due 4/11

the budget CyCle CharaCterIstICs and

ConsequenCes

As the seasons change from hot to cold And I watch the leaves change their clothes From green, to brown, from red to gold They never seem to change their souls. They remain humble even as they grow old. . . . (Sharonda D. Chery 2009)

When I tread, in secret, untrodden snow with Winter I shuffle, beside the low sun, through crisp, golden chestnut leaves of Autumn and dance with daisies in the wild meadow of Summer. (Sally Plumb 2010)

The budgeting process can best be viewed as a series of seasons, with characteristic patterns of activities and behaviors that occur in each phase of budget development, adoption, and imple- mentation. The budget development and budget adoption seasons demand especially high energy and focus from participants. During these phases of the budget process, participants expend an abundance of activity on gathering, analyzing, organizing, and presenting informa- tion. As in spring, there is a lot of dust in the air, and preparations are being made for planting. Under these pressing circumstances, the time allotted to complete budgeting-related activities is never enough to meet deadlines. This is not only because the preparation and adoption season is short, but also because many participants must keep up with other duties that are not directly connected with their seasonal budget responsibilities. As spring gives way summer and the extended period of budget implementation, participants become more relaxed. The close of the budget year and the post-budget audit seasons resemble fall and winter, where the heat of budget preparation gives way to taking stock of the budget harvest and its implications for the next seasonal round of activity.

In this chapter, we explore the distinctive characteristics of the budgeting seasons and the be- havioral consequences for participants. An understanding of these seasonal dimensions of public budgeting is important in helping us establish realistic expectations of what the public budgeting process can and cannot bear. We also intend to provide readers with a greater understanding of and appreciation for the important role that the budgeting process plays in guiding and regulat- ing the behavior of participants. This process, known as norming, helps reduce potential conflict among budget actors and facilitate agreement among various programs and units within the organization.

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122 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

The primary purpose of the budget process at all levels of government is to produce sufficient agreement to obtain approval of a balanced budget. An effective budget process plays a critical role in reducing the complexity and potential conflict inherent in the procedure. Part of this complexity and conflict arises from the multiple purposes that a budget seeks to achieve. You will recall that in chapter 3, we identified the following, often conflicting, purposes of a public budget:

1. building and maintaining financial control; 2. allocating scarce resources; 3. program coordination; 4. improving program efficiency and effectiveness; 5. communication; 6. protection of the organization’s fiscal condition; 7. influencing the economy; 8. a political opportunity for elected officials to exercise leadership; 9. building trust and legitimacy in government agencies and programs.

The political purposes of the budget captured by the last two purposes in the list are especially important. The budget process provides elected leaders with an opportunity to demonstrate leader- ship of the public organization by setting new priorities for existing government programs and by demonstrating the accomplishment of campaign goals. The process also provides one of the most important means for building public confidence in government organizations, in public revenue strategies, and in the very practice of budgeting. In fact, many argue that the transparency, open- ness, and fairness of the budget process may be more important than the resulting substantive allocations and appropriations (Global Movement for Budget Transparency, Accountability and Participation 2014; OECD Best Practices for Budget Transparency 2014). With so much at stake, participants need to emerge from the process with the will to work cooperatively with each other on future issues.

In addition to the complexity and conflict produced by the multiple purposes of a public budget, the conflicting perspectives among the many budget actors create additional layers of uncertainty and difficulty. We argued earlier in this book that these competing purposes and perspectives are largely the product of the structures and processes we have deliberately constructed to achieve the multiple goals of our various systems of democratic governance. The structural complexity of federalism, separation of powers, and checks and balances reflect as well as contribute to the inher- ent conflict and complexity that is part of public budgeting. A clear, predictable, and agreed-upon process helps to temper this potential conflict, thereby facilitating the achievement of sufficient agreement to gain formal approval and public acceptance of the budget. The routine predictability of the budgeting process both norms the behavior of the participants and provides an opportunity for agreements and differences of opinion to be aired and carried forward—presumably with suf- ficient goodwill intact—so that productive policy and budget debates continue in the future.

To summarize our basic argument in this chapter, the public budgeting process must be de- signed and organized to support what is fundamentally a political process. The roles of elected officials, administrators, interest group advocates, and citizens must be coordinated in order to produce the political agreements necessary to pass and adopt a budget. The more contentious the issues, the greater burden there is on those responsible for the process to build in features that ameliorate conflict. As we will argue in this chapter, the most common techniques that are used to reduce conflict are the principles of base budget and fair share. Base simply means that those who have budget responsibility start with the assumption that last year’s budget will serve as the starting point for building next year’s budget. Fair share means that any large departures from the previous year as a result of dramatic changes in revenues and the overall operation of the

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 123

economy will be shared “fairly” among participants in the budgeting process. Together these two principles provide “norming rules” that significantly constrain the behavior of participants in the process, reduce the scope of potentially contested issues, and provide a path forward for resolving the allocation of scarce resources.

The statutory requirement of each local government to produce and adopt a balanced budget prior to the beginning of the next fiscal year or biennium provides an additional incentive that facilitates budget agreement. Failure to meet this requirement results in the loss of authorization for spending, which requires government operations to cease functioning. Most local governments adopt a budget without the kind of political gamesmanship and posturing that is often evident at the federal congressional and some state levels of government. Few elected or administrative of- ficials at the local level are willing to take responsibility for shutting down government programs crucial to the public good.

The budget process of nonprofit organizations shares similar goals and characteristics with lo- cal governments. Nonprofits, like government, need a process that ensures technical soundness, facilitates political agreement, builds internal acceptance, and enhances the confidence of external stakeholders and funders. But there are also some important differences between nonprofit and local government budget processes, which we explore in more detail later in the chapter.

This chapter is organized around the following six goals of any successful local public budget- ing process:

1. Organize the activities of participants through a schedule that produces approval of a final budget.

2. Create a process that aligns with the scale and needs of the jurisdiction. 3. Respond to the needs and goals of participants. 4. Ensure technical proficiency. 5. Respond to changing conditions. 6. Coordinate budget development with the resource allocation of polity partners.

hOw wELL DOES ThE BUDGET PROCESS ORGANIZE ACTIVITIES OF PARTICIPANTS?

All public budgeting processes must guide and coordinate a diverse set of participants toward a final budget agreement that can provide resources and policy direction to agency and organiza- tion administrators. These goals are accomplished by ensuring adequate opportunities for chief executives, legislators, agencies, governing boards and appointed commissions, interest groups, and the general public to influence the development of the budget spending allocations and policy directives. A stable, well-publicized process schedule is a critical tool for organizing and negotiat- ing the development of this necessary political agreement.

A stable schedule also (1) provides sufficient lead time for technical preparation of the budget by the various governmental units and programs, and (2) norms the expectations of what is needed by whom and at what time, thus easing the movement of the budget through the six phases of the process.

Budget Process Phases: An Overview

State statutes and regulations define the local government budgeting process and requirements in each state, but local governments often use ordinances to make refinements to the state established process. Despite local variations, all budget processes are divided into the following six phases (see GFOA 1998).

124 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

• Executive budget planning • Preparation of agency, program, or organization requests • Budget compilation and executive proposal • Legislative review and adoption • Departmental and agency implementation • Audit, reconciliation, and feedback

These six phases recognize a sequential order of events centered on the fiscal year or fiscal biennium. Each process phase triggers a season of work and behavior among budget actors. Unlike the fluid and circular nature of many policy processes, budget processes tend to follow a linear calendar of steps with work product deadlines, and requirements for executive and legislative ac- tions. State regulations often define the exact schedule and dates for task and activity completion. These highly prescriptive processes help to build momentum, contain conflict, and push the actors and the budget process to a timely closure. Each phase of the process builds on the outcomes of earlier phases to produce the needed technical and policy actions and to build public confidence in the budget process and final resource allocations.

Larger jurisdictions typically take a formal approach to the process with strong separation of the executive and legislative roles. Smaller cities, towns, and special districts often use a more collegial process that involves department staff, executives, and elected officials in the planning and development of a proposed budget. Nonprofit organizations use the same basic phases if in modified or attenuated form. Wide acceptance of the standard budget process provides citizens, issue advocates, elected officials, and administrators with a quick understanding of expected events and opportunities for participation at various stages of the process.

Exhibit 5.1 presents a representative budget process for a small city or town. (The budget process for a small- or medium-sized special district would look similar.) Typically, it takes about four months to prepare and adopt a budget. Exhibit 5.1 shows both the months elapsed and the budget phases. It depicts a January 1 to December 31 fiscal year, but the schedule and stages are applicable to other fiscal year starting dates, including July 1 to June 30.

