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Linking strategic plans with budgets.

Through a strategic planning process, effective administration, on-going evaluation and regular internal communications, a government can relate its most basic budgeting operations to the highest level of policy formation.

Strategic planning can be very simple. Defining it is not as easy as demonstrating it. A vivid demonstration of some interesting municipal planning concepts can be found, for example, in "Sim City," an inexpensive computer game. The game starts with a screen that has some water areas and some forest areas. The rest of it is green, open land. The player zones areas as commercial, industrial or residential land and establishes the location for a power plant, a power grid and a transportation network - both rail and streets. At some point later in the game, the citizens will demand a football stadium, airport and seaport. The player either meets those demands or population and property values decrease.

The game begins with a certain fund balance and the player establishes a tax rate. Revenues thus depend on the property zoning. If extensive roads are built before sufficient population growth takes place, maintenance costs on the roads will be greater than the tax base can support. It is a fascinating game, but one can't play it without a strategy. The player must decide what the city will become, make plans in advance and stick to those plans. If the player just sits there, the fund balance disappears.

Real municipal governments are in a similar situation. If local governments address the future with only a one-year budget, they will not get ahead or achieve long-range goals. Establishing clear policy and using the budget to implement it provides a link between strategic planning and budgeting.

Budget Criteria and Relationships

The Government Finance Officers Association's Distinguished Budget Presentation Award program emphasizes strategic planning. The budget award criteria have four main components. The first stipulates that the budget be a policy document that provides a rationale for policies along with a description of the effect of changes on those policies. Such a policy document is closely related to a strategic plan. The budget also must be a financial plan. The operating budget is generally thought of as a financial plan, but the budget also entails capital planning, debt strategy and other considerations. As a financial plan, there should be a comprehensive budget structure. Projected year-end balances and an explanation of the capital program should be included. A communications device, another component of the budget award criteria, is important as a public relations tool and a means of gathering support for the government's strategic plans. Thus, the presence of strategic plans in an outstanding budget presentation is almost a given. Finally, the budget as an operations guide represents an effort to control operations within the legal spending limits and to measure performance. In each of the major areas of the budget award criteria, there is an emphasis on strategic planning elements. An outstanding budget presentation demonstrates and communicates strategic plans of the community.

There are a number of important relationships among the various documents and people involved in the process of linking strategic planning with budgeting. Strategic or comprehensive plans often are a compendium of plans relating to land use, roads, recreation and education. Most communities have plans of this sort, and often they are on a shelf somewhere. If those plans are to be linked to the budget process, it is essential to get them off the shelf and into action. The programs and projects in the operating budget must be related to the goals and objectives stated in comprehensive strategic plans in order to accomplish the goals outlined in those plans.

Apart from comprehensive plans, strategic planning comprises a number of interrelated plans - one of which is the operating budget. Staffing and compensation plans provide a mechanism for implementing the operating budget. Capital improvement programs (CIP) schedule projects over a period of several years. Each year of the CIP becomes a component of the total annual budget. Financial models summarize the operating budgets (with their underlying staffing and compensation plans) and capital programs, comparing them to historical trends and projecting them into future years. A financial model can evaluate various strategies and select those that will achieve the plan's stated goals.

A hierarchy is implied in these planning elements. The process should start with a mission statement set forth by elected officials who adopt a philosophy that can be used as a basis to develop policy. Not very common in governments, mission statements, basically, state the purpose of the organization.

Policy statements are the first element under the mission statement. These statements are frequently translated into an annual policy plan or policy agenda, which is developed through work sessions with the legislative body. Policy agendas provide linkage between policies and specific directions to the administration concerning what is to be accomplished during the year. Policy agendas will dictate capital programs and operating budgets to support the strategic plan.

The process, as depicted in Exhibit 1, begins with policy makers telling the administration what is to be done, and when. They might even say why it is to be done. In practice, the administration first may have outlined the policy agenda and presented it to the policy makers informally and thus know what to expect from the policy makers. The administration then develops programs and projects through what is commonly known as the budget process.

An important element in accomplishing strategic goals is to screen those programs and projects through a funding model. This process depoliticizes some of the decision making and optimizes the use of resources. The model demonstrates how required services, facilities and products can be funded and when they will be provided. The results are inputs to the strategic plans and budgets, which ultimately go back to the policy makers in the form of an adopted document at the beginning of the planning period. Results are reported to provide accountability at the end of the period, an essential step in the completion of this process.

