THE BUDGET PROCESS

The budget process is a continuous cycle, wherein evaluation of this year’s performance signifi- cantly influences next year’s budget. The process described here focuses on the detailed proce- dures within a budget year. (It should be recognized, however, that well-managed governments

Governmental Budgeting in Practice

Mt. Lebanon Uses Zero-Based Budgeting

Mt. Lebanon’s approach to budgeting—the zero-based budget (ZBB)—is more sophisticated than the object-of-expenditure approach illustrated in this text. When the object-of-expenditure approach is used, there is a tendency to consider a department’s current budget as a starting point (or base), from which requests are made for additional expenditures. Under ZBB, however, each year’s budget starts from scratch (or zero), with each activity justified as if it were new. ZBB got its start in the United States with the Carter administration. Like all other budget approaches, it has both supporters and critics.

A key feature of the ZBB approach is the identification of “decision packages”—programs for which separate cost figures can be maintained. Service levels are described for each package, with each successive level providing for increased service with its incremental cost. The various levels are ranked in order of importance to the municipality, giving decision makers the opportunity to choose the level of service to be provided.

The proposed budget for Mt. Lebanon’s Tennis Center provides a simple illustration. As noted in the text, Mt. Lebanon proposed spending $187,710 in 2010 on its Tennis Center program, enabling the center to operate from 7:30 a.m. to 10:30 p.m. daily for 23 weeks. As a result, the center will generate revenues (included in the revenue estimates) of $200,600, creating an estimated “net profit” of $12,890. The budget also shows, for consideration by Mt. Lebanon’s commissioners, an incremental service level, providing for repairs to the grounds at a cost of $11,020. But this expenditure will not generate revenues, so if adopted, the profit would be reduced to $1,870.

manage for results. To accomplish this purpose, they identify their missions, goals, and objec- tives; prepare long-term operating plans to establish policies and operating strategies to achieve goals and objectives efficiently and effectively; prepare long-term financial plans; and prepare annual budgets containing measurable goals and performance objectives.) The typical annual budget process can be broken down into the following steps:

1. Prepare budgetary policy guidelines. 2. Prepare the budget calendar.

3. Prepare and distribute budget instructions. 4. Prepare revenue estimates.

5. Prepare departmental (or program) expenditure requests.

6. Prepare nondepartmental expenditure and interfund transfer requests. 7. Prepare a capital outlay request summary, if appropriate.

8. Consolidate departmental expenditure requests, nondepartmental expenditure and inter- fund transfer requests, capital outlay requests, and revenue estimates, and submit them to the chief executive officer (CEO) for review and revision.

9. Prepare the budget document.

10. Present the budget document to the legislative body. 11. Hold public hearings on the budget.

12. Record the approved budget in the accounts. 13. Determine the property tax (millage) rate. Budgetary Policy Guidelines

At the outset of the budgetary process, the CEO, the budget officer, and members of the legisla- tive body may discuss the policies to be followed when preparing the budget. During these dis- cussions, fiscal conditions of the current year are reviewed, along with the prospects for the following year. In addition, the following points might be considered:

1. The level of revenues collected to date and the level of revenues likely to be collected during the remainder of the year

2. Possible increases or decreases in current taxes and fees, and ideas for new taxes and fees 3. Current and future economic conditions, as well as any possible developments that might

affect the revenues or expenditures of the following year (e.g., a plant closing or the loss of a federal grant)

4. Items due the following fiscal year that might require an unusually large expenditure, such as repayment of a bond issue

5. The status of current-year revenues and expenditures and the possibility of a surplus (or deficit)

Analysis of these issues provides insight into potential financial problems a government may face during the following year. From the discussions of these issues, budgetary policies satisfactory to the CEO, the legislative body, and other affected parties should emerge. Resulting budgetary pol- icy guidelines should be disseminated to all persons responsible for preparing and reviewing vari- ous segments of the budget. The policies might cover, for example;

1. Types of programs and services to be emphasized and deemphasized 2. Changes in capital requirements

3. Legally permissible increases or decreases in taxes and fees 4. Contractually required salary adjustments

5. Inflationary adjustments Budget Calendar

For the budgetary process to proceed in an organized manner, certain deadlines must be met. A budget calendar formalizes all key dates in the budgetary process and often is speci- fied by a government’s laws. The calendar itself can be a simple listing of dates. At a mini- mum, it should list the steps of the budgetary process and the dates on which each of the various steps must be finished. More elaborate calendars often list who is responsible for each step and what data must be provided by whom and to whom. A sample budget calendar is shown in Table 3-2 .

Budget Instructions

To disseminate the budgetary policy guidelines and to assist the various subunits in preparing expenditure requests, a set of budget instructions should be prepared and sent to each person responsible for a segment of the budget. Budget instructions should contain the following: 1. A budget calendar

2. A copy of the budgetary policy guidelines

3. A statement summarizing the organization’s anticipated fiscal condition for the year 4. A statement of specific policies to be followed when preparing expenditure requests 5. A set of inflationary guidelines to be used in estimating future expenditures 6. Specific instructions on how each form and worksheet should be completed 7. Instructions on where to seek help and clarification of any ambiguities

TABLE 3-2 Illustrative Budget Calendar for a December 31 Fiscal Year

July 6 Departments receive instructions for the preparation of the budget.

