RPVCCA_CC_SR_2012_01_31_03_2012_Budget_Process_And_TimelineCrrvOF
MEMORANDUM
RANCHO PALOS VERDES
TO:
FROM:
DATE:
SUBJECT:
REVIEWED:
Staff Coordinator:
HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
DENNIS McLEAN,DIRECTOR OF FINANCE &INFORMATION Dti'-C
TECHNOLOGY \fJ>~
JANUARY 31,2012
2012 BUDGET PROCESS AND TIM~~E
CAROLYN LEHR,CITY MANAGERlV----
Kathryn Downs,Deputy Director of Finance &Information
Technology
RECOMMENDATION
Provide feedback and direction to Staff regarding the hybrid Zero-Base Budget process,
the impact of historical General Fund expenditure variances,resources available for the
2012 process,sample materials attached to this Staff Report,and the 2012 budget
timeline.
EXECUTIVE SUMMARY
The City is currently using a Hybrid Zero-Base Budgeting approach.The hybrid method is
an efficient way to consider the totality of the budget,and refrain from using generic annual
increases for expenditures.The City has a balanced operating budget,and well funded
reserves.Mayor Misetich has expressed interest in incorporating additional Zero-Base
Budgeting concepts into the City's hybrid process.
Staff met with Mayor Misetich and Councilman Duhovic to discuss ideas for the 2012
process,which is the second year of a two-year budget preparation cycle.Based on that
discussion,Staff has provided information about Zero-Base Budgeting and other budget
methods;as well as sample materials for the City Council's consideration.Staff proposes
4 agenda items for the City Council's 2012 budget deliberations,with the goal of FY12-13
budget adoption on June 5th
•
DISCUSSION
The purpose of this Staff Report is to obtain the City Council's input in planning the 2012
budget process.Staff met with Mayor Misetich and Councilman Duhovic on December 20,
2011 to discuss ideas.As a result of that meeting,Staff is offering the following for the City
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2012 BUDGET PROCESS AND TIMELINE
January 31,2012
Page 2 of 6
Council's consideration:
~Information about Zero-Base Budgeting and other methods used by municipalities
nation wide;
~The City's hybrid Zero-Base Budget practices;
~General Fund expenditure variances and considerations for the 2012 process;
~Sample documents to be used in the 2012 process;and
~A proposed timeline for the 2012 process.
Budgeting Methods
After determining what resources are available,there are 3 topics to focus on during the
budget planning process.
1.What are the community's priorities,and what programs should be funded to
achieve those priorities?
2.If the City is to provide a service,how much and at what quality should it be
provided?
3.How can the service be provided efficiently,and is the use of resources reasonable
for the expected results?
The City can address these issues using recognized budget methods,such as Zero-Base
BUdgeting,Priority Based Budgeting,Program Review,or Target Based Budgeting.The
City can also choose to borrow principals from each of these methods to develop a
measured approach to budgeting that suits the City's needs.With input from various
Council Members,including Mayor Misetich,the City's current budget practices have
evolved into a hybrid of Zero-Base Budgeting.
Zero-Base Budgeting
In addition to the summary information that follows,Staff has attached a white paper on
Zero-Base Budgeting (see attachment C)that was prepared by the Government Finance
Officers Association (GFOA),a national non-profit organization with a purpose to enhance
and promote the professional.management of governments for the public benefit by
identifying and developing financial policies and best practices.
The practical uses of Zero-Base Budgeting (ZBB)focus on detailed review of expenditures
or selection between different levels of service.This method requires greater involvement
from program managers,as it typically includes 3-10 decision packages from each
department outlining different levels of service and methods of delivery.The decision
packages are ranked and include performance measures.Documentation is substantial
with ZBB,due to the great amount of detailed information presented.There is no
structured method to consider community or elected official priorities,so the process is
driven largely by management perceptions.
Pure ZBB is rare in practice.Just like the City,most governments using ZBB are actually
borrowing elements of the method,but do not conform to the theoretical ideal.The two
most common forms of ZBB used in practice follow.
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2012 BUDGET PROCESS AND TIMELINE
January 31,2012
Page 3 of6
1.Zero Line-Item budgeting considers whether the resources used are reasonable for
the expected results.This method creates greater transparency by requiring
detailed justification.Managers are engaged,and become more cost conscious.
