MRSC has joined with Toni Nelson, Small Cities Specialist, State Auditor's Office, Tracey Dunlap, Director of Finance & Administration at the City of Kirkland, and Mike Bailey, Finance Director, City of Redmond, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*

Fiscal First Aid – Financial Planning has Never Been More Important

December 2008

By Mike Bailey, Finance Director, City of Redmond and Shayne Kavanagh, Senior Program Manager, GFOA

Even if you are one of the lucky few dodging the latest economic bullet, balancing the budget is always challenging. However, if you are like many cities or counties that have serious financial challenges this year (or biennium for those of us budgeting for two years), it is even more difficult. Headlines are full of the drastic measures being taken to balance budgets. The last three articles in this column have been about budgeting – and I’m about to make it four in a row.

A new initiative within the Government Finance Officers Association (GFOA) is their set of tools on “Fiscal First Aid.” In the November edition of their magazine (Government Finance Review) there are numerous articles on this subject. Tracey Dunlap's latest Financial Advisor column was full of good ideas on long-term financial stability as well. One of the new GFOA projects is the “Long Term Financial Planning” web site and newsletters. The site has additional articles (including one by Jon Johnson and Chris Fabian, “Getting Your Priorities Straight,” about priority-based budgeting in Jefferson County, Colorado which has been especially popular). The GFOA just released its long-term financial planning book (this has a longer term time horizon than “fiscal first aid,” but many of the concepts still apply). As for the future, GFOA is working on more broadly accessible resources. In addition interested parties can sign up for their free financial planning newsletter and keep up to date about new resources.

Budgeting for Outcomes (aka “Price of Government”)

I’m now going to take a bit of a different slant. I wanted to take the rest of this space to discuss a tool that should be familiar to many of us – and I propose it may now be time to consider it further. You might remember when the Washington State government used its Price of Government (POG) approach to balance their budget. They were one of the first in the country to use this novel approach. I’ve heard different views on just how effective that process was, but many insiders confirmed that it was a significant help. In addition to the State of Washington, Snohomish County, the City of Spokane and others have used this approach as well.

Here in Redmond we have been using what we call the Budgeting by Priorities process (BP) for our upcoming biennial budget. While I don’t agree with everything you will find in the foundational text (The Price of Government, by Osborne & Hutchinson) the city has benefited significantly from the BP process (and potentially you can too).

Here are a few of the good things about this approach:

• A true financial framework – “the price” – In our case, the price of government is a range between .05 and .06 percent of total household income. When evaluating fees, taxes or other revenue drivers, we now consider how the changes affect the “price of city government.” Everyone knows when the budget process begins how much money they have to work with. Therefore, the budget is not revenue driven nor expenditure driven (a common debate) but lives within a range that is affordable to citizens.
• Community and employee based approach – the first step of a POG/BP process is to determine community priorities. This results in a great conversation with your elected officials, community stakeholders, employee groups and others about what is really important. We ended up with six priorities in our process.
• Results oriented approach – the priorities are “mapped” into the programs, services or facilities that contribute toward the priorities. This creates a framework for the budget proposals (called offers) that really does focus on results in the context of the priorities.
• Cross collaboration within the city – employees and citizens evaluated the offers and made recommendations to the mayor by “ranking” the offers within each priority area. These Results Teams were made up of a cross section of employees and a citizen for each priority. For most, it was the first time they participated in these types of discussions. Additionally, this occurred in place of departments competing for their slice of the budget. The offers came from teams within and across departments.
• True policy discussion with council – the preliminary budget was oriented around the six community priorities, the factors that the Results Teams felt were most important in contributing towards those priorities, and the offers (budget proposals) by staff which were to be in alignment with the factors. Each offer included proposed performance measures to illustrate how the results generated by the offer could be evaluated over time. This created the right context for the council policy discussions on each level (priority, factors and offer results) for our budget work sessions.
• Performance management now has meaning – while many governments are now measuring performance in one way or another, most struggle with connecting those measures to strategic decision-making. By using the measures within the offers as a means to evaluate performance by the work units that proposed them, the city (mayor and council) have a new tool to evaluate effectiveness in the context of the priorities.

Here are a few areas of caution about this approach:

• Understand how it relates to the traditional mechanics of budgeting – In our case, some very talented staff helped to make sure that while we made decisions in the BP context, we could relate those decisions to the number of employees we had, the proper fund accounting that is required and other “mechanics” of the budget process. This can be tricky!
• Cut the Cord – Once you decide to take this step, go all the way! Don’t attempt to translate the new budget back into the old format. If people believe they can “go back” they will focus on this comparison and not make the transition to a new way of thinking about budgeting.
• Provide adequate training and forums for feedback about what isn’t working – This is new and can be challenging to those who are used to “the way we’ve always done it.” Training about this process for all those involved (including council, department heads, citizens and employees) will be an important part of your success.
• Be patient – Again, this is new and challenging. Expectations will be high (especially on the part of citizens) and it takes time to develop the skills necessary to be successful. There will be a concern by participants that they don’t want to take the risks that will be necessary. (We have used the “we are designing and building the car as it moves down the production line” analogy many times!) This new process will take time – at least three months. We used most of the year to prepare our biennial budget.
• Use what works for you – It will be important to actively manage the risk and reward balance. Plan to add more elements or precision as you gain more experience. If performance measures are new to you, don’t place too much emphasis on getting the measures just right in the first year.
• Make sure leadership is there - top leadership must be fully behind this - otherwise heavy hitters may try to game or just ignore the POG process. If they are successful they can not only derail the current process, but also hurt the credibility of the process for any future attempt.

I have tried to avoid repeating what you can read on web sites or in the book. Instead, I’ve tried to share a few resources from our experiences here (and we certainly looked to others who had gone before us!) in using a method to address perennial budget challenges in the hope that some element may be of benefit to you. You can find out more about our process on Redmond's Budgeting by Priorities Web page.

If you think this approach might be helpful to you, the GFOA has developed a Budgeting For Outcomes toolkit to make budgeting for outcomes more accessible to smaller governments. You can find out more about the resources available from the GFOA on their Web site.

Toni Nelson is the "Small Cities Specialist" for the Washington State Auditor's Office, providing both on and off site financial training and assistance to smaller cities and towns throughout the state. Ms. Nelson has been working with the Auditors office for 6 years and prior to that was the Clerk/Treasurer for a small town for 9 years. She has co-authored the "Small Cities Manual" a detailed reference guide for new clerk/treasurers on governmental accounting procedures and presents numerous training workshops throughout the state for AWC, WFOA, WMTA, WMCA and local/regional organizations such as EWFOA and SCWMCA. Ms. Nelson is also a member of and conference track coordinator for the WFOA Education Committee.

Mike Bailey is currently the Finance Director for the city of Redmond. Previously he worked as Administrator of Finance and Information Services for the city of Renton and as the Director of Finance for the city of Lynnwood. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.

Tracey Dunlap, P.E. is the Director of Finance & Administration at the City of Kirkland. Prior to joining Kirkland in 2006, she was a principal and shareholder in FCS Group, a regional financial and management consulting firm (14 years). An industrial engineer registered in the state of Washington, she has worked with jurisdictions throughout the Northwest to develop and implement cost recovery and fee strategies, set utility rates, and improve organizational efficiency and effectiveness. Tracey's experience also includes working for a large defense contractor (5 years) and a major financial institution (3 years). She has presented on a wide array of topics for organizations including WFOA, APWA, APA, WABO, and AWC.

*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.