Description of Process Phases

The first step in the budget preparation process is executive planning. As we describe in greater detail in chapter 10, budget planning has become an executive-centered activity. The executive takes the initiative in preparing an organization-wide schedule that establishes responsibilities, work products, and due dates for completing a series of activities by the executive, department heads, chief finance officer or clerk, and the elected officials (GFOA 1998). The executive plan- ning phase also sets forth the economic assumptions and policy guidelines/priorities to be used by participants in submitting their budget requests. Many local governments distill the executive phase of the process into a set of budget instructions that give detailed guidelines to the department, program, and central budget office analysts on how to prepare the budget documents. Chapter 10 presents an extended discussion of the budget planning phase.

The second process phase (see Exhibit 5.1) calls on each major department and program to follow the budget instructions and to prepare a comprehensive budget request for the coming fiscal year. This is a season of intense, focused work for the department staff analysts. The department directors and analysts work closely with the town clerk or city finance officer to craft a realistic request that responds to both political agendas and programmatic needs. A department budget request reflects long-term and recent revenue forecasts, workload forecasts, labor agreements and personnel costs, and requests for policy changes. The schedule in Exhibit 5.1 allows one month for the department to prepare its budget request; in reality, however, the department will begin

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 125

Exhibit 5.1

Example Small City and Town Budget Schedule (Hypothetical One-Year Fiscal Year January 1–December 31)

Month Budget Phase Activity

August Budget Planning → Coordination between executive (city manager or mayor) and finance officer or clerk on budget instructions and economic environment.

→ Optional council, executive, and department head/staff budget meeting. Status update reports, strategic planning, and priority setting.

September Prepare Department Requests

→ Clerk makes budget call to department heads and offices to prepare program requests. Requests include estimates of revenues and costs.

→ Requests and estimates filed with clerk by end of month.

October (1st wk) Executive Proposal and Approval

→ Requests and estimates presented to executive mayor, city manager (CEO/ executive officer). Clerk under direction from CEO makes modifications and consults with departments and programs.

→ Executive officer presents a balanced preliminary budget to council or board with revenue estimates and any proposed changes to revenues.

October (2nd–4th wk) → In some states, council or board holds hearings on revenues, especially on any increases in taxes or fees. Council or board may take several weeks but adopts or rejects changes to tax levies and fee rate schedules.

November (1st wk) → Executive prepares a budget message to cover the preliminary (proposed) budget; presents both budget message and budget to the legislative council or board.

November (2nd wk) Budget Adoption → Clerk publishes advanced public notice of preliminary (proposed) budget for prescribed announcement period; clerk publishes public hearing dates.

→ Copies of preliminary (proposed) budget available to public or posted on web.

(continued)

126 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

November (3rd wk) → Council or board holds hearings on revenue and spending estimates, and on program requests and estimates; may call department and program heads to testify; may make revisions to preliminary (proposed) budget.

December (1st wk) → Final public hearing on proposed budget.

December (2nd wk) → Council or board adopts budget.

December (3rd–4th wk) → Clerk submits copies of adopted budget finances and certification of tax levies with state officials.

January (1st) Budget Implementation

→ Fiscal year begins. Based on adopted budget, staff allocates funds and begins to implement program and spending in budget.

December (31st) → Fiscal year ends, all authorized spending activity completed.

January (2nd wk) of year following fiscal year

Audit and Feedback → Fiscal year closing expenses and revenues booked; audits begin.

Source: Modified to a generalized process from Municipal Research and Services Center (MRSC) 2013.

Month Budget Phase Activity

Exhibit 5.1 (continued)

collecting information on program needs and the analysts will be doing the deep analysis to build the request over the previous summer months. The department budget preparation will come together into a final product in late September. In chapters 11 through 14, we provide a detailed discussion of how departments complete phase two of the budget process for each of the four major types of budget formats currently in use.

In the third phase of the budget process, the clerk 1 or finance officer receives the department requests. After reviewing the requests in detail and consulting with the chief executive officer (CEO), the clerk integrates the separate requests into a consolidated preliminary budget. This budget displays all existing and proposed sources and levels of revenue, all proposed expenditures, and all the internal transfers and internal service charges between the different departments and programs. At this point, some states require the public announcement of the proposed preliminary budget for the public review and adoption of any tax and revenue increases necessary to fund it. Review of revenues can include increases or changes to property, sales, or income tax levels, or to fee and charge rate schedules.

Once the revenue levels have been adopted, the clerk consults with the CEO, adjusts expendi- ture levels as needed to match revenues, and finalizes the preliminary budget document.2 Because of their decision-making authority and direct control of the process, CEOs make their requests for funding and policy changes through the preliminary budget document. The final preliminary budget may also be known as a proposed budget.

In the fourth budget phase, the legislative body—the city or town council, the district board of directors, or the township board—receives the preliminary or proposed budget. The town clerk or finance officer publishes an announcement that a budget is available and that a public process

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 127

of hearings will be undertaken prior to formal adoption of the budget by the legislative body. For elected officials and issue advocates, this often is a season of reconsidering needs and choices, responding to constituent pleas, building political agreements, and diligent monitoring and nursing of the budget package into law. For town clerks and department analysts, though, this is a season of hurried, last-minute council or board demands for more information and revised analyses.

As the elected legislative body approaches adoption of a final budget, it is common for its members to review the budget in detail and ask department heads and program leads to provide public testimony. The council or board also holds a series of public hearings to take public concerns and comments on the budget. Considering comments and concerns from the hearings, the council or board members may make revisions to the preliminary or proposed budget by vote. The town clerk or the finance officer helps to ensure the technical integrity of any changes to the budget. The legislative body then votes to adopt the budget by ordinance or resolution. The budget must be adopted well in advance of the first date of the pending fiscal year, which is prescribed in state regulation. In the Exhibit 5.1 example, the city council must adopt the budget by the second week of December in order for the budget to be ready for implementation by January 1, which begins the new fiscal year. The adopted budget takes the form of an ordinance or resolution passed by the town, city, or district. Any future changes in excess of dollar limits specified in the jurisdic- tion’s financial policies must be made using the ordinance process. The final step in the budget adoption phase is to submit copies of the adopted budget and supporting forms to the appropriate state officials.

Once the budget is adopted, the executive, the clerk or finance officer, and the departments move to phase five of the budget process: implementation. This stage includes allocating the budgeted funds to the various departments and programs, and scheduling allotments of funding for release over the fiscal year. Once the budgeted funds have been allotted, the department and program staff make expenditures following defined procurement regulations and rules. The procurement regulations and rules assure that an electronic or paper trail is available to verify the purpose, date, and amount of spending. In addition to making expenditures, the jurisdiction receives and logs revenues from each of the sources it draws on to fund public activities. Using various accounting and tracking systems, the clerk or finance officer prepares regular reports matching actual spend- ing and receipt of revenues against the adopted budget. These regular reports enable the CEO and department heads to monitor their “real time” cash flow. Should conditions change radically, the executive may request that the council or board consider and adopt an amendment to the adopted budget (chapter 17).

Once the fiscal year or biennium closes, the budget process moves into its final phase (chap- ter 18). In this, the sixth phase of the process, auditors review spending levels and patterns for appropriate outlay and identify opportunities to increase organizational performance. The audit results typically feed into a Comprehensive annual financial report (CAFR). Audit information also informs the budget planning discussions and the department budget request preparation for the pending fiscal year.

The local budget process is largely executive driven. In a variation, where a CEO elects to delegate authority, the chief financial officer (CFO) or town clerk may exert a dominant control throughout the budget process. Chief financial officers often play a strong guiding role in nonprofit budgeting. Whether through the executive or the finance director, this centralized control demon- strates the competent and energetic governance tradition (chapter 2)—a tradition that embraces systematic planning and the values of government efficiency, effectiveness, and entrepreneurship. The need for timely adoption of a budget prior to the beginning of the next fiscal year, along with requirements for precise financial analysis and auditing, reinforce executive and finance officer dominance of the budget process. Statutory attention to competent and energetic governance may obscure the need to consider the other governance traditions of civic governance, responsive

128 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

governance, and attentiveness to the needs of minority target populations. Effectively involving and integrating the public into various activities associated with the budget process (i.e., issue framing, priority setting, alternative exploration and decision making) may help to build public confidence in the budget process. Simonsen and Robbins (2000) argue for greater public involve- ment in budget processes and provide a series of case examples to illustrate ways of accomplishing this goal. However, most citizen involvement in local budget processes is confined to statutorily defined structures in the form of citizen budget committees, a limited number of citizen listening sessions, and formal public hearings.

hOw DOES ThE BUDGET PROCESS ALIGN wITh ThE SCALE AND NEEDS OF ThE JURISDICTION?

While the budget process is marked by some common characteristics that are uniform across juris- dictions, there are important variations that reflect the scale and needs of particular governmental entities. Large cities, county governments, and special districts have a much more complex and extended budget process than is the case for smaller jurisdictions. These larger jurisdictions may take up to 10 or 11 months to prepare and adopt their budget. Still more complex, state govern- ments begin preparation and adoption of an annual or biennial budget up to 18 months ahead of actual implementation. The large numbers of state operating departments, programs, and boards, not to mention the sheer magnitude of dollars spent by state agencies, demand an extended lead time; still, these larger governments follow the same basic budget process phases as smaller jurisdictions.

