Budgeting for outcomes in Savannah.
The art of leadership in today's world involves orchestrating the inevitable conflict, chaos, and confusion of change so that the disturbance is productive rather than destructive. (1)
At the end of 2008, city leadership determined that the City of Savannah, Georgia, needed a long-term structural approach to lowering expenditures, and they decided to make the transition to budgeting for outcomes (BFO) in 2009. The changeover was challenging, not only because of the intensity of the learning and implementation process for all involved, but also because the city was under great financial pressure in the midst of a steep economic downturn. However, the priority-driven BFO process helped focus available revenue while supporting the city's most important goals.
The city realized many benefits from this process, but the top four are:
* Financial Resiliency--meeting budget reduction targets without increasing taxes or resorting to balancing gimmicks that would simply increase financial problems in later years.
* Clarity of Outcomes--opening up the budget process and financial information to the entire organization in order to focus all employees on assisting with the financial challenges.
* Internal Engagement--training hundreds of employees to identify outcomes, develop performance measures, and prioritize services.
* Cross-Departmental Cooperation --changing the organizational culture to one of service collaboration in order to meet community priorities.
WHY BUDGETING FOR OUTCOMES
The city's financial team had first been introduced to budgeting for outcomes at a Government Finance Officers Association (GFOA) conference in June 2008.The immediate reaction was that this was a great approach to budgeting but extremely time-consuming and a major challenge to the status quo.lf things ever got bad enough,maybe Savannah would try it.Then, in the fall of 2008, things did get bad enough; the economic crisis became global and hit Savannah's major industries hard.
The City of Savannah, like local governments around the country, was faced with the greatest financial challenge in decades. While Savannah's diverse economy spared the city from the beginning stages of the recession, the downturn hit city revenues beginning in the fall of 2008. Since that time, sales tax revenue and property tax revenue declined substantially, and other elastic sources of revenue such as hotel/motel taxes and rental vehicle taxes declined by more than 10 percent. Additionally, the state of Georgia prohibited property reassessments until 2012. The cumulative impact of these challenges compelled the city to reduce the 2010 general fund budget by more than $10 million. Fortunately, when times were good and revenues were increasing, Savannah had done the right things. The city had reduced general fund debt by more than 40 percent in the previous eight years, increased the capital maintenance program, increased reserves--including establishing a special sales tax stabilization fund to smooth out the volatility of elastic revenue sources (see "Emphasis on Long-Term Planning Helps Sunnyvale Survive Fiscal Challenges" in this issue of Government Finance Review for more information on stabilization funds)--and invested in projects that reduced ongoing costs (e.g., energy retrofits).
The financial challenges were clearly structural and not short term. Therefore, city officials decided to avoid short-term fixes; they would not make across-the-board-cuts, draw down reserves, delay maintenance, take a pension holiday, or undertake other cost-reduction methods that would not lead to long-term budget reductions. Instead, Savannah's financial leaders chose to realistically determine the amount of funds available and then direct them to services and programs that best met the city's priorities--in other words, budgeting for outcomes.
ASSESSING THE CITY'S CAPABILITIES
The first step in the BFO process was to find out if the city had the talent, technical capabilities, and will to adapt to this challenging new process. The core financial team, which consisted of representatives from the finance, research and development, human resources, and auditing departments, was brought together to study the issue. Team members had mixed reactions to BFO, but generally the concern was about change. Of the major issues that came out of these meetings, the first was that the change would be too labor-intensive for staff to deal with, especially when there was so much to cope with as a result of the financial crisis. There were also concerns about whether city staff actually had the skills necessary to carry out the change. And finally, the research and development department staff was worried that it would be difficult to adapt BFO to the city's existing financial software system. A new system would have to be created to accommodate and adapt BFO and then translate it back to the legacy financial system.
