Zero Based Budgeting Modern Experiences Book

Zero Based Budgeting Modern Experiences Book
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    Zero-BaseBudgetingModern ExperiencesandCurrent PerspectivesGGoovveerrnnmmeenntt FFiinnaannccee OOffffiicceerrss AAssssoocciiaattiioonn

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    Government Finance Officers AssociationResearch and Consulting CenterTable of ContentsIntroduction ................................................................................................................................................1A Brief History of ZBB .................................

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    Government Finance Officers AssociationResearch and Consulting CenterCreditsThis paper was written by Shayne C. Kavanagh, Senior Manager of Research for the GFOA’s Researchand Consulting Center in Chicago, Illinois. It is a custom research project completed for the City ofCalgary. To contact GF...

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    Government Finance Officers AssociationResearch and Consulting CenterAbstractZero-base budgeting (ZBB) is a budgeting process that asks managers to build a budgetfrom the ground up, starting from zero. However, ZBB has been the subject of a fairamount of controversy over the years, owing primaril...

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    IntroductionWhen using zero-base budgeting (ZBB), a government builds a budget from the groundup, starting from zero. Though the apex of ZBB’s popularity in the late 1970s is longpast, there has been renewed interest in ZBB in today’s environment of fiscal constraint,not least because the “...

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    ditions from the low points of the late ‘70s and early ‘80s, in the U.S., and the early ‘90s,in Canada, probably reduced the perceived need for what was largely regarded as a“cutback budgeting” method.3However, pure ZBB may have largely disappeared, but it wasn’t forgotten; vestiges ...

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    behind the apparent resurgence, is that those governments that report using ZBB areusing “practical” versions of ZBB that are less intensive than the theoretical model,which is presented in the following section. In fact, our research found that use of “text-book” ZBB is almost unheard of...

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    In addition to the detailed information on inputs (dollars, personnel, etc.) needed to pro-vide the service, decision packages include performance measures that express theimpact of the package on service levels. For instance, a series of decision-packages froma street repair division might use m...

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    Conceivably, an organization could develop hundreds of decision-packages, requiringsubstantial time commitments from every level of management to develop, review, andrank them. Another important drawback is the reluctance of managers to suggest decision-packagesbelow current spending. The advanta...

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    The second question asks: assuming we are going to provide a given program or service,how much/what quality of service should we provide? Under a conventional system theanswer is again, typically: the same level as last year. In a cutback environment, a tradi-tional budgeting system often seeks t...

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    performance metrics to specify the outputs produced and contain detailed resource esti-mates, allowing budget authorities to get a sense of whether the requested inputs are rea-sonable in light of the outputs. Theoretically, ZBB should also provide insight into the first budget question, becausem...

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    flashlight parts, digital voice recorders, polygraphs, and Taser cartridges, includingexplanation of the need to make each of these expenditures. In some instances, theexplanation is in narrative form, but in others there is more quantitative justification. Forinstance, the O’Fallon Police Depa...

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    • Helpful for reallocating funding within a department.Case study participantswere enthusiastic about zero line-item budgeting’s ability to identify better uses ofavailable resources within a department’s budget. For example, one departmentcame to the realization that the money being spent ...

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    will have service implications, compared to using more general, across-the-boardcuts. Also, including a narrative of department goals along with the budget sub-mission helps put the budget requests into context. However, the detailed selectionof different service options contemplated by ZBB theor...

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    • Estimated costs by major object of expenditure (e.g., personnel services, other oper-ating expenses, capital outlay)• Performance measures, often showing workload or output.• A narrative describing the impact of the decision-package• Revenue impacts, if any.Once the decision-packages we...

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    departments’ rankings as well as his own understanding of the Board’s goals, and mayhave made direct modifications to decision-packages as well. In cases where depart-ments submitted too few decision-packages, the departments would be instructed torevise their submission.Finally, all of this ...

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    • Efficiency is not addressed directly. Service level budgeting does not encourageefficiency directly. Managers are not provided incentives to be more efficient andthe ability to propose different service levels does not produce efficiencies either.To the extent efficiencies are realized, they ...

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    GFOA Research and Consulting Center14Zero-Base Budgeting: Modern Experiences and Current Perspectives14Government Finance Officers AssociationResearch and Consulting CenterExhibit 5:ZBB TypologyTextbook ZBBZero Line-Item BudgetingService Level BudgetingKey FeaturesBudgets are built from the grou...

