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the multIPle PurPoses of PublIC budgetIng

The chief financial officer (CFO) of a large urban school system was recently asked by the assistant superintendent for student achievement why she could not design a budgeting system that met all the requirements that managers throughout his organization were placing upon it. The school system’s comptroller said she wanted a budget that was realistic enough for cash planning purposes. The director of personnel said he needed a budget that would reward employee performance. The assistant superintendent for operations told the CFO that he wanted a budget that would help him evaluate operating efficiency. The superintendent wanted a budget that could be used as the primary coordination device to harmonize all of the organization’s activities. Finally, a consultant came in and told the superintendent that she ought to be using the budget as a tool for management development. Like the assistant superintendent for student achievement, the CFO rightly asked, “How can one budget be expected to do everything?”

We commonly assume that political parties, businesses, and most other human activities cannot succeed by being all things to all people, but that is not the case with public budgeting. The bud- geting process is the operational heart of our many local systems of democratic governance and public-serving organizations. It is the focal point for the reconciliation of competing visions of the public good. The final budget that emerges from this process represents, for the time being, a working consensus of how best to allocate the tax revenues, charges for service, and philanthropic donations that have been collected with the promise of serving the larger public good. The budget- ing process is the best forum to witness the reconciliation of these multiple and competing claims about what constitutes the public interest.

In every governmental jurisdiction and public service nonprofit, the development, adoption, implementation, and reconciliation of a budget reflects agreement over the proper balance to be struck among the following purposes served by the budgeting process:

• funding programs that are responsive to constituent wishes and client needs; • funding programs that are effective in accomplishing their goals; • funding programs that are cost efficient; • communicating clearly to the multiple “attentive” publics; and • using the budgeting to plan, set, and coordinate policy priorities.

Governmental jurisdictions add a sixth budget purpose: using the budget to ensure a healthy economy. Frequently, disagreements over the priority of these purposes are differences of opinion about using the budget to meet short-term versus long-term needs. For example, board members, elected officials, and program clients are usually much more concerned about the short-term im- pacts of a public budget than is the case for policy experts and program managers, who are more inclined to view the budget from a longer-term perspective. This is the case for both nonprofit and governmental entities. For those who have final responsibility for creating a balanced bud- get, the process is a scarcity allocation problem: How can we provide citizens and clientele with

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what they want and need using the revenue available? When viewed with this question in mind, the budgeting process is mainly a task of creating a working consensus that can survive through the next budgetary cycle. On the other hand, for many budget analysts, program managers, and administrators, the budget process provides an opportunity to improve the effectiveness and the efficiency of programs. The overall legitimacy of public-serving organizations and their ability to garner the ongoing support of the taxpayers, clients, customers, and donors may depend on how well participants in the budgeting process successfully balance these competing short- and long- term priorities. This is a tall, if not nearly impossible, order to meet successfully year after year.

The goal of this chapter is to explore these conflicting purposes in detail, with a special focus on how they are reflected in the budgeting process of preparing, adopting, and executing an annual or biennial operating budget. This chapter addresses each of the six purposes enumerated above in some detail, after an initial summary overview of the historical development of public budgeting and the impact of this history on the multiple purposes of a budget. In our discussion of each of the six purposes, we describe some important differences between local public budgeting and the budgeting undertaken by nonprofit organizations. We end the chapter with a summary discussion of how nonprofit organizations deal with the mix of competing purposes that surface during the budget development process.

We give special attention to nonprofit organizations in this chapter for two reasons. First, many public administration programs do not provide separate budgeting courses for nonprofit and public-sector-bound students. Most courses that offer such an option do not generally spend time emphasizing the differences between the two sectors and explaining why these differences are important in serving the public interest. Second, given the increased reliance by governmental entities on contracts and partnerships with nonprofit organizations to provide services, public administrators need to have a good understanding of the nature and purposes of the organizations over which they have oversight accountability for the expenditure of public funds.

Many of the purposes of a public budget are reflected in both the structure and the sequential order of the budget process itself. Even the analytic steps in budget preparation (chapter 5), and the formats and required informational content of the budget documents themselves (chapters 11–14) provide a means to reflect the purposes and goals of the budget. It is important to note that this structured process also serves to guide and condition the behavior of administrators, legislators, advocates, and other participants in the process (chapter 5). The challenge for budget practitioners is to design and structure budgeting activity and its products effectively to carry out the differing goals of these multiple participants in the process.