The size and value of the revenues and program expenses—and the greater likelihood of over- sight and public scrutiny in larger governments—require staff who are highly trained and skilled in various types of financial and technical analysis. Large cities and counties typically have the resources to hire budget specialists to produce the required budget documents. The CFO for a large city or county normally manages a small staff of budget analysts. In some counties, deputy county administrators serve as the budget analysts.

Large City and County Processes Provide Greater Opportunities for Public Influence

Exhibit 5.2 displays the flow and relationships of a representative large city budget process. This process, which is more involved, takes about nine months of preparation and adoption time. A large county government would follow a similar path. In this example, the fiscal year begins on January 1 and ends on December 31. For a large city government, the strong mayor, finance of- ficer, and city council are the primary actors. In a county government, the elected county executive or board chair, or the appointed county executive would serve in the executive officer role. The county commission or council would act in the legislative role.

The large city budget process begins with a budget planning stage in late February or early March. This phase includes close communication between the mayor and the finance officer over the budget instructions, the budget schedule, political agendas, the revenue situation, the economic backdrop, and any audit results from the previous years. Preliminary instructions are communi- cated to city department heads and their analysts by mid-March. Based on the instructions, the department budget analysts quickly begin to prepare the department budget request.

At about the same time in early March, the mayor, council members, the department heads, and department managers hold public listening sessions to gather citizen concerns and recommenda- tions for the budget. The city office of neighborhoods may serve as the venue for systematically reaching all neighborhoods and parts of the city. Advocacy contact between citizens and city

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 129

(continued)

Exhibit 5.2

Example Large City Budget Schedule (Hypothetical One-Year Fiscal Year January 1–December 31)

Month Budget Phase Activity

February Budget Planning → Coordination between mayor (or executive) and finance officer on budget instructions, schedule, policy, issue agenda, revenues, economic environment, and audit results.

→ Finance officer provides budget preliminary instructions and schedule to department and programs.

March Prepare Department Requests

→ Departments hold neighborhood listening sessions to hear public concerns.

March–April → Central budget office prepares revenue forecasts.

April → Finance officer transmits final budget instructions to departments.

April–May → Departments provide central budget office a preview of proposed service levels and requested changes to current adopted budget.

May/June–mid-July → Departments prepare operating requests, program modifications, and capital improvement program proposals.

May–June → Mayor’s office and central budget office provide feedback on departments’ preparations.

Late July–August Executive Proposal and Approval

→ Central budget office and mayor’s office review department operating requests and capital improvement proposals (CIP).

August–September → Mayor’s office makes final decisions on spending and policy. Government-wide proposed budget and CIP document produced.

September → Mayor presents proposed budget request and CIP program to city council.

September–early October

Budget Adoption → Central budget office and departments prepare oral presentations for city council on revenues and proposed expenditures.

October–November → City council takes testimony from central budget office and department heads. Council reviews proposed budget request, CIP program, and revenue changes in detail.

→ City council holds public hearings on proposed budget request, revenue changes, and CIP program.

130 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

officials is especially effective at this early stage of the budget process, before technical analysis and political agreements have limited flexibility to accommodate new spending requests or ad- justments to existing programs. Toward late March, the analysts in the city finance office prepare detailed forecasts of taxes, fees, and intergovernmental revenues to support preparation of the budget requests of the department analysts.

By early April, the department budget analysts and program leads have begun the prepara- tion of expenditure requests. Analysts closely follow the budget instructions provided by the

Month Budget Phase Activity

October–November → City council proposes and makes revisions to proposed budget request, revenue changes, and CIP program.

Mid-November → Final public hearing on proposed budget, revenue changes, and CIP.

Late November → Council adopts budget, revenue levels, and CIP.

Late December → Finance officer submits copies of budget, CIP, and certification of tax levies to state officials.

January (1st) Budget Implementation

→ New fiscal year begins.

Early to mid-January → Center budget office and finance staff makes allotments and sets position controls, accounting controls, and encumbrances to control spending.

January to December of fiscal year (12 months)

→ City staff spends funds to implement programs and to make capital investments.

Monthly or quarterly → Finance office provides monthly or quarterly revenue status reports and department expenditure reports.

As Needed → As necessary, mayor proposes and city council adopts amendments, supplements, or rescissions to the adopted budget. Any adopted changes are recorded in an engrossed budget.

December (31st) → Fiscal year ends, all revenues logged, and authorized spending activity completed.

January of year following fiscal year

Audit and Feedback → Finance office and external auditors review financial compliance. Begin preparation of comprehensive annual financial report (CAFR). Performance audits opened. Preliminary feedback developed for pending budget request.

June of year following fiscal year

→ Release of CAFR.

Sources: City of Bellevue, WA 2005; City of Seattle, WA 2006, p. 10. See also Revised Code of Wash- ington Chapter 35.32A.

Exhibit 5.2 (continued)

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 131

central budget office and consult closely with the department heads and program managers to assure accurate estimates and to gain internal support for the requested program. Requested changes to program spending levels and spending policies are highlighted for later inspection. A separate request for capital improvements to facilities and for major equipment purchases is also developed.

The preparation of the department request phase of the budget process is largely closed to the public. Allowing analysts to work in a closed environment lets them concentrate on technical aspects of the budget and develop the broadest array of pre-decisional materials possible for final review and approval by the CEO. At this time, citizens and advocates may have some success influencing the department heads with respect to a particular program. Citizens may also have fruitful discussions with the mayor and council members at this fairly early point in the budget process. As departmental requests are prepared, department analysts consult regularly with their colleagues in the central finance office to ensure compliance with instructions, to confirm that proposed program spending matches forecast revenues, and to guarantee conformity with the po- litical goals of the council and chief executive. Completion of the department requests marks an important milestone, since it creates expectations and starts to mobilize vested interests external to the organization as well as potential alliances within the organization.

In late July and early August, the central finance office requests all departments to submit their final budget proposals and begins the process of compiling the many department submissions into an integrated budget for mayoral approval. Typically, the finance office staff members each take responsibility for a detailed review of one or more departments/programs. This allows staff members to build up familiarity and expertise within a program area. This familiarity increases with each year, which over time allows for deeper analysis and better understanding of program needs. The central finance office staff carefully reviews the proposed funding levels and program changes in the department request, verifies the assumptions of program demand and needs, and checks expenditure levels against revenue forecasts. After reviewing the requests, finance office staff members identify any available funding that could support program increases or changes. Staff members then advocate among each other and with the executive to allocate any extra resources. Following mayoral review and approval of all requests and changes, the finance office staff as- sembles the budget into the mayor’s proposed budget. The proposed budget may also be known as the executive’s approved, recommended, or requested budget. These latter terms reflect the perspective and strong influence of the executive officer in this part of the budget process. Again, this phase of the budget process is closed to public review and comment. Assembly of the pro- posed budget is a pre-decisional process: The closed process allows the staff to focus on building a technically accurate and balanced budget. Once completed, the proposed budget clearly identi- fies key issues that need to be addressed by the council, explains how all available revenues will be used, and details the allocation of resources to the various programs. The development of the proposed budget provides an opportunity for the chief executive to frame the debate for budget consideration by the council or commission. The complexity and size of large city (and county) budgets prevents elected councillors and the public from fully understanding the numerous budget decisions made by the executive and the finance office staff. In the sample schedule in Exhibit 5.2, the mayor releases his budget to the public and legislative council in September. This gives the city council about two months to review and adopt a final budget.

The budget adoption phase begins in late September–early October. Here, the city council reviews the executive’s proposed budget request and moves through a public review and decision process to adopt the budget by ordinance. Depending on the institutional arrangement, the council may have some staff analysts assist with the legislative review. In many jurisdictions, however, the part-time council is on its own or must rely on the finance office staff for explanation and further analysis. The council announces a schedule of hearings to review revenue forecasts, take testimony

132 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

from department and program heads, and consider public comment and recommendations. After taking testimony, the council members may propose changes to the budget. These changes are typically incremental adjustments to the mayor’s proposal. After weighing commentary on any proposed changes, the council adopts the necessary revenue levies and fee rate structures to fund the budget and then, by ordinance, adopts the budget. The definitions in the executive budget and the complexity of the budget limit the depth of changes the council is likely to make. The public has an opportunity to comment and to make recommendations to the council formally in testimony and through informal contacts, but input at this point may be largely pro forma. Efforts to make changes to the budget require substantial political agreement and energy. The city council must formally adopt the budget to allow a sufficient lead time for administrative processing before the fiscal year begins. A council would complete work on a budget in early to mid-December—two or three weeks before the start of the fiscal year.

