Multi-year Budgeting: A Primer for Finance Officers.

• Author: Blom, Barry
• Position: From the Government Finance Officer Association

This article presents the concept of multi-year budgeting and its benefits and drawbacks. The authors also discuss findings from a recent GFOA survey on how multi-year budgeting is practiced among local governments.

Over the past several years, the GFOA Research Center has received a considerable number of inquires from state and local governments regarding multi-year budgeting (MYB). Inquiries have focused on the following questions: 1) What is MYB? 2) What are its advantages and disadvantages vis-a-vis annual budgeting?, and 3) Which jurisdictions have adopted it? In addition to these inquiries, GFOA's continuing work to disseminate newly established recommended budget practices issued by the National Advisory Council on State and Local Budgeting also has led to a resurgence of interest in ways to embed a long-term perspective to budgetary decision making. This article describes the different approaches to MYB and presents results from a recent survey on this subject.

The MYB Concept

For purposes of this article, multi-year budgeting refers to both a process and a document. The document outlines appropriations (i.e., anticipated expenditures) and anticipated revenue for two or more consecutive budget years. Multi-year budgets exist in many forms, such as a biennial budget, a three-year budget, or a five-year budget. A multi-year budget also may consist of a biennial budget with one or more financial plans serving as tentative spending plans for the next biennial budget.

The most common types of multi-year budgets used by local governments are biennial budgets. Historically, local governments have implemented one of three types of biennial budgets: an annual budget with a financial plan, a rolling biennial budget, or a classic/traditional biennial budget which are defined as follows.

1) Biennial Financial Plan refers to a government's spending document consisting of an annual budget with an appended financial plan that serves as a tentative spending plan for the following year. Under this budget method, the annual budget is formally adopted and sets the spending authority for the government, while the financial plan is not enforceable and can be changed in the subsequent year.

2) "Classic" (or Traditional) Biennial Budget refers to a government's spending document consisting of appropriations and anticipated revenues for two consecutive years where both budget year appropriations are adopted at the same time.

3) Rolling Biennial Budget refers to a government's spending document consisting of appropriations and anticipated revenues for two consecutive years where each budget year appropriations are adopted separately (i.e., the first budget year appropriations are formally adopted in the first year and the second budget year appropriations are adopted in the following year).

Biennial Budget Characteristics and Assumptions. Exhibit 1 provides a brief description of the characteristics and underlying expenditure and revenue assumptions of biennial budgets. As Exhibit 1 illustrates, each type of biennial budget is based on different expenditure and revenue assumptions. Based on these budgetary assumptions, governments desiring to change from an annual budget to a multi-year budget should examine their expenditures and structures thoroughly to determine whether it is feasible to implement a multi-year budget. Put differently, multi-year budgets have a greater probability of success when expenditures are easily controlled and revenue sources produce consistent yields from year to year.

Benefits of MYB

Governments abandon annual budgeting for MYB based on the rational that 1) they will improve their long-term planning and priority setting process, 2) better manage financial resources, and 3) reduce budget staff time dedicated to developing an operating budget. With respect to biennial budgeting, the National Conference of State Legislatures (NCSL) observes that some biennial budgeting is probably more conducive to long-term planning, program review, and evaluation vis-a-vis annual budgeting because more time is available.

According to the current literature on MYB, governments with multi-year budgets have found that their budgets have several advantages over annual budgets. Those advantages include the following.

* Improve Lang-range and Strategic Planning. Because policymakets and department personnel have to allocate financial resources and forecast revenues for multiple years at one time, they consider resource and program planning for a longer time horizon than their counterparts with annual budget appropriations.

* Produce a More Policy-oriented Budget Process. The multi-year budgeting process allows policymakets and department personnel to move away from a detailed, line-item approach and focus instead on programmatic policies, goals and objectives vis-a-vis micromanaging financial resources.

* Reduce Reliance on Short-term Grants and/or One-time Revenue Sources. Because grants and revenue sources are viewed within a multi-year budgeting framework, finance and program officers have...