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New directions in budgeting and fiscal planning.

Across the country a reexamination of how governments raise money and how they spend it is underway in a variety of forums. In the standing committees of the GFOA, a careful scrutiny of new directions in budgeting and fiscal planning aims to assist public finance professionals in responding in a successful and creative manner to the challenges of this decade.

In the 1980s local governments expanded their responsibilities for a vast array of new social problems, health care concerns and infrastructure needs. During this same period, the federal government sharply reduced unrestricted aid and expanded mandated programs without sufficient offsetting funding. Municipalities were able to cope with these changes because they occurred during an economic expansion of unprecedented length. This expansion, with few exceptions, extended to most parts of the country and produced substantial tax revenue growth that could accommodate these multiple expanding expenditures.

The recession of the early 1990s, however, has reminded localities that the revenue growth experienced during the last decade was much higher than the normal growth they can expect in the future. Revenues will be hard-pressed to keep up with the expanding cost of the present range of services local governments now provide. The struggle to cope with this new reality shows itself in the recurring local budget problems that persist throughout the nation.

Several common events encountered by most local governments underlie this new reality. Demographic forces propelled by the aging of the baby boom generation are likely to increase saving and decrease the type of spending on housing and consumer goods that supports many local tax bases. At the same time, future economic competitiveness may require governments to spend increasingly on their education systems and on infrastructure, especially transportation. These problems are likely to make resources short for the remainder of the decade.

The Profession Responds

Resolving these problems requires careful reexamination of how governments raise money and how they spend it. Local government officials throughout the country and committees of the Government Finance Officers Association (GFOA) are carefully scrutinizing several new directions in budgeting and fiscal planning to facilitate this reexamination. A February 1992 white paper produced by the GFOA Committee on Governmental Budgeting and Management scoped out the issues; it stated that, while "there are no easy solutions, . . . good processes and tools to deal with resource identification and allocation can provide both short- and long-term approaches to help manage the underlying issues and minimize financial problems. . . ."

The white paper identified several areas in which further development could prove beneficial to local governments in this decade. Most importantly, it said, there needs to be a movement away from emphasis on form and documents and toward an emphasis on processes and end results. In particular, the committee suggested more integration of planning, budgeting, goal and objective setting, and performance tools and measures. In sum, governments need a body of commonly accepted guidelines for processes and tools which they can readily call upon to guide improvements in their own fiscal processes.

Improved ways to disseminate information about good tools and procedures developed by individual governments was identified in the white paper as critical. In particular, there is a need for effective training mechanisms for professionals, elected officials and citizens. While extensive training exists for specific issues, the committee identified a need for training that covers the overall purpose of resource allocation efforts, spans the several disciplines that affect resource allocation, and encompasses a consensus set of guidelines for procedures and tools commonly used by a broad range of local governments.

The Committee on Governmental Budgeting and Management took two additional steps in June 1992 to help governments deal effectively with the fiscal stresses of the 1990s. It passed a resolution detailing the need for the development of recommended guidelines for resource allocation including performance measurement, short-term operating and capital budgeting, financial and economic forecasting, and long-range strategic and financial planning. Among the concerns that the resolution cited were:

* many governments are having to deal with severe financial difficulties;

* taxpayers are concerned with the level of taxes and the way in which resources are being utilized by government programs and services;

* there are growing public demands and a need to improve the quality and effectiveness of government programs and services;

* there is a continued need for managing for the long-term and reliable provision of crucial public service and infrastructure needs;

* there is a lack of tools and guidelines to address these problems;

* a long-term program is needed for the development of resource allocation guidelines that would address these problems and integrate financial and economic forecasting, short-term operating and capital budgeting, long-range strategic and financial planning, and performance measurement; and

* performance measurement and service efforts and accomplishment reporting are most appropriately addressed in the context of these resource allocation guidelines.

The committee also adopted revised criteria for the GFOA Distinguished Budget Presentation Awards program and introduced mandatory criteria that identify the core level of budget preparation and communication which it believes is now commonly accepted by a broad range of local governments in the United States and Canada.

The GFOA's Committee on Governmental Debt and Fiscal Policy at its June 1992 meeting adopted a Statement on New Directions, which is excerpted in the accompanying sidebar. Stating that "prudent financial planning and management are imperative if provincial, state and local governments are to meet the challenges of the 1990s," the committee concluded, "the mission of the Committee . . . is to promote sound financial health for state and local units of government by developing and advancing financial guidelines, policies and practices and strengthening the partnership among all levels of government."

Three specific directions are emerging in public finance and budgeting in the 1990s which span the considerations discussed above. Each of these directions is dynamic and will surely undergo redefinition and refinement. Below is a summary of each development followed by short discussions which lay out the essential thinking to date behind each development.

