Budgeting by local governments is an important function because it provides an outline of their goals and objectives for the 12-month fiscal year ahead, and also shows how they will allocate funding to programs and services for the community. Budgeting on an annual basis works well for most governments, but the focus on long-term planning and aligning the budget to the successful completion of priorities for the community is what makes multi-year budgeting an attractive process. Budgeting over a longer time frame can save time and provide other advantages over an annual budget, yet the transition to a multi-year budget doesn’t come without challenges. While multi-year budgets can take many forms depending on the government, no matter the format, the purpose is always to help governments plan better for the future.
Every local government invests considerable time in preparing the annual budget. It is a labor-intensive process to gather, analyze and prepare all of the information required to support: the government’s goals and objectives, financial plan indicating how it plans to allocate resources, operations guide for staff, and its communications tool for citizens.
Annual budgets that plan for anticipated expenses and revenue over a 12-month period enable governments to ensure their priorities for the community are met. However, recognizing that an annual budget is limited in linking long-term strategic goals and objectives with their financial planning, some governments have moved to a multi-year budgeting process. Doing so permits them to spend less time scrutinizing spending increments each year, and instead turn their focus to better planning for the future of their communities.
What is multi-year budgeting?
Multi-year budgeting is defined by the Government Finance Officers Association (GFOA) as “the development and formal adoption of an expenditure and revenue document that spans two or more years.” A multi-year budget could be a biennial budget, a three-year budget, or a five-year budget depending on how the government chooses to plan for the future. By implementing a budget that estimates expenses and revenue for more than one year at a time, governments are obliged to consider the long-term impact of budget requests because of how they affect future years.
The common types of multi-year budgets are:
Classic multi-year budget
A budget that details the expenses and revenue for a budgeting cycle of two or more years. The budget is approved only once with only minor adjustments made at the end of each budget year to reflect any significant change in expenses and revenue.
Rolling multi-year budget
A budget of two or more years with a “rolling” year added upon completion of the first budget year. The entire multi-year budget is approved during the first year of the budget with adjustments tabled for approval for each of the additional years.
Advantages of multi-year budgeting
In addition to the time saved on budget development, local governments find multi-year budgeting appealing because of the following:
Improves long-term strategic planning
When considering budget requests, governments will now have to decide whether the request needs to be budgeted for more than one year, and whether the program or service being budgeted for is sustainable and desirable over that period.
Encourages the anticipation of problems
Multi-year budgeting encourages governments to stay alert to changes in funding patterns that could lead to unwanted surprises, and gives them the ability to respond before problems occur.
Prevents budgeting burnout
Since budget staff will work the hardest on the first year of a multi-year budget, the following years can concentrate on strategic planning, analysis, research or training instead of budget development.
Improves revenue forecasting
When multi-year budgets require forecasts that go beyond the first year, budget staff will likely take a conservative approach to their revenue projections. Having the ability to compare projections to actual receipts in the second year and beyond will help staff make more accurate projections.
Opportunity for citizen engagement
Long-term planning provides an opportunity for local governments to present their vision for the community to citizens and obtain their feedback on the budgeting priorities they have chosen.
Obstacles to multi-year budgeting
Unfortunately, there are also drawbacks to implementing a multi-year budget that may deter governments from the process. Some of the disadvantages of multi-year budgeting to be considered are:
Ability to make projections for expenses and revenue
The economic or political climate at the time could make it difficult for some governments to forecast expenses and revenue for future budget years.
New legislation and policies required
Introducing a multi-year budget may require new legislation or policies to be introduced to support the government’s transition to this type of budgeting.
Difficulties for government departments
Some government departments may not have the ability to predict increases or plan for multiple years, and will require assistance to participate in a multi-year budgeting process.
Increased workload for budget staff
Transitioning to a multi-year budget may be difficult for some governments because it increases the workload of budgeting staff, particularly during the first year of developing a multi-year budget.
A budgeting solution that supports multi-year budgets
Questica Budget is a comprehensive budgeting solution specifically designed for the public sector that will support governments making the transition to multi-year budgeting. Develop a first-year budget and then use the Prepare Next Budget Year (PNBY) function for the following year(s), with the option to either roll or shift the budget amounts to the next year. Create complex formulas for projecting expenses and revenue for future budget years using the Advanced Calculation Engine (ACE), and save the formulas for ongoing budget planning. View and analyze budget data in one place, and create dashboards and generate reports that can be shared with stakeholders. Governments can also provide role-based, secure access to all departments participating in the multi-year budgeting process and effortlessly make adjustments to the budget using Questica Budget’s change request feature.
Keep an eye on the future
Multi-year budgeting is a process that links long-term planning to budgeting for expenses and revenue for more than one year. By moving to a multi-year budgeting process, many local governments have saved time and improved their financial and strategic planning practices. In addition, multi-year budgeting often leads to governments paying closer attention to shifts in funding patterns that could lead to future problems with their budget, allowing them to respond before any serious consequences occur. While there are obstacles to multi-year budgeting to consider alongside the advantages, governments who have adopted a multi-year budget believe this budgeting process helps them keep an eye on the future and see where they are, where they are going, and where they plan to be.
To learn more about the Questica Budget Suite of software solutions for budgeting and transparency, read one of our blogs or white papers, take a product tour or sign-up for one of our free monthly informational webinars.
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