In the end, the city determined that it had the talent, will, and sufficient technology to adopt the new system. Implementing BFO would force the city to take a more strategic, thoughtful, collaborative, and innovative approach to closing the projected budget gap in 2010 and beyond. Furthermore, the new system would have the added benefit of involving more people in the budget process, tapping into more talent, and creating an environment that promoted teamwork. The most controversial aspect of BFO is that it puts a great deal of trust in thoughtful non-experts to make good decisions and to encourage or force experts to start thinking outside the box. If this basic premise is not accepted, BFO will not generate the preferred results.
INTRODUCING BFO TO THE ORGANIZATION
In February 2009, the city manager and assistant city manager gathered key financial staff, bureau chiefs, and department heads for a two-day meeting to introduce BFO. They knew they had to make a strong case to staff to help employees understand that the city could not continue with business as usual. External consultants presented an overview of BFO and case studies from other cities to help illustrate the process and its desired outcomes. They were also on hand to help newly minted teams and team leaders understand their roles and get organized.
The initial introduction of BFO overwhelmed the majority of staff and created a lot of confusion. There were a handful of employees, however, who left the meeting feeling like they had a fairly clear understanding of what BFO was. Many of these employees had come into public service from the private sector and the BFO system was much more in line with what they had been accustomed to as private-sector workers. They were happy with the change because, it emphasized efficiency and strategic thinking. The conversion was less traumatic for them than it seemed to be for their colleagues who were career public administrators. The city leadership team has determined that it would be worth the effort to tap into the experience and insight of these employees as Savannah continues working through the process.
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DEVELOPING THE PRIORITIES
The executive staff put together a list of priorities based primarily on the Savannah City Council's vision statement and existing goals. However, existing council goals focused on where to direct new resources, and they did not include all community values. For example, the city council did not have goals for culture and recreation or financial management, although these were clearly community values. The priorities were expanded to be more inclusive through feedback from citizen survey data, ongoing interaction with neighborhoods, and staff input. Each priority was given a priority statement. Each statement was written from the citizen's point of view:
* Economic Growth. "I want to live in a community that has appropriate economic growth that creates jobs, expands city revenue, and improves neighborhoods and commercial corridors?
* Poverty Reduction. "I want to live in a community that reduces poverty by empowering motivated people to become economically self-sufficient."
* Neighborhood Vitality. "I want to live in a city of strong and vibrant neighborhoods that are clean, safe, and encourage a sense of community."
* Public Safety." I want to be safe and feel safe from crime, fire, and other hazards anywhere in the community."
* Culture and Recreational Opportunities. "I want to live in a community that provides a recreational and cultural opportunity that will keep my mind and body active and that recognizes the needs of all citizens."
* Health and Environment. "I want to live in a community that promotes health through good infrastructure while preserving the environment for future generations"
* High-Performing Government. "I want a fiscally responsible, accessible, and responsive government that maximizes use of public resources for services I need"
SELLERS AND OFFERS
BFO is based on the premise that instead of being organized through individual departments, budgeting should be based on services one department or several departments (as well as outside agencies) provide to the city. One or more departments or authorized outside agencies offer services to "sell" to the city at a certain price. The city "buys" the service based on how closely it aligns with the indicators, factors, and strategies detailed in the "request for results" (RFR) associated with each priority. An offer includes a description of the service, its justification, and an explanation of how the service addresses a priority. It details any collaboration efforts with outside agencies and departments, performance measurements (output, quality, and outcomes), and a summary of total expenditures.
Department heads and outside agencies were given a training session on writing offers, and the research and development department provided a guidebook with step-by-step instructions for filling out the online Excel forms and calculating expenditures. Although information and support were provided, there was still a great deal of confusion, and research and development spent a lot of time cleaning up expenditure calculations. More targeted training for different types of departments would have been helpful. Authorized outside agencies were especially vulnerable in the new system and felt that they were at a disadvantage in competing with city departments when submitting offers.