In the example in Exhibit 5.2, the fiscal year begins on January 1. The central finance office allocates funds as directed in the budget. Policy decisions on how to spend funds and how to hire staff are turned into guidance documents to organization managers. The departments and programs then spend funds over the fiscal year. Tax and fee revenues are collected, and intergovernmental revenues are received. Both spending schedules and revenue forecasts are compared against actual levels to determine variances, and adjustments are made as necessary. In the example in Exhibit 5.2, all spending must be completed by December 31 at the close of the fiscal year. The audit and reconciliation phase of the process then begins. This phase typically runs until the finance office staff and external auditors complete all audits and produce a CAFR.

The representative large city or county budget process that we have just described spans more than two years of elapsed time. This requires staff to prepare next year’s requests while simulta- neously monitoring the spending for the current fiscal year. The auditors are also examining the previous year’s books while those responsible for answering their questions are deep into budget implementation for the current fiscal year. Exhibit 5.3 diagrams the overlap in budget years and the different activities being carried out across budget cycles. Exhibit 5.3 also demonstrates the cyclical flow and timing of events as seasons of the budget cycle.

State Government Budget Process

Like local governments, state governments follow a budget process with the major phases of plan- ning, preparation, executive request, adoption, implementation, and audit. But in general, state governments are at least an order of magnitude larger than most local governments. Mid-sized and larger counties, large cities, and very large port and special districts develop general fund budgets on the scale of hundreds of millions of dollars in annual spending. States typically adopt total general fund spending in the billions of dollars. The size of state government organizations and the diversity of programs add a level of complexity to the budget process not experienced by most local governments. This size and complexity reflects the states’ important role in the U.S. federal system as program delivery agents and as major recipients of federal intergovernmental revenues. State governments also must rely on an extended, formal legislative process to complete the adoption of appropriation and revenue bills. The formal legislative process must respond to the concerns of a state’s diverse population and its needs. The legislative process allows for greater political influence and the chance that a budget will be delayed or not adopted in time for the fiscal year. In most instances, however, budget adoption is “must pass” legislation that attracts orphan issues and allows for complex grand bargains of legislative agreement in the waning hours of the budget process.

State governments are similar to local governments in an important aspect. Virtually all state governments must balance their annual or biennial budget. The exact form and timing of the bal-

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134 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

ance varies with state law. Some states require the governor to submit a balanced budget. Other states require the legislature to adopt a balanced budget. While state spending, employment, and procurement all influence the regional economy, balanced budget requirements limit the states’ capacity to serve as economic stimulus agents.

States vary in their fiscal period and budget structure. Most states rely on a one-year fiscal year, but several states budget and spend over a biennium (Exhibit 5.4). The biennial fiscal period is a product of state constitutional requirements and a holdover of the traditional practice of conven- ing a legislative session every two years. Careful allotments and financial controls meter state spending over the full two-year period, but revenue shortfalls toward the middle and end of the second year of the biennium can be especially crippling because all appropriated funds have been spent and the legislature is often out of session.

In most states, the budget preparation and adoption process requires at least nine months of lead time. Revenue forecasts to support budget preparation are often produced and updated quarterly. The timing of the budget planning and preparation phases responds to the opening of the state legislative session. The session in turn responds to the beginning of the state’s fiscal year. We will discuss implications of the start date of a state’s fiscal year later in this chapter.

Exhibit 5.4

State Annual and Biennial Budgeting Table

Annual Budgets Biennial Budgets

Alabama Biennial Budgets Adopted Once Every Two Years Alaska North Dakota Arizona Oregon Arkansas Washington California Wyoming (odd-year adoption) Colorado Biennial Budgets Adopted Annually Delaware Connecticut Florida Hawaii Georgia Indiana Idaho Kentucky (odd-year adoption) Illinois Maine Iowa Minnesota Kansas Montana Louisiana Nebraska Maryland Nevada Massachusetts New Hampshire Michigan North Carolina Mississippi Ohio Missouri Texas New Jersey Virginia New Mexico Wisconsin New York Oklahoma Pennsylvania Rhode Island South Carolina South Dakota Tennessee Utah Vermont West Virginia

Source: Adapted from National Conference of State Legislatures (NCSL) 2008.

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 135

State governments follow a budget schedule that is similar to the one summarized in Exhibit 5.5. The budget planning phase begins in March, with the state governor meeting with her staff and the head of the central budget office (Forsythe 2004). As in local government, the budget planning phases establish the basic rules to be followed by departments and programs in submitting their budget requests, including the formats for presenting the budget, the budget production schedule, the governor’s budget priorities, the economic and policy backdrop, and the revenue parameters under which the departments will prepare their requests. By late April, the central budget office releases budget instructions to all state departments, agencies, programs, and commissions. Release of the budget instructions begins the budget preparation season and gears up the organization for an annual exercise. Early citizen and advocacy contacts with department executives and program leads may be fruitful at this beginning stage of the budget process.

The budget staff in each state department agency and program works closely with their agency executive and program managers over May, June, and July to craft a spending request. The depart- ment or agency may hold public listening sessions around the state to gather client and advocate recommendations. The department then carefully assesses forecasts of caseload demand, any need for program changes, and any needed changes in law and policy as it prepares its request. Updated quarterly revenue forecasts appear in June, which helps to frame the request with new information. Analysts rely heavily on information from the prior budget year to build their proposed budget request. This use of templates and updates saves time, guides staff energies, and presents the governor and legislature with familiar presentations formats (see especially chapter 11 on line- item budgeting). The departments complete their requests by early August and file them with the central budget office according to a delivery schedule. As in local governments, the department and agency budget preparation phase is closed to public review and comment.

From August to October, the central budget office staff reviews the department and agency requests and then, under the governor’s oversight, develops a combined operating budget. Depend- ing on state law and practice, the budget office may produce a separate capital spending request, or include the capital request as part of the department or agency request. The central budget office staff works closely with department executives and analysts to verify numbers and to test possible funding levels and organizational arrangements. The central budget office staff also ensures that the governor’s agenda is thoroughly represented in the various programs, and—perhaps most important—that the budget balances. Final decisions on funding levels, policy choices, staffing, and major procurement are left to the governor and her personal staff, but department executives may be able to appeal any final decisions to the governor. The governor normally releases her budget request to the general public in early December. This is in advance of the legislative ses- sion that begins in January of the following year.

The governor’s budget request is formally presented to the legislature shortly after it convenes in January. In most states, the governor’s request is a strong statement of executive power, and this sets up an interbranch check and balance between the executive and legislative branches. This formal check and balance contrasts with the more informal and collegial relationships of local government budgeting.

Each state follows a variation of the federal legislative model. Administrators must learn the legislative procedures and practices of the respective branches of their state legislature. All states, except for unicameral Nebraska, follow the bicameral structure of a house of representatives (or an assembly of delegates) and a senate. Typically, legislative policy committees must first authorize a program and its overall spending levels. Appropriations or budget committees then address legislation on annual spending. ways and means or revenue committees handle tax and revenue policy. In some states, the transportation authorizing committees have jurisdiction over transpor- tation capital projects. In another variation, the house and senate may assign joint committees to prepare the appropriations and overall budget.

136 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

Exhibit 5.5

Example State Government Budget Schedule (Hypothetical One-Year Fiscal Year July 1–June 30)

Month Budget Phase Activity

March Budget Planning → Coordination between governor, governor’s staff, head of central budget office on budget instructions, budget schedule, policy, agenda, revenues, economic environment, and audit results.

March → Quarterly revenue forecast provides initial resource levels.

April to mid- May

→ Central budget office issues budget instructions, budget schedule, and revenue context.

May–July Prepare Agency and Department Requests

→ Agencies and departments prepare budget requests. Agencies and departments may have public listening sessions across the state.

June → Quarterly revenue update.

August → Agencies and departments submit budget requests and policy change requests to central budget office.

August–October Prepare Governor’s Budget

→ Central budget office staff reviews agency and department requests, and assembles an integrated state budget.

September → Quarterly revenue forecast updates revenue assumptions, forecasts, and program levels.

November → Governor and governor’s staff work closely with central budget office to set final spending, program levels, and policy. Final communication and appeals between governor’s office and agencies and departments.

December → Quarterly revenue forecast update.

Mid-December → Public release of governor’s budget request. Printing and posting of summary documents.

January Legislative Budget Adoption

→ State legislature convenes. Receipt of governor’s budget request. Budget begins the legislative process.

January–March → Legislative committee process. Appropriations, ways and means committees consider the governor’s request and provide oversight of current agency spending. Transportation committees may consider capital infrastructure requests. Committees take testimony from agency and department heads. Committees take public testimony.

March → Quarterly revenue forecast update supplies most recent data to legislators.

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 137

Legislators use the legislative committee process to conduct a careful examination of the gover- nor’s funding and policy requests for each state agency and program. In February and March, the appropriations committees conduct oversight of the current year’s spending and levels of program demand. In addition to taking testimony from the department executives, the committees typically hear from the public and from interest group advocates. March brings an updated revenue forecast that refines the resource levels for appropriations. By late March, the leadership in both houses has begun to coalesce on a budget and spending deal. However, final action on appropriations bills may not come for another month. But, as the appropriations and revenue committees make reports back to the full body, the contours of revenue and spending start to come into focus. The governor may play an overt or behind-the-scenes role in nudging a spending bill toward completion (Forsythe 2004).

