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Budgeting for Local Governments

Budgeting for Local Governments. Minnesota Government Finance Officers Association. Albertville, Minnesota June 25, 2014. “Our Reputation Proceeds Us”. Giving money and power to government is like giving whiskey and car keys to teenage boys. ~ P. J. O’Rourke

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Budgeting for Local Governments

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  1. Budgeting for Local Governments Minnesota Government Finance Officers Association Albertville, Minnesota June 25, 2014

  2. “Our Reputation Proceeds Us” • Giving money and power to government is like giving whiskey and car keys to teenage boys. ~ P. J. O’Rourke • "If you put the government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand." ~ Milton Friedman

  3. Does this sound familiar?

  4. Challenges for Government Economic transition: impacts tax base Aging population changes spending and voting patterns Structural changes Tax/expenditure limitations Government deficits Deteriorating capital infrastructure

  5. Budget FunctionThe Balancing Act • Revenues and expenditures must balance. • Agency requests consistent with overall priorities and financial policies. • Budget reflects the sometime contradictory policies and intent of elected officials. • Long term fiscal health not sacrificed to short term solutions. • Boards/Councils make informed decisions.

  6. Budget Types

  7. Line-Item Budgeting • Expenditures related to commodities • What is to be bought • Focus is on control

  8. Program Budgeting • Organizes information along “program” rather than departmental lines. • a set of activities with a common goal (public safety) • Expenditures related to public goals

  9. Performance Budgeting • Performance goals and objectives • Demand, workload, efficiency, and effectiveness (outcome) measures for each program • What is to be done? • Focus on managerial aspects

  10. Zero-Based Budgeting • Prepare decision packages representing various service levels • Rank order them • Rankings are merged across entire governmental unit; single, ranked list • Funding allocated down the list until the money runs out.

  11. Recommended Budget Practices “GAAP for Budgeting”

  12. National Advisory Council on State and Local Budgeting - NACSLB • Assoc. of School Business Official Int’l • Council of State Governments • GFOA/ICMA • National Association of Counties • National Conference of State Legislators • National League of Cities • Industry, Labor, and Academia

  13. What are Recommended Budget Practices? • Comprehensive processes & procedures - define an accepted budget process • “Goal-driven” approach: Planning, development, adoption and execution phases of budgeting

  14. Benefits of Recommended Practices • “TOOL” for governments seeking to improve budget process • Educate on potential of budget systems • Assessment of existing • Guidance on improving • Promote education, training, and research on effective techniques

  15. Practices are “Recommended”; Not Required Implementation - over number of years • Apply to variety of management and political styles • State/local laws, political aspects, management needs

  16. Essential Features of a Good Budget Process • Long-term perspective • Linkages to organizational goals • Focuses decisions on results and outcomes • Provide incentives to management and employees • Promotes effective communication with stakeholders

  17. Recommended Practices (NACSLB) • 4 Major Principles • 12 Elements • 59 Practices

  18. Four Principles of the Budget Process (NACSLB) • Establish broad goals to guide decision making • Develop approaches to achieve goals • Policies, plans, programs, and mgmt. strategies • Develop a budget consistent with goals, policies, plans, etc. • Evaluate performance/make adjustments • Encourage progress toward achieving goals

  19. Twelve Elements of the Budget Process • Establish Broad Goals to Guide Government Decision Making • Assess community needs, priorities, challenges and opportunities • Identify opportunities and challenges for government services, capital assets, & management • Develop and disseminate broad goals

  20. Twelve Elements (cont.) • Develop Approaches to Achieve Goals • Adopt financial policies • Develop programmatic, operating and capital policies and plans • Develop programs/services that are consistent with policies and plans • Develop management strategies to deliver the strategic plan

  21. Twelve Elements (cont.) • Develop a Budget Consistent with Approaches to Achieve Goals • Develop a process for preparing and adopting a budget • Develop and evaluate financial options • Make choices necessary to adopt a budget

  22. Twelve Elements (cont.) • Evaluate Performance and Make Adjustments • Monitor, measure, and evaluate performance • Make adjustments as needed

  23. 59 Recommended Budget Practices • Procedures that assist in accomplishing elements of budget process • Multiple practices associated with each element • Appropriate for all governments • All circumstances and situations

  24. What is a Budget? A quantified, planned course of action over a definitive time period: • Forces an organization to consider the demand for services/resources required • Translates priorities into resources • Highlights potential problems in sufficient time to take corrective actions • Creates a baseline against which actual results can be compared.