There are efficiency gains,but they are not systematic;and the method only
partially addresses service levels.There is a basis for more centralized control of
the budget,as the budget officer learns a great deal about the organization.This
method is best suited to smaller governments.
2.Service Level budgeting asks the governing body to choose among different levels
of service.This method considers how much and at what quality the service will be
provided.The decision packages are necessarily detailed to define service levels;
however,efficiency is not directly addressed.To get the most from the process,
good performance data is needed.This method is often connected with strategic
planning,and the implication of each decision to reduce service is clear.
The ZBB method is useful for considering the entirety of the budget,not just the
components.It's also useful for justifying budget cuts,as the trade-offs between resource
usage and results is more transparent.Unfortunately,ZBB does not directly address
whether the City should even be in the business of providing a particular service.
The City's Hybrid ZBB
Like most cities using ZBB,the City utilizes a hybrid approach.Instead of beginning at
zero,the City begins with a baseline that includes non-discretionary expenditures (e.g.
those required by law)and existing service levels.The proposed budget for existing
service levels is not simply increased by a standard percentage during budget preparation.
Staff analysis focuses on the actual expected cost of providing the service,and whether
there are opportunities to improve efficiency and reduce the cost.The City Council is
presented with a Menu (accompanied by justifications)of changes to existing service levels
and discretionary expenditures to build the remainder of the budget.
Even though Hybrid ZBB is the City's primary budgeting method,the City has utilized ideas
and concepts from other budgeting methods widely used by other municipalities,as
appropriate for the situation.
Other BUdget Methods
With Priority Based budgeting,the government determines what resources are available,
identifies the most important priorities,and allocates resources to address those priorities.
One of the challenges for this process is budgeting for support services,such as Finance
and Information Technology.Priority Based Budgeting requires a great deal of input from
the public;which necessitates a long lead time before it can be implemented.Staff will
likely propose borrowing concepts from this method for the 2013 budget process,after the
FY11-12 funded Community Survey is conducted.
The Program Review method is conducted outside of the budgeting process,and is used
to examine how a service program is provided.This method is designed to reveal
alternative service delivery methods and opportunities to improve efficiency.After using
this method to review Building &Safety services in 2006,the City Council determined that
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2012 BUDGET PROCESS AND TIMELINE
January 31,2012
Page 4 of6
services should be provided by in-house staff rather than contracting.
In Target Based budgeting,each department is given a targeted spending amount.It is
necessary for the total organization-wide target to be less than what is affordable.The
difference between the targeted spending and the resources available is used to fund
additional activities through decision packages.There is no emphasis on discovering and
examining the minimum feasible funding for a service.The City Manager used a similar
method to drastically reduce spending in 2003,when the City prepared for substantive
reductions of state-shared revenues during the California budget crisis.
Practical Issues
Historical General Fund Expenditure Variances
The City has a history of budgeting conservatively,which has served it well.The City's
budget is balanced and the reserve levels are healthy.The Municipal Code stipulates that
budgetary compliance is by program,which means that actual expenditures for each of the
30 General Fund programs must not exceed the total budget for that program.Even small
variances in each program will combine to create a sizeable overall General Fund variance.
Historically,this favorable variance has been used to fund additional capital projects in
following periods.
1O-Year His re Variances
FY01-02 $672,214 7.0%
FY02-03 $695,755 6.7%
FY03-04 $754,649 6.8%
FY04-05 $978,612 82%
FY05-06 $1,048,687 7.8%
FY06-07 $833,930 5.8%
FY07-08 $420,103 2.9%
FY08-09 $992,478 6.3%
FY09-10 $927,146 5.5%
FY1D-11 $897,647 5.3%
When there is a trend of historical favorable variances within a single program,Staff will
analyze the program and work with the department head to re-scale the budget
accordingly.For example,after a history of favorable variances,Staff worked together to
reduce the Parks,Trails &Open Space Maintenance program by $186,000 before
proposing the FY11-12 budget to City Council.
Although it is tempting to reduce the General Fund expenditure budget to eliminate future
favorable variances,there are some negative impacts of doing so.First,there is no room
for error.If there are unexpected events that necessitate additional expenditures,the
overall General Fund budget could become out of balance.Second,to ensure budgetary
compliance by program (per the Municipal Code),additional City Council agenda items
would become necessary for the increase in the number and frequency of budget
adjustments.Finally,with aged infrastructure,even the best Capital Improvement Plan will
not accurately predict all needs.Additional funding requests for unplanned projects are
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2012 BUDGET PROCESS AND TIMELINE
January 31,2012
Page 5 of6
common,and the favorable General Fund variance is one way to fund the unexpected.
