Budgeting for structural balance: illustrations from New York City.

• Author: Proctor, Allen J.

A necessary prerequisite for stability is a sound budget that is grounded on a well-defined sense of basic, fundamental services that should be provided at all points in the business cycle.

The GFOA presents its Louisville Award for Financial Innovation to an applicant who introduces a new concept or technique with enduring value to the government finance profession. The Louisville Award, presented in recognition of an exceptional accomplishment, is GFOA's most prestigious and rare award. The New York State Financial Control Board's project, Structural Balance, which is discussed in this article, received the Louisville Award in 1993. It was only the fourth Louisville Award bestowed since the beginning of the program in 1980.

The past recession was very difficult for New York City and governments around the nation. As the expansion of the 1980s ended and the recession unfolded, governments found themselves in a process of reversing tax cuts or canceling new spending programs. One obvious question was how long would this retrenchment be necessary: could laid-off workers be rehired and tax surcharges canceled in two or three years? Or would they be permanent? To address these questions, the New York Financial Control Board undertook an intensified effort to rethink New York City's finances. The result of that process was an approach to budgeting that it calls structural balance. The most important characteristic of this approach is that stable and reliable delivery of public services becomes the goal of the budget process.

Structural balance emphasizes that disrupting operating departments mid-year in order to rebalance a budget is undesirable. First, risks are inherent in budget estimates; it should be expected that some revenues will fall short and some expenditures will exceed estimates. It is the budget office's responsibility to anticipate the risks to budget balance and formulate in advance sufficient reserves and contingencies so that reasonable risks can be handled without undue disruption of services. Second, one should acknowledge that revenue growth will peak and drop as economic expansions turn to economic recessions and that a well-structured budget should show surpluses when the economy is strongest and deficits when the economy is weakest. It is the budget office's responsibility to try to anticipate and identify cyclical surpluses and to avoid overexpanding services to levels that will have to be cut back when the economic cycle turns down. It is also the budget office's responsibility to set aside fund balances or tax stabilization reserves sufficient to offset cyclical revenue drops with minimal need for temporary service cutbacks.

Neither of these first two principles can be easily executed unless one starts with a sound budget and, equally important, has consensus on what constitutes a sound budget. For example, it would be futile and counterproductive to set aside reserves and contingencies to hold together a budget that is profoundly out of balance. Moreover, a goal of stabilizing a level of services would be meaningless if elected officials cannot agree whether a particular service level is excessive or inadequate. As a consequence, structural balance says that a necessary prerequisite for stability is a sound budget that is grounded on a well-defined sense of basic, fundamental services that should be provided at all points in the business cycle.

Structural balance provides an approach to help decision makers to develop a sound budget. It provides criteria to facilitate consensus on the appropriate level of fundamental services. It also provides decision makers with criteria to satisfy themselves that the revenues necessary to support those services have been identified and are indeed adequate. Structural balance then goes on to provide guidelines on ways to foster the stability and effectiveness of those services.

Why Focus on Stability?

The structural balance approach to the New York City budget began with a focus on stability because the costs of instability were becoming obvious and unacceptable. Initially, city officials wanted to work toward stabilized service delivery so that they could anticipate employment needs better. They found it counterproductive to hire employees in one year only to find that they needed to reverse this action the next year with hiring freezes or layoffs in order to balance a budget. It was preferable, they concluded, that any expansion and contraction in agency staffing be accommodated as completely as feasible through the more gradual process of attrition, with voluntary transfers among agencies in order to facilitate appropriate allocation of workers. Other benefits of stability soon became apparent: the priorities created in one year's budget could be sustained over time so that agencies could reasonably plan service demands and manpower needs over a multiyear period. In doing so, stability could minimize the sizable inefficiencies created by frequent program reversals.

Importantly for all governments, structural balance argues that an enhanced ability to sustain priorities and to maintain stable service delivery permits substantially increased focus on the purpose and mission of agencies and on the ability of the budget to accomplish that mission, an important objective of performance measurement and total quality management. Without reasonable year-to-year stability...