Risk Based Budgeting

Paul Rosen
Paul Rosen asked

Does anyone know of examples of adding the element of risk into budget decision making? I know we all have it in our minds when considering proposals for funding. However, I'm wondering if anyone out there has developed a simple (or simple as possible) method for using risk to determine whether to fund one proposal over another.

Let's say (for example... this is completely hypothetical)...
Proposal 1:
The Sheriff has requested $400,000 in new positions due to larger jail populations

Proposal 2:
The Building Services Department wants $400,000 to remodel the lobby because the floring keeps coming up and creating tripping hazards to public and staff

Leaving out all of the other issues we usually look at. If potential risk of not funding was included as a variable in the decision making process, is there an easy way to determine what that is?

Any examples or information would be great.


Pamela Muse

Paul – what you describe is an ideal scenario for Priority Based Budgeting. I’ve included a link to the Center for Priority Based Budgeting FYI. I’m happy to provide an electronic introduction if you’re interested.

Pamela Muse
Western Regional Director
Alliance for Innovation
888-468-6450 Voice
480-231-3538 Text

Paul Rosen

Paul Rosen

Thanks Pamela, I'll look into it

Eric Johnson


For another resource, consider GFOA's publication "Decision Tools for Budgetary Analysis." It describes a couple tools that may be relevant -- building an expected values table and using weighted score tables.

On the surface, you have a barter economy -- is the value of services received in one program area more valuable than that in another because they both cost the same? What you are really trying to determine is if they actually both cost $400,000 and they probably don't.

Assuming you are currently incurring costs for injuries and you can reduce the appropriation for that cost in future years by replacing the flooring, then the future savings may offset some or all of the cost of renovations. There just may be a timing issue because of the delay in when you receive the savings. On the other hand, the investment in positions for the Sheriff may have offsets if there are potential claims that can be made against the jurisdiction for understaffing. If you have claims experience there, they need to be factored in as well.

Finally, one is a non-recurring cost and the other is recurring. Run both options through a multi-year analysis and the cost comparison is far from similar.

The GFOA book is cheap and has a variety of tools you may find useful for this and other analyses.

Paul Rosen

Paul Rosen

Thanks Eric. I'll check out the GFOA publication

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Jan 17 2013
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