Financial and Management Documents - Part 2

Financial and Management Documents – Part2


The Program /Performance Budget
(Form, Substance and Process)

Formal budgeting, as a practice used by governing bodies, is literally as old as man’s ability to count. The true advances of the budget document itself have been centered on the idea that somehow there has to be a simple, accurate and meaningful way to reflect the values of a community, over time, which also provides a direct and measurable way to assess the success in living up to those values. In this way the budget document becomes the reflection of decisions in the allocation of a community’s or organizations scarce resources. It is also a LIVING DOCUMENT. It reflects values and the attainment of those values by expenditure of resources OVER TIME. It is the time aspect that makes the budget document a living document because it will also impact decisions which must take place in the future. It therefore becomes a living document reflecting a dynamic process where resources allocated today are largely defined by what were allocated yesterday (retrospective), yet are also impacted by what we hope to attain tomorrow (prospective).
Whether it is merely Polaroid picture of those values at a single moment in time or a high definition video with stereo surround sound depends on the desire, and ability, of those creating and managing the budget document and the budget process itself.

Descriptive Imperative:
It is a generally accepted principle in economics and finance that there are three levels of specificity available to analysts in measuring:
Normative: Explanation using words (Least accurate)
Graphical: Use of Charts to provide spatial measurement in explanations (Moderate accuracy indicating relative spatial relationships)
Discriminate Analysis: Use of statistics and the Calculus to discretely measure the AMOUNT of space measured in specific charts – solely description using finite mathematics (Most descriptive) (Everyday
example in municipalities; coefficients produced by regression analysis used in determining the dollar value of housing characteristics - # of bedrooms, for one - that make up the Assessed Valuation of a residence based on actual sales of similar housing stock within that housing market area.

What this tells us is words are descriptive, but may miss parts of what we mean, or may be misconstrued; pictures, tables and graphs more accurately describe things than do mere words; and mathematics renders finite and discrete measurements which are the most accurate in describing amount and direction of those things being measured.

The idea of modern government budgeting can be directly tied to the US Federal Government as far back as the 1920’s, with broader application of those principals by the Defense Department during WWII. However, for the City’s purposes, two major developments are crucial. The first was the creation and implementation of a Program Budget in the US Defense Department by the late Secretary of Defense McNamara which emphasized the statement of primary goals for an organization, to be reached by attaining or performing specific objectives which were to be as finite and measurable as possible.
The second was the organizational theory of Management By Objectives by Peter Drucker in the early 1950’s, and later, George S. Ordione in the 1960’s, which stressed that any organizations actual central purpose should be the center of all activity, and should provide agreed upon goals and objectives for all members of an organization through clear and unambiguous channels of communication and with attainable and measurable objectives to reach a certain goal. This to be obtained by:

“ * Motivation – Involving employees in the whole process of goal setting and increasing employee empowerment increases employee job satisfaction and commitment.
* Better Communication and Coordination – Frequent reviews and interactions between superiors and subordinates helps to maintain harmonious relationships within the enterprise and also solve many problems faced during the period.
*Clarity of Goals – With MBO, came the concept of “SMART” goals (i.e. goals that are: Specific, Measurable, Achievable, Relevant and Time bound)”

Line Item Budgets

Traditionally, budgeting has followed a simple format, a collection of expense categories (for example, salaries, and expenses such as office supplies, postage, training expenses, association dues and memberships, office furniture) associated with an accounting recording system numeric identifier (a “line item” number). Essentially it is merely a list of things you will need to purchase to keep municipal operations running. It is a simple listing of items with projected prices attached with no particular frame of reference, and usually based on what was appropriated and spent in previous years. It does not describe what is actually achieved by the expenditure of resources.There is no statement of what the appropriations will produce in any measurable way. In fact, with few exceptions, only normative measures are available. The line item budget most often reflects INCREMENTAL budgeting, providing only marginal increases in proposed expenses based on a rate of inflation or average historical percentage increase with no specific programmatic reason as a basis for the increase.
Such budget formats are deficient in data necessary to measure achievement of values in any way other than simple words. It is the height of a normative measurement. This is simply not acceptable in a time of ever growing restrictions, and actual loss, of resources to supply public services. Choices and decisions can not be made between competing demands in any meaningful way. No well run community utilizes only this type of Line Item budget. This is merely a portion of a real and useful budget document.


