Financial Goal Setting

With a more sophisticated understanding of budget-making processes, public managers can answer a variety of questions and management concerns:

• How is "managing costs" different from "managing a budget"?
• What's the best way – financially and politically – to respond to a potential budget cut? To respond to a potential budget increase or expansion?
• How can we structure our budget process to minimize conflict and maximize employee engagement?
• How does the budget timeline, namely when new information is introduced to budget decision-makers, affect how the budget is made?
• What are budget decision-makers key concerns throughout the budget process? How do loss-aversion, incrementalism, and parochialism affect budget-making?
• How does the format and presentation of a budget document affect how staff, clients, and other stakeholders perceive it?
• Why do government's actual budget processes regularly deviate from their statutory or legal budget processes?
• What are the most and least effective ways to engage citizens and other stakeholders in the budget-making process?

In the late 1990s several dozen people died in major house fires throughout the City of Seattle. Critics blamed the Seattle Fire Department for its slow and insufficient response to those fires. The Fire Chief accepted that criticism, and urged the City's leaders to invest in a significant upgrade to the Fire Department's facilities, equipment, and training. Then-Mayor Greg Nickels proposed a new, ten year $197 million property tax levy to pay for that upgrade, and voters approved that levy in 2003. The centerpiece of that levy was a plan to rebuild or refurbish 33 fire stations.

In 2015 the City announced it had spent $306 million to date on those fire station projects. Of the 33 projects included in the plan, 32 had exceeded their original budgets. Many had cost twice their original estimate. And the program is not yet complete. The City expects to spend at least $50 million more from other resources to complete those projects over the next five years.

How did this happen? How can a major city program staffed with many sophisticated budget and finance staff over-run its budget by more than 50%?

The problem is best captured by the late, great Yogi Berra's adage that "Predictions are hard, especially about the future". Costs of basic materials and labor change all the time, so it's difficult to forecast those costs seven to ten years into the future. And indeed, basic construction costs increased by around one-third from early 2005 until late 2007. Moreover, during the ten years of the program, professional standards for fire fighters changed. Under the new standards, fire stations must now have better training and fitness facilities, better information technology, and other upgrades that added costs to the projects.

To others, the problem is politics. According to some accounts, Mayor Nickels' staff estimated the fire station program would cost around $300 million. The Mayor, however, did not believe voters would approve that large a tax increase. So instead, he proposed the highest possible levy he believed would pass, and he assumed the fire stations could be built at lower costs or that additional money for the program would come from future city budgets. Whether you believe the problem is forecasting, politics, or something else, it's clear that the legacy of the fire station levy is two-fold: better fire protection and, presumably, closer scrutiny of future long-term capital projects.

This story illustrates the central point of this chapter: How we make a budget is just as important as the revenues and spending proposed within it. Consider, for instance, how changes to the City's budget process might have produced a different outcome for the fire station levy:

• If the program had not required voter approval, Mayor Nickels might have proposed a much larger levy that better reflected the full cost of the program.
• At the same time, if the City had paid for the full cost of fire stations out of general fund resources that did not require voter approval, then those projects might have crowded out the Mayor's other high-priority projects in areas like economic development and affordable housing.
• If the City Council had better access to more sophisticated cost estimates earlier on in the approval process for the new levy, they might have supported a higher requested amount, or been willing to spend additional city resources.
• If the City Council members were elected by districts (as they are today) rather than at-large (as they were then), then specific members would have had a stronger incentive to monitor the costs and timing of  fire station projects within their districts. That might have produced more substantial changes to the program at both the planning and implementation stages.
• If the City's capital budgeting process had more stringent accountability features, then the mayor might have reduced the budget for projects scheduled later in the program once it was clear that the first few projects had run over budget.

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Source: Sharon Kioko and Justin Marlowe, https://press.rebus.community/financialstrategy/chapter/budgeting/
This work is licensed under a Creative Commons Attribution 4.0 License.