BUDGETING: LEGAL REQUIREMENTS, TYPES OF BUDGETS, CITIZEN PARTICIPATION

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1 BUDGETING: LEGAL REQUIREMENTS, TYPES OF BUDGETS, CITIZEN PARTICIPATION MAY 9 &10, 2017 Daniel Smith, CPA, CPFO Director of Finance, City of Creve Coeur dnscpa69@gmail.com

2 BUDGETING Legal Requirements in Missouri Types of Budgets Citizen Participation in Budget

3 Municipal Budgeting in Missouri Why Budgets? Legally required Provides opportunity to maximize resources Provides opportunity for long term financial planning Provides opportunity for Public Input in decision making Promotes responsible fiscal management Strengthens financial control of the City Allows Government to tie its goals and objectives to spending plan

4 Municipal Budgeting in Missouri Legal Requirements Budget provides authorization to make expenditures( RSMO) Budget Preparation Required((67.010) Contents of Budget Required Budget Message Estimated Revenues plus 2 preceding years of actual or estimated revenues(3 recommended) Estimated expenditures plus 2 years of estimated or actual expenditures required(3 years recommended)

5 Municipal Budgeting in Missouri Contents Cont. Debt payment charges Budget summary Balanced Budget Expenditures do not exceed projected revenues plus unencumbered balance or minus deficit(67.010) Requires appointment of Budget Officer(67.020) Governmental Body shall approve Budget prior to beginning of Fiscal year(67.030)

6 Municipal Budgeting in Missouri Governmental Body may alter, modify, increase or decrease Budget. Must still be Balanced (67.040) Increase of expenditures over Budgeted amounts requires formal action such as Resolution or Ordinance(67.040) Governing Body may transfer unencumbered funds(67.050) Budget is Public record and must be retained at least 3 years

7 Municipal Budgeting in Missouri If Budget not adopted prior to beginning of Fiscal year, preceding years approved Budget shall govern(67.070) State Auditor has authority to develop or approve forms to be used for Budget(67.090) Other requirements such as publication of semiannual financial statements may exist Public Hearing for Budget not required but should be included NOTE: Budget requirements may differ based on local laws and upon Charter or Class of the City. Consult your City Attorney

8 Municipal Budgeting in Missouri Contents of Budgets Budget message Should provide highlights of revenues and expenditures including reasons for significant variations from prior years. Also what is accomplished with the expenditures and how they meet the needs of the Citizens and goals of the governing Body. Also a statement of the current Fiscal condition of the City. Revenues Comparison with prior years Discussion of how significant revenues were estimated Historical trends Judgment of estimator Other(Property taxes) Input from other City Sources on specialized revenues

9 Municipal Budgeting in Missouri Expenditures Comparison with prior years Discussion of how Expenditures were estimated Prior year costs Actual projected costs Other documents such as Capital plan Input from Department managers Debt Payment charges Include Budget year payment. Also include future Debt Payments Budget Summaries Total Revenues and Expenditures by Fund

10 Municipal budgeting in Missouri Budget Summaries Cont. Total revenues and Expenditures by Funds Combined Total expenditures by Department within Fund Total expenditures by object Projections for future years Personnel related data Departmental Narratives, goals and objectives Statistical Data General Information

11 Municipal Budgeting in Missouri Budget Administration as important as approving Budget Reasons Ensure Budget goals and objectives of governing body are met Ensure sound financial condition of City To comply with legal requirements Maintain internal control within organization Components of Budget administration Oversight by Person responsible for Budget administration and Compliance

12 Municipal Budgeting in Missouri Good Financial Reporting system that includes Budget Controls Monthly Financial reports issued to each department for their review and action if required Periodic meetings with Departments to discuss their expenditures and possible changes to the Budgets Budget vs actual projections during year for Revenues and expenditures Methods of projections» Spreadsheets using historic trends» Prior years expenditures Periodic reports to Governing Body on Status of Budget

13 Municipal Budgeting in Missouri Other Budgeting considerations 3 or 5 year projections for future planning 5 year capital plan Performance measures as part of Budget Budget document as a communication tool Budget Calendar Budget on web site GFOA Budget award

14 TYPES OF BUDGETS Traditional Budgeting Traditional Performance Budgeting Program or functional Budgeting New Performance or Results oriented

15 TYPES OF BUDGETS Traditional budgeting spends too much effort on figuring out what to buy and not enough energy on what results to achieve Traditional Budgets impediments to good public management and planning Administrative Department basis Not proposed on what they wish to achieve but what department will administrative them Administrative conventions Can conceal the full cost of delivery of government services Single Year Basis Does not consider future cost implications Input orientation Blocks consideration of the spending and operating alternatives to present mode of operations Questions of value Traditional budgets exclude social costs not directly paid, do not reflect value of opportunities not chosen, and do not distinguish between sunken costs and incremental costs

