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Last month’s column described a decentralized approach to budget management, where operating staff are given both authority and responsibility over their financial resources. On the surface it seems like a good idea, but few governments do it. Why don’t they?
At least part of the reason is that a centralized, top-down budget management system was, at one point in history, a good solution to serious problems associated with government in general and local government in particular.
A hundred years ago, as America entered the 20th century, two forces came together to change local government. The reform movement sought to address widespread corruption within city governments, and to put an end to the spoils system in which the city’s political machine would reward supporters with city jobs and contracts. At the same time, the progressive movement held that an effective and efficient city government would be critical in addressing an increasingly urban population. Principles of the new administrative science that was being developed in the private sector could also be applied to government organizations, putting government on a scientifically sound and rational base.
A key feature of government reform was a strong centralized command-and-control management system. The work of Frederick Taylor had shown that work could be done much more efficiently if a smart manager could study the work processes and then direct the workers in the best way to accomplish tasks.
The council-manager plan, championed by Richard Childs and the National Civic League would replace party bosses and political hacks with a professional (and ethical) central administrator, patterned very closely after a business CEO. An elected city council would still set overall policies and laws for the city, but an organizational firewall between policy and administration would reduce the opportunities for corruption. In 1924, the City Managers Association adopted its first code of ethics. To this day, adherence to this strict code remains the only requirement for a city manager to be a member of the professional association (now called the International City/County Management Association, or ICMA).
In 1901, the National League of Cities proposed a “uniform system” of accounts that could be used to track revenues and expenses and to assist in making comparisons across cities. The new double-entry accounting systems tracked revenues and expenses, assets and liabilities, and provided both monthly and annual financial reports.
The reforms included not only new processes, but also new (centralized) organizational structures that identified the officer who would patrol and enforce the rules. This officer was often a city auditor; today the role is typically held by a finance director, chief accountant, or controller (an especially appropriate title).
Once the budget was adopted by the city council, the chief executive was accountable for managing it. If the city council set appropriations at a higher level (by department or program), the city manager (or finance director) could still set limits at the line item level, requiring operating departments to seek formal approval to shift budget authority between line items. In some cases, the fiscal year was split into smaller periods (months or quarters), and budget allotments limited total spending within these periods.
From a purely financial management perspective, there is much to be said for centralized budget control systems, and little to criticize. If public organizations were inanimate black boxes, with revenues as inputs and expenditures as outputs, it would be hard to devise a better system. The CEO (or chief financial officer) is the central processing unit (CPU) that keeps the rest of the machine operating efficiently, coordinating and regulating the performance of the various components of the machine. This CPU sends out instructions (the budget manual) and receives feedback in the form of budget requests and policy inputs from the governing board. Using a set of algorithms, the CPU optimizes the budget, which in turn regulates the amount of resources consumed by the rest of the organization.
But government organizations are not black boxes. In fact, the very concept of an organization (along with revenues, expenditures, and money itself) is an abstraction. In reality, government organizations are just groups of human beings. These human beings spend some of their time and energy to help other people, and other people spend some of their time and energy to keep the government workers fed and housed.
The question then becomes, do current budget practices fit with what we now know about human beings? Stay tuned for next month’s column.
Author: Scott Lazenby, city manager, City of Sandy, OR and adjunct associate professor, Portland State University. [email protected]