August 15 Departmental expenditure requests are returned to the budget officer.

September 6–21 Departmental hearings are held with the mayor. October 1–8 Review and preliminary presentation is made to the city

council.

October 9–31 Budget is reviewed and finalized by the mayor. November 5–18 Budget printing and production take place.

November 20 Mayor formally presents the budget to the city council. November 21–December 15 City council conducts public hearings.

December 18 City council formally votes on the budget.

December 20–30 Budgetary information is entered into the computer. January 1 New fiscal year begins.

Revenue Estimates

A key part of the budgetary process is determining the total amount of resources available for spending in the coming fiscal year. This determination requires the responsible individuals to 1. Estimate probable fund balance in each fund at the end of the current year.

2. Project revenues expected to be realized during the budget year.

3. Summarize the estimates in a statement of estimated revenues (and transfers-in), such as the one illustrated in Table 3-3.

Departmental Expenditure Requests

Expenditure requests should be prepared by each department, agency, or other subunit of the government. These documents show the total expenditures of the prior year, the total estimated expenditures for the current year, and the proposed amounts of expenditures for the budget year. Detailed supporting schedules for each major object-of-expenditure should accompany these requests. Expenditure requests force department heads and other managers to examine the objec- tives, current levels of activity, and accomplishments of their subunits and to determine whether operational improvements are possible. If managers wish to expand the scope of the activities of their subunits, they must be able to justify the additional expenditures.

Expenditure requests often serve as the basis for departmental budgetary hearings, held by the central budget office, enabling those who make budget decisions to raise questions regarding the reasonableness of the requests in terms of program goals and past performance. Expenditure requests also help budgetary decision makers evaluate the departmental requests in light of the missions, goals, and objectives of the entire government and allocate resources to those activities that best serve the objectives of the government as a whole.

The following process should be applied to each line item when preparing departmental expenditure requests:

1. Determine total expenditures for the past year, and project expenditures for the current year. 2. Apply inflation and cost-of-living factors and other allowances for “uncontrollable” factors

to each current-year expenditure. This will result in a “baseline” expenditure request. 3. Identify those activities to be expanded, scaled back, or discontinued. Identify any new

activities that, if funded, will commence the following year.

4. Adjust each proposed expenditure for the changes in the type and level of activities identi- fied in step 3.

5. Prepare a justification for each new activity or each increase in the level of an existing activ- ity. Include in this justification the effect that not adopting or increasing the level of the activity will have on the organization.

6. Prepare a budgetary worksheet for each type of expenditure (personal services, con- tractual services, materials and supplies, etc.). The formats of the worksheets will vary with the type of expenditure being projected, although each worksheet should show the prior-year, current-year, and projected budget-year level of expenditures for each line item.

7. Summarize the information from each worksheet on the expenditure request.

PREPARING A BUDGETARY WORKSHEET Let’s look at the steps involved in preparing a bud- getary worksheet using the personal services (payroll) object-of-expenditure as an example. The heart of a personal services budget is the position classification plan, which lists all authorized

Fund: General Prepared by PNW Date: September 15, 2012 Approved by LVT

Acct. # Source 2011 Actual Jan.–Aug. 2012 Actual Sept.–Dec. 2012 Est. Act. Total 2012 Est. Act. 2012 Budget 2013 Budget Remarks

1110 Property tax $3,246,575 $1,384,300 $1,940,700 $3,325,000 $3,325,000 $3,550,000 Reassessment of property 1112 Liquor tax 355,240 235,650 124,350 360,000 354,000 480,000 International

Exposition 1114 Sales tax 1,864,680 1,252,840 857,160 2,110,000 2,200,000 2,650,000 Same as above 1116 Royalty payments 385,000 245,000 120,000 365,000 375,000 300,000 Decline in gas

production 1119 Fines and

penalties

84,610 63,450 30,000 93,450 92,000 100,000 International Exposition 1121 Rental charges 8,500 6,500 3,500 10,000 9,500 11,000 Same as above Subtotal $5,944,605 $3,187,740 $3,075,710 $6,263,450 $6,355,500 $7,091,000

2010 Transfer from

Enterprise Fund 122,000 — 145,000 145,000 145,000 50,000 Major events Total $6,066,605 $3,187,740 $3,220,710 $6,408,450 $6,500,500 $7,241,000

position titles within a department and their corresponding salaries. From the plan, past and cur- rent personnel costs can be identified. The positions expected to be occupied during the budget year should be recorded on the personal services worksheet, along with the past, current, and projected rate or salary attached to each position.

