"There are many reasons to consider adopting program budgeting, but perhaps the most important is its ability to create a more transparent budget. A program budget shows exactly what the government does and how much it costs." This quote is from an article recently published in GFOA's October 2015 Government Finance Review authored by CPBB's Chris Fabian and Jon Johnson in addition to GFOA's Shayne Kavanagh.
Program budgeting has
long been a cornerstone of best practices in public budgeting.
Simply put, a program budget organizes a budget into service areas, rather than
just, departments, objects-of-expenditure, and line items. A program budget is
more meaningful to the governing board and the public because programs are
directly relevant to how they experience public services – budget discussions
about police patrols and tree services are more meaningful than discussions
about salaries, benefit, commodity, and contractual service costs. Program
budgets also make trade-offs between different spending options clear. If the
budget for police patrols is to be increased, than a trade-off discussion about
resource reallocation could be approached (ie the budget of another program,
like tree services, could be proposed to offset the costs). Service goals and performance measures can
also be associated with programs, making for a much richer conversation about
the costs and benefits of different resource allocation strategies.
Given these merits, it’s
surprising that program budgeting is still not as commonplace as it should be. As of a 2011 survey, only about one-third of the winners of GFOA’s
Distinguished Budget Presentation Award used program budgeting.
It is safe to assume that program budgeting is even less common among other
local governments (although becoming more common among high performing local
governments).
So, why is program
budgeting not a common practice even if it is a best practice? Certainly, part
of the reason is that the increased clarity brought about by program budgeting
can also bring about increased conflict. When the tree service program budget
is reduced in favor or increasing the police patrol budget, the community’s
tree-aficionados will come to out to public meetings to make their displeasure
known. However, if only the salary line item in the police budget goes up and
the salary line item in the public works budget goes down, it may not draw the
same level of public attention. However, as budgets tighten, public skepticism
of government’s motivations increases, and the need for higher quality public
services goes up, obscuring tough decisions behind a veil of line items is no
longer a tenable strategy. Program budgeting is as needed as it ever was – in
fact, program budgeting is more needed than ever.
Program Budgeting 101: A "How to Guide"
Financial constraints have
forced many local governments to take a hard look at the services they offer. A
fundamental step is to develop an inventory all programs in order to clarify
the breadth of services it provides and, ideally, inform all stakeholders (i.e.
staff, elected officials, constituents) exactly what the organization “does”. How often do we engage in long and stressful
conversations about “line-items” or about a total department budget? Are these conversations as meaningful as they
could be if we were focused on individual programs? When we prioritize or when we have to “cut”,
discussions about which department is a priority or which line item to reduce
are sometimes subjective and circular (i.e. they just go “round and
round”). It is hard to gain agreement or
even consensus at these levels. When confronted with the question “Is Police
more important that Parks?” or “Is Public Works more important than the
Library?”, are those conversations productive?
Do we all really know what “Public Works” is? The inventory provides the basis for better,
more meaningful, discussions about what services are more of a priority and how
to understand the budget at a “programmatic” level than just viewing it from
the line item or “org chart” perspective.
But
what is a program? Programs are a set of related activities or tasks intended
to produce a desired result. The objective is to identify something that is in
between the “department or division” level and the “line item or task”
level. Think of a program inventory as a
menu of services. If you went to a
restaurant and the menu offered only “Entrees, Side Dishes and Beverages”, it
would be impossible to order a meal (like at the department or division
level) Similarly if the menu listed the
full recipes for everything (ingredients and all), it would be difficult to
order as well (perhaps like line items or tasks!) Is the Police Department or the Public Works
department “one thing”. Of course
not! Each offers a large variety of
programs and services that we don’t articular very clearly at all. While the staff in the department know what
they do, staff in other departments, elected officials and especially citizens
do not know or understand the number of things each department provides.
Here
are some things to consider when identifying programs
·
Do you “advertise” you provide a service?
- if your webpage, departmental
brochures, telephone directory or other published materials represent you offer
a program, then it needs to be included in your program inventory. This is the first place to look when
preparing a list of programs. If you say
you do something, then it’s clearly something that needs to be listed
·
Does someone “tell you” to provide the
service? - if there is a
legislative requirement mandated by a level of government “above you” or if
there is a section of your own code, local ordinance or an officially adopted
policy that states you have to provide a specific service, then this also
represents a program to be included in your program inventory.