Some of the issues that came up during this part of the process had to do with ensuring that sellers were accounting for all expenditures in their offers and that they had effective performance measurements. An important part of the BFO system is making staff see and understand the total cost involved in providing a program or a service. This involved accounting for all overhead costs, monies that departments would not normally include in traditional budgeting (e.g., gas costs for vehicles, risk management allocations, pensions, and longevity bonuses for personnel). Performance measurements are also an essential component of the BFO model. Many sellers struggled to put together quality performance measurements, and consequently, the priorities team will focus on this issue for the 2011 budget cycle.
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TEAMS: KEY TO SUCCESS
The city's financial team developed the teams that would help lead the city through the BFO process. The BFO framework suggests having a priorities team to provide overall leadership; a process team to monitor progress, set deadlines, and help clarify procedural and process issues; and a results team for each priority. The results teams put together the indicators (specific measures of success), craft the strategy maps (visual representations of a cause-effect pathway to a desired outcome), develop the RFR from which the offers are written, and then rank the offers.
In the Savannah model, the city eliminated the process team, adding those responsibilities to the priorities team, and expanded the budgeting team structure. A values team and efficiency task forces were also added. The values team was made up exclusively of bureau chiefs (the seven individuals who answer directly to the city manager). The hope was that bureau chiefs would be in the best position to identify channels leading toward inter-bureau cooperation and reveal efficiencies that could be implemented throughout the city. Each efficiency task force was a temporary cross-bureau group focusing on identifying cost savings in one operational area. For example, task forces looked at the city fleet, office space, mowing--all areas where there were possibilities for reducing costs through shared use and collaboration. The theory was that these task forces, through reporting to the values team, would make recommendations that departments could use to reduce the costs of their offers. (Figure 2 shows the city's BFO team structure.)
Results Teams. The city was interested in choosing people for the results teams who could think beyond the limits of their own departments, who could be critical thinkers and put themselves in the role of an average citizen or non-expert when reviewing offers and linking them to desired outcomes. Furthermore, and perhaps most importantly, team members needed to not only deal with change in a positive way, but also to embrace the experience and inspire others to do the same. In the end, results teams took ownership of the process and became committed to its success. Out of this process, new leaders emerged who otherwise might never have been identified.
The target for completing the 2010 budget was October 2009. Results team meetings began in February 2009 with the teams' first task: Identify three to five indicators that would serve as broad measurements of success for each priority. After the indicators were in place, teams started working on strategy maps, which provide a succinct look at what matters most. The maps consist of identifying three to five primary factors that contribute to achieving the priority, and then identifying three to five secondary factors that directly contribute to the primary factors. The teams researched and found evidence that these factors demonstrated a direct causal relationship to the priority, even if it seemed counterintuitive. For example, "well-maintained streets" is a secondary factor that contributes to a primary factor "prevention of risk" under the public safety priority.
After developing the strategy maps, each results team developed RFR documents. Each RFR included a description of the desired outcome, the factors that contribute to the outcome, the strategies that will influence each outcome, and the indicators that will serve as a gauge in determining if the results have been achieved. RFRs were submitted at the beginning of May 2009.
City-wide Priorities Team. The priorities team's responsibilities included overseeing the process, establishing a timeline, making procedural decisions, allocating funds for each priority, handling communication with teams and executive staff, and training or offering guidance to results team leaders. As results teams were working on indicators, strategy maps, and RFRs, the priorities team spent a great deal of time discussing the details of each step. Issues that came up and the subsequent decision made about them include:
* How do capital improvement projects fit in with BFO? (Capital improvement projects were not included in the process for this year but will probably be included in subsequent years.)
* How are overhead departments handled? (All overhead departments were included in the "high-performing government" priority.)
* Will team members submitting offers be allowed to vote on their own offers? (Yes.) * Will team members assigned as recorders and facilitators be allowed to vote on offers? (Yes.)
* What will the criteria be for ranking offers? (There will be forced ranking with a third ranked "excellent," a third ranked" very good", and a third ranked "good: Team members give offers 3 points for excellent, 2 points for very good, and 1 point for good. All offers should be scored individually first and then by the team, and finally ranked after discussion and debate.)