16 TYPES OF BUDGETS Traditional performance budgets emphasize agency activity performance objectives and accomplishments and not purchase of resources Differences in thinking as compared to traditional budgeting Budget info organized by activity Activities are measured, costs should be identified for the activities, and efficiency in performing these activities should be measured Performance is measured by comparing cost and accomplishments against planned activities Performance measures are means to end not end in themselves

17 TYPES OF BUDGETS Components of Budget classification The demand section Operating environment for budget year The workload section How agency plans to respond to demand by allocation of staff time The productivity section Presents cost per activity unit that emerges for Budgeted costs Effectiveness section show s units performance against criteria to determine whether unit is accomplishing its intended objectives Performance structures special implications The Budget should become powerful tool for management responsibility and accountability Legislatures must change their review and appropriation procedures from line item to agency activity reviews

18 TYPES OF BUDGETS The program budget format organizes proposed expenditures according to consumer output/outcome or contribution to public objectives What value are you intending to do? Budgets are organized along product or service lines Program Budgeting defines goals of government and classifies expenditures contributing to achievement of each goal Program Budgeting requires careful definitions of programs Criteria for program design Facilitate comparisons Permit comparisons of alternative methods of pursuing policy objective Include complementary resources example Public infrastructure costs Recognize the unallocable costs Supporting services such as IT, Personnel.

19 TYPES OF BUDGETS Criteria for program design Multiple structures Governments may need overlapping program structures to achieve objectives Revenue Department Recognize tong term activities Programs such as research, development or long term investment maybe considered separate subprograms because of long time span over which expenditures occur Program Budgeting goal is to identify components of broad objectives so choices can be made among components and among alternative approaches to achieving the objective

20 TYPES OF BUDGETS PPBS system remains in Budget framework of many Federal agencies The functional classification required in 1974 Budget act provided program format for federal expenditures that appears in Budget resolution and Presidents message Federal classifications occur across agencies Three operational problems with program budgets Many public services contribute to more than one objective and best programmatic classification is not clear service academies and transportation Cost estimates for programs maybe less meaningful than anticipated don t include certain cost such as overhead, shared services etc. Programs cannot entirely displace departments to deliver all expectations. Program Budgets may have little impact on appropriations Political association with traditional process

21 TYPES OF CUDGETS Zero based Budgets in theory are developed without reference to prior year s Budget In practicality this is preposterous and the correct way to do a Budget Hope that agency administrators will build Budgets with open mind to serving public, what services are provided and how they are provided, and not assume current levels of funding are guaranteed and that increments only go up Involves preparation and eventual ranking of Decision packages Also include implications of not providing funding for project Programs included in Budget will have survived a number of rankings As many packages as can be afforded by available revenues will be in Budget, all priority ranked

22 TYPES OF BUDGETS Strengths of Zero based Budgeting It provides much operating data for use in management and should induce consideration of alternative delivery approaches Require formal consideration of priorities throughout organization Budget construction begins from bottom of organization where best operating info exists Requires considerable thought about objectives of organization Problems with Zero Based Budgeting Generates package options that have no serious chance of consideration Performance information maybe contrived and not meaningful to organization Spending activities will not be amenable to Zero based treatment(mandates, earmarks, formula entitlement and contractual payments

23 TYPES OF BUDGETS ZERO BASED BUDGET Rankings of those in Program delivery may not match ranking of society Numbers from different agencies not comparable Most observers believe Federal ZBB had little impact on Federal spending ZBB directs too much attention to process and not enough to questions of program objectives and social values

24 TYPES OF BUDGETS PERFORMANCE BUDGETING The Budget process best place to involve a look at government performance and being able to link it to decisions about government resources should make it better Complicated due to lack of agreement on definition of Performance Budgeting operate at different parts of structure Intentions not always the same(efficiency, cutting size of government, improved transparency and info flow) Identifying results maybe difficult and time consuming and even embarrassing for administrators New performance based budgeting makes effort to provide outcome or result measures in addition to activity costs

25 TYPES OF BUDGETS Emphasizes the concern for Fiscal decisions should be not what government purchases(inputs) but what is produced By focusing on results governments could be more responsive to interest of citizens: by being more flexible governments could become more efficient New Performance Budgeting involves the following principals Objectives/strategic plan Agency should state what it is trying to accomplish that matters for it s citizenry Performance measures Measures that will gauge progress on meeting those objectives Measures outcomes the result or extent to which agency activity have their intended effect

26 TYPES OF BUDGETS Performance measures Measures that will gauge progress on meeting objectives Some performance measures can be observed from existing data but some may require new test or surveys to gauge performance Performance measures should provide connection between the strategic plan and the results Six principals in selecting outcome performance measures External focus Measure should relate to client or customer not to internal procedures of agency Truly measurable Measure should gauge success or failure, whether performance is getting better or worse or staying the same Outcome based Measure service delivery to citizenry rather than impact within entity

27 TYPES OF BUDGETS Six principals in selecting outcome performance measures Significant Encompass full scope of agency Manageable Measures should be no greater than what is needed to cover the scope of operations Verified Measures should be independently verifiable if not produced by third party Flexible execution Should not be constrained by narrow control of how resources are used Both executive and Legislative agree on places and measures for the flexibility Agencies maybe allowed to retain some of unspent funds(use it or lose it) Reporting End of year agencies emphasize outcomes within Financial reports(gasb SEAS)