·
Is someone willing to pay a fee or offer a
grant to provide the service? -
if the ultimate end user of a service or a granting agency is willing to
cover all or part of the cost to provide a program, then this specific service
should be established as a “stand-alone” program in your program inventory.
·
Are you offering the service to a particular
group or demographic? - if the
program is meant to serve or benefit or specific constituency (residents,
businesses, visitors, neighborhoods, etc.) or population (preschoolers; youth,
adults, seniors, non-residents, etc.) then it would be beneficial to list these
types of things as “stand-alone” programs
·
Where to “to what” are you providing the
service? - does the service
directly impact a building or a vehicle; a park or a pool; a street or a storm
sewer; an outdoor trail or an indoor recreation center? For a better understanding of the variety and
complexity of the services offered, being specific about the type of asset (as
opposed to the generic term “infrastructure”) or the where the activity takes
place (air quality is above ground; sewer line repair is below ground; median
maintenance is on the ground; trail maintenance is outdoors; exercise classes
are indoors, etc.)
·
What “type” of service is being provided? –
differentiated between activities that are “preventative” or “proactive” verses
“responsive” or “reactive” could be helpful in comprehended the nature of the
program. Fire Safety Education or
Community Policing are more “preventative” and are offered for a different
reason that “Fire Suppression” or “Patrol Response to Emergency Calls” which
are more about “reactive” and protective.
·
Is there a public agency or a private sector
business that does something similar?-
to respond to questions about partnerships, shared services, outsourcing
or privatization, it’s critical we can articulate where services are the same
and where we are not comparing “apples to apples”. Making sure programs are clearly identified
can better ensure these conversations are supported with objective data and not
subjective assumptions.
In order to translate your line item into an
effective program budget, the first tip is to characterize and categorize the
various types of line items in your budget, and decide which of these costs are
best expressed in terms of ongoing programs and services.
· Tip #1: Distinguish between “ongoing
(operational)” costs, and “one-time” costs – as you consider how you want to frame conversations using program
budgets rather than line-item budgets, it’s helpful to portray your
organization’s ongoing program costs based on your organization’s ongoing,
operational costs (salaries, benefits, insurance, office supplies, materials, etc.).
While programs absolutely incur one-time costs (capital improvements, unique projects,
contracted services), differentiating the one-time, more sporadic costs will
help you create program costs that have an ongoing, reliable base cost, with
the potential for fluctuations of a one-time nature. Especially as your
organization uses program budgeting for the purposes of discussing ongoing
efficiency, or sourcing comparisons, be clear what are the ongoing costs of a
program as distinct from the one-time costs.
With your line items categorized as either
ongoing or one-time in nature, the second tip is to organize your costs further
in terms of “personnel-related” versus “non-personnel related” costs. An easy
way to imagine this is to consider any cost that can be associated with a
person, or a position – these are “personnel-related” costs. Everything else
that can’t be associated with a person or a position is non-personnel.
· Tip #2: Distinguish between “personnel” and
“non-personnel” costs (and
associate personnel costs with the people and positions within your
organization)– the purpose of this step is to develop “fully-loaded personnel
costs” for each person or position within your organization. Sometimes
organizations have compiled this information within their Human Resources
department for the purposes of compensation studies, or to show employees how
they are valued in the organization beyond their salaries. As you associate
every personnel-related cost to an actual person or position, you have taken
the biggest step in program budgeting (as most public service organizations,
being service driven, are driven mostly by the costs of personnel).
With the program inventory that you’ve
created, the next task is simple: associate each person (or position) with the
programs they support. Recognizing that each person may support more than a
single program through the year, allow for an individual to be spread to
multiple programs.
· Tip 3: Associate people (positions) with the
programs they serve - How do
you allocate people to one or more programs? Some organizations support a
culture where employees track their working hours associated with the programs
they serve. In many organizations that do not track their time, consider
leading employees through a simple exercise in which, given the programs
identified in their program inventory, on a percentage basis, how would they
answer the following questions:
o
How much
of your time, during a given week do you spend on these programs?
o
How much
of your time, during a given month do you spend on these programs?
o
On
average, during a given year, how much of your time is spent on these programs?
o
Are any
of the programs you serve impacted by seasonal, or other sporadic issues?