Ideally, by May, both houses of the legislature have agreed to appropriations bills and sent the legislation to the governor for a signature. In addition to the funding levels specified in legislation, the legislature may add spending policy guidance to the department and agency executives. Unlike the federal system, with its “all or nothing” presidential veto, many states allow a governor to use a line-item veto to reject selected portions of a spending bill. The line-item veto gives a governor even more power relative to the legislative branch. In our representative schedule in Exhibit 5.5, the legislature must complete work on all appropriations bills by early June. This allows time for the governor to act on the legislation before the fiscal year or biennium begins on July 1.

April–May → State House and State Senate reach agreement on budget package. Floor action on overall budget and appropriation bills. Governor may have a supporting role in building agreement.

June → State legislature passes appropriations bills. Governor signs bills into law.

July (1st) Budget Implementation

→ New fiscal year begins.

July to mid- August

→ Center budget office and finance staff make allocations and allotments to agencies and departments, set position controls, accounting controls, and encumbrances to control spending.

July to June of fiscal year (12 months)

→ Agencies and departments spend funds to adopted levels to implement program.

Monthly or quarterly

→ State treasurer or finance office provides quarterly revenue status reports to agencies, departments, legislative committees, and central budget office.

June (30th) → Fiscal year ends, all revenues logged, and authorized spending activity completed. Legislature and governor complete work on appropriations for next fiscal year.

July of year following fiscal year

Audit and Feedback → State auditor, agency and department auditors, and external auditors begin review of fiscal year financial records.

Month Budget Phase Activity

Exhibit 5.5 (continued)

138 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

Once the fiscal year begins and the appropriations bills have been signed into statute, the central budget office and the state finance office begin to allocate and allot funds to the departments. Then, the spending process commences. While effective cash management ensures that the departments continue to run smoothly from one fiscal year to the next, it takes time to process funds out to the various departments, agencies, and programs; thus, local governments and nonprofits may face a lag time of one to two months from the beginning of the fiscal year to the availability of funds for new grants and contracts. Over the fiscal year, departments, agencies, and programs spend their allotted funds. Quarterly or monthly status reports indicate areas of over- or under-spending by programs. Revenue performance is also tracked, and spending is adjusted as necessary. It is especially important to note that most spending must be completed by the close of the fiscal year. Unspent funds typically revert to the state treasury; however, legislatures may allow outlays to continue into the subsequent fiscal year. The close of the fiscal year opens the audit and review phase of the budget cycle. Audits are used by the central budget office and the legislature as future budgets are built and adopted.

Federal Government Budget Process

In this section we provide a brief overview of the federal budget process mainly to illustrate the contrast with most local budgeting processes. The federal budget dwarfs even the largest of state budgets. If state government budgets are several orders of magnitude larger than local budgets, the federal government budget is several orders of magnitude larger than state government budgets. The total federal government budget is tallied in trillions of dollars, with many individual federal agencies spending hundreds of millions or billions of dollars annually. The massive federal bud- get reflects the full scale of the U.S. economy, extensive military and security programs, Social Security, Medicare, and other large welfare programs. Changes in federal spending or policy can have an almost immediate impact on hundreds of thousands of citizens and benefit recipients.

The U.S. Constitution requires that all money bills originate in the House of Representatives, thus giving this branch a preferred position among equals in the federal budgeting process. But because of the complexity and size of the U.S. budget, both the House and the U.S. Senate are organized similarly to deal with complicated budgetary issues. Most issue advocates, federal agency analysts, and congressional staffers focus on a small set of agencies or program areas in which they develop expertise. Experienced nonprofit, local, and state government administrators tap into this expert network to learn of pending changes to agency and program funding and policy. The National Association of Counties (NACo), the National League of Cities (NLC), and the National Conference of State Legislatures (NCSL) provide communication points into the expert network. Congressional staffers from your state delegation may also offer effective assistance.

The federal budget process follows the six main phases we have described above: planning, preparation of agency requests, executive budget and request, review and adoption, implementa- tion, and audit. However, each phase takes longer, involves a more extensive network of national, regional, and local offices, and involves decisions over larger sums of funds. The preparation and adoption of a budget and spending authority for a new fiscal year takes up to 21 months. In the federal budget process, the president relies on the director of the Office of Management and Budget (OMB) as the chief budget officer. Highly skilled technical budget analysts who are guided from above by several layers of presidential political appointees staff the OMB organization. The OMB assures the technical integrity of the budget request and ensures federal agency compliance with the president’s political and policy agenda.

Congress provides a check on the president’s budget request. After receiving the presi- dent’s request in late January, it uses its legislative processes to review the request, adopt a budget, and appropriate spending authority for the new fiscal year. Congress relies on the

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 139

Congressional Budget Office (CBO) to provide independent estimates on the president’s budget request and on any proposed budget and spending legislation. The CBO, like the OMB, is staffed by very experienced analysts and assiduously strives to maintain partisan independence in its analytic work.

Completing the legislative process to adopt a budget, appropriate funds, and reconcile spending in nine months’ time is extremely challenging. House and Senate Appropriations subcommittee chairs are typically seasoned legislators who can present and move bills through the committee and floor debate processes, but even with such expertise, the process often breaks down because of political agendas and diverse beliefs over the role and size of federal spending. In recent years, Congress has failed to pass many of the 12 annual discretionary and military appropriations bills. Exhibit 5.6 presents a very terse summary of the federal budget process timeline. For more refined information on the federal budget process, consult TheCapitol.Net (2009), Schick (2007), and Collender (1996).

The federal process provides several opportunities for citizens to gain information on budget decisions. The release of the president’s budget request in late January is the first and best of these opportunities. Inclusion of a funding request for a program provides recognition and a base level of funding upon which to build in the congressional adoption process. The president’s proposed budget provides detailed program-level information and comparisons to current and previous years’ spending.

Exhibit 5.6

Federal Budget Timeline for Fiscal Year 2014

Budget phase and activities Calendar date

Budget Planning

Budget instructions developed by Office of Management and Budget (OMB).

December 2011 through January 2012

Preparation of Agency Requests

Agency receives budget instructions from OMB. Agency regional and field offices prepare requests. Completed requests transmitted back to national headquarters. Review by agency budget office, agency executive, and cabinet secretary.

April 2012 through August 2012

Compilation of President’s Budget Request

All agency requests submitted to OMB. OMB reviews, aligns with revenues, ensures compliance with agenda, compiles the president’s budget request.

September 2012 through December 2012

Congressional Budget and Adoption of Appropriation Bills

Congress receives the president’s budget request and adopts a budget. House and Senate each review presidential request, develop and pass appropriations bills, conference on differences. Presidential acceptance or veto.

January 2013 through September 2013

Implementation of FY 2014

Allocation and allotment of budget authority to departments and agencies. Outlay and spending of funds to meet program objectives. Quarterly reporting. All outlays completed by September 30, unless carryover allowed.

FY 2014 runs October 1, 2013 through September 30, 2014

Audit and Review

Internal financial audits, external audits, Government Accountability Office (GAO) reviews.

October 2014 into 2015

140 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

In the congressional legislative process, there are three additional opportunities for citizens to obtain information on possible future funding levels. The House of Representatives and Senate appropriations committees are broken into 12 subcommittees. Each subcommittee has jurisdiction over the discretionary appropriations for a defined group of programs. Subcommittee jurisdic- tions include: agriculture and food; commerce, justice, and science; defense operations; defense construction and veterans affairs; energy and water development; financial services and general government; homeland security; labor, health, human services, and education; the State Depart- ment and international affairs; transportation, housing, and urban development; natural resources and environment; and the federal legislative branch. After reviewing the president’s request for the program area, taking testimony, and preparing an appropriations bill, each subcommittee will pass out and report a bill providing budget (expenditure) authority and policy guidance for its program area. The House and Senate subcommittee bills and subcommittee policy reports are the second and third critical sources of information on potential future funding levels for programs and agencies. The levels of funding provided in the two subcommittee policy reports typically bracket the range of possible program funding for the coming fiscal year.

The House subcommittees act first, preparing their bills and moving them through the full ap- propriations committee, the House Rules Committee, and then to the House floor for an adoption vote. The Senate subcommittees then follow and do their work, and through the Senate majority leader report a bill to the Senate floor for passage. Ideally, representatives from both the House and the Senate come together in a conference committee to reach agreement on a common bill for final passage. The conference committee report and conference bill are a fourth and final informa- tion point for funding levels and policy guidance. The conference committee report and final bill contain the final funding levels for the fiscal year unless vetoed by the president.

Overlap and Inconsistent Timing Across Levels of Government

The extended lengths of the state, federal, and large local government budget processes result in overlaps between the different levels of government. Exhibit 5.7 demonstrates this overlap for a representative county government, state government, and the federal government.

