Click here for Full Text


Budgeting is a cyclical decision-making process for allocating limited fiscal resources to achieve organizational priorities and objectives over a specific time period.


In the public sector, a budget is:

Principal and Practices of Public Budgeting

A budget represents the culmination of a complex decision process whereby policy is translated into operating programs and both legislative expectations and management controls are established.

A budget provides the legal basis for spending and accountability.

Operating and Capital Budgets

An operating budget:

A capital budget identifies the capital expenditures required to meet public improvement needs and the means of financing these commitments for the current fiscal year.

The Budget Cycle

The budget process involves four steps: (1) executive preparation; (2) legislative review, modification, and enactment; (3) budget execution; and (4) post audit and evaluation.

The budget cycle begins with the issuance of a budget call, outlining: (1) goals and objectives; (2) anticipated fiscal policies; and (3) specific performance expectations.

The governing body holds public hearings, may make amendments to the proposed budget, and then may approve the budget by resolution or by adopting a separate appropriation ordinance which list specific amounts for specific agencies by specific categories of expense.

Budget execution procedures include: (1) appropriations, (2) allocations and allotments, (3) expenditure controls, and (4) adjustment.

The accounting process should provided sufficient information to anticipate budget amendments during the fiscal year.

Internal and External Audits

Internal audits are conducted by in-house staff and result in reports for internal control purposes.

External audits are conducted by independent accountants after the fiscal year has been completed and are submitted to the regulating state agency (such as the Auditor of Public Accounts), as well as to the local governing body.


Several alternative budget formats have been developed to meet the broad objectives of fiscal management and control.

These budget formats arose from the fiscal management needs at a particular point in time; each reflects varying decision-making capacities; and each have varying management information needs and output capacities.

Fiscal Control

Historically, the budget has been viewed as an extension of the accounting and management control system.

Budget requests are supported by detailed objects of expenditures--tabulations of the myriad items required to operate each program, including salaries and wages, rent, office supplies, travel, equipment, and other inputs.

The detail of projected expenditures may be backed up by a personnel schedule which identifies specific authorized positions (i.e., by job titles) and salary commitments of each position.

The object of expenditure budget has two distinct advantages:

Since personnel requirements are closely linked with other budgetary requirements, the control of positions can be used to control the whole budget.

Object classifications show in great detail what is purchased, but not why, i.e., the nature of organizational programs and accomplishments under those programs.

Performance Budgeting

Three components distinguish performance budgeting from other budgetary approaches:

The principal focus of the performance budget is at and below the departmental level, where the work-efficiency of operating units can be assessed.

Program Budgeting

Program budgeting combines a planning framework with the basic functions of management and control.

A program is a distinct organization of resources directed toward a specific objective of either: (a) eliminating, containing, or preventing a problem; (b) creating, improving, or maintaining a condition affecting the organization or its clientele; or (c) supporting or controlling other identifiable programs.

Program objectives must be consistent with the resources available (or anticipated). Specific objectives must describe how and where specific resources (personnel, equipment, materials, capital expenditures, etc.) will be used.

Measures of efficiency and effectiveness provide a "base line" against which to test the notion of program adequacy.

Zero-Base Budgeting

Zero-base budgeting addresses the shortcomings of incremental budgeting, i.e., the continuation of existing programs without periodic re-examination as to their effectiveness and efficiency.

Detailed analyses of programs "to the zero base" have been replaced by the concept of levels of effort.

Responsibility Center Management

Under Responsibility Center Management, all sources of financial support (revenue or income) and all costs--direct and indirect--are attributed to responsibility centers on some equitable and consistent basis.

Costs associated with internal service units (i.e., units which do not receive revenue or income from external sources) are either charged to the responsibility centers on a fee for service basis or are recovered from the responsibility centers through some form of assessment.

Deficits or shortfalls between total costs and revenues/income must be covered through some form of subvention--i.e., a central allocation to ensure the continued operation of programs.


Contemporary techniques emphasize the planning function but have not been well aligned with appropriate management control and accounting procedures and often fail to produce the desired improvements in terms of more efficient, economical, and effective operations.

Control and Accountability

A budget built on objects of expenditure frequently is called a line-item budget, since proposed expenditures are detailed with great specificity, resulting an array of lines within the budget.

Object codes--three-digit or four-digit numbers--are used to budget and record expenditures in considerable detail.

The object-of-expenditure budget, with its detailed recording of spending requirements and subsequent commitments, provides a most effective basis for fiscal control.

Expenditures can be controlled within relatively narrow, predetermined limits.

The objectives of fiscal control are supported by the financial accounting systems that were developed in parallel with the object-of-expenditure budget.

Work Programs, Activity Classifications, and Performance Measures

The performance budget is envisioned as a series of work programs related to particular processes or functions carried out by governmental agencies.

