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Bringing Out the Dead: Can Information Technology Resurrect Budget Reform?

Abandoned budget reforms dot the state and local government landscape. Program, performance, zero-based, and mission-driven budgeting--with isolated exceptions--are just some of the reforms in the scrap heap of public-sector fiscal history. The authors outline a case for why advances in information technology may lead governments to reconsider old budgeting approaches and motivate 21st century reformers to develop new and hybrid ones.

The one thing that has been conspicuously lacking in our governmental business, federal, state, and municipal, has been the element of careful, understandable, responsible planning.

Frederick Cleveland (1915)

Evolution of the Budget idea in the United States

Advances in information technology continue to change the face of planning and administration. Information technology has improved the efficiency of repetitive tasks such as payroll processing, accounting journal entries, and financial reporting. It also has eased the burden of document management and transaction processing in areas such as purchasing and human resources. The latest advances include enterprise resource planning (ERP) systems that allow organizations to reengineer processes and coordinate diverse staff and line functions. The most recent technology "craze"--e-Commerce and customer relationship management (CRM) systems--is pushing out the benefits of technology to parties outside organizations such as suppliers and customers. Indeed, by changing the access, flow, creation, and distribution of information, technology is making it difficult to identify or impose organizational boundaries.

But how has technological change influenced planning and budgeting--two mission critical tasks that all organizations undertake? This article examines this question in the context of state and local governments. In particular, is it possible to bring to life "dead" budget reforms? To provide an answer to these questions it is important to understand what is expected of the budgeting function and the traditions and reforms that shape and constrain it--the focus of the first section of this article. The second section examines the current budgeting systems used by state and local governments and the technology poised to shape them in the future. The concluding section makes observations regarding the role of information technology in easing the implementation of recommended practices of the National Advisory Council on State and Local Budgeting (NACSLB)--the most recent (1998) comprehensive budget reform effort.

Seven "Habits" of Budgeting

Budgeting is a term that represents numerous tasks and activities related to fiscal planning and management. In a hierarchy listing of different purposes that budgeting might serve, financial control would make the top of most lists. But most finance officers would look to budgeting as a launch pad for many other organizational improvements--priority setting and planning, forecasting, performance measurement, cost management, and competitive government.

Budgeting practices used today are shaped by long-held traditions in American government such as: 1) annularity--planning one year at a time; 2) citizen participation--a factor that imposes pressures for transparency in budgeting; 3) intergenerational equity--exemplified by the separation of current from capital programs; 4) executive-driven processes--where "executive proposes and legislature disposes;" 5) input focus--that emphasizes line items not outputs and outcomes; 6) incrementalism--where the previous year's appropriation is the starting point for budget formulation with negotiations focused on increments or decrements; and 7) the balanced budget norm--a goal of most state statutes and local ordinances. While it is not yet pervasive enough to be called a tradition, the expanding role of state and local governments in economic development and infrastructure finance also has led to long-range financial planning efforts to satisfy requirements of stakeholders, such as creditors and rating agencies. With these factors in mind, it becomes easier to understand the motivations for budget reform, and then, budgeting technology.

Brief History of Budget Reform

A key to the budget reforms of the early 1900s was the establishment of the budget itself--both as a process and a document. From this point on, the bulk of the reform efforts up to the current period have focused on policy and procedural reforms relating to better budgeting approaches and new formats. Just as the line-item budgeting "innovation" was becoming an ordinary feature of government administration in the 1920s and 1930s, dissatisfaction with this approach set in and then spread quickly. The deficiencies of line-item budgeting were not hard to identify. Line-item budgets were incremental not comprehensive, based on inputs not outputs, obsessed with financial control over managerial flexibility, organized around government departments and functions instead of programs, and forced a short-term planning horizon that provided an incentive for opportunistic spending.

Calls in the 1930s soon followed asking for better budgeting, cost accounting, and the use of performance measurement--which led to the Municipal Finance Officers Association (MFOA) (GFOA's previous name) to push for performance budgeting. Performance budgeting efforts increased in the 1940s and 1950s but enthusiasm for this approach waned after World War II. Instead, the population and economic growth facing the country led people to explore the use of the budget as a planning tool. In the 1960s, Planning and Programming Budgeting Systems (PPBS) emerged that combined program and performance budgeting with the use of cost/benefit analysis.