* How are outside social service agencies effectively incorporated in BFO? (A presentation was given to all outside organization, and a separate results team was set up to review and rank offers from outside agencies.)
The priorities team set up regular meetings with results team leaders and facilitators, allowing them to vent, voice concerns, exchange ideas, ask questions, and learn successive steps in the process. These meetings proved vital in keeping the teams working within the same framework of rules and in ensuring the integrity of the system. Feedback from results team and priority team members underscored how critical they were to the success of the process.
CHALLENGES RANKING OFFERS
When offers were submitted, the results teams began working on the first-round ranking. Each offer was ranked without regard to cost and only on the merits of how well it met key results. Feedback from team members revealed certain challenges in the ranking process:
* Bias. Results teams took the issue of bias in ranking very seriously Some teams went to great lengths to minimize any appearance of bias throughout the process. In the end, each team relied on a team member's good judgment and objectivity. Final decisions were based on team consensus, and most felt satisfied with their final rankings. Many team members commented that the biggest challenge they had was taking themselves out of their own departments and acting in the best interests of the city.
* Team Makeup. The most important issue about the makeup of the results teams had to do with the balance between subject area experts and non-experts. Some sellers believed their offers ranked low because they didn't have enough subject experts on a team, while others saw the involvement of non-experts as essential to moderating issues of bias and supporting the goal of staff looking at programs from the point of view of the city and its citizens.
* Offer Size. There was concern that opportunities to find efficiencies were missed because of the sheer size of an offer. Small offers tended to have a higher casualty rate than large ones because the small offers were more easily handled and researched and thus easier to cut.
* General Fund vs. Enterprise Fund. All offers, regardless of funding sources, were ranked together. This did cause some confusion for team members, and many supported the notion of either disclosing all funding sources during the second round of ranking or ranking offers funded from the general fund and enterprise or other funds separately
After the priorities team established funding levels for each priority, second-round ranking began. Offers were re-ranked with funding taken into account. During the second-round ranking and post-ranking period, results teams analyzed offers and worked with sellers to reduce cost, create efficiencies, and identify avenues for collaboration and consolidation of services. Savings found with offers that were above the funding line helped fund programs and services that had fallen below the line. It was a challenging process, but in the end, the City of Savannah had relatively few programs that went unfunded.
COLLABORATION AND INNOVATION
The race to save programs at the end of the BFO process served as an effective way of wringing out the efficiencies and cost-saving measures that were critical to balancing the budget. In traditional budgeting, there is an understanding that department heads and bureau chiefs will hang on to a "cushion" as a buffer against budget cuts they know will come. In the end, there were relatively few services that had to be cut because bureau chiefs were forced to look closely at all their programs to cut the fat from their budgets and find new ways to collaborate with other departments in order to reduce costs. Although somewhat slow to embrace this major change in budget preparation, the majority of bureau chiefs played important and critical roles to bring in a balanced budget.
As difficult, time consuming, and frustrating as many found the process to be, there was a lot of positive feedback on how much the exercise of creating indicators, strategy maps, and RFRs changed the way team members thought about the role of city government. Setting priorities and creating a visual roadmap to achieving those priorities had a powerful impact on the organization. Instead of status quo, city staff had to seriously examine what was important, visualizing where the city was going and how it was going to get there.
The City of Savannah had to cut nearly $10 million from the 2010 budget because of the financial crisis, and BFO was an important tool--it helped the city identify its most important priorities and provided guidance on how to approach cost cutting strategically Expenditures had to be reduced, which would have been the case regardless of the budgeting system in place. However, BFO made the painful budgeting process more constructive and purposeful.
The first year of BFO came with a great deal of anxiety and disorganization because of the newness of the system. Among other things, working on the BFO infrastructure in the same year as implementing the system (many experts recommend a two-year implementation) caused the budgeting cycle to become much longer. The entire process, from when BFO was introduced to staff to when the City Council adopted it, took 11 months, as opposed to the usual six-month cycle.
