DUE 4/4
Wahonda7
Line-ItemObjectCodeBudgeting_26_03_27_10_49_11.pdf
303
lIne-Item (objeCt Code) budgetIng
Putting objectives first, alternatives second and choices third is inefficient as a method of calculation, ineffective in relating thought to action and inappropriate as a design for learning. . . . The [line-item] approach is more efficient for resolving conflicts . . . because . . . it does not require its practitioners to discover all or most possible conflicts and to work out answers to problems that may never materialize.
(Aaron Wildavsky 1979b, v, 166–167.)
Line-item budgeting presents little useful information to decision makers on the functions and activities of organizational units. Because this budget presents proposed expenditure amounts only by category, the justifications for such expenditures are not explicit and are often not intuitive. In addition, it may invite micromanagement by administrators and governing boards as they attempt to manage operations with little or no performance information.
(National Center for Educational Research 2009)
The line-item budget is the most widely used of all budget formats. It is used even when other formats have been put into place to correct for its deficiencies. It is celebrated, as Wildavsky observes, for its flexibility in allocating scarce resources and for its ability to quickly adapt to changing circumstances. It is also highly valued for its capacity to facilitate one of the major pur- poses of democratic governance—namely, to resolve conflict peacefully. But it is simultaneously criticized for continuing with the status quo without any supporting justification and neglecting questions of efficiency, effectiveness, and reexamination of budget priorities. In this chapter, we will see why both points of view are correct and demonstrate the conflicting needs that successful democratic government must strive to accommodate.
Line-item budgeting is technically known as object code or expenditure code budgeting. A typical example of a line-item schedule for a county department of assessment and taxation is provided in Exhibit 11.1.
The example illustrates clearly how line-item budgeting breaks expenditures down into major categories that include personnel/personal services, materials and supplies, capital outlay, and interfund/interdepartmental expenditures. Within each of these major categories, expenditures are further broken down into as many refined object codes as a jurisdiction wishes or is allowed to create under local budgeting law or organizational rules. Each separate budget unit within the organization is also assigned a unit identifier number (e.g., Exhibit 11.1 top, 161 code for the Assessment and Taxation Department). Subordinate units are nested within their parent units, but the units at all levels use the same object codes. This allows the aggregation of expenditures from subordinate units into a total level for the parent unit. The object code categories remain consistent throughout the organization and the jurisdiction, thus ensuring uniformity of practices and the ability to quickly see by the code number what part of the organization to charge each expense that is incurred. To further ensure this uniformity and consistency in accounting practices, the organization or jurisdiction maintains a master list of object code numbers and definitions
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306 EXPENDITURE FORMATS FOR DECISION AND CONTROL
of which expenses should be included within each code and subcode classification. Where ap- plicable, object codes apply and extend the state mandated budget fund and account definitions and nomenclatures (chapter 9).
Personnel services expenses make up the largest expenditure (or expense) category for most gov- ernment and nonprofit service delivery organizations. The personnel/personal services category of object codes represents the complex details of a department or program’s employees, including the number of employees, their professional series and grade levels, the blend of permanent and temporary employees, and the full-time equivalents (FTEs) allocated by position and in total to a department or program. Exhibit 11.2 above details the positions and FTEs that correspond to the departmental funding for the Assessment and Tax Department in Exhibit 11.1.
The materials and supplies category (M&S) of expenses (Exhibit 11.1) lists the consum- able supplies, the program delivery services, and the administrative services needed to operate the department or program. Many of these purchases are from external providers. Funding for contracts for services, grants, and intergovernmental agreements are included in this category of expenditures. In Exhibit 11.1, left column bolded object codes 51280 and 51285 cover competi- tive service contracts, grants, and intergovernmental agreements, professional service contracts. These seemingly minor and buried line items can provide the funding for a substantial portion of program service delivery capacity. These codes fund ongoing contracts and agreements, the start-up of new contracts, and the closure of completed contracts. Such expenditures can add up to a major portion of the departmental budget. This is especially the case in organizational units where contracting out and new public management (NPM) strategies have been extensively employed.
Exhibit 11.2
Example Department Budget Detail
Professional Class Position Title/Grade FTEs
375 Cartographic and Recording Manager 1.0 373 Senior Cartographer 1.0 372 Cartographer II 4.0 371 Senior Administrative Specialist 4.0 358 Director 1.0 357 Appraisal Division Manager 1.0 356 Administrative Division Manager 1.0 355 Tax Collection Supervisor 1.0 354 Appraisal Supervisor 3.0 353 Appraisal Data Analyst 1.0 352 Senior Appraiser 3.0 351 Appraiser II 24.0 350 Appraiser I 0.0 349 Appraisal Assistant 1.0 348 Personal Property Tax Collector 1.0 053 GIS Specialist 1.0 028 Senior Management Analyst 0.5 026 Management Analyst 1.0 011 Delivery Clerk 1.0 010 Data Control Coordinator 1.0 009 Data Entry Operator 1.0 008 Support Unit Supervisor 2.0 005 Accounting Assistant II 5.0 002 Administrative Specialist II 22.5
Permanent FTEs 82.0
Note: FTE = Full-time equivalent.