ThE hISTORy OF PUBLIC BUDGETING AS A GUIDE TO BUDGET PURPOSES1

Historically, the evolution of local public budgeting processes has mirrored the national trend away from a legislative-driven model emphasizing constituent responsiveness and financial control and toward an executive-driven model emphasizing efficiency and effectiveness. The evolution of public budgeting has gone through the following three developmental stages, which we will discuss in detail in the sections that follow:

• financial, with an emphasis on spending control and accountability; • administrative, with an emphasis on operational efficiency and effectiveness; and • policy development, with an emphasis on strategic planning and policy coordination.

The antecedents of our present formalized and quite structured process of public budgeting emerged as one of many government reforms advocated by the Progressive movement at the turn

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of the twentieth century (Schick 1966, 1980). Prior to 1900, it was common for each agency or government commission to approach the legislature independently for funding. These conditions left the jurisdiction’s executive or the president of the United States with only informal control and presented the legislature with an uncontrolled and uncoordinated flood of requests. A desire to ameliorate these problems laid the groundwork for the first major phase of budget reform.

The Need for Financial Control

The balkanized nature of the early budgeting process combined with several other factors to contribute to the development of a unified system of budgeting that was executive centered and focused on financial control. First, government was growing in both size and complexity. For some turn-of-the-century reformers (1890–1910), this growth demonstrated the need to curtail and control the size of government. For others, a more unified public budgeting process provided an opportunity to control graft and corruption, and to rectify the excesses of government spending. For still other reformers, the consolidation of fractured government commissions and agencies under strong executives marked a key step toward increasing government efficiency.

The development of what has come to be called the executive budget proved to be a ready-made solution to the multiple goals of controlling the size of government, preventing corruption, and increasing administrative efficiency. An executive budget simply required the chief executive of- ficer of a jurisdiction to consolidate all agency spending requests into a single document that could be presented to the legislature. The 1921 Budget and Accounting Act required the president for the first time in the history of the United States to present such an executive budget to Congress each year. This set the stage for similar reforms to be put into place at the state and local levels of government. When these new centralized budgeting processes were combined with civil service and procurement reform, the primary tools were fully in place for increasing the efficiency and professionalism of modern government.

The turn-of-the-century reformers’ goals of curtailment and control created the first and still pri- mary justification for a unified public budget. To implement these purposes, accountants were hired and accounting practices were formalized. These practices emphasized the importance of clearly identifying costs and establishing routine protocols for controlling spending. Such a control-centered system resulted in what has come to be called the object of expenditure or the line-item budget. This system remains the primary tool used in public budgeting, as we will discuss in chapter 11.

The Administrative Need for Operational Efficiency and Effectiveness

By the end of the Great Depression and the beginning of World War II, a variety of civil service, purchasing, and budgeting reforms had created an increasingly professional government service. With spending control now institutionalized, the emphasis began to shift to a greater focus on the efficiency and the effectiveness of government operations. The idea of performance budget- ing gradually emerged from these early 1940s concerns over how best to increase the efficiency and effectiveness of the administration of public programs. As this shift began to occur, public administrators became increasingly important members of agency budget staffs. The practice of presenting efficiency information in the budget documents raised the visibility of the all-important performance issues with legislators and executives.

The Need for Planning

During the 1960s, practitioners and academic researchers began emphasizing the importance of viewing budgeting as an integral part of long-range program and agency planning. Secretary

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of Defense Robert McNamara (in office 1961–1968) and his “whiz kids” from the Ford Motor Company set a very high standard of what careful planning could accomplish if systematically applied to public agencies (Schick 1966, 1973; see chap. 12 for a more detailed discussion of this development). The dominance of rational analysis and the practical availability of mainframe computers supported this shift to planning as a centrally important purpose for public budgeting. However, using the budget as a planning tool frequently conflicts with other priorities of agen- cies and professionals, who often feel that a more urgent use of the budgeting system is to deliver resources and services to clients, or to respond to legislative and political concerns. During this period of executive-centered planning, most members of the legislative branch of government expressed little interest in radical departures from program-focused budgeting and the baseline allocations forged in the budget agreements of previous years. As a result, the planning function of public budgeting was never fully adopted in practice.