BFO introduced a process that energized staff and created an environment that rewarded innovation and collaboration across departmental lines. The city's mayor had established a paradigm for change at the beginning of his tenure in office, calling for the creation of "a distinctive environment in which employees feel an alignment with and a deep commitment to the ideals and mission of the organization." The mayor saw BFO as a continuation of that paradigm and indicated that he was proud of staff for committing themselves to setting aside the interests of their own bureaus or departments, taking ownership of the process, looking objectively at the city's most important priorities, and working toward achieving those goals. One of the best aspects of BFO, he noted, is that it involved so many people throughout the organization who were all focused on the same vision and set of priorities. BFO involved a greater number of staff members across all bureaus than traditional budgeting does, opening countless informal lines of communication and facilitating current and future avenues for cooperation. Staff interviewed during the assessment of the process consistently supported the premise of BFO because it took a more strategic approach to cost reductions and created a budget that focused on achieving the city's most important priorities.
Important Considerations in Developing a BFO System
I. Make Culture Change Central to the BFO Process and Continuously Challenge the Status Quo. Managing change requires dedicated, committed leadership in the face of resistance and a complex environment.
2. Get Buy-In from the Governing Board Early On. BFO represents a major change, so it is important to proceed with the approval of the governing board.
3. Put the "Best and Brightest" on Your Teams. Do not choose by title.
4. Clearly Define an Organization-wide and Ongoing Communication Strategy. Having an effective and ongoing communication strategy cannot be over-emphasized. Change is difficult in any organization, and it is even more difficult when the central leadership loses control of the message to the rumor mill. BFO training for all levels of the organization should be a key component of this strategy.
5. Determine the Level of Outside Help You Need. Be realistic about how much help your organization will need and bring in outside consultants to help with the whole transition, or with parts of it. The length of time you choose for implementing BFO--12 or 24 months--will influence this decision.
6. Define All BFO Staff Roles. Without clear roles, the BFO process will not function effectively. Functions and responsibilities of BFO staff need to be defined, and these roles within the process need to be recognized and empowered by strong central leadership.
7. The Chief Executive Should Take a Strong Role as BFO Leader. Change that is not supported at the highest level is not likely to succeed.
8. Establish a System Dedicated to Idea Generation, Selection, and Dissemination. Create a database of ideas for innovation, cost savings, and cross-collaboration. Employ an evaluation process for idea selection and publish the best ideas--share them at team meetings or through targeted e-mails. Implement a system for keeping a record of ideas so knowledge is not lost.
9. BFO is Not a Process You Can Do Halfway. The system must be fully implemented to produce results,
Questions to Ask: Is Your Organization Ready for BFO?
* Do you have the time?
* Do you have the talent?
* Are your elected officials on board?
* Do you have support from top management?
* Do you have the technology?
* Can your organization deal with change?
* Do you have a communication strategy?
* Can your organization deal with the fact that BFO is an art, not a science?
While the original goal of BFO was to produce a sustainable balanced budget, the city experienced some unanticipated but positive consequences:
* New leaders emerged.
* The level of discussion and debate in the organization was elevated.
* Performance measurements were finally linked directly
* Tremendous capacity was built throughout the organization.
* Elected officials felt more involved in the process.
(1.) Ronald Heifetz, Alexander Grashow, and Marry Linky, Leadership in a (Permanent) Crisis, Harvard Business Review, July-August 2009
EVA ELMER is a graduate intern with the City of Savannah, Georgia. CHRISTOPHER MORRILL is the city manager of Roanoke, Virgina, and the former assistant city manager for the City of Savannah. He is a member of the GFOA's executive board.
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|Author:||Elmer, Eva; Morrill, Christopher|
|Publication:||Government Finance Review|
|Date:||Apr 1, 2010|
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