Better budget management: financial modeling and maximizing existing resources in Glendale, Arizona.
Each year the Government Finance Officers Association bestows its prestigious Award for Excellence to recognize outstanding contributions in the field of government finance. The awards stress practical, documented work that offers leadership to the profession and promotes improved public finance. This article describes the 1997 winning entry in the policies and procedures subcategory of the budgeting and financial management category.
Until 1992, the budgeting process in the City of Glendale (population 186,500), Arizona, generally resembled that of most southwestern municipalities of comparable size. In the face of dwindling resources and increasing citizen expectations, conflict and competition for funds were an integral and seemingly unavoidable part of the budgeting process. The harder the economic times, the more difficult and adversarial in nature budgeting became. The six-month budget cycle took up hundreds of hours of council, city manager, deputies, and department managers' time and involved numerous professional and support staff. Most of the technical budget and finance presentations to city council were virtually unintelligible to many local residents and some staff members who attended. The general view of the budget process was that of a painful yearly exercise inflicted on city staff.
Within five years, however, the City of Glendale has successfully improved and enhanced its budgeting process from the perspectives of utility and outcomes. Attitudes toward budgeting have evolved into viewing the process as a functional learning activity that has been woven into the fabric of the organization at many levels. The innovative steps in budget development that spurred this new budgetary culture were
* revitalizing three key strategic documents - the strategic financial plan, city finance policies, and the five-year financial forecast - and educating the staff in how to read and apply them;
* ensuring that the guiding principles in each document are consistent with and strongly reinforce each other;
* integrating the underlying philosophy, concepts, and policies contained in these documents into all levels of city government throughout the budgeting process; and
* publishing the documents in its annual budget so that citizens, the news media, and other readers will have the opportunity to learn and understand more about the financial environment and its effects on the government's operating capacity and to participate more fully in the decision-making process.
A Painful, Volatile Process
Prior to its redesign, the budget process started in January with the mayor and six council members establishing their individual and collective goals, objectives, and priorities for the year. The council's goals, the city's overall financial status, predicted local and state revenues, and growth-related service and personnel needs were analyzed and discussed with the city manager and the management team. Administrative controls were formulated to evaluate departmental supplemental requests that might permanently impact the "ongoing" base budget.
The city manager and the management team communicated council goals and objectives to individual departments, which then developed their ongoing budgets using their prior-year base budget as the starting point. One-time expenditure requests and requests to increase existing service levels, add or reclassify positions, or fund new services were submitted through supplemental budget requests.
In order to reach a balanced budget, as required by Arizona law, the management team had to work its way through every department's budget. A large volume of competing supplemental requests had to be reviewed and either accepted, postponed, or denied. Often additional across-the-board cuts were necessary to create a budget that would be acceptable to the city manager and the council.
City council budget subcommittee hearings lasted almost a full week of eight-hour days, with all 23 departments presenting their budget requests directly to the committee and often also to the full council. Council reviewed the management team's recommendations and examined the budget line by tortured line. The few citizens who attended the open sessions were bemused by the cumbersome, often meandering analysis.
There were other problems that prevented the city from maintaining a desirable level of financial equilibrium during economic downturns. For example, when their base budget was frozen, some managers would submit - and receive approval for - one-time supplemental budget requests for ongoing costs, such as personnel. The one-time expenditure rubric also was used to fund first-year costs of high-dollar, multiyear projects, leaving the future costs to be dealt with in succeeding years. If there were an economic recession, as in the late 1980s and early 1990s, the project had to be salvaged by authorizing contingency funds or some other means. The budget office had to find ways to budget for current and future needs as well as for past council commitments to multiyear projects for which no ongoing operating funding had been allocated.
Revenue problems facing the city were not apparent to employees and the public, since, in any given year, the city's overall financial position appeared very healthy. In the late 1980s, however, when a severe and sustained decline in real estate sales and new construction forced the city to absorb shortfalls in anticipated revenues by depleting fund balances, the need to make significant changes in Glendale's fiscal philosophy and financial policies became clear.
A Short- and Long-Term Focus
In 1988, the budget department prepared its first comprehensive five-year forecast of revenues and expenses and long-term economic trends that might affect city operations. The strategic financial plan was developed and written by budget department and some planning department staff, taking about 1,000 hours of staff time. This plan outlined short- and long-term strategies for stabilizing and diversifying revenue sources and building fund balances during prosperous years to cushion the effects of lean years.