LINE-ITEM (OBJECT CODE) BUDGETING 307
In this particular jurisdiction, the materials and supplies category also includes a series of line- items showing the internal purchase of facilities and administrative services from other depart- ments in the county government (Exhibit 11.1 M&S category bolded “internal” labels). These line-items are termed internal charges for services, or internal service charges. Each department purchases these services from a central services budget fund or directly from a fund attached to the providing department. For example, the police department purchases vehicle assembly and maintenance services from a central fleet management budget fund that supports the city motor pool department. The central finance office determines the rules and policies for allocating these common administrative expenses across all departments in the county organization. Allocation may be based on simple percentages or on a refined set of service use and need criteria. Placing the internal charges for service inside the M&S category highlights their presence as program costs. Other jurisdictions prefer to categorize internal charges for service as interfund or interdepartmental purchases. This highlights the internal exchange nature of these charges. We provide additional explanation and detail on internal charges for service and their allocation in chapter 15.
The capital outlay category includes the expenses for durable equipment (extended service life of more than one fiscal year) used by a department or program. This includes motor vehicles, furniture, and computer equipment, among other expenses. However, the label capital outlay has a specific meaning in the line-item context. Most governments have a separate budget, called a capital budget, to deal with the long-term funding, purchase, construction, rebuilding, and replacement of buildings, facilities, major pieces of equipment, and other major assets (chapter 16). Capital expenses for these major investments are not included in what is called the operating budget, which is the focus of our discussion in this section on budgeting formats. But there is a need to take into account normal expenditures to maintain rather than to replace existing equip- ment and infrastructure. This may include painting buildings, supporting service maintenance agreements, and replacing worn parts. Expenditures that fall into the maintenance category are considered capital outlay and are included in the operating budget. You can think of the difference between capital investments and capital outlay as the difference between replacing your car and doing regular maintenance. If you depreciate your car on an annual basis and put the money in an account that accumulates with the goal of replacement within 10 years, you are doing capital budgeting for an investment. On the other hand, if you do annual maintenance, you are making capital outlays.
Finally, the interfund/interdepartmental category of expenses funds the purchase of services from other branches of the organization. Expenditures in the interfund category often represent purchases that directly support service delivery by the receiving department or program. For example, the Assessment and Tax (A&T) Department may maintain the county geographic infor- mation system (GIS) to support its assessment function, but it also may sell GIS services to the land-use planning program, the transportation planning and construction program, and the building permits program. These purchasing programs would budget funds in an interfund object code to make payment to A&T for GIS services. As we mentioned earlier, many jurisdictions also include allocated internal charges for central administrative services in this category of expenditures.
The columns in Exhibit 11.1 are also typical of a local government line-item display. The expenditure object codes and the expenditure descriptions are on the left. The actual spending levels for each line-item in the previous four fiscal years (FY) counting from the earliest to the most recent are in the center (FY1 to FY4). The FY5 Adopted column reflects the current year’s spending levels and the current budget adopted into law by the council, committee, or board. The values in this column may not be identical to the budget originally approved by the council or board just prior to the beginning of the fiscal year. Rather, this column reflects the current law, which includes all amendments made by the legislative body (council, committee, or board) to the original approved budget. The adopted budget is the appropriation that the organization is
308 EXPENDITURE FORMATS FOR DECISION AND CONTROL
currently using as its benchmark for spending limits and control. Finally, the empty column on the far right, titled FY6 Requested, will hold the yet-to-be determined estimates for the coming budget year. Departmental and program budget analysts and the department leadership have the task of filling in an expected spending level for FY6 for each object code as they prepare the department’s budget request for the next budgeting cycle.
ORIGINS AND PURPOSE
Line-item budgeting was first introduced as part of the early twentieth-century reforms to reduce political corruption. By creating detailed object codes for specific classes, or even for individual items of expenditure, public money could be tracked more easily from the point of appropriation by a legislative body to the point of expenditure by an administrative agency. Budgeting by object code makes it more difficult for money intended for a bridge improvement project to be diverted to build a community center or to undertake projects that benefit specific neighborhoods or target populations without specific legislative authorization. This was a common practice by George Washington Plunkett and other machine bosses in charge of Tammany Hall in New York, as well as in other political machines in the Midwest and the Northeast before the turn of the century. They diverted public funds from legislated purposes in ways that built political loyalty among the new immigrant classes streaming to the United States to pursue better economic opportunities.
The main purpose of line-item budgeting is to ensure high levels of financial accountability. Object code tables prepared at the project level or cost center level isolate spending for that func- tion. The spending levels in the object code table are one-year totals that may mask variation in production costs and in the timing of expenses. Thus, object code spending levels are insufficient as measures of performance or as instruments for cost analysis. Nonetheless, project-level and cost center–level line-item budgets provide management control over cash flow at a refined level. As we described, line-item budgets for subordinate units can be aggregated by object code into a line-item budget for a parent unit such as a department or a major government function. Project and cost center line-item budgets are also segregated by budget fund and compared to budgeted revenues. This aggregation by fund allows management control at the budget fund level, which is typically a state regulatory and professional accounting requirement. A jurisdiction’s line-item budgets for its general fund, all other major revenue funds, and all enterprise funds form the basis for the year-end financial reporting (chapter 18).
But extensive controls over line-item categories can stifle administrative discretion and the abil- ity to make adjustments under adverse circumstances that no amount of planning can anticipate. Whether it is overtime pay to deal with a storm emergency or a broken piece of equipment, budget managers need the freedom to exercise their discretion without having to call the legislative body into session for approval. For this reason, most organizations permit the transfer of funds within the large categories of personnel/personal services, materials and supplies, and capital outlay, typically designating an upper limit on the amount of money that can be freely transferred among subcategories without legislative action by the city council, commission, or board (chapter 17). Some organizations provide for managerial discretion to transfer funds across broad categories, thus empowering administrators to manage the budget, not simply to exercise budget control. Organizations built on a culture of mistrust give specific limited authority within the budgeting chain of command for the approval of expenditures. This central control eliminates an incentive for financial accountability on the part of operating managers.
