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Zero-based budgeting

Many local governments, agencies and states are adopting elements of zero-based budgeting, to balance the benefits and effort for the best possible outcome.

 

Zero-based budgeting has long been recognized as useful, but labor and time intensive. As BusinessDictionary.com defines it, zero-based budgeting is a “method for preparing cash flow, budgets, and operating plans which every year must start from scratch with no pre-authorized funds.”

 

Given the constraints of starting a budget from scratch, zero-based budgeting isn’t always the right answer. What is becoming more prevalent, however, is the desire to focus on creating a budget that ensures money is spent appropriately, and with thought.

 

Many cities, counties, agencies and states are adopting elements of zero-based budgeting to balance the benefits and effort for the best possible out-come. We’ll explore how two cities in the U.S. and Canada have adopted aspects of zero-based budgeting.

 

To preface, the Cities of Naperville, Illinois and Windsor, Ontario were highlighted in a GFOA whitepaper, discussing how local government is adapting elements of zero-based budgeting to create budgets that meet their objectives while maintaining control on the bottomline. Questica spoke with these two cities to find out more about the process each City went through, what the results were, and what lessons they’ve taken from it.

 

City of Naperville, IL

 

The City of Naperville decided to turn the budget process on its’ head, with a service-based approach. Instead of the traditional methodology of “assumptive budgeting”, they understood the new fiscal environment demanded a different approach, and worked to prepare a budget that they believed best reflected the residents’ view of priorities in the City.

 

Although departments were initially concerned about the amount of work required to prepare budgets in this manner, they found they could use the same base of information, and that it was more about how the information was summarized. Once people became less concerned with the pennies and more comfortable with providing a reasonable understanding of the dollars involved, the benefit was realized.

 

The conversation with Council was also much easier with the service-based method. With the focus shifted from reviewing budgets in an overly detailed manner, to a more conceptual conversation about service categories, the meetings have become shorter and more fact -based. Working with Council, determinations could be made on which services they needed to deliver; what level of service they wanted to deliver; and where changes could be made, to best match their budget to the needs.

 

While Naperville’s approach wasn’t zero-based in its’ true form, they were able to apply some of the concepts in a way that gave them the benefit of the approach, without spending the time and effort typically involved.

 

Karen DeAngelis, Finance Director at Naperville, believes the zero-based budgeting resurgence is due to the expectation of “steady-state” no longer being there, and that a stronger challenge to municipal budgets is here to stay.

 

City of Windsor, ON

 

The City of Windsor, Ontario adopted a budget approach similar to zero-based budgeting, although also not in its’ purest form. The City had been struggling with economic pressures for several years, and Council had demanded a budget with a zero increase in spending. They believed the best way to accomplish this was to look into every department budget in detail, and make serious cuts. To add to this challenge, the City still needed to absorb wage increases, inflation, increased fuel costs, and other unavoidable charges.

 

The budget approach was rolled out in three phases, over three years. There was inevitably a steep learning curve, new templates required, and understanding of the process. In order to minimize the complications and ease the transition, they implemented the easier to tackle administrative departments first, and moved on to larger departments such as Public Works and Parks and Recreation, in the later phases.

 

Although Council initially wanted to be heavily involved in the detailed review of the budgets, it was very time consuming, and took focus away from other initiatives. Once Council realized this, they backed away from the idea of being so involved. The departments reviewed their budgets down to the line item in detail, to figure out where the money was being spent, and where cuts and increases could be made.

 

While zero-based budgeting involves creating multiple detailed scenarios for each service, in this case the City prepared loosely derived scenarios that gave a fair understanding of the spending. They presented a packet of options to Council for the different services and worked through the decisions together. This gave Council a better understanding of where and how money was spent, and they were able to make choices best suited to the City’s needs.

 

The City of Windsor is no longer using this formal, time consuming approach, however, it served its’ purpose in helping provide them a clearer understanding of their spending. The City is pleased to report that they were able to cut $2.5m from the budget, partly due to outsourcing several of its’ key services (garbage collection, child-care, parking enforcement).

 

Want to find out how zero-based budgeting can help your city, county, agency or state? Contact Questica to learn more about how our budgeting software can help.

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