And finally, with all personnel costs now
associated with programs, the only costs you have remaining to allocate are
your non-personnel costs. With this final tip, you will have successfully
translated your line-item budget to a program budget!
· Tip #4: Associate (allocate) non-personnel
costs to programs – in many
organizations, since personnel related costs are often the highest percentage
of a program’s cost, it isn’t necessary to be overly laborious in the approach
to allocating non-personnel related costs. Be reasonable. Be accurate. Be as
precise as possible. But recognize there is a point of limiting return, and
less value in spending too much time considering how to cost-allocate a less
costly, non-personnel line item from your budget. And at the same time,
consider appropriate allocation methodologies for the line-item cost you are
considering. Is it appropriate to allocate evenly based on the number of FTE in
a program? Is it appropriate to directly allocate certain costs to certain
programs? These are important questions, and cost-allocation methodology is an
important consideration.
At this point, your organization will have
successfully, accurately translated your line-item budget into a program
budget. But don’t stop here. Up until this point, we’ve solely focused on the
costing side of the equation; it is here, with the “true cost of doing
business” established, that it is most interesting to explore revenues and how
programs recover their costs through fees, charges for service and grants. This
is what we refer to as Program Revenue.
· Tip #5: Associate “program revenues” with
programs – traditionally,
programs offered by the organization are funded through the general revenue
streams being collected from entire community that the agency serves. Property
Taxes, Sales Taxes Franchise Fees, Fines, and Investment Earnings are all examples of revenue sources that the
legislative body allocates to pay for the services being provided. There are instances, however, where there is
a revenue source that is specifically meant to offset the cost of offering a
particular program – these are considered to be “program revenues”. In an era where we are eager to seek more
diversified sources of revenue, Charges
and Fees for Service as well as Grants
are examples of ways we can have the specific user or beneficiary of the
service help defray the cost of provided it.
It’s important that there is a clear understanding of those programs for
which general government revenues are not used to fund the program but that
there is a specific revenue stream that partially or fully offsets the cost to
provide it. When developing the budget, it needs to be clear that making
chances to programs that have a specially associated revenue stream will
warrant a different type of discussion. Reducing
the costs of a program with a fee or grant, won’t impact the total budget - if the program goes away so do the revenues.
When developing the costs of a program, it is essential that any revenue source
that is meant to recover the costs of that program is clearly identified
Applications
– With Program Budgeting, a Whole World of Opportunity Opens up
Program budgeting
is an underlying assumption to many of GFOA's budgeting best practices, and
being able to connect costs and outcomes associated with specific services is
critical to communicating value to citizens.
As
we’ve outlined in this article, while program budgeting methodology may not be
so entirely daunting, the kinds of conversations central to program budgeting,
can be! As so many leaders know, engaging in the exercise itself is often the
result of controversial questions around “sourcing”, assessing fees and charges
as they measure against the “true cost of doing business”, privatization,
running government “like a business”, public-private partnerships, efficiency
analysis and financial transparency.
And
yet, therein lay the most exciting realization! If you can measure Program
costs, you can answer these questions.
Case Study #1: Program
Budgeting in the City of Cincinnati: Confronted with the 'new normal' of
flat or declining revenues, spiraling health care and pension costs, persistent
structural imbalances, and a $34 million deficit, the City of Cincinnati
embarked upon Priority Based Budgeting an alternative to the traditional
incremental budgeting approach that automatically makes this year's budget the
basis for next year's spending plan. A primary goal of the process was to to
engage a large and diverse segment of the community, creating an open and
transparent window into every program and service offered by the City, a
thorough description of each service, and most interestingly, complete openness
as to the cost of each program. The City’s elected officials held to the belief
that the very legitimacy of their plan to identify $34 million worth of
savings, depended on an authentic attempt to offer citizens a completely clear
perspective on how resources were currently allocated. Ultimately, the City
identified over 500 individual programs, totaling $972million dollars. And to
achieve their objective of transparency, the City posted their Program
Inventory, complete with Program Costs on the City’s website and in their
budget document (the
complete program inventory is accessible here). The resounding response
from citizens was that they’d never been given such access to program-level
data, thus fulfilling the City’s objective of true transparency.