The financial control focus of line-item budgeting has particularly important consequences for nonprofit organizations that are required to demonstrate financial accountability for the grants and contracts they receive from government and foundations. Line-item budgeting applied to separately identifiable budget funds allows organizations to demonstrate to their contract administrators and
LINE-ITEM (OBJECT CODE) BUDGETING 309
auditors that they have adequate financial controls in place. We describe examples of such over- sight in chapter 18. While recipient organizations must demonstrate fiscal accountability for all the funds they spend, they also must report and demonstrate programmatic outcomes and results. These additional requirements lead most organizations to establish accounting and performance tracking systems, and to hire qualified fiscal and budget personnel, all of which adds administra- tive costs that come at the expense of direct service delivery to clients.
Because of its high value in promoting financial accountability, line-item budgeting has become the most durable and commonly used budget format throughout the public sector. In fact, one can hardly imagine public budgeting without it. Line-item budgeting is almost always superimposed or used alongside all other budgeting formats. This practice frequently creates some obvious tensions, since the purpose, information, and expertise needed to carry out line-item budgeting is different than what is needed to carry out program, performance, and zero-base budgeting. These tensions sometimes result in one format dominating the budget, or dual or multiple budgeting systems that are not necessarily integrated into a single system. For example, a parks manager who is responsible for multiple summer programs may need to establish separate program budgets in order to ensure that each program is self-supporting, but this information may not be tracked by the jurisdiction’s centralized budgeting system, which is designed to support line-item budgeting.
ChARACTERISTICS OF LINE-ITEM BUDGETING: BASE, INCREMENTALISM, AND FAIR ShARE
We mentioned in chapter 5 that there are three characteristics of the budgeting cycle, each of which has been associated with line-item budgeting. First, the budgeting process starts with the assump- tion of an existing base budget, which is defined as the amount needed to fund the current level of services being provided by the organization or jurisdiction. Second, participants in the budget- ing process assume there will be only incremental change up or down (incremental budgeting/ incrementalism), depending on the revenue estimations for the coming budget cycle. If there is to be more than an incremental change, there is a presumption that participants will abide by the principle of fair share in making cuts or in enjoying the bounties of any increases beyond what is needed to accommodate inflationary increases to maintain current levels of service. Why do many administrators associate these core characteristics of the budgeting process with line-item budgeting? We answer this question in the sections that follow.
Base Budget
Line-item budgeting collects historical information by object code. This accumulated information can then be used without much analysis to make budget projections for the coming year. Analysts simply look at the patterns of spending by category and, using workload estimates, determine with a high degree of accuracy how much money the organization will need for the next year, adjusted for inflation. Most agencies do not experience dramatic changes from year to year in service de- mands, and most of the costs of providing public service are tied up in personnel costs, including salaries, health benefits, retirement, and unemployment insurance. These personnel-related costs constitute 75–85 percent of a typical public agency budget, and are often restrained on a multiyear basis by union-negotiated labor contracts. The multiyear provisions reinforce the notion that the previous year’s spending levels will serve as the benchmark for the coming fiscal year. Existing multiyear service contracts, grants, partnerships, and extended intergovernmental agreements for services also add continuity to future spending levels (Wanat 1978, 120).
It is reasonable for most agencies to assume that the legal authority they have been given to pro- vide public services is not going to be removed by the authorizing body during the budget develop-
310 EXPENDITURE FORMATS FOR DECISION AND CONTROL
ment and approval process. Based on historical experience, this is a very safe assumption. Managers put their budgets together with the fully rational assumption that program and service levels will continue with small adjustments up or down. The line-item budget format enables information to be gathered and easily transformed into a request that supports and reinforces this assumption. This reinforces the belief in an existing base budget. A base budget contains the resources and inputs needed to continue program content and service delivery at the current year’s level. The base budget reflects the most recent version of the adopted budget, which may include amendments of funding increases or decreases to the original budget adopted by the legislative body before the beginning of the fiscal year.1 However, the adopted budget may contain one-time revenues and projects that apply only to the current fiscal year. To reflect a base budget, these one-time revenues and program costs must be subtracted out of the updated adopted budget. For example, a local fire department may receive a grant from the Federal Emergency Management Agency (FEMA) to hire four new firefighters. The grant provisions may not require a commitment from the city that it will continue to fund the new positions after the grant expires. The grant could be seen as one-time funds in that the positions will end when the grant funding ends. To compute a base budget, the grant revenues and the related FTEs would be removed from the adopted budget. On the other hand, if the city makes a policy and revenue commitment to fund the new firefighter positions permanently, then the base budget would increase to include the new positions. The base budget reflects the revenues and expenses for continuing programs and for continuing administrative costs at the level of service reflected in the most recent adopted budget. It is important to note that the base budget reflects only the minimally necessary costs to accomplish department or program operations. Necessary costs reflect mandatory legal requirements and the foundational costs of operations. Improvement costs to gain efficiencies or new programs that may be needed by the community are not included as part of the base budget (Riley and Colby 1991, 61).