The difficult economic times of the 1970s made fiscal austerity a feature of everyday life for state and local governments. Zero-base budgeting (ZBB) was the politician's answer to a number of trouble-some questions regarding government efficiency. It was felt that for far too long government agencies took their budgetary base for granted. Under "naive" incrementalism, it was difficult to identify and allocate discretionary resources for new or changing priorities. The knee-jerk popularity of ZBB is understandable: Politicians, after all, appealed to constituents when making statements such as "the new approach will force agencies to justify and defend every dollar of taxpayer money." Some forms of ZBB required that agencies provide budgetary estimates for different levels of services (e.g., best, worst, and status-quo case). Other forms imposed more analytic dimensions such as assumptions about economic climate.

In the 1980s and 1990s, governments sought to adopt some of the best practices used in business. The book Reinventing Government documented the experiences of governments that had broken the mold of being "dysfunctional" bureaucracies by embracing a mission-driven approach. The authors argued, like many others before them, for a "results-oriented" budget system that held government accountable for results rather than the consumption of inputs. The emphasis on applying best practices from the private sector, a mission-driven budgeting system, and sunset laws that would force a formal reauthorization of agencies were the main "reinvention" reforms.

Exhibit 1 summarizes the history of budget reforms. This brief history of budgeting corresponds closely to Allen Schick's study of budgetary reforms 35 years ago. In an article that can legitimately be called a "classic" in public administration, The Road to PPB: The Stages of Budget Reform, Schick argued:

Informational needs differ in terms of time spans, levels of aggregation, linkages with organizational and operating units, and input-output focus. The apparent solution is to design a system that serves the multiple needs of budgeting. Historically, however, there has been a strong tendency to homogenize informational structures and to rely on a single classification scheme to serve all budgetary purposes. [1]

Schick noticed that budget reforms emphasized either a planning, management, or control orientation. Successive stages of reform altered the planning-management-control balance. For example, some reforms to line-item budgeting emphasized a "management" orientation (e.g., performance budgeting in the 1950s) and others a "planning" one (e.g., PPBS in the 1960s). In the end, the reforms that did gain acceptance were short lived; governments reverted back to either traditional (line-item) budgeting or a hybrid of line-item and program budgeting.

Why the Traditional Budget Survives

In an essay titled "A Budget for All Seasons?" political scientist Aaron Wildavsky (1978) addressed this very question. Wildavsky argued that traditional budgeting lasts because it has the "virtues of its defects." More specifically, Traditional budgeting makes calculations easy precisely because it is not comprehensive. History provides a strong base on which to rest a case. The present is appropriated to the past, which may be known, instead of the future, which cannot be comprehended. Choices that might cause conflict are fragmented so that not all difficulties need to be faced at one time. Budgeters may have objectives, but the budget itself is organized around activities or functions. One can change objectives, then, without challenging organizational survival... Traditional budgeting lasts, then, because it is simpler, easier, more controllable, more flexible than modern alternatives like PPB, ZBB, and indexed entitlements. [2] Pronouncing specific budget reforms as "dead," it could be argued, is prema ture. After all, budget reforms that are not used on an organization-wide scale are thriving in finance subsystems. For example, some programs are reauthorized on an annual basis, while others--especially capital projects--have multi-year planning horizons. Some governments measure the results of programs and use performance measures even if a direct link to the budget is nor made. Some governments use rigorous cost-benefit analysis in capital budgeting while others budget using simple rules of thumb. In essence, the persistence of the traditional approach lets us deduce the minimalist criteria of effective budgeting for most of the 20th century--simplicity, ease of communication, and financial control.

Information technology is providing new opportunities for tackling budget reform. In ways early reformers never dreamed of, technology is an enabler for budget approaches that may have been introduced ahead of their time. But to argue that budget reforms previously cast aside will now work solely because of new technology ignores lessons of the past--the behavior of budgetary actors and the structure of processes matter! With this caveat in mind, the remainder of this article focuses only on the technology aspects of budget reform.

Budgeting Technology Functions

What are the main functions of budgeting technology? What goals must it serve? The following list is based on discussions with finance practitioners and the consulting experiences of the authors.

