Anatomy of a priority-based budget process.

• Author: Kavanagh, Shayne C.

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The traditional incremental approach to budgeting is not up to the financial challenges posed by the Great Recession. An incremental approach is workable (but not optimal) in periods of revenue growth because the new revenue increments can be distributed among departments and programs with relatively little controversy. There is much more potential for acrimony, though, when allocating revenue decrements during times of revenue decline. Hence, the popularity of across-the-board cuts--they are perceived as equitable and thus attenuate conflict. But by definition, across-the-board cuts are not strategic. They do not shape and size government to create value for the public.

Priority-driven budgeting (PDB) is a natural alternative to incremental budgeting. Using PDB, the government identifies its most important strategic priorities. Services are then ranked according to how well they align with the priorities, and resources are allocated in accordance with the ranking. (1)

This article identifies the essential steps in a PDB process and the major levers that can be pushed and pulled to customize PDB to local conditions. The following organizations contributed to the Government Finance Officers Association's research on PBD: the City of Savannah, Georgia; Mesa Country, Colorado; Polk Country, Florida; Country, Washington; City of Walnut Creek, California; City of San Jose, California; and City of Lakeland, Florida.

MAKING THE PROCESS YOUR OWN

Designing a process that is fair, accessible, transparent, and adaptable is a challenge. However, it is also an opportunity to customize a PDB process that fits your organization best. The GFOA's research has identified five key customization questions that need to be answered as you design a PDB process:

* What is the scope? What funds and revenues are included? What is the desired role of non-profit and private-sector organizations in providing public services?

* What is the role of PDB in the final budget decision? Is it one perspective that will be considered among many, or is it the primary influence? By what method will resources be allocated to services?

* What is the organizational subunit that will be evaluated for alignment with the organization's strategic priorities? Departments, divisions, programs? Something else?

* How will subunits be scored, and who will score them? The scoring mechanism is central to PDB.

* How and where will elected officials, the public, and staff be engaged in the process? Engagement is essential for democratic legitimacy

Jurisdictions can tailor the process to their needs so long as they stay true to the philosophy of PBD, which is about how a government should invest resources to meet its stated objectives. Prioritizing helps a jurisdiction better articulate why its programs exist, what value they offer citizens, how they benefit the community;, what price we pay for them, and what objectives and citizen demands they are achieving. PDB is about directing resources to those programs that create the greatest value for the public.

STEPS IN PRIORITY-DRIVEN BUDGETING

A PDB process can be broken down into a few major steps. In addressing each step, there are several options for answering the five key customization questions.

1. Identify Available Resources. The organization needs to fundamentally shift its approach to budgeting before embarking on priority-driven resource allocation. An organization should begin by clearly identifying the amount of resources available to fund operations, one-time initiatives, and capital expenditures, instead of starting out by identifying the amount of resources the organization needs for the next fiscal year.

Many jurisdictions start developing their budgets by analyzing estimated expenditures to identify how much money the organizational units will need to spend for operations and capital in the upcoming fiscal year. Once those needs are determined, then the organization looks to the finance department or budget office to figure out how they will be funded. When adopting a PDB approach, the first step is to gain a clear understanding of the factors that drive revenues. Jurisdictions perform the requisite analysis to develop accurate and reliable revenue forecasts of how much money will be available for the upcoming year.

Once the amount of available resources is identified, the forecasts should be used to educate and inform all stakeholders about what is truly available to spend for the next fiscal year. As the organization begins developing its budget, everyone must understand and believe that this is all there is--that there is no padding beyond what is forecast. Sharing the assumptions behind the revenue projections creates a level of transparency that dispels the belief that there are always "secret funds" to fix the problem. This transparency establishes the level of trust necessary for PDB to be successful.

In the first year of implementing PDB, an organization might chose to focus attention on only those funds that appear to be out of alignment on an ongoing basis. This will usually involve the general fund, but the organization might decide to include other funds in the PCB process. Polk County, Florida, for instance, limits the scope to the general fund.

Intended Result: A common understanding throughout the organization about the amount of resources available, which limits how much can be budgeted for the upcoming fiscal year.

2. Identify Your Priorities. PDB is built around a set of organizational strategic priorities. These priorities are similar to well-designed mission statements in that they capture the fundamental purposes behind the organization--why it exists--and are broad enough to have staying power from year to year. The priorities are very different from a mission statement, however, in one respect: They should be expressed in terms of the results or outcomes that are of value to the public. These results should be specific enough to be meaningful and measurable, but not so specific that they outline how the result or outcome will be achieved, or that they will become outmoded after a short time. Mesa Country, California, has six priority results, which are expressed as citizen statements:

   * Economic Vitality. "I want Mesa County to have a variety of industries that will promote a healthy and sustainable economy'

   * Well-Planned and Developed Communities. "I want...