By Gerald Young, senior research associate, ICMA
A recent question in the “Ask & Answer” section of the ICMA website spurred an interesting exchange of thoughts about the metrics to use for financial performance tracking and strategies for managing underspending as well as overspending on the expense side.
The questioner asked if there was an “industry best practice” for comparing actual expenditures to budget. In this case, the jurisdiction had underspent its expense budget, and the manager was considering developing a policy as a guide for managing expenses in the future.
One way to think of such a standard is as a one-size-fits-all pair of shoes. You may be able to find someone willing to sell you such shoes, but the best fit would consider your foot size, width, arch support needs, and other factors.
For local government budgeting, here are some considerations to keep in mind:
- Coming in under budget is not a bad thing—as long as it doesn’t mean that you’re neglecting programs and services that residents need, pay for, and expect.
- Ask how well your budget performance tracks with the organization’s strategic priorities and what level of unallocated fund balance you’re able to maintain for unanticipated expenses. Are the priorities still current, or are you still funding operations that no longer align with your core commitments?
- From a performance perspective, are your expenditures helping you to accomplish your adopted goals and objectives? Have you set targets for quality, efficiency, timeliness, or customer satisfaction? Are you meeting those targets?
- Have you compared to other jurisdictions to see whether they’re able to achieve better results for the same level of investment? Doing so will help you put your own performance in better context and better understand opportunities for improvement.
- If you’re comparing your contingency or spending policies to others, are they working from a similar base? Risk managers set their self-insured retention amounts based on the specific operations performed or liability exposures faced. If your jurisdiction offers a wide array of services with unpredictable finances (e.g., health clinics, performing arts centers, recycling programs), it may make sense to tailor your expectations for each one and not simply adopt an arbitrary, jurisdiction-wide standard for a target percentage under budget.
- Refer to historical data showing budget versus actual performance by department. If some departments historically underspend, there might be opportunities to fund new programs and priorities within existing resource levels.
- On the policy front, one respondent’s governing body had adopted a policy to allow the manager to allocate unspent funds to designated reserves at yearend. This provides a mechanism to ensure that (what should be) one-time savings are leveraged into growth in reserves and enhanced fiscal stability, rather than just rolling over into fund balances.
- Finally, involve your elected officials to discuss the preferred budgeting strategy. If the inclination is toward a bare-bones initial appropriation, there may be limited capacity for year-end savings later.
One source for information and advice on budget alignment is the Center for Priority Based Budgeting. If you’re looking for comparative data, check out ICMA’s Open Access Benchmarking database (no fees, no software requirements).