The exhibit includes two federal cycles to demonstrate the overlap more clearly. Both the county government and the state government represented in Exhibit 5.7 begin their fiscal years on July 1. This common start date presents budgeting challenges for county governments because they must adopt a final budget without knowing the exact funding levels for revenues coming out of the state legislature. An ongoing, incomplete legislative process causes county and other local government officials to budget in likely ranges of intergovernmental revenues. Additionally, once the legislature and the governor adopt a budget, it may take several weeks for the state agency bureaucracy to allocate the new funding and deliver it to local governments.

Similar budget cycle overlaps plague the federal-to-state relationship and the federal-to-local relationship. For example, in Exhibit 5.7, state legislators are in session in the first and second quarters of the calendar year (January through June) and have knowledge of funding levels in ongoing federal cycle I implementation. But state budgeting for the coming fiscal year rests on funding levels from the newer federal cycle II, and Congress is in the middle of the legislative process for this cycle. State budget analysts and legislators can only use funding proposals in the president’s budget request and in the appropriations subcommittee reports as indicators of final federal funding for the coming fiscal year. County and other local governments on this schedule have the same difficulty. Potential funding level information is important to state governments because they receive on average nearly 40 percent of their revenue from intergovernmental trans- fers from the federal government.

Several states have adjusted their fiscal years to try to compensate for the budget process

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142 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

overlaps, but many remain stuck in asynchronous confusion. The majority of state and local jurisdictions in the United States are on a fiscal year that begins July 1 and ends June 30, but there are exceptions to this general practice. The states of Alabama, Michigan, and the District of Columbia have a fiscal year that begins in October, which coincides with the federal process. Texas has a fiscal year that begins on September 1, and New York’s fiscal year begins on April 1 (NCSL 2008). Local governments are even more varied in their fiscal year timing. In Washington state, cities, towns, districts, and other local governments begin their fiscal year on January 1, but counties begin on July 1. In other states, all local government fiscal years begin July 1. School district fiscal years may begin on September 1 to coincide with the academic year. In the end, administrators must know and fully understand the implications of the fiscal year dates and budget process calendars in their states.

We close this section with a summary of the key factors that influence the kind of budget process a given government jurisdiction needs to develop in order to align funding with its needs. The left- hand column of Exhibit 5.8 lists some of the key conditions that must be considered in any budget process. Small special districts that provide a single service and obtain most of their revenue from a single source have relatively low levels of complexity with respect to contested issues, politi- cal partisanship, multiple structures of authority, legal responsibility, and scale of operation. As one moves horizontally across the columns in Exhibit 5.8, all of these factors grow both in their degree of complexity and mutual influence. One of the ironies illustrated by Exhibit 5.8 is that the American rule-of-law system places very high demands on even local levels of government to conduct processes that serve multiple purposes. In managing the public treasury, financial resources, etc., local governments must respond to public expectations for legal and political accountability including separation of powers, checks and balances, federalism, responsiveness, and local control. Furthermore, political accountability must be tempered with respect for professional technical standards and expertise. This is an important reminder when constructing a budget process that is well aligned in meeting the particular needs of a given governmental entity.

Exhibit 5.8

Comparison of Budget Processes

Small cities, counties, and nonprofits

Large cities, counties, and nonprofits States Federal government

Problem/issue complexity Low-Medium Medium-High High Very high

Political conflict Low-Medium Medium-High High Very high

Structural complexity Low-Medium Medium-High High Very high

Legal complexity Medium High High High

Scale of responsibility Low-Medium Low-Medium High Very high

hOw wELL DOES ThE BUDGET PROCESS RESPOND TO ThE NEEDS AND GOALS OF PROCESS PARTICIPANTS?

All the budget processes we have summarized in the previous sections serve to organize budget actors into a predictable flow of sequential activities. A repeating process sets an internal work schedule for the budget actors, fosters legal compliance with budget regulations, and provides the public with expected work products, opportunities for participation, and closure of the process itself. But other political processes interact with the budget process. The electoral process often

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 143

conditions the budget process and injects uncertainty into it. Additionally, the budget process generates social and psychological behaviors in the budget actors. These behaviors are critical to the successful completion of the budget process. In the sections that follow, we review several of the behaviors that increase predictability and certainty in the budget process.

The Electoral Processes Tempers the Budget Process

Clearly, public budgeting processes interact with other political and legislative processes. For example, election cycles and electoral politics may have a strong influence on the budget process. This influence becomes more pronounced every two or four years during the campaign and elec- tion for the president, state governors, and local officeholders. Campaign issues and candidate commitments may transform quickly into budget initiatives by those running for office. A newly elected president, governor, or local chief executive never fully owns his first-year budget. This is especially true for states and jurisdictions with a January 1 or July 1 fiscal period start date for the budget year. Typically, the first-year budget has been prepared by the central budget office under the direction of the preceding administration. The newly elected official has limited time to make marginal adjustments and to incorporate agenda items. For example, in states that have a July 1–June 30 budget cycle, the newly elected governor might have until February 1 follow- ing his election to complete and deliver a budget request to the legislature. This contrasts with nonelection years, in which the governor would present a budget request by December 1—before the legislature convenes.

At the county and local levels of government, the effect of election cycles may be more mod- erated. Membership terms on city councils and on county commissions are staggered to assure continuity on policy and budget decisions, and in most western states local elections are nonparti- san. However, elections in cities with a strong mayor form of government may have an especially strong influence on budget cycles falling in campaign years.

The Budget Process Builds Confidence and Trust Among Participants

Interest groups, clients, government employees, and elected officials all enter the budget process with the chance of gaining resources and opportunities, but also with the fear and chance that resources may be lost or severely restricted by allocation choices. There are several ways in which the budget process helps to temper these fears and potential for conflict.

First, the defined steps in the budget cycle impose some order, predictability, and certainty, however much uncertainty and potential for conflict there may be in the larger budget environ- ment. Detailed budget instructions, a public schedule of activities and due dates, defined financial analysis and reporting formats, oversight hearings, public listening sessions/hearings, public notice and comment opportunities, organizational expectations and rules, and the norms of professional practices all provide routinized compliance structures that help to manage the uncertainty and risk in the budget process (cf. Robinson 2004). The degree of confidence actors have in each step of the process conditions their confidence in later process experiences. If confidence is lacking at a given stage of the process by one or more of the budget actors, the regulatory detail and linear flow of the budgeting process provide critical evaluation points against which budget actors can hold their peers accountable. These accountability points help the actors manage distrust and build confidence in each other and in the budget process (cf. Kass 2001).

A second set of factors that contribute to building confidence and trust in the budget process are professional relationships. Exhibits 5.1, 5.2, and 5.5 point out the many intra-organizational, interpersonal, and intergroup relationships embedded in local budgeting processes. Process regulations and position descriptions may define the structure, contours, and intent of a relation-

144 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

ship between budget actors, but how a professional uses personal skills and values to build and maintain that relationship is critical to process success. Trustworthy relationships between and among the budget actors are mandatory for managing the risk and uncertainty of the budget pro- cess. Interestingly, trustworthiness is not defined by whether someone supports or opposes your actions or point of view. It is defined by consistency and dependability. A trustworthy budget ac- tor consistently supports or consistently opposes another actor or interest group. The consistency of support or opposition provides certainty around which other actors can work. This certainty ultimately facilitates the successful completion of the budget process. Similarly, professionals in the process demonstrate their trustworthiness through consistent prudential judgment, effective communication, and reciprocity in understanding other actors.

The public budget process has a third set of structural attributes that help manage its inherent uncertainty and risk. Budget preparation and adoption is an annual or biennial activity. The repeti- tive cycles of the budget process year after year allow budget actors, advocates, and citizens to learn about each other and to build a history of shared process experiences—that, through time, condition the mutual expectations of participants for future budget cycles (cf. Robinson 2004). These unwritten rules enable the budget actors to work together even when they encounter unex- pected difficulties along the way, because they have had the experience of working successfully together in the past. Consistent experiences with these unwritten structures allow actors to build confidence in the process and trust in each other.

Finally, the legal requirement to adopt a budget by a specific date norms the expectations of actors in ways that temper the risk and uncertainty that is an inherent part of the process. The threat of closing down a local government on the first day of a new fiscal year is too large a political risk for almost all budget actors. The requirement to complete the budget process on time effectively pushes budget actors toward process closure. Timely closure of the budget process sends a signal to the larger tax-paying public of a functioning government that can perform for the public good. This positive signal, however, can be undercut by the “rush to closure,” which comes at the expense of sound technical data and adequate time to address the concerns of affected parties. Like all successful governance work, budgeting is a matter of balancing competing needs and priorities.

