WHY DO WE NEED TO Rethink Budgeting?

• Position: RETHINKING BUDGETING

About GFOA's Rethinking Budgeting Initiative

Local governments have long relied on incremental line-item budgeting, in which last year's budget becomes next year's with changes around the margins. In a world defined by uncertainty, this form of budgeting puts local governments at a disadvantage, hampering their ability to adapt to changing circumstances.

As we all know so well, the ability to adapt has become essential over the last two years--and will certainly remain so for some time. The premise of the Rethinking Budgeting initiative is that the public finance profession has an opportunity to update local government budgeting practices with new ways of thinking and new technologies to help communities better meet changing needs and circumstances. The Rethinking Budgeting initiative seeks out and shares unconventional but promising methods for local governments to improve how they budget, and how they embrace the defining issues of our time.

This issue of GFR looks at new ways of thinking about revenue to help governments understand and steward public finance in a changing world. From reducing overreliance on past budget decisions to framing complex problems and building procedural justice into the process, April's GFR gives government finance professionals the keys to understanding how today can better serve tomorrow.

Local governments have developed their budgets in essentially the same way for decades. The essence of the traditional approach is, first, that the budget is incremental. This means that last year's budget becomes next year's budget with changes at the margin. Second, the budget is built around line items--categories of spending like personnel, commodities, and contractual services, which are then grouped into departments and funds. People have criticized this approach for almost as long as it has been in use with local governments.

One of the most prominent criticisms is that past decisions are frozen in place past the point at which they are affordable or relevant. Once a change is made to the budget, the change is carried over to successive budgets. Let's illustrate with an example that is not uncommon in traditional budgeting. If a department gets a grant from, say, state or federal government to increase staffing for a few years, those positions come to be regarded as part of the department's baseline budget. Once the grant ends, the expenditure continues to be funded without an evaluation of whether those positions are creating sufficient value for the community to justify the cost. This same phenomenon occurs more widely but more subtly when entire budgets are carried forward and inflated from year to year without a good understanding of what services are being provided, at what cost, and for what benefit. This "layering on" effect contributes to financial distress and is a suboptimal allocation of resources. There are also more complex examples with further-reaching implications that GFOA has documented elsewhere. (1)

Another criticism is that the traditional budget is not strategic. Spending is allocated to line items that concern the day-to-day operations of government. Line items like "travel," "supplies" or "miscellaneous" don't speak to how spending impacts big-picture results like public safety, mobility, health, and more. Also, historical precedent is the primary determinant of how much money is allocated to each line item. This is backward-looking, not forward-looking. All of this means that the budget process is not well suited to handle big-picture and/or emerging issues.

For example, local governments may be slow in adopting new and better methods of operating and have trouble coordinating multidisciplinary solutions to complex problems. This means that the local budget may become increasingly disconnected from evolving community needs and priorities over time. A well-known example is that fires are less common than they used to be due to improved building codes and better construction methods. Nevertheless, city governments have been slow to adapt public safety spending away from fire response to more pressing issues. In many communities, a more pressing need is emergency medical services (EMS), due to an aging population. The changing building stock and age of the population unfolded over several years, yet municipal budgets were still slow to respond. We can easily appreciate that the traditional budget would not do any better in responding to more rapidly evolving situations.

A final criticism we will cover is that traditional budgeting is a "zero-sum game." This means that for one party to win, someone else must lose. In the context of budgeting, this means, for example, that for one department to get more funding, another department must get less. Critically, in traditional budgeting, this is seen as a win for one department and a loss for the other. A zero-sum game promotes power dynamics that favor maintaining the status quo and encourages self-interested decision-making.

Zero-sum thinking makes it difficult to address problems that require collaboration across participants in the budget. Collaboration is required to accomplish outcomes that make life better for communities, like reducing violent crime, increasing economic opportunity, or improving public health. Traditional budgeting focuses participants primarily on inputs and secondarily on outputs. Inputs are the money in each line item and staffing in each department. Outputs are the services a department produces with the resources they get. If success in the budget "game" is defined by inputs and outputs (rather than outcomes), then self-interested, zero-sum behaviors are likely to result. This game also encourages departmental budget "silos," where departments don't consider the potential to work with people outside of their boundaries and take on an insular attitude about the services (and budget) the department provides.

These criticisms have led to some attempts to do budgeting better. Two widely recognized innovations are zero-base budgeting and priority-based budgeting * A number of intrepid local governments have tried these methods with varying degrees of success and staying power. Among the majority of local governments, however, the traditional budget has endured...and for good reasons. The traditional budget has advantages that we must not overlook: (2)

(right arrow) Simplicity. Because budgeting is done at the margins, incrementally, it is easier to understand and calculate. Because it does not address larger, strategic issues, the budget process is able to be less demanding of participants' time and attention than a comprehensive process would be.

(right arrow) Control. Individual line items provide easy-to-understand accountability: Did the line item get overspent or not? Also, incrementalism means the budget is not subject to radical changes from year to year. Radical change, almost by definition, risks getting out of control.

(right arrow) Predictability. Historical precedent is often a widely accepted justification for decisions. Relying on historical precedent sets the expectations of participants in the budget process. This...