Incrementalism
There are several ways the incremental features of the budget process surface during the budget cycle. First, as already noted, most requests begin with an assumption that everyone will request a little more this year than they did last year to accommodate inflation, built-in cost inflators from union contracts, and cost drivers in the economy like health insurance and fuel costs. Second, there is an assumption that there are likely to be cuts in the original request, but normally these will be small. These two assumptions about a relatively fixed base with small departures from year to year grow out of and reinforce a third source of incrementalism: the desire to keep past political agreements intact. Once you achieve agreement among various constituency and clientele groups outside the organization and various career administrators and elected officials within the organization, it is difficult to renegotiate these agreements afresh each budgeting cycle. Line-item budgeting is viewed as a major contributing factor to this incremental characteristic of public budgeting (Wanat 1978, 114; Wildavsky 1978).
Fair Share
A third important principle of line-item budgeting is the assumption that if cuts have to be made, or increases allotted, then everyone should share the pain or gain as equally as possible: each program receives its fair share. After all, the legislative body in almost all cases has given each agency the legal authority to deliver services without ranking which ones are more important than others. Once a program has been authorized, there is little guidance provided by the board or legislative body about the priority ranking among the existing programs that are being funded. And when such rankings have to be made to balance the budget in a given year, traditionally
LINE-ITEM (OBJECT CODE) BUDGETING 311
there has been little reason for budget managers to assume that this ranking will fundamentally alter the assumption in future years that the majority of programs have an equal standing with the authorizing body. Exceptions to this general rule occur when the governing board engages in a priority-ranking exercise that provides managers with policy guidance (see chapter 14 for a discussion of “priority-based budgeting”). In the absence of such guidance, budget and program managers assume that reductions in funding will abide by the fair share principle.
Usually, the norm of fair share is applied by asking for across-the-board cuts from all departments and programs, sometimes even from enterprise fund agencies (chapter 9) that aren’t supported by general fund revenues (such as property taxes, income taxes, and some fees). When you hear requests being made for an across-the-board cut in budget requests, you know that the principle of fair share is being used rather than relying on extensive analysis. Reliance on the principles of a base budget and fair share results in a process that produces only incremental changes from year to year.
LINE-ITEM BEhAVIOR AND TEChNIqUES
Line-item budgeting norms the behavior of participants in favor of expecting that the present world of budgeting will continue into the future with only marginal changes. This future includes maintaining labor agreements, service contract and agreement provisions, statutory authorizations, and relative constancy of public need and client demands. Under these conditions, there is little discretion to start or grow new programs or to reconfigure existing programs. The incremental aspects of line-item budgeting respond to the realities of a limited decision space and scarce re- sources. More than a computation procedure, line-item budgeting generates a set of attitudes and behaviors (Wanat 1978, 128–129; Riley and Colby 1991, 29).
With annual repetition, building and updating a line-item budget often becomes a “rule of thumb” procedure. Administrators with long organizational tenure and extensive experience with a budget system may simply increase the line-item category subtotals (personnel services, materials and supplies, capital outlay, interfund/interdepartmental) by a preferred percentage to quickly generate a budget request. Once an administrator or analyst develops a successful line-item budget and budgeting approach, it becomes a template for use in coming years. Using the previ- ous year’s budget as a template maintains limits on the decision space and reduces the amount of detailed analysis needed to produce expenditure estimates. These characteristics and behaviors make line-item budget construction relatively efficient. As long as there are no major changes to cost structure, client demand, or program configuration, using the previous year’s budget as the basis for the next year’s request can be both efficient and reasonably accurate.
Continuing Costs Drive Incremental Change
For analysts and administrators who have limited familiarity with an organization and its budget system, adjustments at the line-item level form the basis of budget construction. With much of the budget decision-making space confined, analysts follow a predictable pattern of cost estimation to construct a line-item budget request for the pending fiscal year. The line-item schedule in Exhibit 11.1 defines a typical base of expenses needed to operate a county department or program. To generate a FY6 Request (blank column on the far right), analysts must develop expected expen- diture levels for each object code. Subtotals are also developed for each major cost category of personnel/personal services, materials and supplies, capital outlay, and interfund/interdepartmental spending. The expected expenditures are then summed into a department-level or program-level request. Expected expenditures are then compared to the current FY5 Adopted level to define the request as a total percentage increase (or decrease) over the current year’s adopted budget level.
312 EXPENDITURE FORMATS FOR DECISION AND CONTROL
Exhibit 11.3 presents an extract of Exhibit 11.1 with the previous fiscal years’ actual expen- ditures deleted to highlight the current year FY5 Adopted budget and the incremental changes (center column) needed to develop an FY6 Request.
The far right column in Exhibit 11.3 provides terse notes describing the contract, payment requirement, or data source that determines the percentage adjustment for each object code. To develop a line-item request, analysts build from the current law FY5 Adopted level. This is the last legal budget reported to the public and to state authorities. Analysts take an incremental approach to estimating personnel services salary and wage expenses based on labor contract provisions (Riley and Colby 1991, 29). Second, analysts do the same thing for employee health and retirement benefits. These incremental changes may be based on contracts between the jurisdiction and insurance carriers and brokers, retirement trust funds, or state retirement fund agencies (public employee retirement system [PERS]). In recent years, these uncontrolled expenses have increased substantially—often at rates far exceeding annual inflation (chapter 15). Other employee costs are incrementally changed based on labor contracts or regional inflation rates. Third, following directions in the CEO’s budget instructions, analysts may or may not apply an explicit inflation increment and cost adjustments to all other object codes to continue the existing level of services (e.g., 2 percent in Exhibit 11.3). The exception to this blanket adjustment is the cost adjustment for service contracts, grants, partnership agreements, and intergovernmental agreements. Contracts and agreements may include payment escalation clauses that define any year-to-year adjustments. Analysts would set expense levels to meet these requirements. Fourth, analysts consider any size and capacity changes to the department or program operations. Expenses are adjusted on a proportional basis to add or close capac- ity. Finally, analysts consider any new programs or productivity improvements. Using percent changes reinforces the line-item analytic approach and further illustrates the incremental behavior that is associated with line-item budgeting.
