Using Scarce Dollars With Purpose

Best practice standards for budgeting got an update last month when the board of the Government Finance Officers Association (GFOA) approved guidelines from its Rethinking Budgeting initiative. The new guidance supplants practices recommended by a National Advisory Council on State and Local Budgeting, endorsed by GFOA more than two decades ago.

Rethinking Budgeting is a partnership between GFOA, the International City/County Management Association (ICMA) and the National League of Cities (NLC). A 2022 report from the project team, comprised of finance officers, researchers and policy experts, proposed a new way of looking at an essential governmental function.

“In traditional budgeting, historical precedent is the primary determinant of how much money is allocated to each line item,” it said. “This is backward-looking, not forward-looking.” At GFOA’s June conference, 250 local practitioners took part in a workshop in which they worked through an assessment tool designed to help them move beyond starting with the previous year’s budget and then adjusting it at its margins.

That approach might work in an environment of linear change, when “last year” and “next year” are essentially the same, says Shayne Kavanagh, senior manager of research for GFOA. But at this moment, “hockey stick” sorts of events are increasingly common. Things seem to be the same until suddenly, they are not.

“The budget has to adapt, and even better, provide for some foresight,” says Kavanagh. New ways of looking are needed to accomplish this, given the mix of challenges local governments face.

Uncertainty, the New Normal

The U.S. economy is expected to grow between now and 2031, at a rate of 2.1 percent per year. (That is about the same as the previous decade, if below growth in the 1980s and 1990s.)

This doesn’t mean local governments won’t face constraints on their resources, or new demands for them. Climate and weather disasters are affecting more and more communities. Not only is the frequency of floods, fires and storms increasing, so is their magnitude.

Past accounting of economic impacts from natural disasters isn’t predictive of future costs. If insurance becomes prohibitively expensive, or even unavailable, how much might property values and associated tax revenues decrease? Could inhabited land become unsafe for residents or businesses?

The pandemic laid bare the consequences of underinvestment in public health. It’s still not clear what COVID-19 might still have in store for communities, even if there isn’t another major outbreak. International travel is at higher levels than before the pandemic, and there’s no reason to assume another infectious disease won’t circle the globe.

The population is aging. By 2035 there will be more seniors than children for the first time in the nation’s history. The U.S. already has the worst health outcomes among high-income countries, and chronic disease rates are rising.

If artificial intelligence will automate 30 percent of the work now done by humans by 2030, does that mean better jobs or fewer jobs (and less tax revenue)?

These aren’t the only uncertainties that lie ahead. They’re not solely the responsibility of local government, but local governments will need to deal with local consequences.

That these new circumstances are arising in a time of political polarization adds to the difficulty of addressing them through previous budgeting methods, GFOA notes in its 2022 report. Negotiations between government colleagues are more partisan and public distrust of government has increased. GFOA’s assessment tool can inform budgeting that addresses both of these issues.

Trust and Transparency

The “operating system” GFOA would like to see more governments adopt is built around a strategic plan based on the needs of the community, and metrics that can show that its investments are achieving the plan’s goals. Another essential element is fostering a collaborative process across departments, so that rather than competing for a share of funds, all stakeholders see how they are contributing to the success of the plan.

Rethinking Budgeting recognizes the emotions behind decision-making, and the need to engage people as well as the intellect, says Chris Morrill, GFOA’s executive director. “You start with internal trust, working with elected officials in the policy setting roles so you can address their concerns, then have a really robust citizen engagement piece,” says Morrill. “It’s not just the transparency, the process of engagement and the way things are presented is critical.”

There’s no prescribed recipe, Kavanagh says. The Rethinking Budgeting Readiness Assessment GFOA published recently asks questions about a jurisdiction’s budget process that can help it identify what it can do to improve it. What happens next will vary from one city to the next.

“It’s not about layering on more complexity to local government budgeting,” says Kavanagh. “In fact, there could be less in many cases.”

One of the “rethinkers” GFOA has been working with is College Station, Texas. The budget process there is fairly simple, Kavanagh says. The innovation there was getting people in different departments to come together and talk about the needs of the community and how budget choices might jointly impact those needs. This replaced a “zero-sum game” of competition for resources, with winners and losers rather than collaborators.

Craig Owens, city manager for Lawrence, Kan., was one of several officials GFOA asked to review the assessment tool in its final stages and offer feedback. “What I’m excited about is that they’re saying start with the language of the community and match your resources from there, instead of starting with the language of accounting and hope that you meet expectations,” Owens says.

Beyond Debits and Credits

Rethinking Budgeting is one of several GFOA initiatives designed to offer finance officers innovative approaches to managing resources. It has brought technology companies into this work, with the idea that increasing their familiarity with the sector would lead to products that best fit its needs.

This partnership is unique, says Elizabeth Steward, vice president for marketing and research at Envisio. In 2022, a group of vendors met with government customers to find out what kind of help they needed to implement a more agile approach to budgeting.

They agreed that they needed technology for this transformation, Steward says, but that cultural and process issues were just as important. The companies published a white paper with their recommendations, and had a role in creating the readiness assessment.

“That’s been a year in the making, and it’s been so unusual for us in the vendor community to be allowed to be at the table and bring our expertise,” Steward says.

Most people are likely to think of debits and credits, not values and trust, when the subject of government finance comes up, says Morrill. “Starting from a point of values, hope and fairness changes the mindset as you are developing your budget process.”