Some governments budget for employee (fringe) benefits as a separate item for each depart- mental activity; other governments budget for them as nondepartmental items, discussed in the next section. Because the cost of fringe benefits may differ by activity (police and fire department fringe benefits are likely to be more costly than general government employee fringe benefits), budgeting for them separately for each activity produces more accurate data for making budget decisions.

Other personal service costs that must be considered are overtime, shift differentials, and requests for temporary help. For example, on certain holidays it is sometimes necessary to ask police officers to work overtime to handle the crowds of parade watchers. In addition, some cities hire students to perform special tasks, such as street repairs, during the summer. These costs are usually known well in advance and can easily be determined by multiplying projected hours by appropriate pay and fringe benefit rates.

Another factor that warrants consideration in budgeting for personal services is the likeli- hood of vacancies from retirement or termination and the speed with which the vacancies are likely to be filled. The potential for vacancies provides opportunities for cost savings that cannot be ignored either by the department or the central budget office.

Table 3-4 shows a personal services budgetary worksheet for a police department. Notice that the worksheet explains the calculations made to develop requested amounts and justifies certain increases on the basis of expanded operational responsibilities.

When the worksheets for the various objects-of-expenditure are complete, summary information is transferred from these forms to the departmental expenditure request docu- ment. This schedule contains, at a minimum, the title of each object-of-expenditure, the level of prior- and current-year expenditures, and the requested level of expenditures for the bud- get year.

Some organizations summarize the requested level of expenditures by activity (e.g., vice squad, juvenile control, traffic control, and so on). Such information helps the CEO and members of the legislative body make judgments on the costs and benefits of specific activities. An expen- diture request for a police department is shown in Table 3-5 .

Nondepartmental Expenditure and Interfund Transfer Requests

Nondepartmental expenditures are expenditures that do not relate to any one specific depart- ment or activity. Instead, they relate to the organization as a whole. They are, therefore, bud- geted by the central budget office. Examples of nondepartmental expenditures include utility and maintenance costs of buildings used by several departments or programs (such as a city hall), interest on long-term debt, and liability insurance premiums for city-owned vehicles. Some expenditures, such as judgments and claims and employee benefits, may be budgeted either by each department or by the central budget office. In addition, many organizations budget an amount to cover possible revenue shortfalls, emergencies, or contingencies. An interfund transfer is a movement of existing resources from one fund to another as necessary for operating purposes. Interfund transfers are classified separately from revenues and expen- ditures. Table 3-6 provides an example of a nondepartmental expenditure and interfund transfer request.

Fund: General Prepared by PE Function: Public Safety Approved by PRT Department: Police Date: September 15, 2012

Prior-Year Actual Current-Year Est. Actual Budget Request b Code Position Title No. Rate a Amount No. Rate a Amount No. Rate a Amount Remarks

101 Chief 1 $51,300 $ 51,300 1 $54,000 $ 54,000 1 $59,474 $ 59,474 102 Captain 2 44,888 89,775 2 47,250 94,500 2 52,324 104,648 104 Lieutenant 4 38,475 153,900 4 40,500 162,000 4 42,903 171,612 105 Detective 2 32,063 64,125 2 33,750 67,500 2 35,753 71,506 106 Sergeant 5 29,925 149,625 5 31,500 157,500 5 33,369 166,845 108 Police Officer 12 25,650 307,800 12 27,000 324,000 14 28,602 400,428 Two new

positions c Total 26 $816,525 26 $859,500 28 $974,513

a _{Includes employee benefits, which are budgeted at 13.5% of salaries and wages. This rate is 1% higher than the current rate because of an expected increase in the cost of}

pension and health care benefits.

b _{lncludes a cost-of-living factor of 5.0% plus an additional merit increase of $2,000 each for the chief and captains.}

c _{Justification for new positions: In the latter part of the current year, an area of 4 square miles was annexed. To provide an adequate level of protection in this area and the}

original parts of the city, an additional patrol unit is necessary. If this additional unit is denied, the annexed area, containing 562 residents, will receive inadequate police protection, or the entire city will receive a lower level of protection due to the overextending of available personnel and equipment. In either case the level of crime can be expected to rise significantly if the additional unit is not approved.

TABLE 3-5 Departmental Expenditure Request

Fund: General Prepared by BER

Function: Public Safety Approved by PRT

Department: Police Date: September 15, 2012

Code Object Prior-Year Actual Current-Year Budget Current-Year Est. Actual Budget Request 100 Personal services $816,525 $859,500 $859,500 $ 974,513 200 Travel 4,600 4,800 4,800 5,350 300–600 Operating 60,500 61,600 61,450 62,350 700 Equipment 62,470 66,500 65,800 87,100 Total $944,095 $992,400 $991,550 $1,129,313

Narrative: The Police Department maintains law and order in the community. Major departmental expenditures are for personnel, operating, and equipment. Because of the increased area of the city, the department must add two police officers and an additional police cruiser. In addition, it must replace three police cruisers that have reached the end of their useful lives. Finally, the department must upgrade its communication system because of a recently passed law requiring that police departments throughout the state maintain comprehensive networks that are integrated into the state system.