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HomeMy WebLinkAboutFIN 2017-05-16 Item 2C - Discussion - Plan for Budget Process ImprovementsCity of Tukwila Allan Ekberg, Mayor INFORMATIONAL MEMORANDUM TO: Finance Council Committee FROM: Peggy McCarthy, Finance Director BY: Vicky Carlsen, Deputy Finance Director CC: Mayor Ekberg DATE: May 10, 2017 SUBJECT: Budget Process for 2019 -2020 ISSUE As part of the City's 2017 work plan, we are reviewing the current budget process and will be recommending enhancements to the 2019 -2020 process. These enhancements will allow the City to meet its current biennial priority of "Ensuring organizational effectiveness and responsible fiscal stewardship ", while also directly aligning with the Strategic Plan goal of maintaining "A high performing and effective organization ". BACKGROUND A City budget serves several functions. Based on GFOA's "Best Budgeting" practices, a budget is a policy document, a communications device, a financial plan, and an operations guide. The City receives the GFOA budget award every two years for this document, representing the City's ongoing commitment to conforming to these guidelines. To keep current with these best practices, it is important for the City's budget process to evolve over time. In planning for the next biennium, we will be reviewing the various budgeting methods available. DISCUSSION There are several different methods used by government agencies to achieve the goals and priorities of the community. The Finance Committee has requested a comprehensive overview of the different budget models available for consideration. Based on research from AWC, MRSC, GFOA, the Government Consortium, and other local cities, we determined that the following budget models are available for consideration: 1. Line Item Budget 2. Program Budget 3. Performance Budget 4. Program - Performance Budget 5. Zero -based Budget 6. Expenditure Control Budget 7. Incremental Budgeting 8. Budgeting for Results 9. Priorities of Government Each of these budget models is highlighted in Attachment A. Further discussion of the more common models used in municipal budgeting are included in Attachment B, including a pro /con discussion on each as requested by the committee. Currently, the City budgets using a hybrid approach, which primarily includes the "incremental" and "budgeting for results" models. Essentially, this means we start with the prior year's adopted budget, and either add or subtract to each expenditure category based on a specific rate, often 85 INFORMATIONAL MEMO Page 2 tied to inflation. For example, salaries are typically increased by a proposed COLA, which is tied to the Consumer Price Index (CPI). Then, based on available resources, the City considers adding new programs or initiatives to the budget. These additional programs are tied to the City's current priorities which are also tied to the Strategic Plan. Other components of a budget process include adding performance measures as well as developing financial policies (such as an incentive -based model, and /or establishing reserve funds). These components can be discussed as part of the overall budget process discussion. RECOMMENDATION Based on available research, the recommendation is to move towards a Budgeting for Results model, with an enhanced use of performance measures in the 2019 -2020 budget. The Committee is being asked to review the available options, provide feedback to staff, and offer direction on how best to engage the rest of the Council in making this transition. ATTACHMENTS 1. Attachment A — Budget Models Available for Consideration 2. Attachment B — Common Budget Models Discussion 86 H: \Temp - Ana 1 \00.docx INFORMATIONAL MEMO Page 3 ATTACHMENT A 1. Line Item Budget a. Very detailed budget which includes account codes and budget amounts b. Outdated model which doesn't meet current budgeting guidelines 2. Program Budget a. Includes financial data at the program level b. Organized around city programs 3. Performance Budget a. Similar to Program Budget i. Strong emphasis on the performance measures ii. Results in outcome focused budget b. Can be oriented around programs, organizational structure, or financial structure 4. Program - Performance Budget a. Hybrid of Program / Performance Budgeting b. Focus is on programs, with emphasis on performance (either performance measures, goals and /or objectives) c. Often includes accomplishments within programs 5. Zero -based Budget a. each year budget is built from ground up b. Made popular by Harvard Business Review article in the 1960s, but not practical for most cities c. Can be practical for certain expenditure types, including travel 6. Expenditure Control Budget a. Budget is set based on pre- determined amount available 7. Incremental Budgeting a. Starts with last year's budget and adjust expenditure categories based on different factors b. Includes "decision packages" which allow for deviations from predetermined increments c. Most common budgeting type 8. Budgeting for Results a. Typically linked to strategic plan b. Citywide goals are supported by department /program goals 9. Priorities of Government a. A form of Budgeting for Results b. Start by determining priorities, then develop strategies to advance the priorities c. Also called Price of Government H: \Temp - Ana 1 \00.docx 87 INFORMATIONAL MEMO Page 4 ATTACHMENT B Below is a more comprehensive discussion of common budget models used in municipal budgeting. Incentive Current research shows that higher educational institutions are who typically utilize an incentive budget model. However, Columbia, Missouri, has successfully implemented an incentive system where departments that have unspent budget don't necessarily lose those funds to fund balance at the end of a fiscal year. Rather, departments can `save up' all or part of unspent funds for several years to pay for a high -cost project that might not ordinarily be funded through the regular budget process. Pros: • Encourages departments to find cost effective ways to fund existing programs and services to fund higher -cost items. • Has the potential of removing unexpected spikes in spending because high -cost programs and services are planned for in advance. Cons: • Projects that departments save for may not be tied to strategic goals. • Departments could lose saved funds due to an economic downturn. • Could create fluctuations in fund balance over the years causing rating agencies to down grade bond ratings. Participatory This budgeting model was first developed