Today’s public budgets continue to reflect the learning and features of these earlier budget pur- poses. Line-item and performance budgeting are well institutionalized in structure, practice, and values. Over the years, public budgeting has come to serve other important purposes, especially in coordinating the related activities of agencies and in communicating to the various attentive publics.

PUBLIC BUDGETING AS A GOVERNING TOOL TO TEST POLITICAL RESPONSIVENESS

The budgeting process is an opportunity to test an organization’s and jurisdiction’s responsive- ness to community desires. For nonprofits, the budgeting process tests responsiveness to a blend of community needs and donor/grantor priorities. For governments, the budgeting process as- sumes that what the community has supported in the past is likely to continue to be supported, incrementally more or incrementally less in the future. This has been the normal practice in most public budgeting processes. Only in the last few years has this incremental focus begun to shift in the face of unsustainable spending that the existing revenue base of many government jurisdic- tions cannot support. Nonprofit organizations also have traditionally budgeted in an incremental manner. Multiyear contracts and grants, annual renewable contracts and grants, continuing donor relationships, annual combined donation campaigns, and continuing community needs reinforce the incremental nature of nonprofit budgeting. The completion of major contracts and partner- ships, and the commencement of new ones, may have the effect of forcing a reexamination of incremental budgets.

For government agencies, the budget process also presents an important political platform from which to make changes in both the selection of policy choices and the allocation of resources to support those choices. Almost all jurisdictions place responsibility on the chief executive or administrative officer (CEO) to prepare a balanced budget and to present it to the legislative body for review and adoption. The CEO’s budget proposal provides an opportunity to array and prioritize all the functions and needs of the jurisdiction from a legislative and an executive per- spective. In its final presentation, the executive budget represents a unified policy statement of the organization and the jurisdiction’s services.

The opportunity to use the budget to make fundamental and important policy changes is espe- cially important to elected officials and interest groups who seek to acquire the funding necessary to support programs important to their interests. The perspectives and needs of elected officials and interest groups may often conflict with the values and hopes of public administrators who need to weigh and adjust the competing program priorities. Understanding these contrasting perspectives is a useful key to understanding the budget process, which we will discuss in considerable detail in the next chapter.

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Elected officials operating within the American representative system of government face a dif- ferent set of performance evaluations than their administrative counterparts. Elected officials must respond to their constituents’ needs and demonstrate a record of leadership. Even the most junior legislator must demonstrate an ability to control or use government to solve problems in the home district. Survival as an elected official rests on this ability. By contrast, civil service professionals rely more on agency and professional values to guide their sense of action and accomplishment. For example, program managers and direct service providers (social workers, police officers, civil engineers, foresters, and so on), as well as agency budget analysts are primarily committed to acquiring the resources necessary to maintain the continuity of program services to clients, not to delivering on promises to constituents. Sometimes, clients are constituents and vice versa, but there is a fundamental difference between “service delivery” to clients and “delivering the goods” to constituents. The former requires attention to issues of efficiency and effectiveness, while the latter is primarily a matter of responsiveness. The budget process provides recurring leadership opportunities to bridge and reconcile these competing perspectives.

Differing notions of appropriate budgetary goals must be viewed against the backdrop of a prevailing set of economic conditions. The implications of these conditions for budget choices become fully evident only with the compilation of an integrated budget. Good economic times generate strong revenues and provide a chance to strengthen the fiscal health of the budget. When acting in the midst of a recession, however, the CEO must curtail spending to match revenues. For all the hopes and promises of new programs and services, a downturn in the economy may make spending cuts and reductions a necessary order of the day, despite the promises made by elected officials during their campaigns.

Finally, a jurisdiction’s or organization’s budget process provides a means by which interest groups raise and debate issues. Nonprofit organizations can make a special contribution in this regard. Nonprofit service providers often have the clearest conception of community needs and the costs of services to meet those needs. As independent organizations, nonprofits can advocate for changes in service programs during local government budgeting processes. We give further attention to the nonprofit advocacy role in chapter 4.