Electronic spreadsheets (Chen, Forsythe, Weikart, and Williams 2009) and relational budgeting software have greatly eased the task of projecting expenses for personnel/personal services. These electronic packages can be used to provide a total projected expenditure for each personnel service object code for the coming year. Spreadsheet systems allow departmental analysts to project a given year’s personnel services budget once they know the incremental drivers, such as cost of living or contractual increases, grade-step increases for service time, grade-level increases, hazard and overtime pay expenses, vacation and leave expenses, required salary-based contributions to retirement, unemployment insurance contributions, and costs for life, disability, health, and dental insurance. With relational software packages, personnel expense projections are often centrally computed with summary values returned to the department analyst. Thinking and working in terms of summary totals reinforces the incremental nature of line-item budgeting.
The example in Exhibit 11.3 also includes several discretionary expenditures for expanded programs, among them a new interagency agreement (see contracting costs for object code 51280) and capital outlay expenses for a new vehicle and for software and hardware upgrades (see object codes 57120 and 57155, respectively). The need for each of these discretionary expenses would be fully explained and justified as part of the department’s budget submission. The request in Exhibit 11.3, however, basically intends to maintain the current level of programs and service delivery for Assessment and Taxation. While there may be employee turnover due to retirements, resignations, and replacements, the FY6 Requested budget expects to maintain the current staffing and personnel expense levels. Any discretionary requests to increase staff would be reflected in identifiable increases in the personnel/personal services cost category and would be justified in new position requests to the executive, the board, or the council.
Analysts and administrators are aware that the percentage rate increment or dollar adjustment they request will be compared by the central budget office staff to the levels requested by their
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LINE-ITEM (OBJECT CODE) BUDGETING 315
peers. Any requested adjustment will typically comply with the fair share test of relatively equal gain and pain. Comparison also serves to check and limit the size of any requested increase.
historical Trend Information Contributes to Incremental Budget Development
Recent spending patterns can add another reason for an incremental approach to line-item bud- geting. Historical types of information often take three forms: (1) recent year-to-year percentage changes in expenditures by object code; (2) sufficiency of the current year’s adopted expenditure level; and (3) a current year’s rates of spending as an indicator of changing needs and conditions. As context demands, analysts and program administrators may use one or several of these sources of information to supplement the basic line-item procedure described above. We provide detailed examples and details of line-item adjustments on the text website (www.pdx.edu/cps/budget-book). Recognizing and incorporating historical expenditure trends reinforces the incremental aspects of line-item budgeting. Using trend indicators steers analysts away from comprehensive cost analysis or from asking if spending supports organizational goals and objectives.
Using the first form of historical data, analysts can use several methods for computing percentage changes between years. Analysts can calculate an average change occurring for each object code and category total using available data from previous fiscal years. Alternatively, analysts can compute the percentage change from one year to the next and use that to make their projections. Depending on current circumstances, one approach or both may be useful in informing a new budget estimate.
In the second form of data, the original FY5 Adopted budget and its object code spend- ing levels represented the best estimate of future spending at the time of its official adoption. Depending on the elapsed time into the fiscal year, this was likely six or more months ago. A thoughtful look back over the fiscal year to date may indicate that conditions have changed, or that conditions have been stable. In the latter case, an analyst or administrator may conclude that the adopted budget levels are still relevant, and that they could serve as expenditure levels for the coming fiscal year.
If, on the other hand, the look back shows that conditions have changed, analysts can consider a third form of historical data—the rate of current year spending—as a guide to what will be needed in the next fiscal year. Based on the number of accumulated months of spending infor- mation, analysts multiply the line-item values by the appropriate multiplier to obtain a full-year projection of spending. The full-year spending levels give an indication as to the need to increase or decrease spending in a budget request. The danger in using this approach is that spending for a program or department may be highly seasonal, with the bulk of expenses concentrated in one part of the fiscal year (for example, a county medical clinic with an intense cold and flu season, or a state forestry department with a costly summer wildfire season). Spending to the reported date may not reflect the true annual spending needs of the department or program. But, taking these seasonal variations into account, analysts compare the FY5 full-year projected levels to the FY5 Adopted levels to identify consistency or divergence. Divergence typically indicates rapidly changing conditions that will inform the requested levels for upcoming FY6. A variation on this projection method involves making a separate projection for spending in the remaining months of the fiscal year and then adding this amount to the year-to-date amount. Good budget analysts use judgment as to which technique to use for each line. A simple extrapolation works fine for smaller amounts or for line-items that do not see much month-to-month variation.
Exhibit 11.4 offers a line-item budgeting exercise to illustrate the line-item budget methodology.