Direction 1: establishing structural balance as the goal for fiscal decision making. This approach to budget development places an emphasis on fiscal stability and reliability of public services.

Direction 2: adopting some form of multiyear financial planning as a tool for fiscal decision making. Recent thinking views the familiar financial planning concept in a new light that uses financial planning as a beneficial means to fuse the fiscal process with effective management planning.

Direction 3: facilitating the exchange of ideas as a way to improve fiscal decision making. This view places emphasis on speeding up the learning curve through establishment of guidelines to help government professionals to compare programs and budget techniques with other jurisdictions, to share information on successful management innovations and to establish more effective and accessible professional training and education.

Structural Balance

Local government, distinct from other levels of government, is charged with providing the most basic public services: those which citizens demand year after year with little fluctuation in their demands. The job of local government is to get as close to being a reliable provider of those basic public services as it possibly can. While there are many possible approaches to guiding and balancing budgets, structural balance is the name for an approach whose primary goal is to ensure that basic local service levels are predictable and cost effective.

The term "structural balance" implies that the structure of a government's finances is such that a balance is achieved between the services that are provided and the local economy's ability to pay for these services on a recurring basis. Simply put, structural balance is a government budgetary policy that strives to identify the service levels that a local government considers to be basic and to guarantee that they are at a level that can be supported by the local economy on a sustained basis through good times and bad.

With a balanced structure there should be no persistent need to raise taxes or cut back spending in order to maintain annual budget balance. In short, structural balance provides fiscal stability. Fiscal problems move to the background when the fiscal structure is balanced, allowing more time to address policy and management issues.

Structurally balanced finances enable a government to stabilize service delivery and thereby anticipate employment needs better so that expansion and contraction in government employment can be accommodated as completely as feasible through attrition and voluntary transfers. For example, with structural balance, contradictory action, such as hiring in one year which is reversed soon after with freezes or layoffs, is minimized; this can be accomplished because the structure of expenditures that led to the hiring is sustainable over time.

It is important to underscore the point that structural balance will neither be achieved in a straightforward manner nor be established once and for all. A structure that is balanced at one point in time can become unbalanced when underlying circumstances change. For example, revenues and expenditures also are constantly subject to changes beyond local direct control. Policy decisions and priorities in any balanced structure are constantly subject to revision as local needs change. Therefore, structural balance is a moving target that requires continual re-evaluation and high-level support on a permanent basis. This is not an easy undertaking because the long-term planning and sustained maintenance of effort it requires are especially difficult to support against the conflicting and intense daily demands of government.

The extra effort required to develop budgets from the perspective of structural balance may produce substantial benefits. In a balanced structure, the policy priorities created in one year's budget are sustainable over time so that line departments can reasonably plan service demands and resource needs over a multiyear period. Program reversals, and the sizeable inefficiencies they create, are minimized. The enhanced ability to sustain priorities and to maintain stable service delivery permits substantially increased focus on the purpose and mission of line departments and on the ability of the budget to accomplish that mission. Without reasonable year-to-year stability, repetitive budget-cutting exercises occur under relatively short time frames, which permit little opportunity to design expenditure reductions that achieve the necessary savings and at the same time preserve the top priorities and mission of the departments.

For government managers, a budgetary approach that seeks structural stability can make it easier to manage a department. It can afford them more opportunity to develop and train staff by focusing their time less on budget changes and more on improving service delivery without raising costs. Public employees value stability because layoffs are avoided and evolving personnel needs are handled by managed attrition, which is least disruptive to their lives. The benefit to the business sector is that structural stability gives businesses predictable tax and service policies that are necessary for effective business planning. For other taxpayers, structural stability means that they can reliably know their tax obligations and the services that they can expect from government.

Multiyear Financial Planning

Identifying the revenue and expenditure structure most appropriate for a locality, ensuring that structure is balanced, and instituting the necessary policy and management changes needed to bring this all about require appropriate tools. Governments wish to expand their focus beyond short-term and operational issues and are looking for tools that enable them to integrate and coordinate annual budget preparation, capital improvement projects and management plans. This need for integration and coordination is a theme that runs throughout a wide range of concepts: quality management, reinventing government, performance budgeting, for example.

The budget process is oftentimes limited to being a short-term operational tool for three reasons. Budget management is first and foremost a spending control process that is inherently oriented to short-term, even monthly, considerations. Second, budget submission and adoption are usually compressed into a period of a few months that often limits the scope of deliberations to innovations that can be identified and developed in a few weeks or months, usually resulting in minor changes on the margins. Third, control mechanisms are not well defined for capital improvement programs, leaving most controls operationally focused.