Legislative proposals and votes on proposed funding levels create the necessity to set priori- ties and make choices among competing purposes. The budgeting process provides an important opportunity for citizens and interest groups to become involved in these priority-setting activi- ties. Without this involvement, the budget process risks the loss of public trust and legitimacy. For major community nonprofits, the annual budgeting process provides an opportunity to revisit community priorities, community strategic visions, and community values. But unlike the open government budget process with its multiple internal controls and system of checks and balances, donors offering extraordinary-sized grants may in essence coerce nonprofits and their dependent partners into particular policy and program choices. For example, a major donor may want to establish a large endowment for a given target population that does not represent the greatest community need that the nonprofit is seeking to serve. Even those donors making small but consistent donations from year to year expect to see program outcomes that meet their particular vision of the community. The nonprofit budgeting process can provide a limited forum for a discussion on reconciling donor wishes with the organizational mission and community needs. A full discussion of these issues should contribute to an organizational strategic planning and visioning process.

PUBLIC BUDGETING AS FINANCIAL ACCOUNTABILITy

A second purpose of the budget process is to ensure financial accountability. This accountability is achieved in a variety of ways, including:

90 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

• limitations on spending through the use of accounting codes and regular monitoring of expenditures;

• statutory and/or constitutional limits on spending; • ongoing legislative oversight; • postexpenditure preparation of a comprehensive annual financial report (CAFR) and the

conducting of audits at the close of the budget fiscal year or biennium; • a legal requirement that the chief executive officer’s proposed budget and the legislative

adopted budget be balanced; • a legal requirement that the legislative body enact a budget; and • a requirement that the CEO comply with the expenditure obligations set forth in the adopted

budget, rather than use discretion to implement other priorities.

Taken together, these accountability requirements ensure that elected officials will provide public documentation of how citizens’ tax dollars are spent and that expenditures will not exceed the collected revenues.

Like the public sector, nonprofit organizations also use budget preparation and implementation to demonstrate financial accountability and to build donor and public trust. The wide variation in the purpose and size of nonprofits results in disparate capacities and resources for monitoring and demonstrating financial accountability. Small nonprofits may have little professional support and have few resources to bring to bear on financial issues, while larger nonprofits typically retain accounting and finance professionals, and recognize the need for a full set of financial controls to build public and donor support. In the past decade, new federal and state laws have revised the structures for demonstrating financial accountability for both nonprofit and for-profit organizations. The Sarbanes- Oxley Act of 2002 (SOX) was enacted into law in response to abuses and major financial scandals in the for-profit corporate sector. Though the act does not directly apply to nonprofits, concerns of legal liability and the expectations of board members from the private corporate sector have pushed many larger nonprofits to implement SOX compliance procedures. We give additional attention to nonprofit compliance with the Sarbanes-Oxley Act and other state laws in chapter 18.

The budget preparation and implementation processes provide the tools to demonstrate nonprofit integrity. Today, the extensive partnering between nonprofit organizations and government agencies through service contracting effectively blurs the boundary between the nonprofit and government sectors. Consequently, nonprofits and government are motivated to work more closely together to build donor and public trust through transparent accountability and performance standards.

PUBLIC BUDGETING AS MANAGERIAL ACCOUNTABILITy

Throughout this book, we emphasize the distinct perspective of those who manage programs and have the responsibility of making government and public service organizations work on a day- to-day basis. This has some important implications for the budget process. Program managers are uniquely situated to provide two kinds of information important to various stakeholders in the budget process. The first focuses on the best way to organize a coordinated response across organi- zational boundaries in the delivery of governmental services to the citizens. This role has become increasingly important as the public calls for a more responsive and accountable government that organizes and delivers its services with a common and coordinated sense of customer service.

Program managers are also equipped to provide another kind of information: data on enhanc- ing productivity. With the spending information from repeated budget cycles, program managers have access to the information necessary for developing unit cost trends and other productivity measures. The growing public concern for productivity enhancement has increased the burden on managers to provide this kind of information to the decision makers in the budgeting process. For

THE MULTIPLE PURPOSES OF PUBLIC BUDGETING 91

example, school board officials in a large metropolitan district might decide to allocate additional staffing to schools above a preexisting base level to close the achievement gap. Establishing a clear understanding of the expected student achievement results that these new positions would produce would be critical to gaining support for any additional resources. Similar kinds of productivity- based measures can be established for a wide range of public services.

Similarly, nonprofit organizations frequently find themselves needing to demonstrate performance and accomplishments. Grant and donor performance requirements often stipulate measurement and accomplishment criteria. The planning, programming, budgeting system (PPBS) and performance budgeting formats discussed in considerable detail in chapters 12 and 13 provide a means for non- profits to integrate donor performance requirements into an organization’s annual budget.