1) Automated Financial Control. Budgeting technology is expected to serve as the main vehicle for spending control. Budgetary control at the transaction level typically rests in the general ledger (GL) module. But a broader concept of budgetary control would include the ability to analyze costs and monitor budget execution, which would necessitate some degree of interaction of the budget system with the GL.

2) Ease Budget Development. Budget development refers to the "painful" side of budgeting--developing budget forms, managing budget versions, amalgamating agency requests, validation of calculations, and accessing historical data. Budgeting technology should ease the staff burden and costs of budget development. In particular, budgeting technology should permit the automated "self-assembly" of information submitted by stakeholders across the enterprise, which eases the development of the budget document itself.

3) Planning and Forecasting. Planning and forecasting are basic tenets of administration. It is desirable to anticipate change in the organizational, economic, or political environment and assess its impact on the level and allocation of resources.

4) Facilitate Analysis and Reporting. An organization's transactional history is an important resource for planning and budgeting. Budgeting technology should facilitate and simplify data analysis, information access, and deliver high-quality reporting closely tailored to the needs of diverse user groups. Once a data warehouse of budgetary information is developed, advanced capabilities (discussed further below) are easier to utilize and implement.

5) Promote Collaboration and Harmonization. While many financial analysts use the terms "top down vs. bottom up" or "centralized vs. decentralized," budgets that minimize the input of stakeholders are viewed as vehicles for tyranny, as many of the "Dilbert" comic strips show. Budgeting technology should accommodate top-down goal setting, bottom-up feedback, and collaboration on an enterprise-wide basis. Such technology promotes harmonization of stakeholder and management interests. These aspirations for information technology are also an implicit critique of what is wrong with budgeting technology today (Exhibit 2).

Current State

The vast majority of governments today rely on one of four basic technologies for budgeting software: 1) Spreadsheet Systems; 2) Homegrown Systems; 3) Standalone Packages; and 4) ERP Modules. GFOA's ERP consulting work and research indicates that these solutions are unsatisfactory for the vast majority of governments using them today. Statistics are telling--no budgeting technology vendor today has even a 5 percent share of the state and local government market. The weaknesses of spreadsheets are discussed at some length below--because spreadsheets are the leading budgeting "solution" in the marketplace today.

1) Spreadsheet Systems. When spreadsheets arrived on the scene, they were a blessing that revolutionized personal productivity and efficiency. Even with new technology spreadsheets are unlikely to disappear altogether--they are cheap, easy to use, and have interoperability with a large number of finance system applications. To many small and mid-size governments, the spreadsheet is really the budget system. Spreadsheets, however, do not do much to foster collaboration in a multi-user environment. Difficulties of spreadsheets include:

Single-cell Logic. Spreadsheets do not inherently link information stored in one cell to another. Each cell represents a single point of data that remains unaffected by the information in another cell unless it is linked by macro programs. However, macros are complex, hard to understand, difficult to maintain, and difficult to convey to users that did not invent them. Simple changes such as adding new programs or adjusting revenue projections can mean an arduous error checking process.

Data Integrity Issues. Spreadsheets are designed by and for individuals, which negates central control and reduces data integrity.

Coordination Problems. With a tendency toward proliferation and the inability to accommodate text processing, the underlying details used to develop budget assumptions are not easily communicated by spreadsheet systems. Aggregate budget numbers may not tie back to department detail and there is no streamlined way for end users to communicate the rationale behind requested allocations. The coordination between the central budget analysts and departments becomes dependent on additional layers of communication (telephone, e-mail, and electronic document attachments) that further fragments the budget development process.

Poor Integration/Interfaces to Other Systems. Spreadsheets do not easily permit import and export of data in and out of other systems. All extant budget systems struggle to extract data out of financial and human resource systems. This creates redundant processes and duplicates data entry creating the all-too-familiar scenario of knowing data exists within the system with the frustration of not being able to access it.

Limited Analysis and Reporting Capabilities. Spreadsheet applications do not have the reporting capabilities to support the production of a budget document. While pivot tables can be a means of adding dimensions when analyzing and viewing data, in complex databases such approaches run against computational limits quickly.