  25. Functions of the Budget The budget is a means--not an end. “Turns policy and intentions into services.” • The budget is a policy document • determines who gets what • “establishes organizational priority.” • Budgets enable organizations to prioritize resources to attain objectives. • Budgeting defines the scope of specific operational activities

  26. Budgeting • Goal of the Budget Function: Manage the balancing act between providing funding for vital services, protecting the fiscal health of the whole agency and ensuring the budget meets the goals of elected officials. • The budget is a tool for proving services.

  27. Budget Process is Crucial Government Activity “Characteristics” of budget process determine: • Quality of decisions made • Level of acceptance of budget decisions

  28. Distinguished Budget Presentation Award

  29. Budgetary Reporting - GFOA Distinguished Budget Presentation 4 major aspects of budget documentation are identified and communicated: Budget a s a policy document Budget as a financial plan Budget as an operations guide Budget as a communications device

  30. Four Themes of Budget Presentation • Budget as a policy document • Should identify and clarify policies. • Policies should be adopted by governing body. • 5 criteria

  31. Four Themes of Budget Presentation • Budget as a financial plan • Takes account of available and anticipated resources and provides a plan for their disposition. • Primary instrument for promoting solvency, efficiency, and collective choices regarding distribution/allocation of resources • 10 criteria

  32. Four Themes of Budget Presentation • Budget as an operations guide • Operating considerations go beyond financial dimensions, and effect the number and level of employees and other factors that affect day-to-day activities of various units • The budget seeks to explain the relationship between organizational units and programs. • 6 criteria

  33. Four Themes of Budget Presentation • Budget as a communications device • The printed operating budget is a central focal point for residents, taxpayers, the financial community, and the media. • Budget hearings on the proposed operating budget afford the public the single most important opportunity to obtain and to understand the workings of a locality • 6 Criteria

  34. Budget Award continued Budget document reviewed by 3 independent reviewers Judged proficient or outstanding by 2 reviewers in all 4 basic categories And judged proficient or outstanding in 14 criteria identified as mandatory Unlike CAFR allows more flexibility of format & context

  35. What to Expect from Potential Stakeholders • Don’t have time • Lack of understanding • Want simple solution • Perception of government often poor to begin with • Special & narrow interests • Strong bias

  36. Budget Award continued • Great deal of effort for first time • Not as time consuming in year 2 • 1996 Government Finance Review Article asked “How important is the budget to the credit evaluation process compared to the Official Statement and the CAFR?” • Fitch & S&P Rate OS, Budget, CAFR • Moody’s Budget, CAFR, OS

  37. Budget Award continued • Minnesota Participants: • 27 Government entities receive the award. • 14 Independent reviewers • List available on GFOA web site with links

  38. Criteria • Table of contents (C1) mandatory • Strategic goals & strategies (P1) • Long-term, entity-wide, strategic goals • Provide context for decisions • Reference: GFOA’s best practice on Establishment of Strategic Plans.

  39. Criteria • Short-term organization-wide factors influencing decisions (P2) • Key factors guiding upcoming year’s budget • Could include; personnel costs, tax levels or capital improvements • Priorities & Issues (P3) mandatory • Summary of key issues/decisions made during budget process and their ramifications

  40. Criteria • Budget overview (C2) mandatory • Executive summary • Similar to MD&A in CAFR • Understand quickly major budgetary items & trends • GFOA best practice Effective Presentation of the Budget Document • Organization chart (O1) mandatory

  41. Criteria • Fund descriptions & structure (F1) • Each major fund • Whether its governmental, proprietary, or fiduciary or the fund type • Department/fund relationship (O2)

  42. Criteria

  43. Criteria • Basis of budgeting (F2) • For each fund type • Explain basis of accounting verse budgeting basis • Financial policies (P4) mandatory • Should include financial planning, revenue, and expenditure policies • Should define balanced operating budget • Various GFOA best practices

  44. Financial Policies • Guidelines: operational and strategic decision-making related to financial matters • Identify acceptable/unacceptable courses of action, establish parameters in which to operate, and provide standard against which fiscal performance can be judged

  45. Essential Characteristics • Consistent with broad goals. • Mutually consistent. • Integrated into various planning processes: • Program planning • Capital planning • Budget preparation

  46. Financial Policies:Benefits • “Good government” practice. • Streamline decision-making process. • Provide direction to decision makers. • Improve control. • Avoid hazards of short-term horizon for decision making. • Provide political cover for difficult decisions.

  47. Common Objections • Statutes are sufficient – financial policies would be redundant. • Fewer controls the better – need maximum control and managerial discretion. • Small size of government.

  48. Criteria • Budget Process (P5) mandatory • Help decision makers make informed choices about the provision of services and capital assets, and…… • Promote stakeholder participation in the process • Internal process, opportunities for public input, adoption of the budget, and process for amending budget

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