Considerations for the 2012 Process
The FY12-13 budget must be adopted prior to July 1st.Staff recommends targeting June
5th for budget adoption,which will allow for a fall-back date of June 19th
•The June 5th
agenda packet is scheduled for distribution on May 30th
,which gives the City 4 months to
complete the 2012 budget process with new work product.In addition,it is expected that
Finance &IT Staff will devote a great deal of time to implementation of a new Enterprise
Resource Planning (ERP)system during 2012.
The City currently prepares a two-year budget document,but does not adopt a two-year
budget.The City Council adopts the first year of the budget document.The second year
of the document,with a limited number of changes,is presented to the City Council for
adoption the following year.This method reduces the amount of work in the second year
of the cycle.The 2012 process is the second year of the budget preparation cycle.
The FY11-12 Budget includes appropriations for a Community Survey and Infrastructure
Report Card.As these work efforts have not yet begun pending the outcome of the City
Council's goal setting,the results of these studies are not expected to be completed in time
for the 2012 budget process.Staff also expects that the City Council will provide direction
regarding performance metrics.The performance data will be more meaningful if ample
time is provided to gather it.These tools will provide critical information to the City Council
that can be used to shape service levels and spending plans during the 2013 budget
process.Therefore,Staff does not recommend a drastic departure from prior practices at
this time.
Sample Materials for the 2012 Budget Process -New Work Product
General Fund Expenditures by Program
The City's 250-page budget document can be overwhelming to digest.Staff would like to
improve transparency and the public's ability to understand the budget.In an attempt to
efficiently answer the questions "what do we get"and "how much does it cost",Staff has
prepared sample expenditure summaries for 4 General Fund programs (see attachment
A).These one-page summaries include the following information:
~A quick summary of the service provided by the program;
~Historical and proposed expenditures categorized by Non-Discretionary,Revenue
Generation,Current Service Levels,and Discretionary;
~Page references to the full budget document;
~The percentage of total General Fund expenditures;and
~Initial program metrics.
Staff requests that the City Council provide feedback and direction about whether these
expenditure summaries or something similar should be used during the 2012 process.
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2012 BUDGET PROCESS AND TIMELINE
January 31,2012
Page 6 of6
General Fund Contracts
Staff has prepared a list of current vendor contracts funded with General Fund money (see
attachment B).This information will be useful for the City Council to take a targeted
approach,and direct Staff to focus analysis on certain expenditure activities for the 2012
process.
Budget Timeline
Staff recommends 4 agenda items as outlined below.
1.Budget Meeting 1-Initial Budget Direction (90 minutes on March 6th
)
a.Review "General Fund Expenditures by Program"sheets with initial program
metrics for all 30 General Fund Programs,as well as any other information
that was requested by the City Council on January 31 st .
b.Provide Staff with direction regarding which programs,contracts,and/or
expenditures warrant further analysis for FY12-13.Further analysis may
include options for levels of service and alternative delivery methods.
c.Provide Staff with direction regarding the ranking of program expenditures
and the initial set of program metrics.
d.Review 2011 Five-Year Capital Improvement Plan (CIP),with a 2012 update,
and provide Staff with direction for the 2012 Five-Year CIP.
2.Budget Meeting 2 -Refined Budget Direction (60 minutes on April 3rd
)
a.Review information that was requested during Budget Meeting 1.
b.Review any new and updated expenditure/project information from Staff.
c.Review initial estimate of FY12-13 revenues.
d.Provide Staff with direction for preparing and ranking FY12-13 budget
decision packages.
3.Budget Meeting 3 -Review Decision Packages (90 minutes on May 1st)
a.Review revised estimates of FY12-13 revenues.
b.Review decision packages,and provide direction to Staff.
c.Review draft 2012-13 Performance Goals,and provide direction to Staff.