Activity classifications relate activities to the work responsibilities of distinct operating units and can be applied to: o Processes--the various steps in carrying out the work program of a budget unit.

A performance unit can be described as a team of workers responsible for carrying out a specific task or series of tasks.

Performance costs are those costs directly associated with carrying out these activities.

Unit cost measures aggregate relevant costs associated with the delivery of a particular service and divide these costs by the total units of service provided.

Workload measure relate to the volume of work performed during some time period.

Performance measures--workload or output measures related to unit costs or input measures -- are used as indicators of operating efficiency--e.g., the cost per patient-day of hospital service; the number of cases successfully prosecuted per law enforcement officer; or the response time involved in providing paramedical services.

Program Budgeting

Program budgeting provides the basis for resource allocation procedures that incorporate the basic objectives of accountability, efficiency, and effectiveness.

A program should facilitate the comparison of alternative methods of pursuing imperfectly determined objectives.

Programs may be subdivided into component parts--subprograms and program elements.

Program analysis seeks to:

Program evaluations may be carried out to:

Multi-year program plans often are developed to identify the anticipated outputs of services and facilities according to the program and subprogram objectives.

Program and subprogram objectives identify key results to be accomplished within a specific time period; they should be:

Measures of efficiency and effectiveness provide the mechanisms for determining the success (or lack thereof) of a program element in achieving agreed-upon objectives.

The output of many public programs may be difficult to define and secondary measures--called surrogates--must often be used to evaluate costs and to test alternative approaches.

Program budgeting provides a more rational basis for resource allocations by identifying data on costs and benefits and by providing measurements of effectiveness and efficiency.

Resources are allocated on the basis of goals, objectives, and strategies.

Service Level Analysis

Limitations of traditional practices of budgeting and accounting are becoming more widely recognized:

Service level analysis is applicable to all actionable programs or activities--those in which there is some discretion as to the course of action to be pursued.

Service level analysis can assist in the identification of the public costs of constraints imposed by law or statute, intergovernmental commitments, or other legal or fiscal constraints.

Budget units are the basic building blocks responsible for the delivery of services and often correspond to established divisions within the departments or agencies of local or state government or other public organization.

Decision packages are discrete sets of services, activities, and resources required to carry out a given operation or accomplish a program objective.

Minimum service levels include only the most essential elements or activities within chosen decision packages--the highest priority services or the most critical needs of the government or organization.

Each level of service must be analyzed in terms of the specific quantities and qualities of work to be performed (and services to be provided).

Ranking establishes an order or priority among service levels for various activities.

Three approaches can be used to bring proposed expenditures and projected revenue into balance:

Funds are allocated to the service levels in order of priority until anticipated resources are exhausted; at this point, a funding "cutoff line" is draw and those services below the line are not funded.

Decision makers are often forced to make across-the-board cuts; service level analysis minimizes this need by creating an explicit priority listing.

A number of organizational and fiscal management improvements can be achieved through the use of service level analysis, including:

Responsibility Center Budgeting

For purposes of budgeting, controllable costs are defined as those costs subject to the influence of a manager of a given program or organizational unit during a given time period.

Noncontrollable costs include all costs that do not meet this test of "significant influence" by a given manager.

Under responsibility center budgeting, all pertinent costs and the revenue to support these costs are assigned to various organizational units designated as responsibility centers.

Costs assigned to responsibility centers should be separated between direct and indirect costs.

Once income/revenue and costs have been fully allocated to responsibility centers, in all likelihood, there will be some "deficits" (i.e., where assigned costs exceed income/revenue) which will have to be addressed through some form of subvention.

Project Budgeting

A project budget represents a portion of the total agency budget for a given fiscal year which may be partially funded by external funding sources.

Project budgets often are prepared for more than one fiscal period and therefore, provision must be made for salary adjustments and inflation.

Extramural funding sources may permit the recovery of indirect costs, i..e, costs that support more than one activity or program within an agency or organization.


Planning, programming, and budgeting are complementary activities in the management process.

The object-of-expenditure budget serves well the purposes of internal fiscal control by offering two distinct advantages over other budget formats:

Performance budgeting identifies performance units within work programs and measures performance costs through the use of cost accounting techniques.

The extended time horizon of the program budget shifts the decision focus from the one-year budget cycle to a multi-year time frame, thus providing a more comprehensive basis for annual budget deliberations. The focus of program budgeting is on policy analysis and planning.

Service level analysis seeks to identify budget units and decision packages. By arranging levels of service in descending order of importance and determining a funding cutoff point, alternative approaches can be ranked according to their capacity to meet program objectives.

Each of these budget formats has obvious strengths and weaknesses--by combining the positive points of each format in a hybrid approach, public organizations should be able to develop budget systems that better serve sound fiscal management objectives.