Local Governments and the Annual Budget Process

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Roger L. Kemp
August 7, 2015

The Annual Budget Process

The best way to understand a local government’s annual budget process is by using the systems approach to management. This approach recognizes the interdependence of all major activities within an organization, especially public ones. A public organization is viewed as an open system that includes five basic sub-systems, which are explained below, as they relate to the annual budget process in municipal governments.

• The Input – This includes available revenues to finance public services for the coming fiscal year. A local government’s revenues typically include non-restricted funds, restricted funds, and other possible funding sources as allocated and approved by its elected officials. The services provided by a public agency are based on the available revenues from all sources as approved in its annual budget, which is a result of the annual budget development process.
• The Process – The budget preparation process includes four typical steps followed by public officials, both elected and appointed. These steps include the administrative preparation of the budget, the legislative approval of the budget, the financial implementation of the budget and the annual year-end accounting and financial reporting, which is usually performed by an independent outside auditor. This process is in the best interest of everyone – the citizens, their elected officials as well as the employees of a public organization.
• The Output – The output of the budget process is based on the available revenues and approved allocation of these revenues to pay for projected departmental services for the coming fiscal year.  Available funds are allocated to finance the public services provided by local government, as well as its approved capital projects, for the coming fiscal year. The common types of public budgets include line-item budgets, program budgets, performance budgets, zero-based budgets and other evolving budget formats. Most local government budgets use a line-item format, with possible program performance measurements.
• The Feedback – The financial feedback on the adopted budget is provided to both the elected officials and their administrators, based on an annual audit that is typically conducted by an outside independent auditor.  This is usually required by a city’s charter, which is approved by its voters. This financially objective feedback is provided to the organization’s major stakeholders for both the operating and capital budgets including its elected officials, management staff and citizens. It is typically viewable on a city’s public website, as well as copies placed in its public library to accommodate those citizens that wish to review a hard copy of this annual report.
• The Environment – The annual budget process is influenced by several factors that comprise a public organization’s environment. These factors include its political environment, its economic environment, its social environment and its legal environment. All of these factors are interrelated and greatly influence all phases of a public organization’s annual budget process. While elected officials and their administrators have an influence on their internal environment, they have little control over their external environment. 

The Future

Elected officials typically create the political orientation of their organization, its political environment. While some local governments are liberal, others are conservative. Many represent both political perspectives and yet others change their political perspective over time.

While the political portion of a local government’s environment may change, the other components of a local government’s budget process generally remain the same, unfold annually and influence the organization’s political, economic, social and legal sub-systems, which in turn influence its annual budget process. Most of these other, primarily external, sub-systems change slowly over time.

Many aspects of a local government’s environment are influenced by higher levels of government too, primarily their state government and the federal government. Local public officials, both elected and appointed, generally have little influence over these levels of government and usually only react and adapt to their respective mandates, available grants and legal requirements.

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Author: Roger L. Kemp, Ph.D., ICMA-CM, has been a career city manager in California, Connecticut and New Jersey. Kemp has worked in and managed the largest council-manager government cities in these states. He is presently a practitioner in residence, Department of Public management, University of New Haven. Kemp can be reached via email at <[email protected]>.

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