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By Scott Lazenby
In previous columns, we considered ways to adapt governmental budget systems to modern management principles of delegation, empowerment and alignment of organizational goals. Following Douglas McGregor’s work, we labeled this a “Theory Y” budget system. One critical element is a carryover savings program, where the positive (or negative) financial results of one fiscal year are automatically carried forward into the department’s budget for the next year. Managers of enterprise funds or special revenue funds have always been treated this way. This modification simply treats managers of general fund programs the same way.
Some early experimenters with “expenditure control budgeting” allowed operating managers to carry over some, but not all, of their budget savings (e.g., 50%). There are two reasons for this. First, there is a natural tendency for the CEO and governing board to want access to some unallocated beginning balance for equipment, capital improvements or pet projects. If the general fund’s beginning balance is scattered across a multitude of program and departmental budgets, it would not be available for large one-time projects or investments.
Second, it’s hard to argue that all of the savings are due to the hard work and excellent management of the manager and his or her staff. Surely some percentage of it is due to luck, revenue windfalls, delays in hiring caused by the HR department, good deals in materials and contracts negotiated by the purchasing department, an overly-generous target budget, etc. Why reward operating managers for something they didn’t do?
These arguments belie a Theory X philosophy (operating managers are lazy and stupid, and not to be trusted), and we’ll return to them in a moment. But aside from the issue of management philosophy, there is a strong pragmatic reason for allowing operating managers to carry forward all of their savings: anything less seriously weakens the disincentive for playing the “spend it or lose it” game. Operating managers aren’t idiots. When faced with a choice of losing half their savings or keeping as much of it as possible through a year-end spending spree, they will choose the latter. Creating a discipline of saving for the future is hard enough, since humans naturally discount the value of future spending compared to current spending. To further discount the value of future resources through an arbitrary “tax” on the savings seriously undermines this discipline.
Returning to the arguments for splitting the savings, in a Theory Y culture individuals act as good managers (and stewards of public resources) not because they are bribed or rewarded for doing so but because of the intrinsic motivation for doing good work. Allowing managers to carry over savings is not some kind of reward. It is simply a way to give them more flexibility in the use of resources to get the job done. The accounting system’s annual (or biannual) budget clock is completely arbitrary and has nothing to do with the continuing demand on resources faced by managers as they provide services to the public. We would not expect the revenues of an enterprise fund (e.g., a sewer utility or the Tennessee Valley Authority) to magically and arbitrarily disappear when the accountants’ fiscal year begins. The same should hold for programs within the general fund. Whether savings are due to management skill or dumb luck, they should be available to the manager to help him or her meet continuing service challenges and unanticipated contingencies.
A CEO can choose to “keep” some of the carryover savings, but in this case, the program is just a variant of the traditional Theory X budget system in which the CEO and other central staff functions are presumed to be better and smarter at allocating the organization’s resources. A rule that allows only partial carryover of savings sends a perverse mixed message: “I trust you to manage your resources…but only so far.”
For those who truly want their organization’s systems to align with a culture of trust, openness and empowerment, there is no choice but to allow managers to keep all their savings. But this still leaves the practical problem of finding resources to fund priorities of the governing board that don’t fall neatly into one of the operating programs, or exceed the resources available to any single program.
Fortunately, there are several solutions that don’t involve poisoning the health of a carryover savings program:
In a healthy organization, there should be minimal need for the governing body or CEO to have a source of their “own” money. When the priorities of the governing board and the operating managers are aligned (as they should be in a well-managed organization in a representative democracy), the operating managers will act to carry out the wishes and desires of the governing board.