28 TYPES OF BUDGETS Some challenges for New Performance Budgeting Need for agreement on what is to be accomplished Start with mission statement Programs often have competing and conflictive objectives and disagreement about relative importance of objectives Performance budgets do not cross agencies Output measures give minimal guidance in comparison among agencies No standard performance measure or yardstick that makes sense for all agencies Cost must be tracked (some fixed costs cannot be reduced, and some costs are not associated with any particular activity)

29 TYPES OF BUDGETS Some challenges for New Performance Budgeting Responsibility without control Many measured performance incomes may be outside their control Other factors influence income(school performance Parents and the community) Trust and no micro management different relationship between Agencies and Legislatures Refocused Audit Audit can no longer be focused on financial detail but on performance measures and success in meeting objectives Information overload One or two good performance measures are better then a laundry list of not good measures Outcome measurement Outcome measurement not easy so resort to output measurement Frequently client or citizen surveys are part of measurement process Not all reports are accurate Exaggerated performance indicators

30 CITIZEN PARTICIPATION Process design Timing Input received late unlikely to effect outcome Input more beneficial during preparation stage then adoption stage Studies show input occurs more commonly at end of process Type of Budget Allocation Operating Capital Grants

31 CITIZEN PARTICIPATION Local and State Governments budget processes include an opportunity for ordinary citizens to speak their mind about proposed expenditures before legislatures votes to approve budget Participatory budgeting systems integrate citizen input more fundamentally into Budget cycle not just at the end when legislature is considering it. Stakeholders debate, prioritize, and monitor choices made about public expenditure so that ultimate choices are more transparently made, so process is more inclusive, and results are more equitable Characteristics of citizen involvement Direct citizen involvement early in development of budget Direct citizen participation in monitoring of Budget Formal engagement of society civil organizations in the Budget process

32 CITIZEN PARTICIPATION Participatory influence in 3 stages of Budget Budget Preparation Expenditure Monitoring Service Delivery Main features of process Clearly defined regional Boundaries within territory of government Open meeting to discuss thematic issues Porto Alegre example An annual cycle of participation, planning, and meeting to regularly involve the citizenry A Budget decision process that brings priorities in the regions directly into development and approval of Budget

33 CITIZEN PARTICIPATION Process design Participants Participation should be open to large numbers of people Participants should be representative of the Community Selection methods should seek to include wide range of perspectives. Avoid cronyism Sincere preference/willingness to pay Those that don t have to pay may have higher preferences for certain activities

34 CITIZEN PARTICIPATION Mechanisms Public meetings Most common participation method Timing of hearings is constraint Attendance usually low unless "hot topic Attendees may not be representative and have little knowledge of Budget as a whole. Can be successful if structured properly Focus groups More selective because smaller groups Can fall victim to group think and maybe non representative Can obtain in depth opinions on Budget preferences and consensus on specific issues

35 CITIZEN PARTICIPATION Budget simulations Reveal sincere preference since Budget tradeoffs required Citizen Advisory Committees Participation is often limited and not representative Are effective when appointments made in democratic manner and committees have clear goals Citizen Surveys Useful for understanding Citizen needs and satisfaction May not show intensity of individuals opinions regarding services Question wording is critical

36 CITIZEN PARTICIPATION Study Circles and town meetings Multiple input methods Citizen input relatively small no matter what methods used Goals and Outcomes Informing Decision Making Testifying at Public Hearings Usually one way input Little opportunity to influence decisions(commenting on decision already made) Educate participants about Budget Important goal of Budget participation Educated citizens about complexities of Budget and tradeoffs

37 CITIZEN PARTICIPATION Goals and Outcomes Gain support for budget proposals Market proposals to public Gather input for making decisions Input does effect budget decisions in some cases Change resource allocation Citizen input used to confirm proposals or discuss modification in later years Enhance trust Create sense of Community

38 CITIZEN PARTICIPATION Great variation in process Reasons Conditions in Political Environment may limit of commitment of City Officials to seeking or using input Process design variables occur Hard to get a committed representative group involved in process All participatory mechanisms have weaknesses Input process is portrayed as linear process and in reference to single Budget cycle rather than 2 way dialogue Cost and frequency of input maybe factors in lack of 2 way dialogue

39 CITIZEN PARTICIPATION Local and State Governments budget processes include an opportunity for ordinary citizens to speak their mind about proposed expenditures before legislatures votes to approve budget Participatory budgeting systems integrate citizen input more fundamentally into Budget cycle not just at the end when legislature is considering it. Stakeholders debate, prioritize, and monitor choices made about public expenditure so that ultimate choices are more transparently made, so process is more inclusive, and results are more equitable Characteristics of citizen involvement Direct citizen involvement early in development of budget Direct citizen participation in monitoring of Budget Formal engagement of society civil organizations in the Budget process