Financial Goal Setting

Budgeting is many things to public organizations. It's a mechanism to plan and develop strategy for the coming year. It's a tool to evaluate how well managers manage. It's a way to evaluate if and how an organization's resources are connected to it's priorities. It's a tool to get feedback from key stakeholders about an organization's successes and failures. For governments, the budget is a legally binding document that commits it to a spending plan for the coming year(s). But fundamentally, budgeting is a form of politics. Resources are scarce, and budgeting is the process by which organizations allocate those scarce resources. As such, budgeting is about managing conflict.

Budgeting in governments, and most large bureaucratic institutions, is an incremental process. That is, the focal point for each year's budget is an incremental increase or decrease over last year's budget. Put differently, there's an old adage: "most budgets are last year's budget plus three percent". Since the Great Recession most budgets have been last year minus three/five/ten percent. For budget policymakers, conflict and compromise is often around that annual percentage change, or increment. This assumes, of course, that last year's budget – or base budget – was a fair representation of the organization's goals and priorities. If this is not true, then debating incremental change will only amplify that disconnect between resources and priorities. In fact, for most public organizations, that disconnect is persistent and pervasive.

Historically, governments have prepared line-item budgets that place significant emphasis on inputs. Unfortunately, line-item budgets do not present information in a format that connect its mission to its money. A vast majority have experimented with various budgeting models designed to "reform" the line-item format and incrementalist tendency. One of the most popular reform strategies is to allocate resources not through political bargaining, but in a more mechanical or formula-driven way that's driven by priorities or goals. For roughly fifty years one of the most popular strategies to this effect is performance budgeting. In this format, the organization allocates resources not according to inputs or line items like salaries or supplies, but rather according to the level of overall resources, regardless of inputs needed to achieve some desired goal or outcome. Some governments extend this model into a Price of Government or Priorities of Government approach. Under this model citizens identify the levels and outcomes of government services most important to them, and the government allocates packages of resources to achieve those outcomes.

Performance budgeting and the "Priorities of Government" approach are not mutually exclusive. Cities like Redmond, WA and Somerville, MA have implemented performance-based budgeting programs that are tightly connected to strategic priorities. In the Somerville model, departments orient their budget requests around outcomes rather than budget inputs or line items. For example, the library system requests its budget in terms of the cost per library patron served, not just in terms of payroll, commodities, equipment, and other line items.

A few state and local governments have experimented with versions of zero-based budgeting (ZBB). Under ZBB the organization assumes there is no such thing as a base budget. Each year departments and programs must justify everything in their budget. Much of the money state and local government spend is "required by law" or "necessary for public safety," so a large portion of a government's budget cannot be cut through a ZBB process. Some versions of ZBB require departments/programs to connect their non-required spending to the organization's strategic goals or priorities. Proposed spending most closely connected to those goals is most likely to make its way into the final budget, and vice versa. In some ZBB models departments and programs must present decision makers with "scenarios" or "decision packages" that identify what will happen if their department/program does not receive a portion of its base budget. All these innovations are designed to remove some or all of the pure political bargaining from budgeting.

That said, the vast majority of governments and non-profit organizations continue to practice traditional, incremental, line-item budgeting.