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    views of governments who had not seriously examined ZBB are considered, a total ofalmost a third of all governments surveyed held this view. Exhibit 6 summarizes therespondents’ views on ZBB. Among those not accounted for in the 53% of respondentsaddressed in Exhibit 6, most have not seriously ...

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    • ZBB can be used to centralize budget decision-making, if that is a goal of budgetreform. The detail provided by ZBB helps central authorities understand depart-ment budget requests more precisely and the decision-packages allow authoritiesto make more fine-grained distinctions on what to fund...

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    their program). However, it is mainly because managers tend to concentrate onlooking for opportunities to make cuts to the current way of doing things to anextent that will be acceptable to central budget authorities (e.g., find a way to cut10%), rather than looking for ways to spend the bulk of ...

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    force managers to think of better ways to use their more limited resources, butthese are secondary effects. This is important to understand because finding effi-ciencies is a common motivation for adopting ZBB. Recognizing this problem,some of GFOA’s case study governments adopted efficiency en...

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    detailed level. In others, elected officials did not find the details helpful, leading to a nega-tive experience with ZBB. Also, is the organization willing and able to have conversationsabout funding “basic” or “core” services? Some organizations may be able to use theseconversations to ...

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    success with ZBB reported minimal problems with the budgetary “game-playing” that istheorized to afflict ZBB. This is likely because top leaders in those organizations made itclear that attempts to game the system would not be tolerated. Hence, if ZBB is thoughtby organizational leadership to...

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    that asks explicitly about “community need.” Rather, management is expected touse their expertise to judge which service levels are appropriate. In contrast,understanding community need is an integral part of priority budgeting.• The process builds up costs through a ranking process rather ...

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    • What does the City do?The City inventoried its entire service offering and catego-rized each service as core or discretionary, including a review of relevant laws todetermine which services were truly “mandatory.” The City also reviewed thelevel of service provided by each program to see ...

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    Program review appears to be a promising alternative to ZBB for governments who are notdissatisfied with their current budget process, but feel that more insight is needed on thethree planning questions in Exhibit 2. Program review may be particularly helpful for gov-ernments that want to conside...

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    plish their jobs within their reduced base/target spending. This isn’t much differentfrom how ZBB accomplishes efficiency gains, and Edmonton recognized the limitation,but felt the gains came through a less onerous process.Given the Edmonton experience and academic evaluations, here is how TBB ...

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    ular budgeting reform of all those presented in this paper, with about one-third ofrespondents using it. This could also imply that TBB requires less administrativeeffort than ZBB.Our discussion of the alternatives to ZBB ends with Exhibit 7, which recapitulates thealternatives. GFOA Research and...

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    GFOA Research and Consulting Center26Zero-Base Budgeting: Modern Experiences and Current Perspectives26Government Finance Officers AssociationResearch and Consulting CenterConclusionsLike most budget reforms that promise to bring more rationality and comprehensivedecision-making to cut-back budg...

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    Appendix 1: Survey Results SummaryThis appendix presents the results of the GFOA. Each table describes how our respon-dents replied to key questions or series of questions.Zero-Base Budgeting: Modern Experiences and Current Perspectives27Government Finance Officers AssociationResearch and Consul...

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    Zero-Base Budgeting: Modern Experiences and Current Perspectives28Government Finance Officers AssociationResearch and Consulting CenterWhat have been the most important strategies for dealing with financial challenges? (% rating this either important or very important)Making existing personnel, ...

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    Zero-Base Budgeting: Modern Experiences and Current Perspectives29Government Finance Officers AssociationResearch and Consulting CenterIf they have not used ZBB, why not?*Zero-base budgeting is perceived as being too much work 42.8%No one has raised zero base budgeting as a serious option35.7%In...

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    Notes1 GFOA’s survey found only one government that reported using “textbook” ZBB. Asthe paper explains, others that reported using ZBB are using budgeting methods thatare, in part, inspired by ZBB ideas.2 ZBB was subject to a great deal of academic evaluation in the early 1980s. These eval...

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    tions create the most value for their constituencies when they focus on strategic concernsand create less when engaged in issues of operational detail. See for example: JohnCarver. Boards That Make a Difference: A New Design for Leadership in Nonprofit andPublic Organizations. Jossey-Bass. 2006.1...