In capital programs the acts of spending and funding are often separated by several years, making capital controls more abstract, less pressing and not easily adapted to the budget process used for operational expenditures. Some jurisdictions have adopted formal debt policies to try to fuse capital and operational spending into a common process for policy development and fiscal control. In general, however, debt policies are rare and they are usually so customized that a common model for widespread adoption does not yet exist.

A multiyear financial plan is an alternative tool to move beyond the short-term and the operational, to extend fiscal management across years and across capital and operational areas. It complements the annual budget process by providing a mechanism to identify problems sufficiently in advance to provide substantial lead time to develop and implement creative solutions that may require several years and several line departments to accomplish. It is ideally suited to assessing the impact of current capital spending decisions on the future affordability of debt service and other operational spending.

Financial planning is a tool for planning, control and decision-making; not an end in itself. The potential weakness and danger of relying on a financial plan is that forecasting can become its objective and forecast accuracy its measure of success. By that measure, financial plans will fail because forecasts, by definition, will be wrong.

A financial plan loses its value if the time horizon becomes too long or the objectives become too abstract; it needs a medium-term time horizon in a range of two to five years. Sufficient detail and concreteness are needed for a financial plan's forecasts to have clear operational implications that can pinpoint emerging problems.

A financial plan's major benefit lies in pulling together the many parts of a locality's finances over time and across areas to see whether the whole makes sense and is viable. It can uncover inconsistencies in funding assumptions or in cost estimates, such as different parts of the budget being based on divergent assumptions on inflation or population growth, projected future service demands being inadequately costed out, ancillary needs being overlooked such as supplies or overhead costs, or planned revenue growth falling short of planned spending growth.

A multiyear financial plan can be used to coordinate project implementation, management planning and annual budget decision-making. As a multiyear forecast of intentions and expected results, it can provide a means of creating and enforcing accountability of line departments. It can be used to demonstrate whether problems are being identified or ignored and whether departments are complacent about problems or are actively seeking solutions.

Successful performance budgeting needs a multiyear financial plan, which serves as a tool to establish and enforce financing and performance agreements with line departments by associating funding in various years with a line department's commitment to achieve specific performance objectives by targeted dates.

Facilitating the Exchange of Ideas

As local officials throughout the country struggle to resolve the fiscal problems presented by the 1990s, they are confronted by a dilemma. On the one hand, they know that many localities have very similar problems and are probably developing effective solutions. On the other hand, they know that their jurisdictions have some unique political, statutory or other characteristics that may conflict with straightforward adoption of methods or approaches used by other jurisdictions. Greater comparability and compatibility of fiscal practices and budget presentations across jurisdictions could facilitate the communication and adoption of fiscal innovations, but rigid standardization is not an acceptable price for greater accessibility to others' ideas.

How does one reconcile local diversity and flexibility with guidelines or standards? Professional organizations such as the GFOA exist on the premise that there is sufficient consistency in good financial management practices that more extensive professional interaction can contribute to better financial management. The existence of the GFOA's budget awards program, by definition, runs counter to absolute diversity and flexibility.

The widespread acceptance of these programs shows that a certain level of consistency and uniformity is considered helpful by local governments. Participants in the programs know they must continually maintain a balance between preserving flexibility for the unique aspects of their local environment and maintaining a certain level of consistency with practices commonly used by a broad range of governments. Where that balance occurs will be determined in each locality based on its own special circumstances. In that sense, the art of budgeting lies in the locality's knowing when the consistency presented by professional guidelines has to accommodate the unique requirements of that particular time and place.

When one looks at guidelines, therefore, one has to be conscious that there are two kinds of flexibility. A successful program of guidelines and training will endeavor to distinguish between those two types of flexibility and address them quite separately and differently. The first is a negative kind of flexibility that allows one to avoid identifying problems and developing solutions. To paraphrase an often-heard argument, "We can't do this the way other governments do because we are unique, we are not like them, we have our own special circumstances." While often having some basis in fact, this response also can become a set of excuses to cloud the need for and feasibility of improvements in practices and solutions to problems. The creation of guidelines or norms directly limits this type of flexibility.

Another type of flexibility, one which is highly valued, is the flexibility that releases innovation, a new solution, a different way of putting together financing the capital budget, a different way to define the performance standards for a line department and to create an incentive structure for managing that department. This type of flexibility, which enhances identifying problems in advance and getting innovative solutions in place, is the type that needs to be encouraged.

The Distinguished Budget Presentation Awards program conducted by the GFOA successfully incorporates guidelines that are widely viewed as constructive and beneficial without unduly compromising legitimate diversity.