PUBLIC BUDGETING AS A COMMUNICATIONS TOOL

The public budget process and its documents serve as a communications tool to a variety of audi- ences. The general public, issue advocates, and legislators all receive information from the budget process. Once the legislature adopts the budget and, if necessary, the executive signs it into law, agency administrators and staff members become information recipients. Each of these actors perceives the budget differently. A given budget format and its unique analytic emphasis may be especially helpful to one actor, but may be distinctly unhelpful, or hold little meaning or interest for others. For example, a budget showing high clientele satisfaction may make it more difficult for elected officials to reallocate scarce resources. Extensive performance information showing the inefficiency and/or ineffectiveness of a given program that has high levels of constituency support can pose the same problem for elected officials. This is a reminder that budget documents and other briefing materials must be informed by an understanding of the needs and expectations of the audiences they are intended to serve.

Agency department heads and directors face one of the most difficult budget communications challenges. They must prepare a budget request that persuades the CEO and the central budget office staff that the department and its programs are worthy of continued or increased funding and support. The departmental budget request must (1) demonstrate how well it is performing and using its resources; (2) justify and explain any proposed changes to programs, policies, and funding levels; and (3) explain how the department programs will implement the CEO’s policy priorities. In short, department-level budget documents must communicate to the executive and the central budget office the current health and future needs of its programs.

After the central budget office compiles all the individual department budgets into a unified executive proposed budget, the primary audience for budget communication shifts from the CEO to the legislative body. The primary goal at this stage is to provide information to elected officials to support decision making and political outreach. At the state and federal levels of government, the congressional and legislative budget and appropriations committee staff analyzes the budget proposed by the governor or president and provides the legislative members with the necessary analysis and recommendations. However, local jurisdictions with part-time elected officials do not have this kind of staff support, and they must rely on the executive and central office budget staff to provide them with the information they need to make decisions on the proposed budget. This puts the budget staff in the challenging position of serving the executive and legislative branches of government, an issue we will discuss in detail in the next chapter.

One of the most difficult challenges for administrators in the budgeting process is to communicate an agency’s intentions and performance record to the citizens and community. The budget process provides a routine mechanism for extending these messages, usually through an annual budget mes- sage from the chief executive to the governing body and citizens at large. The potential for building citizen trust in government departments or programs stretches beyond the formal budget process

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presentations to the city council, county commission, or board of directors. Communication on budget process events and outcomes includes attending face-to-face meetings and working informal contacts through neighborhood citizen participation groups, government-appointed citizen advisory groups, advocacy and client groups, community network partners, and contractors and grantees.

The media plays a major role in presenting budgets to the citizens of a jurisdiction. For that reason, those responsible for the budgeting process must have a keen eye for how the key activi- ties in the budget processes and budget documents can be packaged and communicated online and through social media. Successful communication helps to build legitimacy for the programs, agencies, and departments—and more broadly for the governing entity.

PUBLIC BUDGETING AS AN OPPORTUNITy TO PLAN, SET, AND COORDINATE POLICy PRIORITIES

The budget process provides a platform for the selection of policy choices and for the allocation of resources to support those choices. The CEO’s proposed budget sets the stage for this process by arraying and prioritizing all the functions and needs of the governmental entity. The compila- tion of the proposed budget also provides a means to coordinate service delivery across agencies and programs. A comprehensive response to complex social, environmental, and other problems often requires the expertise and services of several departmental units—and even external com- munity partners and resources. A unified budget that brings together governmental, contractual, community, foundation, and nonprofit sources provides the basis for organizing a prioritized and coordinated response to these complex problems and needs. Finally, at the state level and in local government jurisdictions that have strong partisan political parties and a traditional separation of powers system, the proposed budget provides the foundation for the CEO’s advocacy efforts during budget consideration by the legislative branch.

