Why Do We Need A Fixed Budget?

Ah, a boring subject – government budgets – except that the average American turns over a quarter or so of family income to the budget makers.  

And although most taxpayers haven’t thought about it much, to make matters worse, the standard approach that most governments use each year to prepare their budgets is, at least in the USA, almost a hundred years old.  Of course, a hundred years ago a budget was the latest reform 🙂

This is just the summary portion of New York City’s latest budget.

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Typically, agencies are asked to start planning their budget proposals way ahead of the fiscal year.  So it’s possible they could be proposing a spending plan 18 months or more ahead of the actual time they need to deliver services – without knowing all the factors that could change during that time.  

Do they know how much snow will need to be removed?  How many people will need unemployment insurance?  Whether there will be an outbreak of the flu that affects everything from school attendance to public employees being able to work? How much money will there be from income or sales taxes in an economy whose future is not certain?

Is it any surprise that a fixed budget leads to mis-allocation of public funds considering the real problems that might exist at any moment after that budget is approved?  

This fixed budget process was developed in an era before readily available computer technology, “big data” and the frequent changes that government has to deal with today.

As I wrote about fixed tax brackets, technology now makes it possible fix the traditional fixed budget.  It is no longer the reform it once was – indeed, it stands in the way of running a more efficient and adaptable government today.

There have been variations on the theme, such as performance-based budgeting, zero-based budgeting, etc.  But not much has changed about budgeting in most governments for a long time, except that now the budgets are kept on computers instead of printed documents.

Experiments to get out from under the old fashioned budget have had various names – conditional budgeting, priority budgeting, flexible budgeting.

All of these approaches, in one way or another, try to match the priorities among the demands on government with its possibly changing revenues.

Perhaps the most interesting innovations have been around priority budgeting.  In its 2011 report, titled “Anatomy of a Priority-Driven Budget Process”, about Snohomish County, Washington State, the Government Finance Officers Association (GFOA) summarizes the approach.

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This is an especially useful area for citizen input, including the use of web-based collaboration platforms.  The average person is much better at defining the relative importance of various outcomes to himself/herself than in understanding the implications of a dollar amount that sits on a line in a budget.
Some of the other associations of government officials have In addition to GFOA, the International City Managers Association (ICMA) and the National League of Cities have been trying to educate their members about priority budgeting.   They have been working with the Center for Priority Based Budgeting.

Variations of priority-based budgeting have been used in Boulder, CO which ICMA has reported on.   It has also been used in Cincinnati, OH among a few dozen other jurisdictions.

An important assumption underlying this more flexible budgeting is that government decision makers cannot foretell the future with precision.  So, even the priority-based budget may need to be changed during the course of the year as the public and its leaders learn from what they’ve spent on so far and as new needs arise.

Technology today makes possible a more dynamic approach to managing government finances than in the past because it makes these four key aspects of flexible budgeting feasible:

  • Identify the cost of delivering each kind of outcome the government has in mind
  • Prioritize those outcomes through some combination of public values and cost-effectiveness
  • To get things started, estimate the revenue expected to come in and the volume of demand for each outcome.
  • Adjust on a monthly basis

This obviously requires some flexibility in the allocation of human resources to.  Some aspects of government are not that flexible – for example, you can’t train a new police officer overnight – so there are bound to be some inflexibilities even in this approach, but much less than the entirely rigid traditional approach.

Besides, such a situation might encourage people in government to get creative.  If crime is going up, maybe people will realize that not all tasks assigned to police officers require an officer.  If crime is going down, maybe there are some on the police force who can work on other things.

But getting more creativity in government is a story for another time.  For now, please let me know if you’re aware of more flexible budgeting in the public sector or you want to explore this more for your government.

© 2015 Norman Jacknis

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