The GFOA Committee on Governmental Budgeting and Management recently took steps in the direction of greater consistency and comparability by adopting 13 mandated criteria for its Distinguished Budget Presentation Awards program. Previously, budget criteria had been offered to program participants as recommended guidelines. An examination of the mandated criteria suggests that the members of the committee were sensitive to making certain that greater comparability of budget documents does not impede innovative flexibility. These minimum, mandated criteria, already accepted as fundamental fiscal practices in many governments, range from simple issues of reader accessibility to basic issues of disclosure. The committee strove to avoid an orientation on form in favor of an orientation on tools and procedures for effective budget documents, leaving wide scope for localities to adapt their budget documents to elected officials' preferences for how the documents should appear and what the documents should highlight.

The new direction emerging from the committee's discussion considers the creation of norms or guidelines as having merit if it facilitates the communication of ideas, solutions and tools among professionals. By providing a core body of knowledge that can form the basis for training programs, guidelines can foster the dissemination of ideas and supplement existing networking methods. Guidelines can facilitate better understanding and communication of issues to citizens and elected officials, as well. The existence of guidelines can aid innovation: managers seeking to introduce practices and procedures that are part of established guidelines can use the existence of guidelines as a type of "seal of approval" that the practices are widely accepted and their usefulness established.

Guidelines are seen as helping to make budgets more comparable across jurisdictions; they help government professionals to do more efficiently what they do continually, i.e., compare themselves with other jurisdictions. This greater comparability also would permit the rating agencies to use the prospective viewpoint provided by budget documents as fully as they use the retrospective viewpoint provided by financial statements in their examination and comparison of jurisdictions.


As local governments struggle to respond to the demanding fiscal environment of the 1990s, they have a need to find ways to enhance fiscal stability, coordinate fiscal decisions with innovative management, and facilitate the creation and communication of beneficial fiscal tools, techniques and procedures. Several new directions in budgeting and fiscal planning are already underway. Structural balance is an approach to budget development that focuses on enhancing stable service delivery. Multiyear financial planning is increasingly being viewed as a management tool to increase coordination and accountability of government across line departments and across time. Budgetary guidelines are being explored as a tool to enhance comparability across governments so that communication and dissemination of fiscal innovations can be accelerated and training facilitated. While government in the 1990s is facing especially difficult times, these developments have potential to substantially assist budget and finance officials in responding in a successful and creative manner to the fiscal challenges of this decade.


The Government Finance Officers Association will host a national symposium in January 1993 to examine the need and means for more effective budgetary practices and fiscal policies at the state and local levels of government. The symposium will focus on the development of guidelines for state and local budgeting, which has been recommended by GFOA's Budgeting and Management, and Debt and Fiscal Policy committees. The approximately 40 invited participants will include public managers, finance officers, elected officials, academics, researchers and private industry representatives. Their charge will be to evaluate the development of guidelines and explore possible ways of carrying out such an initiative. A report of the proceedings of the symposium is planned and is expected to be published in the spring.


The fundamental economic, demographic and social changes that have occurred in the United States and Canada present profound challenges for elected officials and the public financial manager in the 1990s. To assist members of the Government Finance Officers Association meet these challenges, the Committee on Governmental Debt and Fiscal Policy has identified new directions it will pursue to promote the strategic goals of the association in the area of fiscal


Prudent financial planning and management are imperative if provincial, state and local governments are to meet the challenges of the 1990s. Among the challenges facing financial officers at all levels are

* increasing public demand for services and facilities at a time when intergovernmental revenues have diminished and restrictions limit the revenue-raising capability of governments,

* increasing mandates from higher levels of government for services and standards that are not accompanied by sufficient funds to provide the services or meet imposed standards, and

* changing economic and demographic conditions and declining economic and productivity growth that have had an adverse affect on state and local governments.

Fiscal conditions are expected to continue to deteriorate. The Committee on Governmental Debt and Fiscal Policy will help governments meet increased fiscal pressures by defining problems and developing solutions for improving governmental financial management.

To meet the wide range of circumstances facing provincial, state and local governments and to develop a financial framework that responds to changing circumstances, the Committee on Governmental Debt and Fiscal Policy adopted the following mission statement . . . .

The mission of the Committee on Governmental Debt and Fiscal Policy is to promote sound financial health for state and local units of government by developing and advancing financial guidelines, policies, and practices and strengthening the partnership among all levels of government.

ALLEN J. PROCTOR is executive director of the New York State Financial Control Board and adjunct professor at the Columbia University Graduate School of Business. Formerly deputy budget director for New York City, he is a member of GFOA and serves on GFOA's Committee on Governmental Budgeting and Management. Copies of Financial Control Board reports are available by calling 212/417-5046.
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Title Annotation:includes related article
Author:Proctor, Allen J.
Publication:Government Finance Review
Date:Dec 1, 1992
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