4.Budget Meeting 4 -Finalize Draft Budget (30 minutes on May 15th
)
a.Review the final version of the draft budget.
b.Review the draft 2012 Five-Year Financial Model and the draft 2012 Five-
YearCIP.
c.Provide final direction to Staff for the budget to be adopted by the City
Council on June 5th
•
Attachments:
A -General Fund Expenditures by Program
B -General Fund Contracts
C -Zero-Base Budgeting:Modern Experiences and Current Perspectives -white paper
prepared by the Government Finance Officers Association
3-6
Attachment A
General Fund Expenditure Summaries by Program
INTRODUCTION
Staff has prepared four sample documents titled "Expenditure Summaries by
Program"presented in the following pages.These summaries attempt to
efficiently answer the questions "what do we get"and "how much does it cost".If
the City Council agrees that this summary information is useful for the 2012
budget process,similar one-page summaries would be prepared for all 30
General Fund programs.The summaries include page references to the City's
two-year budget document,so the reader may easily find more detailed
information for each program.
EXPENDITURE CATEGORIZATION
Categorizing General Fund Expenditures is a useful methdijft~;c;marrow t~~.i~cope
of analysis during the budget process..f\lthough not<f~rrnally:td;Emtified
previously, the following categories have beeijj~;!ilized by Staff.tg,identify the
baseline budget presented to City Council inprevl~~~budget cycles1
,""'"",","'"""'",'''"',.',""
Non-Discretionarv.,,;;:U <iI i <
Those activities required by law or Isg~L covep~nts,as w~ffas prudent costs of
risk management (e.g.general lla:b'ilitytM:~~rqrt~e).
Current Service Levels
Services to the~14;plic and t"~.9itY>~~~l6lcil,as well as support services.Core
services include~~fi~~ri~!rastrd~t~{e malntenance,and land use issues.
;:»::~"'i{>::::::<:>
.'s ;::\i)~'~'Discreti?n~[Y<:i <ii:.Thos~::q~tivities nof >.iuired by law or legal covenants,not related to revenue
gen~f~tion,and n()t ti ·to core public service levels.
Revenue Generation 300,000
Current Service Levels 14,000,000
Discretionary 1,000,000
m<l.tRf86a$ia:lini"WEunaje.irtatdi~$?::;::::;:·;jjj}H}j;j11:;ai:oOli
STAFFING
Staff positions support all 4 expenditure categories presented here.For
example,the City is required by law to hold elections,maintain records and
respond to Public Records Act requests;therefore,the expenditure to provide for
3-7
Attachment A
General Fund Expenditure Summaries by Program
a City Clerk may be considered Non-Discretionary.In addition,certain Staff
positions may support functions that can be placed in several categories.For
example,a Senior Administrative Analyst in the City Manager's Office may
support risk management (Non-Discretionary),grant writing (Revenue
Generation),analysis (Current Service Levels),and the composition of
proclamations (Discretionary).
For purposes of this exercise,all Staff compensation expenditures have been
categorized as Current Service Levels.A distributed cateQorization of Staff
compensation would require a much more comprehensivf?,i~halysis of all job
duties.It should be noted that most Staff positions Ii~~~fsupport 2 or more
categories;and that job descriptions are designed to~~gl.nre a G~~ain skill set
and education level,not to support a specific categorizatlG~~2f E;{(p~nditures.
3-8
Attachment A
General Fund Expenditure Summaries by Program
City Clerk Program
Service Provided
City records management (contracts,meeting minutes,ordinances and
resolutions,recorded documents,agenda packets,and other public records),
public meeting coordination,election coordination,campaign filings
management,municipal code updates management,rules of procedure
administration,recruitment of advisory boards,and response to Public Records
Act requests.
3,864 6,957 3,550
1,700
Code Updates
Training
Meetin s &Conferences
Proportionate allocation of office equipment,
computers &software
Salaries &Benefits for 3.0 FTE's +Incidental
Part-Time
Office Expenses
Program MetricS"~li'~:;l
Program metrics il1'1""de(
~,~,,:.publid
~i$:~''I electl
~~~0Quarte~I¥§9ge ",'
~'!i1j~;-~>A,~~iS6tY!:;)Ji30 c'recruitments annually
~>46',;;eO Publidlecords Act requests annually
This program is 2.1 %of
3-9
Attachment A
General Fund Expenditure Summaries by Program
Code Enforcement Program
Service Provided
Investigate municipal code violations,such as those related to property
maintenance or non-permitted construction.Assist with permitting process to
resolve issues.Monitor case progress.
