further, municipal administrators and finance officers face not only the enormous task of solving a very complex problem, but also the constraints of limited resources and limited time. Thus, practicality often dictates the use of a simplified and not overly expensive approach to budgeting, such as incrementalism.
An advantage of incremental budgeting is that it is relatively easy to implement. Another advantage of incrementalism is that it is more amenable to conflict resolution among budget actors and less painful compared to other budgeting approaches. It can provide a workable process to resolve the conflict between spenders and guardians. The spenders enjoy a sense of continuity for their base programs because the increases and decreases in their allocations are marginal. The guardians are assured that there is a ceiling on the growth of spending, if any (Ibrahim and Proctor, 1992). However, a disadvantage of the incremental approach is that certain programs or services may become entrenched and just be carried over from year to year without sufficient scrutiny.
Another budgeting approach, which is based on allocating resources (via budgets) to desired levels of support for government programs or services, is called performance budgeting, or performance-based budgeting. Rivenbark & Kelly (2006, p. 36) state that "Performance budgeting occurs when performance results are used to inform decisions during budget preparation and adoption." Or, performance budgeting may attempt to identify desired levels of specific outcomes and then allocate funds to the program or service based on a per unit cost allocation (Franklin & Carberry-George, 1999). Performance measures may be used to inform budget decisions and allocation of funds when the budget request is new or significantly expanded from prior periods (Rivenbark & Kelly, 2006).
ASBBS Annual Conference: Las Vegas February 2012 Proceedings of ASBBS Volume 19 Number 1 Ideally, performance budgeting should lead to greater accountability because it deals with quantifiable performance metrics which can be measured and actual results can be compared to what was included in the budget preparation. Those performance metrics that cannot be quantified are expressed in clear terms regarding the desired outcomes, and accomplishments can again be compared to expectations. Rivenbark and Kelly (2006) suggest that each municipal program should have service delivery goals and quantifiable measures based on its service mission. Quantified performance measures can be employed to monitor progress. It is important to stress that merely developing performance measures is not enough. These performance measures must be integral inputs in determining budget requests and utilizing them during budget deliberations (Rivenbark and Kelly, 2006). The implementation of performance budgeting entails the constant use of performance information in the development, implementation, and evaluation phases of the budget.
Proponents of performance budgeting argue that this budgeting approach can improve the effectiveness of a department or organization and improve the overall quality of budget deliberations and decision making (e.g., Rivenbark & Kelly, 2006). However, performance-based budgeting has been criticized for being difficult to implement in practice. In addition, some governmental services are mandated by statute, and may not lend themselves to a "per unit" or other performance analysis. Finally, political considerations may inhibit municipal administrators and finance officers from using this approach if sacred cows would get gored in the process.
Rivenbark and Kelly (2000) conducted a survey of selected finance officers and found that departmental expenditures, not performance measures, were the primary factors considered by city administrators and city councils in budget development and appropriation. Anecdotal evidence from individual finance officers input suggested that department heads were often resistant to the use of performance measures, city administrators were at times loath to provide financing for this activity, and that it was possible that using a performance based system may lead to escalated expenditures.
There is often a feeling among taxpayers that budgetary processes are more or less merely politics resulting from stasis rivalries, voter apathy, and interest groups haranguing and leading to the success of the politically powerful over those less powerful (Franklin & Carberry-George, 1999). Another commonly held belief is that is that the most critical decisions involving the use of public funds are made behind closed doors in “executive sessions” that exclude the participation of those stakeholders who do not have access to the most powerful political players (ibid.).