Current Service Baseline Makes Assumptions Explicit
Using percentage change increments may provide an efficient and even reasoned basis for a line- item budget request, but central budget office analysts, budget committee citizen members, council
316 EXPENDITURE FORMATS FOR DECISION AND CONTROL
and board members, and the public will demand explanations for the procedures and assumptions behind a request. The line-item methods we have just described provide a macro-explanation by documenting what is required to continue the base program and the funding adjustments for program increases or decreases in a single percent increment (e.g., 3.2 percent on the bottom line of Exhibit 11.3). But there is a more explicit approach that increases transparency by separately detailing the adjustments needed to continue the base budget at the same program and productivity levels over the next fiscal year or biennium. This approach is called the current service baseline (CSB), which separates the base budget and its adjustments from changes in program size, content, or productivity. The procedural steps for building a current service baseline would be included in the organization’s budget preparation instruction/guidelines. The following is an example of what these instructions might look like (Riley and Colby 1991, 61).
• Current year’s budget. Begin with the current year’s adopted budget levels (e.g., FY5 Adopted column in Exhibit 11.3). In separate spreadsheet columns add the following information:
• Amendments and modifications. If not already included in the adopted budget, add in any legislatively adopted budget amendments and modifications to the adopted budget levels for all affected object codes. This includes any additions through supplemental appropriations, or subtractions from any rescissions of unneeded or unused funds. These adjustments are in dollar amounts as detailed in adoption ordinances.
• Deduct one-time nonrecurring expenses so they do not appear in the permanent base (see chapter 15).
Exhibit 11.4
Exercise: The Line-Item Budgeting Methodology
Using the book website (www.pdx.edu./cps/budget-book), select a line-item budget schedule for a city, county, or special district department or program. As a practice exercise, use an electronic spreadsheet to develop a requested budget for the coming fiscal year. Identify the most recent version of the adopted budget and use that as a base for your computation. Exhibit 11.3 provides a template for your work sheet. Proceed line-item by line-item. First, develop a percentage incremental adjustment. Consider the following expense multipliers.
Labor contract salary and wage escalators 2.5 percent Health, dental, and other insurance benefits 6.0 percent PERS or local retirement trust fund contributions 7.0 percent Service contract and intergovernmental agreement expenses 3.5 percent Inflation multiplier 2.0 percent Interfund, interdepartmental, and internal charges for services 2.5 percent
If your sample budget schedule contains actual spending levels from previous fiscal years, use any useful historic information to adjust your line-by-line incremental adjustments. Changes in spending across previous years may indicate trends of growth or reduction. Work line- by-line and reconsider your incremental adjustments in light of historic information. When you’ve completed your line-by-line adjustments, multiply the incremental adjustment by the adopted budget level to compute a dollar request level. Do this for each line-item. Sum the line-items by major cost category: personnel (personal) services, materials and supplies, capital outlay, and interfund/interdepartmental. Sum all line-items into a total dollar request for the full department or program. Finally, express the total dollar request as a percentage change from the current year’s adopted level total.
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• Annexations and population changes. Recognize any change in the jurisdiction’s population, especially those caused by annexation of new territory and population. Proportionately in- crease or decrease program spending levels and FTEs to maintain service levels on a uniform per capita basis.
• Cost multipliers. In separate spreadsheet columns, determine percentage multipliers for each of the following expense adjustments and apply the multipliers to the appropriate object codes: – Employee benefits administrative changes. Add in the effects of any organization-wide
changes to retirement or insurance programs (e.g., administrative changes, shifting from a local retirement plan to a state PERS system, or changing from one insurance broker/carrier to another). In many cases, these are systemic changes that are intended to be cost neutral. These changes may be in dollar amounts or in a percentage rate adjustment.
– Employee grade and wage step increases. Increase current employee salary and wages based on current labor contract provisions for grade level, seniority, and time in grade- step increases.
– Employee wage and benefit contract provisions. Adjust current employee salaries and wage rates according to existing or expected labor contract provisions.
– Employee benefit provisions. Health care costs and retirement benefits costs often escalate much faster than other expenses, and local governments may need to make supplemental payments to state PERS or other retirement funds to ensure solvency (object codes need to reflect these increased costs); for current employees, adjust object codes for higher rate increases of employee health and dental benefits, and for an increased rate or lump sum contribution to retirement funds.
• Adjust existing service contract, grant, and partnership expenditures. For all existing mul- tiyear service contracts, grants, partnerships, and intergovernmental agreements, increment appropriate object codes per contract inflation adjustments. Make rate adjustments to continue existing levels of contract administration and partnering.
• Adjust part-year service contract, grant, and partnership expenditures. For contracts, grants, and agreements adopted in the previous fiscal year, adjust any part-year expense levels to full-year levels. Remove any part-year expenses for contracts, grants, and agreements that closed in the previous year.
• Continue installment purchases per procurement contract provisions. • Continue any debt installment payments. • Include any capital equipment and information technology replacement purchases needed
to maintain current service levels. • Adjust interdepartmental and internal charges for service purchase rates. Adjust the expen-
ditures for interdepartmental purchases from other governmental departments and programs based on revised overhead rates in the budget instructions/guidelines.
• Annualization of new program start-up costs. New programs may have been adopted and new facilities may have been opened in the previous year. Part-year start-up and operating costs may have been included in the previous year’s budget. Continued operations require a full year of expenses. Adjust all affected object codes as needed.
• Adjust all remaining expenditures by inflation rate. As directed in budget guidelines, adjust all other materials and supplies, along with capital outlay object codes, by the regional or metropolitan area’s commercial inflation multipliers (e.g., Federal Reserve publications). On rare occasions, no adjustment or a deflation of costs may be appropriate. This may result from a lack of inflationary increases or a belief that substitution works as well in government spending as it does in other sectors of the economy when costs are increasing.