0-11,with 28-day median
FY10-11,with 75-day median
1,000
5,000
8,400
10,000
183,700
in FY10-11,with 23-day median
205 300
660 2,644
1,656 525
1,400 1,100
174,073 172,611
Staff Memberships to professional
organizations
Salaries &Benefits for 2.0 FTE's
Technical Consultants
Field Expenses
Nuisance Abatement
Proportionate allocation of office equipment,
computers &software
Meetings &Conferences
Program metrics include,put are
~138 Municipal·····Ola1tI0!1($
processing time
~7 Buildin Code
processi
~77 Zonin
processing
Program Metrics
This program is 1.1 %of General Fu
3-10
Attachment A
General Fund Expenditure Summaries by Program
Parks,Trails &Open Space Maintenance
Service Provided
Maintain all parks sites and open space areas.
39,650
256,396
4,381
12,552
35,917
40,000
10,000
40,000
300,000
7,500
13,750
60,000
40,000 Non-Discretiona
-Non-Discretiona
10,000 Non-Discretiona
40,000 Non-Discretiona
306,000 Non-Discretiona
7,500 Non-Discretiona
14,000 Non-Discretiona
-Non-Discretiona
This progrqmj~;~;~~~of General Fund expenditures.
'<':':-:':':';';'·:·'\,2"':':>:<':':<',',
Program Metrics
Program metrics include,but are not limited to:
~18 parks maintained
~1400 acres of open space maintained in the Preserve
~94%of all public maintenance requests addressed within 2 weeks during
FY09-10
3-11
Attachment A
General Fund Expenditure Summaries by Program
Recreation Special Events
Service Provided
Coordinate recreation special events for the community.
City 40th Anniversary Celebration
Fourth of July Celebration
Palos Verdes Symphonic Band Performance
Portable Toilet &Lighting Rental
Salaries &Benefits for Part-Time Staff Support
Shakespeare b the Sea Performance
Sound Equipment Rental
Special Event Supplies
Whale of a Day Parking
This program is 0.4%of General
Program Metrics
15,884 16,196
500
545
3,533 2,954
5,325 8,626
3-12
Attachment B -Current City General Fund Contracts
Contractor Description Amount Beginning Date Ending Date
Charles Abbot and Associates I Building and Safety Consulting Services $89-$132/hour +CPI Index I 1984 I FY12-13
Coleen Berg I Mediation Consulting Services for View $125/hour -not to exceed I 11/3/2004 I FY12-13Restoration/Preservation $40,000/year
Kling Consulting Group I Engineering geologist and soils engineering $50-$165/hour 101711997 Ongoing
Kling Consulting Group I Consulting Services for the City's General Plan Not to exceed $23,800 2/20/2007 Until completion of General Plan
Update Update
Linscott,Law &Greenspan,Eng I Consultant for Traffic Engineering Design Services Not to exceed $16,500 7/21/2009 Until completion of General Plan
Update
David Magney I Environmental Consulting -Bio $45-$115/hour (paid by applicant)9/6/2005 Ongoing
Palos Verdes on the Net I Consulting services for General Plan.For GIS and Not to exceed $8,241 2/20/2007 Until completion of General Plan
mapping work Update
Rincon I Environmental documents for Zone 2 Not to exceed $139,826 4/6/2010 Until completion of project
Scott Fazekas &Assoc I Building and Safety Consulting Services $70-$100/hour 9/16/2008 Ongoing
URS I Environmental Review for NCCP document and Bio I Not to exceed $164,438 I 81712000 I Upon completion of environmental
document
Tom Hollingsworth I Design Services -City Logo I Not to exceed $5,000 7/1/2002 Ongoing
Kosmont Companies I Net Fiscal Benefit Analysis Not to exceed $25,000 5/17/2010 Upon completion of project
Blais &Associates I Grant Writing Services $95/hour +mileage 7/1/2009 Ongoing
Mark Doddy I Station Manager RPVTV I $32/hour 1/16/2008 Ongoing
Albert Edwards Consultant for Leadership Academy I Not to exceed $20,000 71712011 FY11-12
Richards,Watson &Gershon Legal Services I Fee by necessity I 1973 I Ongoing
3
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1
3
Attachment B -Current City General Fund Contracts
Contractor
TelVue Virtual Television Network
Description
Customer support for Access Channel Equipment
Amount Beginning Date
$50/hour I 7/2/2007
Ending Date
Ongoing
All City Management Services
LA County Sheriffs Dept
Crossing Guard Services
Law Enforcement Services
Nottoexceed$17,260peryear I 9/1/1992
$5,754,489.27 I 3/24/1980
Ongoing
FY11-12
AJ Fistes Building Painting Maintenance Per bid proposal 4/3/2007 I FY11-12
Bennett Landscape Weed abatement Control and Landscape Per bid proposal I 9/19/2000 I FY11-12
Coastal Building Services Janitorial Services/Carpet Cleaning $6,741.89 I 6/20/2006 I FY11-12
Fire Grazers I Open Space Fuel modification (Brush removal)Notto exceed $107,574/year I 6/15/2010 I FY12-13
Great Cleaning Services Custodial Services I $69,264 +PPI I 3/16/2010 I FY13-14
Marina Landscape Landscape Maintenance for Parks and Trails,City Not to exceed $148,050.24 I 4/29/2008 I FY12-13Medians,etc.