November elections often bring new strong mayors, county executives, or state governors into office. These newly elected officials must step instantly into the position of the organization’s chief executive officer (CEO), often with little preparation or training. Depending on the start date of the jurisdiction’s fiscal year (e.g., commonly January 1 or July 1) the newly elected CEO may or may not have the time or opportunity to revise or prepare a new proposed budget. Whether the people directly elect the executive or the executive serves at the pleasure of the legislative body, the promises made during an election campaign must be translated quickly into policies and pro- grams. The campaign goals and visions must be transformed into legislation and directives that reorient administrative agencies to the goals of the newly elected officials—both executive and legislative (e.g., new council, commission, or board members). If the CEO is appointed (e.g., a city manager or district director), he or she becomes the immediate contact point for the all of the pressures placed upon newly elected officials by various constituency groups.

There are structural factors built into the process that require the CEO to exercise caution in using the budget to make quick and fundamental policy changes. The CEO’s budget is reviewed and modified by the legislative body to meet the needs of the political leadership of that branch of government. Legislative bodies range from special district, corporate, and nonprofit boards of directors, to city councils and county commissions, to much larger state and federal legislatures. When the branches are divided along partisan lines, compromise is usually necessary to meet a twofold constitutional duty shared by the executive and legislative branches: (1) the CEO must present a balanced budget to the legislature, and (2) the legislative branch in all state and local jurisdictions is constitutionally required to enact a budget. In local jurisdictions with nonpartisan offices, these goals are easier to accomplish than is the case for jurisdictions that have divided branches of government and high levels of party partisanship.

Finally, and perhaps most important, there are economic reasons for a new executive to exercise

THE MULTIPLE PURPOSES OF PUBLIC BUDGETING 93

caution in making significant changes to a budget that has been assembled by the outgoing execu- tive. The implications of budget choices within a given economic milieu become fully evident only with the compilation of an integrated budget. As mentioned earlier, good economic times generate strong revenues and provide a chance to strengthen the fiscal health of the organization or jurisdiction’s budget. But in times of economic slowdown or full-blown recession, the executive must limit spending to match revenues, regardless of earlier campaign promises.

PUBLIC BUDGETING AS AN INFLUENCE ON ThE ECONOMy

The spending and taxing policies of public jurisdictions, regardless of size, have economic impacts. Of course, the federal government—with its $3.65 trillion budget in 2014, over 3 million civilian employees, and its capacity to deficit spend—has far more impact on the economy than a state like Oregon, with just under 60,000 employees, an appropriated budget of $28.44 billion for 2014, and a constitutional requirement to present a balanced budget. To provide additional perspective, a typical top five Fortune 500 company will generate $200–400 billion of annual gross revenue and have 350,000 employees. Most local jurisdictions have budgets that pale by comparison, yet they do affect their local economies.

State and local spending and taxing policy is important in attracting an expanding and quali- fied labor pool, and in competing for growing businesses whose incomes add to the jurisdiction’s revenue stream (chapter 8). Federal matching dollars add to state and local economies, primarily through federal entitlement programs and transportation infrastructure. In turn, state grants comple- ment county and local government spending, all of which spurs economy activity. In addition, local governments can use various tax incentives to encourage local economic development. These can include tax breaks on property and income, waiving various fees, and building needed infrastructure, just to mention some of the more commonly used development strategies.

Finally, government facilities and activities, which can include military installations, prisons, hydroelectric and reclamation facilities, national parks and natural resources, and research labo- ratories and facilities, can significantly affect local economies.

From a business economist’s point of view, a jurisdiction’s budget must:

1. Fund social service programs and contracts for those in need, thus increasing the demand for private-sector goods and services.

2. Fund the transfer of welfare benefits that redistribute income and provide entitlement payments, including Medicare, veterans’ benefits, and Social Security.

3. Reflect tax policy that favorably affects business and individuals. 4. Reflect and fund the enforcement of commercial, transportation, land use, and environ-

mental regulations that affect the business climate. 5. Fund education and other training programs that enhance the jurisdiction’s human and

economic resources. 6. Fund the direct and the contracted production of goods and services, such as the sale of

state timber and other resources, higher education, the delivery of law enforcement and/ or correctional services.

7. Fund routine purchases and capital projects that stimulate economic activity. 8. Serve to redistribute wealth across the jurisdiction’s residents. 9. Fund economic development efforts to attract and help distribute economic activity within

the jurisdiction. 10. Provide significant employment opportunities for citizens.

