So, you have a budget – what does that mean and how do you leverage it? How do you find value and relevance beyond the compliance aspects of preparing and filing a budget? How do you integrate the annual budget process with operational and capital planning to ensure you cover all the bases? These questions are asked when someone has moved beyond the basic task of “getting the budget done” and begins to think strategically. They are questions that drive an organization forward and move the needle in terms of truly effective planning and performance management.
In for-profit business and many not-for-profit organizations, budgets are planning tools that help guide management decisions and provide benchmarks for progress against established goals and objectives. Much the same is true in government. Additionally, government budgets are legal documents developed and adopted in a very public, transparent process. Government budgets set limits on spending that if exceeded represent a violation of law, with potential consequences to governing bodies. Often a local government’s focus on compliance with budget law and the process for developing, approving, and eventually adopting the budget becomes the primary objective and the context or relevance of the budget information itself becomes secondary or lost altogether.
The budget should be a tool; part of a larger structure for meeting the goals and objectives of an organization. It should be relevant to management decisions in the current year and in planning for future years as well. A budget should be a slice of information for the current year that is drawn from a long-term, strategic planning and projection model developed to maintain consistent direction over time and as governing bodies change. There will always be adjustments along the way, and a well thought out fiscal plan utilizing projections and current budgets for operations and capital helps put side rails on those changes and provide consistency over time.
A budget should be coupled with a three- to five-year capital plan and a five- to seven-year financial projection model. These longer-term planning documents give context to current year budget asks and provide insight into impacts in future years of those asks. A current decision to purchase a piece of equipment carries with it future maintenance costs. The decision to build a facility may drive the need for additional FTE and other operational costs far into the future with direct impacts on fund balance that may not be otherwise anticipated in the current budget if not for projecting the costs.
Practically speaking, how does a local government move beyond the compliance of budgeting and towards relevance in the budget process? It starts with the governing body setting clear policy and goals for the organization. These goals become the priorities upon which funding decisions are made and resources are allocated. If a city prioritizes public safety, one would expect a shift in resources towards public safety expenditures and likely reductions in other areas not of the same priority. These priorities should be set and monitored in a way that allows the city to evaluate progress toward the goals and determine that resources are providing the desired outcomes within a stated period. If outcomes are not as expected, then resources can be reallocated towards alternative activities or even other programs and priorities.
Once the governing body has established goals and priorities, the organization should identify available funding sources across the organization and develop a long-term plan for funding priorities according to the governing body’s direction. Certain assumptions are made in the projection of resources and uses such as inflationary factors, interest rates, anticipated development and growth, and future capital plans. Planned expenditures (operations and capital) should be overlaid with a resource plan and assumptions on how they will be funded. These funding plans are driven by organizational policy and philosophies such as “growth pays for growth,” or generational equity concerns, and include strategies for “pay as you go,” debt financing, and use of reserves. Often combined strategies provide stability and smooth the impacts of seasonal receipts like water revenues and property taxes. Use a launch point such as the prior year’s audited financial statements for projections. This allows the organization to clearly identify potential impacts to fund balance in operating funds based on assumptions made and planned revenues and expenditures. Incorporating graphs and charts into the projections provide a quick visual reference point that can be used to easily communicate information to elected officials and constituents.
Once a long-term projection model is in place, the first year of those projections provides a logical starting point for development of the current year budget. It is a natural progression to take the policy direction inherent in the projections and translate into an operating plan for the coming year. The budget development is obviously at a more detailed level initially to provide context and information for internal decision making. The summary information provided to budget committees and governing boards for approval and adoption, respectively should relate back to the projection model at some level. That consistency and familiarity will help build confidence in the modeling and the process as well as help smooth the process for passing the budget.
A long-term capital improvement plan (CIP) provides the same planning foundation to capital budgeting as the projection model does for operations, and there are components that link the two. Development of a CIP begins with an evaluation of facilities and infrastructure that includes an inventory and condition assessment. Maps, capital asset detail listings, insurance records, and GIS information all can be used to develop a complete inventory. Condition can be assessed using engineering standards, actual or estimated age of the assets, observation, or other systematic methods. Armed with this information, the organization can estimate the time before major maintenance or replacement will be necessary. Current replacement or maintenance costs can be trended forward to reach reasonable estimates of future costs that can be factored into the CIP and related financing plans.
When developing a CIP, it is important to consider impacts (actual or potential) on operations in the form of direct dollars for repair and maintenance or additional FTE to staff facilities or maintain infrastructure. Purchase of park land may require additional mowing equipment and FTE to maintain the park. These costs should be identified in the CIP and integrated into operational cost projections as well.
A coordinated, well-thought plan for operations and capital starts with clear policy direction from the governing body. That direction translates to allocation of resources and spending plans in the form of long-term operational and capital spending and financing plans. Those long-term plans provide the foundation and parameters for current budget development and help ensure the organization takes a longer view than just the next fiscal year. Plans can and should change in the context of a changing environment and economy, but the organization’s vision and guiding principles should remain a constant within which those changes make sense.
About the author:
Rob Moody is a partner at Merina+Co, a CPA/Consulting firm specialized in the challenges of state and local government. He has more than 30 years’ experience working in and with government in the areas of budget, accounting, reporting, auditing, and operational effectiveness.
Contributed by: Rob Moody | Merina+Co
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