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Inflators like the Consumer Price Index (CPI) tend to overinflate budgets because they don’t recognize the motivation to find cheaper substitutes to reduce costs or keep them from rising.
• Define and apply any productivity enhancements that could increase efficiency and lower costs. Clearly identify any up-front expenditures necessary to achieve these efficiencies and any expected lower costs.
For transparency purposes, analysts establish separate spreadsheet columns that break out the effects of each of the above bulleted factors on the current year’s adopted budget object codes. For summary reading, the effects of all factors are aggregated into a combined adjustment to the FY5 current year adopted budget. This adjusted budget is the current service baseline budget for FY6. Once the baseline is computed, program increases or decreases and other deviations from the current service baseline can then be presented separately and compared to the current service baseline as budget alternatives.
Critically, the executive, elected officials, and constituent group advocates must fully understand the components and assumptions implicit in any current service baseline computation. The current service baseline provides an inflation adjusted package that keeps service at current levels, but in effect also provides an increase in absolute program funding. As the teaching case for Part III describes, in times of limited revenue, governments and private-sector organizations often budget without recognition of inflation and contract rate adjustments. This approach of not recognizing inflation and cost changes serves to marginally reduce the funds available for program delivery on an annual basis. Critics of budget baselines and current service budgets remind administrators to fully disclose the methodology and components for baseline computations, and to educate elected officials, the media, interest group leaders, and the public as to the need for and effect of current service baselines.
With the current service baseline level developed and displayed separately, analysts at the re- quest of program, department, and board leaders can then develop budget alternatives that make specific proposed adjustments and changes to department and program funding for the coming fiscal year. The proposed changes may reveal revisions to only a few object codes, or they may require the development of a full object code schedule that signals an alternate budget scenario for the program or department. Modifications to the current service baseline can reflect: (1) the executive agenda; (2) changing conditions in the community that result in the need for more or fewer services; (3) new program start-ups and staffing; (4) new intergovernmental policies and requirements; (5) increased operational expenses tied to the opening of new capital facilities; or (6) the commencement or completion of service contracts, grants, partnerships, or intergovernmental agreements. Updated forecasts of client usage and service demand levels provide a rationale for program increase alternatives. Proposed decreases from the current service baseline levels may reflect program obsolescence, declining client demand, or a decision by senior leaders to repri- oritize. Based on direction and changing conditions, budget analysts work with their department and program leaders to develop line-item schedules that form the foundation of a requested budget for the coming fiscal year.
Even with more analysis and with extensive attention to expense and rate adjustments, the current service baseline suffers from the same weakness as the incremental behavior of line-item budgeting. Adjustments to compute a current service baseline are largely developed using per- centage and proportional changes to existing expense levels and cost rates. No attention is given to whether the organization or program is spending on the right things, and no attention is given to productivity or performance. A current service baseline assumes that the current program is appropriate for the coming year, and that any changes to the program appropriately build from the current organization and program configuration.
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ADVANTAGES AND DISADVANTAGES OF LINE-ITEM BUDGETING
As we noted earlier in the section on the incremental characteristics of line-item budgeting, not much programmatic or managerial expertise is needed to successfully carry out object code bud- geting. In fact, this is its chief advantage. As we have suggested in our discussion of the chief characteristics of object code budgeting, you do not need to know how pencils are going to be used in order to budget for pencils. If you used 100 pencils last year and your overall workload and FTEs haven’t changed much, you can with some degree of confidence assume that you will need enough money with inflation to buy 100 pencils next year. This example illustrates both the strengths and weaknesses of line-item budgeting. On the one hand, you can assume that what you have been doing will likely continue being done next year, with some exceptions on the margin. You can then concentrate your limited time and energy on analyzing and planning these marginal changes. This reduces complexity and allows the budget to be assembled without endless hours of analysis, pouring over reams of spreadsheet information, planning, and spending hours in meetings with others in reexamine everything that is currently being done.
In addition to the efficiency in putting a budget together, line-item budgeting reduces conflict. It lets sleeping dogs lie. Whenever managers and employees are asked to reexamine what is currently being done, they normally become defensive. At the point where this examination begins to create priorities for organizational funding, conflict internally and externally begins to rise exponentially. With line-item budgeting, when there are more requests than resources available, the budget can be brought into balance by cutting dollars, usually by relying on formulas like across-the-board cuts or some similar notion of fair share. By shifting the universe of discourse to dollars and away from programs and activities, budget balancing obscures the impact of cuts on services, thereby reducing conflict in the budgeting process. Dollars can be cut and divided in far more ways and in much smaller increments than is the case with programs. In short, line-item budgeting and its reliance on formulas like base and fair share tend to keep the conflict and complexity in the bud- geting process within manageable bounds. The format, according to Wildavsky, “does not require its practitioners to discover all or most possible conflicts and to work out answers to problems that may never materialize. It permits each participant to go his own way until he discovers that the activities of others interfere. Efforts can then be devoted to overcoming the difficulties that do exist” (1979b, 166–167).