PCI I Pavement Striping Maintenance Project Not to exceed $70,000 annually I 4/3/2007 I FY12-13
Hunter &Assoc.I NPDES Implementation ,FY11-12-$61,631,FY12-13-I 9/16/2003 I FY12-13$62,455
KCD in SGV (Traffic Solutions)I Traffic Data Collection Services I Not to exceed $60,000 for one year I 6/16/2009 I FY11-12and$25,000 for one event
Kling Consulting Group I Geotechnical Consultant ,Not to exceed $60,000 for one year,10/19/199 I Ongoingand$25,000 for one event
3
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1
4
Attachment 8 -Current City General Fund Contracts
Contractor Description Amount Beginning Date Ending Date
Nobel Systems GIS solution services Not to exceed $60,000 for one year 6/16/2009 FY11-12and$25,000 for one event
Willdan Engineering Crest Road at Whitley Collins Pedestrian Crossing Not to exceed $16,160 11/15/2011 FY11-12
Withers &Sandgren Landscape Architectural Services Not to exceed $60,000 for one year 5/6/2008 FY11-12and$25,000 for one event
ADP Payroll Payroll Services $27,800 (varies bases on actual I 8/5/2008 I Ongoingtransactions)
Bank of America Merchant Services Bank Card Processing Services Per transaction based on card use 5/20/2011 Ongoing
Cost Recovery Systems I Consultant to prepare eligible claims for State $7,250/year 7/18/2000 OngoingMandateReimbursement
Diehl,Evans &Company LLP I Auditing Services Not to exceed $50,000 7/16/2008 Ongoing
GFOA I Accounting Software Selection Service Contract I Not to exceed $51,000 4/19/2011 Upon completion of project
NEXUS I Phones and voicemail I $6,000/year 8/6/2002 Ongoing
Oce North America I Copier Agreement I $21,600Iyear 8/30/2007 Ongoing
Palos Verdes on the Net I IT Services I $270,000 +$40-$50/hr for special 10/1/1996 FY13-14additionalservices
Bell Event Services July 4th Celebration at Point Vicente Park/Civic I Not to exceed $12,000 I 2/6/2007 I Oct 2013Center
Mountain Conservation &Ranger Patrol and Interpretive Programs I Not to exceed $170,052.48/year I 6/16/2009 I FY13-14RecreationAuthori
Jeff Robinson -Disaster Coordinator for Area G -consists of 14 cities in the I $7,000/year I 11/1912012 I OngoingManaaementAreaCoordinatorSouthBa"
3
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1
5
Attachment C
Zero-Base
Budgeting:
Modern Experiences
and
Current Perspectives
fHE CITY 01.~CALGARY Government Finance Office..A"ociation Gb
3-16
Attachment C
Introduction 1
A Brief History of ZBB 1
The Theory of Zero-Base Budgeting 3
Zero-Base Budgeting in Practice 7
Zero Line-Item Budgeting 7
Service Level Budgeting 10
Does ZBB Work?13
Is ZBB for You?18
Alternatives to ZBB 20
Priority Budgeting 20
Program Review 21
Target-Based Budgeting 23
Conclusions 26
Bibliography 26
Sponsored by the G@vernment finance ()fficer~
Association and the (~tw @f Ca~garWF Alberta~
GFOA received a grant from the City of Calgary,Alberta,to study zero-
based budgeting for public employers.GFOA used the grant to conduct
independent research using a survey of GFOA members,case studies,and
secondary sources.The findings and resulting publication were reviewed
and approved by an independent panel of GFOA members.
The Government Finance Officers Association
Research and Consulting Center
203 N.LaSalle Street,Suite 2700
Chicago,IL 60601
312-917-6102
Hit tHYUf
CALGARY Government Finance Officers Association G~
Research and Consulting Center I;.)