Budget process structure, trustworthy relationships, familiarity through repetition, and timely process closure all build a sense of confidence and trust in a budget process and its outcomes. Confidence and trust, in turn, lead to a public perception of fairness and justice in government, revenue collection, and the use of public resources. The opportunities for public involvement and the checks and balances embedded in the process help to ensure a fair budget process. Government employees, unions, government partners, interest group advocates, and citizens may tolerate a less-than-expected or less-than-satisfactory share of budget resources if they have confidence that the budget process itself is impartial and was conducted fairly (Rawls 2001; Thibaut and Walker 1975). In instances where the budget process is defined by state regulation in ways that limit process fairness, local administrators may need to exercise their discretion to add other public activities, offer new analyses, and provide more opportunities for citizen, client, nonprofit partner, and advocate involvement in the budget process.

The Budget Process Creates Behavioral Norms

The disciplined ordering of the various stages of the budget process both reflects as well creates some predictable behavior norms. For example, there is the norm that what you spent last year, absent significant changes, is the starting point for estimating what you will need next year. If there are significant changes, there is the norm of assuming that everyone will do “their fair share” in helping to balance the budget. Together, these norms create the principles of base budget and fair share, which tend to foster incremental changes from year to year in agency and department

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 145

budgets. As a result of frequently relying on these two principles, some students of the public budgeting process have tagged the public-sector process with the label incrementalism (Wildavsky 1984, 1992). In Part III of this text, we discuss incrementalism in greater detail, including various efforts to overcome the tendency for public agencies to continue what they have been doing in the past without much reexamination. In the meantime, it is important to understand the forces inher- ent in the very nature of putting a budget together—forces that predispose participants to take an incremental approach and make alternative approaches sometimes difficult to implement.

Base Budget

All agencies, programs, and participants in the budgeting process begin with a presumption that they will be able to obtain support for an existing base of services without providing extensive analysis and justification. What constitutes the base may change from one jurisdiction to the next and from one year to another. In some cases, the base may be fixed at some reduced percentage of last year’s authorized budget. In other cases, the base may be what was authorized last year, increased by some inflationary factor (i.e., 3 percent). The existence of some kind of base from which to operate greatly simplifies what has to be examined with care and what will serve as the primary focus of debate. (For purposes of the exercises associated with this text, we provide a very clear definition of base budget in chapter 11).

Fair Share

A second important shortcut that reduces conflict and the need for extensive analysis in the budget- ing process is the norm of fair share. Whenever expenditure requests exceed available resources and cuts have to be made, what criteria should be used in funding some programs over others? This question can be answered by gathering plenty of data and analyzing it extensively—two steps that are not always possible within the tight time frame of a budget cycle. The use of the principle of fair share, like the notion of base, provides a norm that is easy to apply and implement. Usu- ally, fair share is operationalized by asking for across-the-board cuts from all departments and programs, sometimes even from enterprise fund (user charge) agencies that are not supported by general fund revenues. When you hear requests being made for a fixed percentage cut in budget requests, you know that the principle of fair share is being used without an extensive analysis of data. Reliance on the principles of a base budget and of fair share results in a process that produces only incremental changes from year to year.

Incrementalism

There are several ways that the incremental features of the budget process surface during the budging cycle (for a good description of the expression of these incremental features of the budget process at the federal level, see Wildavsky 1984, chap. 2). First, as already noted, most requests begin with an assumption that everyone will ask for a little more this year than last year. Second, there is an assumption that there are likely to be cuts in the original request, but these will normally be small. Both of the first 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 (see chapter 11). In subsequent chapters, especially chapters 12 and 13, we will discuss various alternatives to incrementalism, including priority setting as a way to encourage agencies to sort and order the most essential budgetary priorities to be funded. While incremental decision making purposefully narrows options, the approach has several positive at- tributes. One advantage is that the principles of fair share and base make it easier for participants

146 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

in the budgeting process to simplify complexity, avoid potentially difficult conflict, and complete the budgeting process in a timely fashion. Equally important, the process can be completed with enough goodwill for the participants to engage one another in a civil fashion in the next cycle, which is always just around the corner. Building from current political agreements speeds the development of future agreement. The incremental approach also provides continuity to budget decision making and to the routine funding for each agency. And incremental decisions provide stability in another manner. When one or two programs among many in an agency receive relatively large adjustments, incremental decisions at the larger agency level help to maintain the relative structure and balance among the remaining programs within the agency as well as balance from one agency to another.

Modifications to the Budget Process

The budget process for local jurisdictions reflects the laws and regulations of the state from which the local jurisdiction receives its governing authority. Budget actors engaging in local budget processes must comply with all aspects of state law. Failure to do so could result in legal liability to the jurisdiction and to the government employee. Beyond legal compliance, local budget actors perceive the state budget and revenue laws as objectively firm. Budget steps must be executed on time, and a budget must be delivered in time for the new fiscal year. Only the state legislature can change the state local budget and finance statutes, and only the responsible state agency can modify regulations and official guidance promulgated from those statutes. State legislative and administrative changes quickly affect hundreds of county and local budget processes. The only recourse to address any adverse consequences of state control is to advocate for change in the legal requirements through the state association of counties, state association of cities, or association of special districts. Petitions for statutory changes would be handled through the state legislative process, and administrative changes to state regulations would follow a formal administrative process of notice and comment.

While state law grounds the local budget process in a defined structure, local jurisdictions may go beyond the minimum requirements—especially if the changes would enhance the process and better meet local needs and conditions. For example, if a city manager wants to and can effectively employ a citizen budget committee, this can be accomplished by adopting an ordinance that for- mally changes the city’s budget process, adding steps for convening, managing, and using a budget committee throughout the process. Such a change would normally precede the upcoming budget cycle and be adopted by a vote of the council. Deciding when to go beyond the minimal budgeting requirements established by state law requires local administrators to have a deep knowledge of the authority they have been granted and an understanding of how best to align their administrative discretion as interpreters and refiners of state law with the ultimate goal of meeting pressing local needs. The executive budget instructions to staff, developed to guide preparation of the department and program requests provide, a powerful administrative tool for implementing local discretion and for creating a process responsive to local political and polity needs.

State legislatures and U.S. Congress may change their own budgeting procedures by passing laws and by legislative agreement. Process revisions have been successful in some cases, and in other cases have produced poor results. For example, in the early 1990s, congressional leader- ship met with the George H.W. Bush administration and struck an agreement to balance annual federal deficit spending. The agreement was incorporated into law with a revised version of the Gramm-Rudman-Hollings Budget Act of 1985 (Collender 1996).3, 4 Over the next decade, Con- gress constrained annual spending and generated an annual surplus at the close of the Clinton administration. More recent experiences with federal budgeting and appropriations have pointed to the severe limitations of the federal budget process (Schick 2007, Meyers and Joyce 2005).

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 147

hOw wELL DOES ThE BUDGET PROCESS MEET ThE TEST OF TEChNICAL INTEGRITy?

While the primary purpose behind a public budgeting process is to organize political forces, the process must also support the technical analysis needs of producing a balanced budget. At its most fundamental level, the budget process must clearly and fully demonstrate that revenues will match with expenses over the short term of the next fiscal year and that the jurisdiction will maintain a structural balance over the long term. The technical analysis supporting a public budget must fully disclose all of the procedural, economic, organizational, and political assumptions used in assembling the budget.

Whenever the integrity of this technical analysis is called into question, citizens will challenge the legitimacy of the budget, the budget process, administrators, and ultimately the elected officials. A lack of technical integrity will also become evident to the financial community to whom the government must demonstrate ongoing creditworthiness. The public budgeting process at both the state and local levels must provide sufficient and accurate technical information to support investment decisions.

The technical aspects of budgeting are especially critical in the preparation of the department, program, and agency requests. In this early phase of the budget process, technical analysis must fully and accurately describe the public demand for services as well as the resources needed to meet those demands. Careful crafting by budget and program analysts helps to ensure accurate information and a comprehensive picture of needs and available resources.

During the adoption phase of the budget process, the rush to political agreement must not sub- vert the technical integrity of the budget under development. Arbitrary adjustments to incremental baselines, redefinition and recombination of line-items, and the use of revenue gimmicks chal- lenge the integrity of the budget process and the final budget it produces. In addition to following announced budget schedules and meeting applicable regulations, the culture of the legislature or local government must allow sufficient time for budget analysts and staff to develop realistic and accurate analyses that can fully support political intentions and agreements. At the local govern- ment level, technical standards defined in state law and regulation, and set by the Government Finance Officers Association (GFOA) provide standards for technical integrity and clarity of budget development and presentation.

hOw wELL DOES ThE BUDGET PROCESS RESPOND TO ChANGING CONDITIONS?

The public budgeting process does not end with the legislative adoption of a new budget. Once adopted, agency administrators and program directors must allocate and program the appropriated funds and resources into workable programs. Administrators must also interpret and prioritize the policy directions that have accompanied the appropriations. Agency administrators may need to reconcile funding shortfalls or excesses as set by the legislature with other private- and public- sector funding.