Case Study #2: Program Budgeting in
the City of Shawnee, Kansas: A comprehensive review of existing services,
or ‘programs’, was conducted in the City of Shawnee, Kansas, including
allocating costs to each Program (based on the 2014 Budget). The City launched
into this effort (in conjunction with a Priority Based Budgeting process) to
reassess spending, and ensure sound, long-term funding decisions – to view a
list and description of each city program, please visit the City’s Program
Inventory page. As in Cincinnati, city leaders were intent on extending
information to citizens to open up a dialogue about the full breadth and scope
of services offered, and the cost of these services, and built an interactive
online tool to allow citizens to drill-down into each of the City’s departments
to a division level, and ultimately down to a program level to see every
program offered.
Case Study #3: Program Budgeting in
Broward County, Florida: The largest full-service, fully accredited public
safety agency in the United States - the $700 million Broward County Sheriff’s
Office (BSO) in south Florida - provides full–time law enforcement services in
14 Broward County cities and towns. As
the local economy tightened, the leadership among several of the cities came together
to raise an important question: are we getting a fair deal for the services we
pay for from the County, or would we be better off forming our own local
law-enforcement agencies?
Program
Budgeting was key to this analysis. Both the County and the towns and cities
came to the table with a common objective to be fair, to transparently analyze
their service contract, and agreed to an approach to costing each program that
led to a decrease in the overall cost of service provided by the County, and
increased trust and satisfaction from the cities.
Conclusions
It’s
been demonstrated again and again – the way to diffuse politics, to temper emotionally
driven decision making in favor of data-focused decision making, can come about
with great, accurate data. Program
Budgeting is a centerpiece to data-driven decision making. Many of you have spent your careers delving
into the kinds of controversial discussions that have, until now, polarized decision-makers
– whether to
outsource, to insource, to raise fees, to lower taxes, to privatize or partner
or divest the organization of a service.
In
your field, we’re attracted to these contentious debates NOT because we’re
crazy, but because the answers to these questions are so important to get
RIGHT! Or, to put it another way, the authors of this article present
methodology and tools specifically to resolve these kinds of debates, because
throughout our careers, like so many of you, we experienced the emotional
struggles and misunderstandings that accompany data-less debate!
The
development of a program inventory and program costs is the foundational
data-set to bring clarity and understanding, data-focused decision-making in a
time when it’s never been so crucial.
There
are some clear objectives in undertaking the development of a program inventory
which always should be communicated clearly to the departments as develop these
listings. The major reasons for creating a comprehensive listing of all
services (both externally and internally focused) is that it:
·
Offers a better understanding of “what we do” for staff, administration,
elected officials, citizens and other community stakeholders;
·
Offers a
framework to better understand the types of resources needed to support the
things that we do
- Offers a better way to evaluate the fees, rates and charges that you assess on a program-by-program basis,
- Offers a more reliable way to make ready comparisons to other public-sector, or private sector service providers, to the extent that you want to evaluate the efficiency or the appropriate sourcing of your programs,
- Offers a tool that allows you to see more clearly how your workforce is associated with programs and integrate succession planning more specifically in the budget process
·
Offers a valuable tool to use when faced with
budgetary choices about how limited funds are to be allocated to provide
services
·
And ultimately, program budgeting offers a way
to discuss the budget at a “programmatic” rather than a “line item” level.
The GFOA Best Practice for "Measuring the Full Cost of Government Service" was created over a decade ago... At a
time when this data-driven practice, this "evolution" from line-item
budgeting is so valuable, so vital to our community's success, let program
budgeting be the way to drive better resource allocation decisions in your
organization.
Keep an eye on the CPBB blog for further updates. Sign-up for our social media pages so you stay connected with TEAM CPBB!
If you're thinking of jumping into the world of Fiscal Health and Wellness through Priority Based Budgeting we would certainly like to be part of your efforts! Contact us to schedule a free webinar and identify the best CPBB service option(s) to meet your organization's particular needs.