A final factor that influences the economic health of a community, but is usually taken for granted, is the overall integrity and competence of those who manage the budget and financial forecasting

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processes. If revenue and expenditure estimates are continually off the mark, and employees lose their jobs, negative signals are sent to the larger financial community. But when there is a structurally sound budget that matches recurring revenues with recurring expenses, lenders and financial analysts are encouraged to grant more favorable credit ratings and reduced interest rates to the jurisdiction. Structural soundness includes adequacy of resources to fund retirement programs, supplementary medical benefits for employees, Social Security, Medicare, and similar kinds of expenditures that can have a cumulative adverse impact over a multiyear period. Those preparing the budget have a responsibility to provide the public and elected officials with clear and honest projections that take into account these hidden or unforeseen cumulative costs of doing public business.

ThE CONSEqUENCES OF MULTIPLE PURPOSES OF PUBLIC BUDGETS

The budgeting process for public service organizations and jurisdictions provides a necessary meeting ground for the many competing claims that are often in competition with increasingly shrinking resources. Exhibit 3.1 provides a summary of these enduring conflicts.

This list of purposes illustrates why public budgeting is the heart and soul of democratic gover- nance. The process creates a necessary meeting ground for democratic claims that almost always are at odds. These claims include competing demands of interest groups, administrative concerns for operational efficiency and program effectiveness, leadership aspirations of elected officials, taxpayer discontent over excessive spending, citizen concerns for ever more responsiveness and accountability, and contending ideologies about the proper scope and limits of government’s reach into the lives of its citizens.

While the periodic election process plays an important role in reconciling these competing claims, the budgeting process bears the reconciliation task on an annual basis. As we will see in the following chapters on the budgeting cycle and the actors responsible for making it work, the different sets of information needed from various experts at different stages of the process further complicate the task of producing an agreed-upon budget. This adds depth and complexity to each of the competing purposes we have discussed above. Despite the difficulty of the task, citizens commonly judge the success of their governmental entities and public service organizations by how well they accomplish this monumentally difficult budget-balancing task. This reinforces one of the major points we introduced in chapter 1: that public budgeting is more about successfully reconciling conflict than it is about managing numbers and technical expertise.

Two consequences result from the necessity of the budgeting process to generate a working consensus among conflicting priorities and competing purposes. The most obvious is the need for

Exhibit 3.1

Summary of Enduring Conflicts Regarding the Purpose of a Public Budget

A. What ends should the budget serve? 1. Responsiveness to clientele interests 2. Financial accountability 3. Program effectiveness and efficiency 4. Promoting a healthy economy 5. Meeting the needs of those with little or no political influence

B. Who should decide? 1. Experts and career professionals 2. Elected officials 3. Board members 4. Citizens 5. Clients

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compromises among the competing policy priorities and political pressures. In most local jurisdic- tions with part-time elected officials, the city manager or executive mayor (the CEO) becomes the initial focal point for sorting, winnowing, and negotiating a working consensus. It is common for the manager, mayor, or CEO to informally test priorities with each member of the elected board before assembling the final budget and officially passing it on for debate and formal adop- tion. Most of the time, the local legislative body does not make significant changes to the CEO’s proposed budget. When this is not the case, it reflects badly on the city manager, mayor, or CEO’s ability to anticipate what the elected board will support. If this occurs with some frequency, the council members are likely to lose confidence in the executive. In the case of a city manager or CEO who works at the pleasure of the council, this puts their continued employment at risk. In jurisdictions with strong political parties and a federal-like separation of powers system, conflicts in the budgeting process get resolved more formally as part of the legislative budget compromise process. Legislative members of the executive’s party serve as the executive’s political advocates and agents in the legislative deliberation process, with the threat of an executive veto if the nego- tiation process does not proceed to the executive’s satisfaction.

A second, less obvious consequence of the need for the budgeting process to produce a working consensus is that it helps explain why most local public budgets are often not tied very closely to systematic long-term plans. The frequency of elections, combined with the multiple purposes of the budgeting process that demand reconciliation from year to year, make it difficult to reach agreements that adhere closely to long-term strategic plans. Periods of economic uncertainty and instability exacerbate this difficulty. The amount of tax that will be collected and the demands for austerity by a vigilant public can quickly override carefully crafted longer-term strategic plans.

ThE SPECIAL ChALLENGES OF NONPROFIT ORGANIZATIONS

We observed in chapter 1 (Exhibit 1.11) that nonprofits resemble special districts in that they have narrower missions than general-purpose governmental entities. However, they differ in that they rely on a volunteer/appointed policy board rather than on election processes to resolve differences. These similarities and differences have some important implications for managing the competing purposes of the budgeting process.