Even with the best program planning and forecasting, economic and business conditions change. Over the course of the fiscal year or biennium, expected tax and fee revenues may fall short or may exceed forecasts in a revenue windfall. Changing economic conditions and policy changes may lead to unexpected changes in client demand and service needs. In most local jurisdictions, state governments, and at the federal level, departments and agencies may reprogram or change the spending purposes of appropriated funds up to a certain ceiling without legislative, council, or board oversight. However, once this threshold has been reached, legislative action is required for changes in spending purpose. Amendments to the previously adopted budget in the form of

148 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

legislative ordinances allow the jurisdiction to respond to changing conditions. Specific actions of budget amendments include rescission or the taking back of funds, reprogramming or the redirect- ing of spending authority, or the supplemental addition of funds. Chapter 17 provides additional information on budget amendment procedures.

hOw wELL DOES ThE BUDGET PROCESS COORDINATE wITh POLITy PARTNERS?

Local governments sit in context with an array of nonprofit and for-profit service delivery, resource, and policy partners. Governments typically sit as primary nodes of the partner network because of their substantial resources and policy authority. The government budget process and its outcomes (1) define when and under what constraints public funds reach nonprofit and for-profit community partners, and (2) authorize the funding of intergovernmental agreements between governments for service delivery. But local governments are not the only major resource providers to community networks. Foundations and nonprofit federated intermediaries provide substantial resources to a community. These organizations convene their own budget processes and make their own resource allocation decisions. Effective community governance requires an awareness of each organization’s budget cycle in terms of preparation, decision making, resource delivery, and project implementa- tion. Because of its open and publicly defined nature, the government budgeting process may act as a foundation for community decision making. To better understand these relationships, we first review budget processes in nonprofit organizations and then examine how government budget processes set the timing and schedules for partner nonprofits.

Government versus Nonprofit Budgeting: Some Important Process Differences

Like local governments, medium and large nonprofit organizations tie their budgeting to their financial fiscal year, which often does not coincide with the calendar year or the government fiscal year. Also, because of their competitive quasi-private sector status, the nonprofit budget process can be partially or fully closed to the public. To build credibility with the community, major federated intermediaries and other larger service providers open their processes to the public as much as possible. Another important difference is how nonprofits use budgets. The budget of a nonprofit organization does not carry the force of law; it is more of a strategic and operational guide than a true mandate. Even with these differences, for the major nonprofit organizations, the budget process follows the familiar steps of planning, request preparation, compilation and presentation, adoption, implementation, and audit. (Dropkin, Halpin, and La Touche [2007] recommend extended budget planning and budget request preparation phases for large nonprofit organizations.) Nonprofit organizations typically budget on a one-year fiscal period to comply with tax and reporting requirements. The audit phase following budget implementation results in annual financial statements for the organization. The organization’s chief financial officer plays a major role in all phases of the budget process and may exert substantial control over the process and budget outcomes. The CFO convenes and leads the planning phase, prepares instructions, sets revenue and service demand forecasts, and coordinates the unit and program staff to prepare their requests. The CFO and her staff continually consult and coordinate with the unit and program analysts. As in the government process, the unit and program requests are consolidated into a uni- fied budget in consultation with the executive officer. The CEO and the CFO present the request to the board. After review, the board may make changes to the proposed budget but then adopts a final budget. The adopted budget is then distributed throughout the organization.

Any effort by the public to influence the nonprofit budget must come through personal contact with the unit and program heads, the executive, and especially with members of the board of di-

THE BUDGET CYCLE: CHARACTERISTICS AND CONSEQUENCES 149

rectors. For foundations, contact with program officers may offer another means to communicate needs and recommendations. Service providers, clients, government representatives, and citizens must advocate on an interpersonal level to make changes to most nonprofit budgets. If approached adroitly, government and interest group representatives may be able to make presentations to the organization board on particular needs or issues.

Challenges of Overlapping Budget Cycles and Coordination

Hundreds of nonprofit, for-profit, and governmental organizations contract with or partner with state and local governments to implement public programs and to deliver services. All of these dependent governments and service providers are affected by budget process timing. Much as lo- cal governments are off cycle relative to the federal budget process, the local government budget cycle is often out of time with nonprofit fiscal years. This inconsistent timing makes it difficult for community foundations, federated intermediaries, and other nonprofits to budget for and to contribute matching funds for government programs. Administrators in both sectors must recognize these timing differences and plan accordingly.

Governments must appropriate funds through an adopted budget to fund contracts and partner- ships, and the budget must contain sufficient funds to support the program at the desired level. Once the fiscal year begins, it takes time to distribute funds and to make payments to contractors and partners. Effective cash management by local governments helps to ensure that ongoing contracts and programs operate continuously from one fiscal year to the next (chapter 17). However, new programs and new contracts may face delay until new funds become available. Also keep in mind that the close of the government fiscal year may condition contract closure and program completion. Unless given authority to carry over spending, most government programs must spend all resources by the close of the fiscal year. This spending requirement may require contractors and partners to expend their allotment of funds by that same fiscal year deadline. Nonprofits and partners entering into a government contract should clarify the spending timeline and conditions. Nonprofits and partners working with governments late in the fiscal year or biennium may find that government administrators have little flexibility in timing the use of their resources. When this occurs, funds may have already been spent down to a minimal planned level, with limited flexibility until the beginning of the next fiscal year. Government administrators are normally reluctant to start new fiscal commitments for shared expenses on joint programs late in the fiscal year.

Even with asynchronous budget processes, the well-defined, public timeline of the government budgeting process sets a foundation for all members of a community polity. All organizations in the polity network know the government’s budget timeline and can plan accordingly. Through their budget cycles and spending policies, governments provide an important structure to polity governance, operational planning, and service delivery.

SUMMARy OF BUDGET PROCESS ChARACTERISTICS AND IMPLICATIONS

At the beginning of this chapter we posed the following question: what are the consequences of the budgeting process on the actors? The well-defined phases and the repeated cycling of the budget process give those inside the process a sense of seasonal activity. The seasonality brings a familiar- ity and a certainty that helps build budget actor and citizen confidence in the budget process and its outcome. In addition, the public budgeting process is structured to ensure a technically sound budget and to respond to changing external conditions. While strictly governed by state law, most local jurisdictions have some discretionary authority to make changes in the process to meet local needs. In its most encompassing impact, the government budgeting process provides a calendar

150 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

and a structure that serves as the foundation for local polity governance. The legal requirements for resource availability and for completion of spending provide a schedule around which foundations and other community nonprofits can coordinate. The government budgeting process is much more than an internal work schedule: It helps to structure community polity governance.

STUDy qUESTIONS

1. What are the major steps or stages in your agency’s budget process? 2. What is the importance of a formalized budget cycle for your agency/program? 3. What are the major characteristics of the budget cycle? What, in your view, explains the

difference between federal, state, and local budget cycles? 4. What changes would you recommend in your local government budgeting cycle and

why? 5. To what extent do you believe there should be greater public involvement in your local

government budgeting process? Why? How would you propose to accomplish greater involvement? To what extent would this compromise the efficiency and closure of the process?

6. What is the significance of the state legislative budget timetable for your agency? The federal budget timetable?

7. To what extent does your agency rely on the principles of fair share and base in assem- bling and finalizing its budget request? What effect, if any, does this have on participants in the process?

8. For the major foundations and federated intermediary nonprofits in your community, identify the fiscal year start and end dates and the budget process calendars. How do these calendars synchronize with local governments? The state budget cycle?

9. How open are the major foundations and federated intermediary nonprofits to public review of their budgets and operational plans?

10. How do the small and medium service provider nonprofits in your community respond to the local government budgeting process?

11. To what extent does your local government/agency coordinate budget development with other private, government, and nonprofit service providers in the community? What im- provements could be made with greater coordination? What would greater coordination accomplish?

NOTES

1. The title of the person responsible for assembling the budget various by the size and kind of jurisdic- tion. For example, some jurisdictions place this responsibility in a single budget and finance office. Others separate budget and finance duties, with a separate person or office that is in charge of providing staff support for budget development and oversight. Small jurisdictions often place this responsibility in the hands of the clerk. Because this is the most common practice for the majority of the nearly 89,500 local governments, we use the term clerk throughout most of our discussion in this section.

2. The order of process steps and terminology vary by state law and local refinement. A “preliminary” budget is typically an initial working version of a budget that identifies the desired expenditures and the revenues needed to cover them. In Washington State, a formal step by the council or special district board midway in the budget process publicly ratifies the tax levies needed to fund the preliminary budget spending. Other states do not have the mid process formal revenue ratification step and move directly to an executive proposed, approved, recommended or requested budget. Tax levies are then reviewed by the legislative body as part of adoption of the proposed executive budget.

3. Balanced Budget and Emergency Deficit Control Act of 1985, Public Law 99–177, title II, U.S. Statutes at Large 99 (1985): 1038, codified at U.S. Code 2 § 900, commonly known as “Gramm-Rudman-Hollings” or “GRH.”

4. Budget Enforcement Act of 1990, Public Law 101–508, title XIII, U.S. Statutes at Large 104 (1990): 1388–573, codified as amended in 2 U.S.C. and 15 U.S.C. §1022.