Linkage: An Evolving Process

In many cases, the policy makers, when they begin the process with mission and policy statements, believe they are handing down something that is written in stone and is infallible. That is not necessarily the case; throughout the process there will be adjustments. A mission statement should be broad enough to be totally flexible and noncontroversial, requiring few modifications over the years. The fiscal policies supporting that mission statement can be more specific and subject to revision as circumstances change.

The implementation phase begins with the chief executive setting the direction of the planning process and launching the necessary consensus-building process. Direction is given to staff as to what the policies are and what their role is in implementing those policies. Staff then develops objectives in support of those goals, objectives that are measurable and provide a clear basis for performance measurement.

It is always a challenge to get a legislative body to come to grips with policy issues prior to the budget process. Prioritization is best accomplished in a planning retreat environment where thinking can be concentrated on particular projects or problems and a consensus can be reached. Much staff preparation is required to provide the atmosphere and environment that produces a policy agenda that both the legislative body and administration can support.

Involving the departments in the budget process is easily stated but can be difficult to carry out. Dictating rarely works well: Directed to cut their budgets 10 percent, department heads will find the most vital 10 percent to cut. The administration then becomes drawn into making decisions at a level better suited for department heads. It is important to solicit input from and to listen to department heads throughout the preliminary planning process and to provide them all available resources necessary to accomplish their objectives. But they should be held to the basic structure of the policy agenda.

The typical budget manual includes forms, instructions and deadlines, often requiring operating departments to provide much information that is not central to the accomplishments of strategic goals. Details are necessary in building a budget from the bottom up, but these details must mesh with policy that comes down from the top. Simplifying the level of detail helps everyone, from the elected officials to the supervisors in the operating departments, allowing them to think more strategically, to look beyond the number of rakes and shovels needed for the next year.

The administration provides direction not only to the operating departments but also to the planning and finance departments. Nonfinancial planners are not always on the same track as financial planners; they often do not think of finance officers as financial planners. Yet planning should be the finance officer's principal function. The finance department needs guidelines within which funding mechanisms can be developed. Without some guidance, the range of funding possibilities is too wide: tax increases, fee increases, service cutbacks or debt issuances. The finance officer will follow many dead-end paths and generate much unnecessary paper if there is no clear direction from administration and clear policy definition on the front-end.

Agencies outside the formal governmental organization, such as city beautification commissions, art commissions, convention and visitor bureaus, and the like, must be brought into the budget process. They should be educated in the strategic planning elements, given guidelines and held to them. This task can be politically sensitive.

Program and Project Evaluation

All the players in operations, planning, finance and the agencies will generate their own programs and projects that they want included in the budget. Advocates will insist that accomplishment of their objectives is essential to achieving the strategic goals, and this necessitates some systematic selection process. Evaluation and prioritization of programs and projects can be accomplished through a number of mechanisms. The most common is simple administrative screening, whereby the chief executive takes a red pencil to the budget submittals. The finance department prepares revenue estimates and debt capacity analyses but usually is less involved in program evaluation.

The finance department could, however, make use of a strategic planning model, such as an electronic spreadsheet that projects fund balances and operating results over the next five to 20 years, based on the past 10 to 15 years' historical data, the proposed budget and the capital program. A model of this nature evaluates the impact of proposed programs on projected fund balances, tax rates, debt capacity, and per capita revenue and expenditure trends.

All these indicators have particular ranges within which they should be allowed to fluctuate; the acceptable ranges should be set by policy. The policy makers must understand at the beginning of the process what fund balances are required - and why - in order to establish a guideline or policy as to the range within which fund balances will be allowed to fluctuate. Similarly, policy must be established through a consensus-building process for tax rates, debt capacity, and per capita revenue and expenditure trends.

A 20-year model does not presume to generate accurate results beyond a few years; however, long-range projections do highlight the trends, by exaggerating them. If compounding of interest is built into the model, trends are exaggerated even more. A number of strategies may appear to be effective over the next several years. But projecting them over a longer period will identify particular strategies that will remain viable well into the future. Using a model to evaluate capacity for programs and projects has many useful byproducts, such as graphic presentation of debt ratios or revenue, expenditure and fund balance trends. These can prove invaluable in explaining the government's strategies.