2) Homegrown Systems. Highly customized "homegrown" budget systems have become the answer for large governments that can afford to build them. Homegrown systems are either built from scratch or based on the products of software vendors who have traditionally provided governmental accounting software. Homegrown systems are costly to develop and maintain. Such programs appear cheaper because they are internally developed over a period of years--and internal costs have the illusion of looking smaller than purchasing software. Homegrown systems do not keep pace with technological advances such as new database standards, Graphical User Interfaces (GUI) or the Web. Adding new users, making changes to fields, and modifying screens require hard-code changes to the underlying program logic that takes substantial time and resources.

3) Stand-alone Systems. A small number of vendors have developed budget preparation packages. These packages do address some of the shortcomings of spreadsheets and homegrown applications. Except for some of the largest governments, most governments cannot afford such systems because of the license and implementation costs. Furthermore, even those packages that are functional fall short in the area of promoting collaboration in the budget process. In essence, most standalone systems are purchased by, designed for, and used by central budget offices and do not extend to the rest of the enterprise.

4) ERP Budget Modules. GFOA has assisted more than three dozen governments with the selection of ERP systems over the past three years. None of these governments are using the ERP budget module for "budget preparation" in the conventional sense of that term. Many of GFOA's government clients examine the ERP budget module and decide not to purchase it. Others purchase the module in the hope of a future release being better aligned to their needs. These observations on the use of budget modules suggest that budget preparation is the Achilles heel of ERP systems. The development cycle of most ERP systems is to take the commercial version of the product and to layer public sector functionality through templates and configurations. Budgeting in the commercial sector does not face the same demands as budgeting in the public sector. Since few governments will chose an entire ERP system on the basis of the budget module alone, ERP vendors have not had the incentive to improve products in this area.

At most, ERP budget modules today help load appropriations detail to the general ledger and foster budget to actual reporting. But these packages are weak on collaboration--and even those that have begun to make better use of the Web lag in functionality for financial planning and budget document production.

Caveat Emptor: What to Look for in Advanced Budgeting Technology?

What then are the features to look for in new budgeting technology? This section outlines 10 features and functions that wise consumers of budgeting systems should consider in technology purchases.

1) Enterprise Platform and Common Database. Modern budget systems should support open and collaborative budgeting processes that allow input from various areas of the organization while relying on a common database standard to reduce fragmentation. Although the central budget office may continue to steer the budget development process, an enterprise budgeting system should engage people that were not traditionally involved in the financial planning process. Most importantly, the software vendor should be committed to keeping pace with leading technology.

2) Internet/Web-enabled. Like most enterprise applications system, a leading budget package should utilize the power and flexibility of the Web (Intranet/Internet). Internet access gives remote users the ability to participate in the budgeting process. Web-enablement permits simple, intuitive Web-based interactions that do not require intense end-user training. Such features also ease the presentation and publication of data directly to the Homepage of the government.

3) Document Management Features. Surprisingly, as a general rule, spreadsheets, homegrown systems, stand-alone systems, and ERP systems do not permit the production of a budget document. Leading budget systems should contain document management capabilities that provide end users with structure to help develop the budget document without imposing rigidity.

4) Flexibility. Because budget practices and processes differ from jurisdiction to jurisdiction, a budget application must have the flexibility to support a number of different ways of collecting and processing information. Flexibility often refers to the ability to configure the software to meet an organization s needs without changes to the underlying code (i.e., no customization).

5) Modularity. Unless the budget module is part of an ERP package already, modern budgeting software should coexist with any of the major ERP applications, more parochial accounting systems, or be deployed on a standalone basis.

6) Workflow. Leading systems should permit electronic routing and approval of documents. Such features reduce the paper-intensive nature of budgeting. Ideally, such "workflow" features also permit "e-mail triggers" that notify end users if a value in the dataset is a cause for concern (e.g., department using 90 percent of its appropriations for a line item in the first six months).

7) Analytical Engine. Data within the budget system should be interrelated and linked to permit automated processing of changes to the budget. The analytical engine of the budget system should permit scenario building, modeling, and "what-if" capabilities that are used for planning and routine decision making. End users should be able to store justifications at the "cell" level on why they made changes to data or to assumptions during modeling exercises. Easy-to-use menus or templates rather than end-user programming should drive the analytical capabilities.

