5.3 Budget Types

There are several types of budgets, each with a different focus:

Traditional line-item budget: Focuses on expenditures and inputs, detailing specific costs like salaries and supplies.
Program budget: Organized around functions and programs, emphasizing the goals and purposes of government activities.
Performance budget: Centers on activities and outputs. The traditional performance budget emphasizes activities, while the new performance budget shifts focus to measurable outputs.
Zero-based budget: Requires justification for all expenses, starting from a “zero base” each period, ensuring that each activity is necessary and cost-effective.

5.3.1 Line Item Budget

A traditional line-item budget focuses on listing expenditures by item, ensuring control and accountability over the purchase and use of inputs. It is input-oriented and classifies costs into general categories such as personal services, operating expenses, or capital outlays. The main focus is on resources purchased. Given how the line item budget is constructed, it does not allow for input substitution given, for examples, changes in input prices. We know from economics that when input prices change, there occurs a shift along the so-called isoquant. That is, producing the same output with a different combinations of inputs. We will see that the line item budget does not provide any information on activities or functions. Remember that (public) organizations exist to achieve goals.

Consider the budget of a municipal library below. The budget listing the operating income can be constructed as follows:

Operating Income	Last Fiscal Year	Current Budget	Next Fiscal Year
Municipality	$41,640	$39,050	$47,190
County	$26,400	$23,980	$28,600
State	$1,800	$1,925	$2,730
Donations	$600	$550	$650
Fines and Other Income	$1,560	$2,310	$2,730
Total	$72,000	$67,815	$81,900

For the operating expenditures, we can have the following:

Operating Expenditures	Last Fiscal Year	Current Budget	Next Fiscal Year
Salaries and Wages	$28,980	$27,170	$33,345
Employee Benefits	$20,100	$18,700	$21,255
Books and Periodicals	$11,520	$11,000	$13,650
Staff Education	$2,280	$2,145	$2,730
Telecommunications	$1,710	$1,650	$2,048
Utilities	$4,560	$4,400	$5,460
Equipment Repair	$1,140	$1,100	$1,365
Supplies	$1,710	$1,650	$2,048
Total	$72,000	$67,815	$81,900

The budget under consideration offers several advantages that facilitate financial management. It is easy to construct, making budgetary planning straightforward and manageable. Additionally, it is effective for maintaining cost control and fiscal discipline, ensuring that expenditures stay within allocated limits. The transparency of this budgeting method also enhances accountability, making it easier to track and justify expenditures.

However, there are notable disadvantages. The budget primarily focuses on inputs rather than the outputs or outcomes, which does not provide a clear indication of the effectiveness or efficiency of spending. It also lacks insight into the broader purposes of expenditures, such as improvements in service programs, which can be crucial for strategic decision-making. Furthermore, its short-term, single-year focus does not support long-term planning and sustainability. Lastly, the rigidity of this budgeting method offers no flexibility for input substitution, restricting adaptability to changing needs or conditions.

Question: Are there any data on books checked out or reading score improvements for children?

5.3.2 Program Budget

Program budgets shift the focus of resource allocation from traditional line-items to major program areas with a goal-oriented framework, i.e., serving a common public purpose. Expenditures are listed by activities. This method prioritizes the expected results of services and activities, organizing budget allocations around a common purpose or function rather than rigid departmental structures. It typically adopts a multi-year perspective, offering greater flexibility in execution and necessitating a “crosswalk” to align program budgets with traditional line-item formats. Common program areas often include public safety, public works (e.g., infrastructure, roads), and human resources, which are aligned with the organization’s overarching goals and often span multiple departments.

The features of program budgets include identifying products and services by their program structure, emphasizing outcomes over inputs. Programs with similar objectives are grouped together. This structure helps connect financial resources with program objectives through the use of crosswalks, enhancing the alignment between spending and strategic goals. Budgets are organized to group programs with similar objectives, such as fire and police departments under public safety, facilitating a unified approach to service provision. Moreover, by identifying cost and benefit data, program budgets enable the reallocation of resources to enhance program effectiveness and efficiency, supporting thorough reviews and adjustments of programs and subprograms.

The advantages of program budgets are manifold. They foster competition among alternative approaches to achieving public purposes, unbound by traditional organizational units. This budgeting method focuses on the government’s provision of goods and services to society, rather than mere purchases, supporting a longer horizon for planning and decision-making.

However, program budgets are not without challenges. They require the use of crosswalks to bridge the gap with other budget classifications, often necessary for accountability purposes. This approach can also disrupt legislative and administrative traditions, which typically focus on line-item appropriations, and the classification of expenditures into functions or programs can be complex, requiring significant effort to define clear goals and objectives. Additionally, the potential for overlapping structures among programs can complicate the budgeting process, presenting hurdles in clear accountability and execution. How to determine the programs (multiple competing objectives)

Below is an example of a possible program structure for a city. The example is taken from Alan W. Steiss’s lecture notes on program budgeting at the University of Michigan:

Public Safety: (a) Law Enforcement, (b) Traffic Safety, (c) Fire Safety, (d) Maintenance of Public Order, (e) Prevention & Control of Other Hazards, and (f) Administration & Support
Housing & Community Development: (a) Housing Standards & Code Enforcement, (b) Community Improvement, and (c) Administration & Support
Transportation: (a) Traffic Control & Accessibility, (b) Street Development & Maintenance, (c) Mass Transportation, and (d) Administration & Support
Environmental Enhancement & Protection: (a) Environmental Health, (b) Water Services, (c) Sewer Services, (d) Sanitation Services, (e) Environmental Code Enforcement, and (f) Administration & Support
Human Resources: (a) Conservation of Health, (b) Personnel, Payroll & Benefits, (c) Vocational Rehabilitation, (d) Public Health Services, (e) Ambulance & Rescue Squad Services
Education: (a) Public Schools, (b) Adult &Vocations Education, (c) Community College Services, and (d) Higher Education Opportunities
Recreation & Culture: (a) Recreation & Parks, (b) Youth Opportunities, (c) Cultural Enrichment (inc. Libraries), and (d) Administration & Support
Economic Development: (a) Industrial Development & Promotion, (b) Job Opportunity Development, (c) Consumer Protection & Regulation, and (d) Administration & Support
Finance & Revenue: (a) Financial Operations (inc. Purchasing), (b) Assessment & Tax Collections, (c) Internal Audit & Records, (d) Recorder of Deeds, and (c) Administration & Support
Executive Director & General Support: (a) City Council, (b) Executive Management, (c) Budget and Control, (d) City Planning, (e) Human Relations & Affirmative Action, (f) Voter Registration & Elections, (g) Community Relations, (h) General Service Administration Support

5.3.3 Performance Budget

Performance budgets fundamentally reorient budgeting approaches by focusing on the effectiveness of expenditures in achieving desired outcomes. This methodology is built upon several key elements. First, it identifies the level of service an organization aims to achieve through the use of performance measures. Resources are then allocated across various programs based on these predefined service levels, providing a structured outline for budget construction. The emphasis is on cost control and the enhancement of internal management within programs, constantly assessing whether the funds allocated—such as $X to activity A—are delivering the intended outcomes. This leads to critical evaluations of financial commitments, asking if the objectives are met and if adjustments are necessary.

This shift in budgeting paradigm moves away from traditional input-output models to a more dynamic output-outcome focus. Instead of merely tracking financial inputs and basic outputs, performance budgets concentrate on the results, overall performance, and the tangible outcomes of government expenditures. This shift aims to ensure that budgeted funds are not just spent, but spent effectively, creating impactful results that justify the investments made.

Let us consider the example of the Sunnyvale (CA) City Budget. We are going to focus on the public safety progamrs by the Department of Public Safety:

Police Services
Fire Services
Community Safety Services
Personnel and Training
Investigation Services
Communication Services
Public Safety Administrative Services
Records Management and Property Services
Fire Prevention and Hazardous Material Services
Community Preservation Services

The budget document provides the following workload and performance indicators:

Workload indicators:
- Number of traffic enforcement stops.
- Number of parking and traffic citations issued.
- Number of traffic complaints addressed by enforcement efforts
- Number of police responses to emergency events
Performance Indicators
- Average police response time to emergency events.
- Average police response time to urgent events

Next, we will discuss the differences between a traditional and new performance budgets:

Traditional Performance Budget: The features of a traditional performance budget is focusing on the relationship between inputs and outputs/outcomes. It integrates the budgeting with (long-term) planning and management. Activity cost (i.e., unit cost) within organizational units as well as workload factors are defined. Consider the following examples of performance indicators found at GA Municipal Association Budget Types):

Workload: Number customers served, miles of streets maintained, businesses inspected, etc.
Efficiency: Cost per unit
Effectiveness: Levels of satisfaction, % of targets met, etc.

The advantages of Advantages

Information for internal management and cost containment (technical efficiency)
Higher levels of accountability, i.e., demonstration of activities and service level
Tool for management responsibility and accountability due to assessment of quantity, quality, and productivity of the budget

Disadvantages

Cost of budget preparation
Exposition of operating details
Quality of performance measures

New Performance Budget: Principles Principles

Strategic plan with stated objectives
Development of outcome performance measures
Flexibility in appropriation and execution
- Agencies’ flexibility in spending appropriations in order to achieve stated objectives (not input controlled but responsibility for outcomes)
Reporting and audits focus on outcomes, i.e., meeting of objectives

New Performance Budget: Outcome Measures I Outcome measures

Specific policy goals or objectives
Used as mechanism to allocate resources for activities, inputs, and projects to achieve goals and objectives
Measures should link directly to mission statement
Limited importance and weight given to objectives in case of large number of objectives

New Performance Budget: Outcome Measures II More specifics about outcome measures

Clear and unambiguous, not necessarily quantitative
Relevant and appropriate to the objective, not just available
Economic, i.e., objective measured at reasonable cost
Adequate: Providing acceptable basis for assessing performance
Observable and measurable

Conditions for effectiveness of outcome orientation

Consensus on measures among operating agencies, finance departments, administration, and citizens
Means for unbiased collection of measures
Meaningful measures
Training on interpretation and use of measures
Transparent and understandable process

New Performance Budget: Challenges Comparing agency performance

Measures not comparable across agencies
Difficulty deciding how to allocate resources between agencies

Cost allocation

Difficulty allocating overhead expenses to various agencies

Micro-management

Political agendas in selection of measures, collection of data, or use of measures in preparing budgets or making appropriations

Audit

Focus on achieved goals and not spent money

Performance Budgets versus Program Budgets Difference in focus

Performance budget emphasizes management efficiency
Program budget emphasizes benefits to the governmental unit from the expenditures

Both use indicators to measure financial and operational performance