Strategic plans consist of a variety of documents, including the tax policy, debt strategy, capital program, as well as the operating budget. Many operating budgets are no more than page after page of computer generated numbers that do not explain the underlying rationale: why issue debt now, why put off a debt issuance for two years, why the tax rate is going up this year, what are those multiyear capital programs? A strategic plan will have those explanations. It will identify the policies that guided the development of specific strategies and spell out how these strategies are to be carried out in departmental objectives.

Strategies and Budgets

Policies and strategies must be developed within a number of constraints that become obvious through the budget process. They include: * the resources available; * the taxpayers' values - what is important

to them, what they can give up, what

they hold important; * the norms of the community - what it is

accustomed to, the magnitude of change

proposed in the budget; and * the competition for industry, economic

development, employees and

housing - the tax rates and the level of

services provided to neighboring

communities. As shown in Exhibit 2, all these constraints must be addressed in the strategic planning and budget documents.

Accountability

Accountability is a critical success factor. It can be achieved through the traditional management-by-objective system: goals and objectives are established at the beginning of a planning period, subordinates are involved in the process in a manner conducive to their buying into the goals of the organization, and their performance against those goals is measured. Individuals - not organizations - are held accountable. The administrators are held accountable to the legislators, and those employees who are key to achieving objectives are held accountable to the managers.

Performance measurement and management-by-objectives techniques revolve around measuring activities in terms of demands, effectiveness and efficiency. Each activity of an operating department is evaluated by defining the demands for that activity, determining how effective the department expects to be in meeting those demands and estimating the cost of meeting those demands. Future projections are related to the historical track record.

Accountability for carrying out these plans is established through a reporting mechanism, preferably on a quarterly basis and linked to executive compensation. Quarterly reporting might consist simply of a departmental listing of objectives for the quarter with an indication of the degree of accomplishment or progress toward those objectives. Each department administrator meets quarterly with the city manager or mayor to review progress. Thus, any slippage that is reported may be overcome within the planning period by renewed efforts or additional resources during the remaining quarters of the period. If there are no remaining quarters, a clear explanation should be provided to the legislative body.

Compensation systems can be effective in relating mission statements, policies and strategic plans to all employees. A merit pay system directly linked to strategic objectives can be the most effective way to ensure the completion of those objectives. The textbooks say that money is a dissatisfier: higher pay really doesn't improve performance, but lack of it prevents things from being accomplished. A merit pay system, as part of the accountability mechanism, can be effective with workers at all levels. Management must relate the objectives to specific workers' tasks, and the workers must understand that they will be paid according to the accomplishment of those objectives.

Accountability completes this circle, bringing it back to the policy makers, who should be able to review performance, results and the public's reaction. The review causes the policy makers to modify their future strategies, thereby eliminating surprises for both the administration and the policy makers. A regular reporting process, such as quarterly reports to the legislative body, will eliminate big surprises at year end.

In the Driver's Seat

Strategic planning puts the government in control, in charge of its destiny, knowing where it is going and how it is going to get there. For elected officials, who need to be able to convey their successes and deal with their failures in public, strategic planning can provide a great deal of public support.

Through this strategic process, the government relates the lowest level of budgeting to the highest level of strategy formation, thereby developing all the elements of an outstanding budget presentation. The finance officer, helping shape the future rather than just reporting the past, will find this the most rewarding aspect of being a finance officer. The rewards of strategic planning are as great individually as they are essential to the organization.

The Sim City Solution

Some players have been fantastically successful with the Sim City computer game. They did not stumble on some revolutionary municipal planning strategy, however. Rather, through various networks, they learned that by typing "SHIFT-FUNDS" they could increase fund balance instantly by $10 million. These players may not have mastered strategic planning, but they learned the importance of finding the best tools available to get the job done.

Hal W. Canary, Jr., CPA, is president of Canary Consulting, Inc. of Memphis, Tennessee, which concentrates on the evaluation of capital strategies and financing alternatives. During his previous 10 years service as finance director of the City of Germantown, Tennessee, he received the GFOA's Award for Excellence in Debt Management, and the city received eight consecutive Certificates of Achievement for Excellence in Financial Reporting and seven consecutive Distinguished Budget Presentation Awards. This article is an adaptation of his presentation at the 1991 GFOA annual conference.
COPYRIGHT 1992 Government Finance Officers Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:local government budget planning
Author:Canary, Hal W., Jr.
Publication:Government Finance Review
Date:Apr 1, 1992
Words:2836
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