By virtue of their focus on providing service to narrow target populations, nonprofits have fewer competing programmatic purposes than is the case for general governmental entities—entities that must juggle the needs of transportation, parks, libraries, public safety, and multiple other purposes. For example, in the list of purposes summarized in Exhibit 3.1, the success of most nonprofit organizations has not been measured traditionally by the extent to which they promote a healthy economy, are responsive to a diverse array of citizens, or make efficient use of their resources. The primary measures of success have turned on whether the budget furthers the organization’s mission, meets donor expectations, complies with law and regulation, and builds and sustains the organization’s capacity.

Nonprofit board members have the responsibility of developing a budget and ensuring that it meets the four purposes referenced above. The variations in nonprofit budgeting processes reflect the very wide diversity in the size, complexity, and purposes of nonprofits themselves. Small nonprofits may follow an abbreviated budget process that summarizes and reduces ex- penses and revenues to a single page. In these small nonprofits, volunteer officers may receive little professional support. As nonprofits increase in size, the board and executive director may rely on, or perhaps retain, finance and accounting professionals to ensure quality and to generate confidence in the organization’s budget and finances. This confidence is especially important for those nonprofits that rely heavily on external grants and contracts to fund their activities. Medium and large nonprofits, including foundations and intermediary nonprofits, typically have a chief finance officer (CFO) who is clearly responsible for both the finance and budgeting activities of

96 GENERAL CONCEPTS OF LOCAL PUBLIC BUDGETING

the organization. In these and other larger nonprofit organizations, budgeting responds to a set of needs similar to those found in government:

• Funding programs to match community needs. • Meeting donor expectations for performance, efficiency, and effectiveness. • Demonstrating fiscal accountability, transparency, and stability. • Meeting tax and corporation filing requirements.

The adoption of a budget for a nonprofit organization also frequently involves debate over how best to balance short-term operational and cash flow needs with longer-term strategic goals. For example, should the organization spend as much money as possible on direct services to its clients, or should it spend additional money on professional staff to build its fundraising, grant writing, and organizational capacity?

Over the past decade, the purposes of the nonprofit budgeting process have become significantly more complicated as a result of shrinking resources, greater dependence on government funding, and an expansion of government regulation. Since the mid-1980s, as noted in chapter 2, nonprofit organizations have become increasingly more dependent on government funding. This growing dependence has come with significantly increased federal and state standards for demonstrating financial and performance accountability for both nonprofit and for-profit organizations. The com- bination of dependence on government funding and increased oversight has made the budgeting process for many nonprofit organizations considerably more complex. In some cases, it has resulted in making compliance with government requirements a major preoccupation of the organization, which comes at the expense of program service to clients (Byrtek 2011).

In a series of studies undertaken by the Brookings Institution, researchers found that the “nonprofit sector survives because it has a self-exploiting workforce: wind it up and it will do more with less until it just runs out. But at some point, the spring must break” (Light 2004, 7). Due to pressures by government and private donors alike to work with extremely low indirect or administrative costs, “some nonprofits adhere to bare bones administrative budgets that actually jeopardize the organization’s stability and hinder its ability to grow or respond to change” (48). This level of administrative support would cause the collapse of most businesses and public agencies. The Brookings study concluded with the publication of a monograph calling for government investment in nonprofit organizational capacity building (Light 2004). This conclusion reinforces our argument in chapter 1 that nonprofits in partnership with government enable local communities to function as polities. We will return to the issue of supporting and sizing community networks in the concluding chapter of this book.

STUDy qUESTIONS

1. What are the major purposes of the budgeting process in your organization? 2. How do these purposes compare with those of the federal budgeting process or other

agencies for whom you have worked? 3. How do the priorities among various purposes of the budget align with different levels

of the organizational structure and with the role responsibilities of those with decision- making authority?

4. In what ways, if any, are the purposes of the budgeting process in your agency in conflict? Illustrate with examples.

5. To what extent do you believe the conflicts among the various purposes of the budgeting process can be successfully resolved?

NOTE

1. This section provides a summary overview of budgeting formats and purposes. A more detailed dis- cussion will be provided for each budgeting format in chapters 11–14.