8) Multidimensionality. Modern budget systems must permit the "slicing and dicing" of data. While financial information is usually presented in rows and columns, new technology permits multidimensionality with a simple click-and-point, drop-and-drag functionality. In addition, such features allow end users to "drill down" or "drill through" different fields to get at the detail behind summary data.

9) Trend Analysis and Forecasting. Leading budget systems should have the ability to store multiple years of budget history and use such history for revenue and expenditure forecasting. The forecasting capabilities should permit simple trend analysis as well multiple-regression and econometric methods.

10) On-line Processing. Access to "real-time" information is another distinguishing feature of budgeting systems. Although some of the other improvements to budget systems would still provide value under "batch processing," the ideal state for budgeting technology is to use real-time data from the financial and human resources systems.

In summary, while no product on the market today is proven in each of these areas--the fact is that the technology is available to design a "true" public sector budgeting system with the features denoted above.

Budget Reform Implications

Past budget reforms failed in part because they imposed burdens on organizational processes and staffing. In an era of manual calculations and paper-based processes, reforms such as zero-based budgeting placed significant costs on government bureaucracies. Even simpler reforms such as program budgeting ran against the wall when issues such as "indirect cost" allocations diluted the intention of the budget reform. Some of the features of advanced technology, the authors believe, will lead reformers to resurrect budget reforms and develop hybrid approaches (Exhibit 3).

Over the past several years, the GFOA has advocated major reforms in the area of public budgeting. With its involvement with the National Advisory Council on State and Local Budgeting (NACSLB), GFOA has encouraged governments to adopt recommended practices that provide guidance to elected officials, public managers, and budgeteers. The NACSLB recommended practices emphasize long-term financial planning, revenue forecasting, performance measurement, priority setting, cost management, and capital asset planning. To be implemented and institutionalized in a systematic manner, many of the reforms require a sophisticated information management infrastructure that modern budgeting technology can provide. Over the next several years, GFOA is committed to working with state and local governments to encourage the use of NACSLB practices and to help promote budgeting technology that eases their implementation.


(1.) Schick, Allen, 1966, "The Road to PPB: The Stages of Budget Reform," in Public Administration Review, p. 26(4), 243-258.

(2.) Wildavsky, Aaron, 1978, "A Budget for All Seasons? Why the Traditional Budget Lasts," p. 16-17, reprinted in Budgeting and Governing, 2001, Rutgers, New Jersey: Transaction Books.

The GFOA Research and Consulting Center is working on a project to develop a leading software product for budgeting and financial forecasting. Interested readers should contact the authors for more information.

JUDO METZGAR is a Senior Policy Analyst in the GFOA Research and Consulting Center. He conducts research and consults on technology for budgeting. He holds an M.A. in Public Services Management from DePaul University. ROWAN MIRANDA is Director of Research and Consulting for the GFOA. Dr. Miranda has served as a consultant to numerous state and local governments on technology issues. He holds a Ph.D. from the University of Chicago and also serves on its graduate faculty in the Harris School of Public Policy Studies. The authors would like to thank Greg Michel for assistance with the exhibits.
Budget Reform Motivating Forces
Line-item budget Financial control and
Program budget Promote an awareness
 of the economic costs
 of different programs
Performance Focus on outcomes
budget and outputs
Zero-based Rebellion against
budget incrementalism
 Current Use
 Reasons for in Local
Budget Reform Dissatisfaction Government
Line-item budget Poor information for resource High
 allocation decisions.
Program budget Poorly suited to determine Moderate
 program performance/difficulty
 of coping with overhead costs.
Performance Difficulty in relating performance Low
budget measures to costs and
 analytical burdens related to
 cost/benefit analysis.
Zero-based Complexity and extensive Low
budget staff time necessary to
 formulate decision units
 and justify cost elements.
COPYRIGHT 2001 Government Finance Officers Association
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Copyright 2001 Gale, Cengage Learning. All rights reserved.

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Author:Metzgar, Judd; Miranda, Rowan
Publication:Government Finance Review
Geographic Code:1USA
Date:Apr 1, 2001
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