in Brazil in 1989. The concept of this model is that residents brainstorm spending ideas, volunteer budget delegates develop proposals based on their ideas, residents vote on proposals, and the government implements the top projects. Some portion of the City's resources would need to be allocated to the participatory process. For example, if community members identify recreation spaces as a priority, their delegates might develop a proposal for park renovations. Residents then vote on this and other proposals and if they approve the park renovations, the City pays to renovate that park. Pros: • Promotes deeper democracy; ordinary people have a real say, and they get to make political decisions. • Tends to engage residents who are otherwise cynical about government. • Builds greater trust with community members. • Participants become more active and informed citizens. • Builds community through regular meetings. People get to know their neighbors and feel more connected to their city. Cons: • Could be difficult to get a broad range of community involvement. • It could be difficult to identify discretionary funds that can be allocated to this program. In Tukwila, funds not currently used for general fund purposes are allocated to capital projects. • It typically takes months of planning to design a sound process and build community buy - in. • Extensive outreach and communications are required to engage the broader community. H: \Temp - Ana 1 \00.docx INFORMATIONAL MEMO Page 5 • Difficulty in getting every ethnic group represented. Zero -base Zero -base budgeting (ZBB) first rose to prominence in the 1970's during the Carter Administration. ZBB is a budgeting process that asks departments to build a budget from the ground up, starting at zero. To implement ZBB, the City would be divided into "decision units" — the lowest level at which budget decisions are made. Decision units are formed along functional or organizational lines but programs can be used as well. Managers in each division unit prepare a detailed description and evaluation of all activities it performs, including alternatives to current service delivery methods and spending plans necessary to achieve the decision unit's goals. This information is used to create "decision packages" which show marginal spending level differences that represent varying levels of effort and cost. At least three decision packages for each decision unit are presented: base package (meets only the most fundamental service needs), current service package (continues the current level of service), and enhanced package (addresses resources required to enhance service). Decision packages are then ranked and the rankings are used as the basis for making resource allocations. Pros: • Sends a powerful message to all stakeholders that the lines will be held on spending and that nothing will be taken for granted. • Moves the entity away from incremental budgeting because the starting point is zero. • Offers a rational and comprehensive means to reduce the budget. • Gives top management better insights into the detailed workings of departments. Cons: • Labor intensive to produce decision packages, review, and rank. • Conceivably, the City could generate hundreds of decision packages requiring substantial time commitments from every level of the City to develop, review, and rank the packages. • ZBB does not provide a structured method for considering the community's or City Council's views and long -term priorities. • Because of the time involved to develop the decision packages, participants tend to focus on the current service model rather than proposing innovative alternatives to meet the same underlying demand from the public. Priority -based The philosophy of priority based budgeting (PB) is that results should be allocated according to how effectively a program or service achieves goals and objectives that are of the greatest value to the community. In a priority driven approach, the City identifies the most important strategic priorities, and then, through a collaborative, evidence -based process, ranks programs or services according to how well they align with the priorities. The City then allocates funding in accordance with the ranking. Priority based budgeting aims to align the budget with citizen priorities, measure progress toward the priorities, attain the best value for each tax dollar, and foster continuous learning in the City. Pros: • Identifies the services that offer the highest value and continues to provide funding for them while reducing or eliminating lower value service levels. H: \Temp - Ana 1 \00.docx 89 INFORMATIONAL MEMO Page 6 • Questions past patterns of spending by putting all resources on the table to encourage more creative conversations about services. • PBB starts with revenue available rather than last year's expenditures as the basis for decision making. • Identifies the true cost of programs and services, which increases transparency. • Focus is on the results the program or service produces for achieving community priorities. • PBB demands accountability for results that were the basis for a program or service's budget allocation. • PBB is a `best practices' recommendation from Government Finance Officers Association (GFOA). Cons: • Labor intensive to accurately identify and cost out programs and services. • Due to its goal- oriented nature, PBB focuses on a quantitative rather than a qualitative evaluation. • Without decentralized accounting and systematic reporting mechanism would be ineffective and inefficient. Performance Measures It is City Administration's goal to enhance the use of performance measures in our next budgeting process and will be reviewing and assessing different tools this year. The use of performance measures allows policy makers, managers, and citizens to evaluate the quality and effectiveness of government services. Performance measures include inputs (resources used), outputs (program activities), efficiency measures (ratio of inputs to outputs), and outcomes (the actual results of programs and services). Performance measures quantitatively evaluate the return from resources spent on programs and services. Generating information about program results and outcomes and should be an integral part of any budget process. Performance data is a tool to be used for rationality to planning and budget discussions time have met strategic goals. 90 H: \Temp - Ana 1 \00.docx decision - making purposes. The data can bring by demonstrating how the use of resources over