Another advantage is that line-item budgeting is quite flexible. It can exist alongside other bud- geting formats without requiring extensive changes in existing subcodes. You simply have to rear- range the subcodes into programs (program budgeting), decision packages (zero-base budgeting), or performance units (performance budgeting) to accommodate purposes that go beyond interest in financial accountability. In addition, you can make changes in the budget during the year by simply transferring dollars from one part of the organization to another without having to spend time determining how all of the pieces fit together into a coherent and integrated whole. The line-item budget avoids the “matching suit of clothes problem,” where the parts cannot be easily separated and worn separately without destroying the integrity of the larger whole (Wildavsky 1978).
The aforementioned advantages of object code budgeting are mirror images of its chief defects. Because line-item budgeting can proceed without knowing the purposes or accomplishments of expenditures, questions regarding efficiency, effectiveness, and future priorities aren’t systemati- cally addressed. While there is nothing in line-item budgeting that prevents these issues from being examined, the format itself does not require it. In fact, in order to justify requests for increased expenditures, it is a common practice under line-item budgeting formats to incorporate a wide variety of quantitative information such as workload measures, activity indicators, etc. But the inclusion of such information is not inherently necessary to line-item budgeting and usually raises questions about the larger purposes these measures are intended to serve.
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The incremental nature of line-item budgeting also makes it difficult to respond to major changes in community needs. The funding levels of the past may be completely inadequate to address major new needs, and inertial spending on existing programs may continue programs of lesser value that could be discontinued and the money reprogrammed to address higher priorities. Adopting a percentage change in funding levels for the coming year hides the increases or decreases needed to respond to major changes in demand or community needs.
Over the past several decades, the budgeting process has emphasized efficiency, effective- ness, and priority-setting approaches that supplement the system’s basic reliance on the line-item format. The goal of these supplementary approaches is to avoid the line-item critics’ concern that object code budgeting perpetuates a status quo approach that gives an advantage to constituency groups whose interests are reflected in the existing base, while woefully neglecting public needs and priorities that currently lack political support. In addition, because the purposes/goals of expenditures are not clearly articulated, reliance solely on line-item budgeting contributes to an overlap and duplication of effort—the very inefficiencies that have become the prime targets of the reinvention of government movement (Osborne and Gaebler 1992; Osborne and Hutchinson 2004). Supplementing the line-item budgeting process with this additional information on ef- ficiency and effectiveness does not, however, mean that an additional format has been adopted and is systematically being used to achieve a new set of goals. This will become clearer when we discuss these alternative budgeting formats in the chapters that follow.
A final criticism of line-item budgeting relates to the flexibility of transferring dollars from one set of activities to another within the limits allowed by the rules governing line-item categories. With loose rules and weak oversight, significant program changes can occur under the radar, without anyone really knowing what has occurred. Natchez and Bupp’s study of the Atomic Energy Com- mission (the predecessor agency to the federal Nuclear Regulatory Commission) over a 15-year period demonstrated that priority funding shifted significantly among 24 programs, 12 of which prospered, 8 of which did not, and 4 of which held their own in the period from 1958 to 1972 (Natchez and Bupp 1973, 961). While funding remained relatively stable, showing incremental growth between 1958 through 1972, the changes in prioritization undertaken by “the program director and the operating-level bureaucrats” effectively shifted the agency mission from supporting research on the production and peaceful uses of nuclear energy to research on nuclear weapons and high energy physics (Natchez and Bupp 1973, 963). In short, line-item budgeting—if used as the exclusive budget format over a long period of time—hides the significant policy consequences that remain hidden behind relatively stable dollar amounts.
CONCLUSION
Line-item budgeting continues as the mainstay of public budgeting techniques. It offers many strengths: financial controls and a linkage to financial control systems, minimal data needs, ease of use, relative fairness between competing departments and programs, the maintenance of political peace within the organization, and regulatory compliance. But the simplicity and expense-centered focus of the line-item format leave it with glaring weaknesses. A line-item budget details where money will be spent, but it never explains what the funds will buy or how spending will improve the public welfare. In the next chapter, we turn to a budget format and analysis framework that can answer some of these questions.
STUDy qUESTIONS
The textbook website (www.pdx.edu/cps/budget-book) provides extensive budget data and or- ganizational information for several public service agencies. This information may be helpful in
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answering one or several of the following study questions. The information and data can also be used to complete the line-item budget exercise described earlier in this chapter.
1. Drawing on your experience in completing the line-item budget exercise as well as your professional or volunteer experiences, what were the most difficult obstacles to the formulation of a line-item budget for your department or organization. What strategies would you use in overcoming these obstacles?
2. What kind of information is required to undertake line-item budgeting? Who possesses this information?
3. In what ways is the information provided by a line-item budget useful to a program manager? A department head? The central budget office? Elected/appointed members of a policy/legislative board? Clients? Citizens?
4. In developing a line-item budget, what strategies would you follow if you were a program manager? A department head? The central budget office? Elected/appointed members of a policy/legislative board? Clients? Citizens?
5. Explain why line-item budgeting is associated with the phenomenon of incrementalism. 6. What is meant by the terms base budget, current service level, and fair share? How are
these principles related to line-item or object code budgeting? 7. Does your organization develop and use a current service baseline? What assumptions
are included in the baseline computation? Does using a current service baseline appear to help or confuse budget discussions and decision making? (If you have yet to work with a government or nonprofit organization, go online (www.pdx.edu/cps/budget-book) and complete work exercise 11.2 Line-item Baseline and Packages; then reconsider this question).
NOTE
1. The Washington State budgeting system formally recognizes the amendments and adjustments to the adopted budget by computing a current law budget as the foundation for budget construction.