The finance department published a revised set of financial policies, which were designed to help ensure the city's long-term solvency and its ability to maintain stable levels of essential services, balance the budget, and pay its current bills and future costs. The new, more conservative financial policies were expected to help management respond to cyclical changes in the economy at the operations level.
During the recession of 1991, however, the city was again inadequately prepared to fend off the stresses it caused, and Glendale was forced to make major layoffs for the first time in its century-long history. This incident showed that the availability of more accurate forecasting information and new financial policies was not enough to create meaningful changes in the city's financial status or its organizational and individual behaviors.
The budget director believed elected officials, city government staff, and the public needed to
* gain a better understanding of the impact of internal and external economic environment factors that affect every municipality's ability to provide for the wants and needs of its residents and
* understand that short-term decisions have long-term cumulative financial consequences and accept the more sound financial principle of pairing ongoing costs with stable revenue sources and onetime cost projects with more volatile funding sources whenever possible.
To accomplish these objectives, the budget department developed more sophisticated analytical tools to provide meaningful, relevant, straightforward information to decision makers and those affected by their decisions: computer models, improved forecasting methods, a streamlined process, and an education effort.
The budget department designed, tested, and implemented several computer modeling programs that provided the council and city manager simple-to-understand alternatives, graphs, and what-if scenarios [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. The effects of short- and long-term decisions on the city's financial status, operating budget, and capital project improvement plan could be displayed immediately.
The department began to strengthen and refine its long-range financial forecasting skills and methods, improving the five-year forecast's usefulness, relevance, and readability. Added to the forecast were an explanation of the role of alternative modeling in budgeting and graphs showing the short- and long-term effects of present and past decisions, inflation, and atypical trends on fund balances and contingency funding [ILLUSTRATION FOR EXHIBIT 2 OMITTED].
To improve and streamline the existing budgeting process, many departmental budgeting functions, including budget data entry, were computerized using networked personal computers. Individual departmental presentations to council were eliminated, and the supplemental request forms and process were revised to be consistent with the city financial policies document.
An action plan was prepared to educate the council, city manager, management team, and many other city employees about the importance of integrating fiscal policies, financial planning strategies, and forecasting information into all phases of the budget process. The budget department conducted a special workshop to help the council more clearly define and express its goals and objectives in writing before the budget process starts. Budget department staff met individually with the city manager and each city council member. Meetings explaining the new process and the specific roles of participants at various levels within the budget review process were conducted in every department.
An Improved Budget Process
Since this integration process began, budget preparation has changed significantly. Before the budgeting process starts, every city division - from the council office to the warehouse - is assisted by the budget department in preparing its own five-year forecast. Departmental forecasting has become a routine prebudget process.
At the council's goals and objectives workshop, the budget department presents the updated citywide five-year forecast and assists the council in using the forecast in its budgeting activities. The presentation includes an executive summary of individual departmental forecasts and a synopsis of the critical budget issues identified during the forecasting processes. Each proposed council goal or objective is evaluated using the computer alternative modeling program to see if it fits into the city's strategic financial plan. This ensures that council's final directives to staff will be consistent with the conservative financial principles outlined in the strategic planning and policy documents. A detailed strategic financial plan is developed based on the council's goals. Budget staff deliver the goals document to each department deputy. In compiling the annual budget, the five-year forecast and the strategic plan are included in the document, along with the city's financial policies.
Because all of the key players consider long-range issues before they prepare their respective parts of the annual budget, balancing the budget has become less stressful. The city now successfully maintains a steady 10 percent contingency fund balance. A mandatory replacement fund in every department accrues funds needed to repair, maintain, and replace city vehicles and computers on a fixed schedule based on the expected life of the item. In 1996, the council authorized a similar fund for land and building maintenance, and a land banking program (i.e., acquiring land for future growth needs at current prices) was created.
Council and staff have begun to understand the need to save during the good years in order to prosper during the bad ones and to evaluate their short-term aspirations in terms of the cumulative effect on the long-range welfare of the community. For example, in 1994 and 1995, the City of Glendale accepted several community-oriented policing services (COPS) grants to accelerate the hiring of already budgeted police officers. In 1996, the COPS program offered a third grant opportunity to add more officers to the force. Under the old budgeting system, the council would have authorized hiring as many police officers as the grant would support, regardless of the costs associated with the new officers and without a method of ensuring continuation of employment. With the new system in place, however, the first questions the council and management asked were the following:
* Where will the money come from, and what will be the effect on other police department programs if more officers are hired?