Program/Performance Budgeting (PPB)

With the advent of sophisticated data processing and word processing capabilities, the miniaturization of computers and the development of powerful software applications that easily perform complicated mathematical computations, there is now no reason to be limited to using only a simple line item format for modern budgeting. Indeed, the old line item budget becomes a basic structure of the Program/Performance Budget(PPB).

Operations within a particular municipal department, or between multiple departments, must be described with narrative. However, the PPB combines the necessary list of items and associated costs requested by department heads in the Line Item Budget with the central features of MBO of Motivation, Communication and Coordination between supervisors and subordinates and Clarity of Goals (as listed above).

Each level of upper management has to define the major goals departments have in conjunction with department managers, and they must also agree on the specific, measurable and realistic objectives to be accomplished within a specified time frame, or on a clearly defined continuum, for certain ongoing operations. Accepted municipal activity/output measures for every municipal function are available from communities already utilizing the PPB format. There are , in fact, a select number of communities to contact for examples of forms and activity/outputs most used and which have been the most successful (Newton, Brookline, Andover, Concord for example.) The immediate idea is to start with a "template" used by communities with decades of experience, then over time customize the format to your community's specific needs.
This then also becomes the primary information to evaluate performance of all managers and employees. The system is designed to create the basis for policy that is formulated cooperatively and clearly agreed to, and in which policy direction flows from the top (Mayor) through department heads, then down to employees. Information then flows back up through these channels to department heads eventually to the Mayor. By design, this system of information flow and communications follows the classic pyramid form, and is applicable to decentralized operations as well, because of agreed upon Goals and measurable Objectives. This system provides the most flexibility and managerial independence, but permits ongoing review of attainment of progress towards objectives by upper management. Expectations between all parties is defined and agreed to, and the agreed upon methods of measuring achievement of objectives, then goals, becomes quantifiable, with verifiable data results, not just statements of accomplishments.

The line items expenses are allocated across the various departmental programs and sub-programs identified within a department.
For example, the Police Department may have as its primary goal -

“Maintenance of the safety of citizens of the City of Fall River,”
(a summary form including the summary budget number from each objective)

With Objectives (Programs) of –
*Street Patrol (Each Objective to be defined in narrative, in a separate subsection)
*Traffic Control
*Crime Prevention
*Community Outreach
(a summary form including line item salary and expense requirements for each Objective)

with an attached record of specific activities needed to reach that goal within, for example,
* Street Patrol
-Total Officer HOURS UTILIZED
- # OF RESPONSES FROM EMERGENCY CALLS
- AVERAGE # ARRESTS MADE PER SHIFT (3 SHIFTS)

Each Objective will have a listing of line item expenses deemed necessary by department heads to achieve a stated objective which should reflect the cost of each major sub-program(if necessary) or activity output identified by the department head. These totals are folded “upward” and combined as summary totals for salary and expense items. The summary of each programs salary and expense totals are then also folded upward to the summary totals which become the salary and expense line items for a department to be voted on by the City Council, after approval or alteration by the Mayor.

In this way the line item request no longer reflects a simple list of salaries and expenses. It now is a part of a larger, publicly stated management policy and plan, agreed upon by both Mayor and their department heads, with attached time frames and indicators of relative accomplishment measured in hard numbers. It also provides an unambiguous method to serve as the primary performance evaluation of employees and department heads.

The Munis computer system the City uses has modules for just such a needed tie between the City Auditors expenses subsidiary ledger and the Budget document. The system utilizes a very well defined and specific chart of accounts (in compliance with DOR) to make designations of department , program, subprogram, and activity level appropriations and expenditures to track financial resource (line item) use in relation to goals and objectives. This makes management reports easy to produce, and the actual expenditure data can be easily downloaded into budget document templates for prior year’s actual expenditures.

Tomorrow I will discuss how all the documents listed in Part's 1 and 2 work when taken together. Also I will layout a suggested time frame and process for the budget process itself. which desperately needs to be a more open and active year round process.