* How will this decision affect the forecasted estimate of the number of new positions that can be added without adversely impacting the city's financial situation?
* How will the city pay for their equipment and replace, repair, or maintain the equipment in the future?
Although one of the goals for the year was to improve public safety - and putting more police officers on the streets is a standard response - council decided not to apply for the grant funds to hire more officers but to focus funding efforts on ensuring that the existing grant-related officers will have approved budgeted positions when the grant funds terminate. Every decision that impacts the future fiscal viability of the city is explored before a decision is made.
The new annual budget more accurately reflects the city manager and council's goals, objectives, and directives for the coming year and meets the city's long-range needs. City employees' feedback has been positive with regards to time saved, ease and simplicity of process management and participation, and satisfaction with specific outcomes. Staff believe that the new process distributes limited resources more fairly and has reduced the level of stress and conflict throughout the budgeting process. There are fewer council-initiated 11th-hour emergencies and pitched battles than there used to be during budget hearings.
The education efforts have resulted in improved communications between the elected officials, senior management, and employees as evidenced by greater consistency in setting project priorities. There has been a sharp reduction in the number of inappropriate supplemental requests. There is also more cooperation and less competition among individuals, departments, and senior management throughout the budgeting process, including the budget-balancing phase. The new process has provided staff members with new learning opportunities and job enrichment, the opportunity to work with other departments, and exposure to new information technologies, such as modeling and forecasting.
City management is more comfortable communicating with and educating residents about the realities of budgeting in the municipal political arena. Educating the news media about factors that affect the city's ability to operate effectively and efficiently in a variety of economic environments has become part of the city's mission. The nature of local media coverage also is changing: local newspapers now run more in-depth articles about the budgeting process, including articles on the council goal-setting workshop.
Budget department efforts to streamline the process ultimately succeeded in reducing staff time spent on the mechanics of budgeting by more than 60 percent. Costs were minimal because the city had previously prepared two of the three core documents essential to this program, and less than $2,000 was spent on upgrading software and equipment to develop and run the alternative modeling program. All city departments that did not have existing software, had to purchase an application that allows electronic transfer of budget data to and from the budget office.
All of the necessary expertise was inhouse. The finance department assisted in the review and updating of the core documents to ensure their internal consistency and to identify any gaps. The planning department provided some consultation to the budget staff, including updating socio-economic data and economic trends statistics and methodologies.
A Versatile Program
Most organizations with trained planning, budget, and/or finance employees and supportive managers would be able to design and carry out a project like Glendale's successfully. A computer modeling expert and some programming time may need to be contracted in some jurisdictions.
Cities that already have a strategic financial plan, use reliable forecasting and modeling techniques, and practice conservative fiscal policies will find it easy to integrate them into their overall budgeting strategy in less than one year. If an organization does not already have these documents in place, the most difficult task will be conceptualizing and writing the five-year financial forecast. Many long-range forecasts provide macro-level general overviews; however, including intermediate action steps in the forecast can help managers evaluate their annual progress and update and fine tune the forecast regularly. It is helpful for staff to become as familiar as possible with the local economic forces that directly affect the agency and the relationship between national and local economic events.
Although strategic plans often have limited application to the annual budgeting process, Glendale's strategic plan presents information that is useful. It delineates measurable objectives that can be used to evaluate whether the city is moving closer to realizing its objectives.
ELEMENTS OF GLENDALE'S LESS STRESSFUL BUDGET PROCESS
* Use of computer models for impact analysis
* Improved departmental forecasting techniques
* Networking of personal computers for improved budget processing
* Education of city council, management, and employees on integrating fiscal policies and financial planning
Charles McClendon is management and budget director for the City of Glendale, Arizona. PAULA MOLOFF is the grants administrator for the City of Glendale. For more information on Glendale's improvements, contact the authors at 602/930-2264.
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|Author:||McClendon, Charles; Moloff, Paula|
|Publication:||Government Finance Review|
|Date:||Aug 1, 1997|
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