3-17
Attachment C
This paper was written by Shayne C.Kavanagh,Senior Manager of Research for the GFOA's Research
and Consulting Center in Chicago,Illinois.It is a custom research project completed for the City of
Calgary.To contact GFOA about the topic of this paper or to inquire about your own custom research
project,please contact Mr.Kavanagh at skavanagh@gfoa.org.
GFOA would like to recognize the following individuals for contributing their experiences to our
research case studies:
Advisors
Carol Ebdon,Associate Professor,University of Nebraska
David Fiorenza,Associate Professor of Economics,Villanova School of Business
Merrill King,Finance DirectorlTreasurer,City of Minnetonka,Minnesota
Anne Kinney,Director,Research and Consulting Center,GFOA
Thomas F.Kuehne,Finance DirectorlTreasurer,Village of Arlington Heights,Illinois
Casey Srader,Budget Manager,City of Plano,Texas
Ari J.Sky,Director of Management and Budget,Fauquier County,Virginia
Nancy Zielke,Senior Director,Alvarez &Marsel Public Sector
Case Studies
Mary Ann Debrinski,Director of Urban Renewal,City of Edmonton,Alberta
M.Katherine Barkdoll,CPA,Budget Director,City of Frederick,Maryland
Lora A.Grogg,Budget Manager,City of Johnson City,Tennessee
Martin Hayward,City Treasurer,Chief Financial Officer,City of London,Ontario
Sharon Houde,CMA,Director,Business Planning,City of London,Ontario
Rosanna Wilcox,Business Planning Process Manager,City of London,Ontario
Karen DeAngelis,Director of Finance,City of Naperville,Illinois
Vicki Boschert,Mg.Director of Finance,City of O'Fallon,Missouri
Teri Doby,Budget Officer,City of Rowlett,Texas
Len Brittain,Director,Corporate Finance,City ofToronto,Ontario
Josie La Vita,Director,Financial Planning,City ofToronto,Ontario
Tony Ardovini,Deputy Treasurer Financial Planning,City of Windsor,Ontario
Onorio Colucci,CFO/CityTreasurer and Corporate Leader Finance and Technology,
City of Windsor,Ontario
Melinda Munro,Manager of the Office of Continuous Improvement,
City of Windsor,Ontario
Dave Soave,Manager of Operating Budget Development and Financial
Administration,City of Windsor,Ontario
Eric Johnson,Director of Strategic Planning and ERP Implementation,
Hillsborough County,Florida
Jim Seuffert,Director,Financial Management Department,Manatee County,Florida
Shaela E.Jones,MBA,Budget Analyst,School Employees Retirement System of Ohio
Kathy Thornburg,CPA,Senior Accounting Analyst,School Employees Retirement
System of Ohio
Bill McKennan,Treasurer,Town of Orangeville,Ontario
The survey research was conducted using www.surveymethods.com.
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Attachment C
Abstract
Zero-base budgeting (ZBB)is a budgeting process that asks managers to build a budget
from the ground up,starting from zero.However,ZBB has been the subject of a fair
amount of controversy over the years,owing primarily to questions about the value
derived from ZBB analysis versus the cost required to put ZBB into practice.
The goal of this paper is to define what ZBB means in current practice,describe the uses
of ZBB,and to help public officials facilitate a conversation in their organizations about
the value of ZBB.GFOA's research found that "textbook"ZBB or ZBB systems that con-
form to the theoretical ideal are almost unheard of in present day financial management.
However,an increasing number of governments that exhibit leadership in budgeting
practices (albeit still a minority)are considering elements of ZBB and incorporating them
into their budget processes.Major conclusions the paper reaches about ZBB include:
•Practical uses of ZBB streamline ZBB theory to focus on either detailed examina-
tion of expenditures or selecting between different levels of service.
•ZBB isn't for everyone.ZBB,or concepts inspired by ZBB theory,may be useful in
certain situations.Ultimately,public officials must decide if the benefits of ZBB
outweigh the disadvantages.
•Alternatives to ZBB exist.These alternatives can answer many of the same cut-back
budgeting questions as ZBB,while sidestepping some of its disadvantages.
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Attachment C
Zero-Base Budgeting:Modern Experiences and Current Perspectives 1
~ntr@dud§@n
When using zero-base budgeting (ZBB),a government builds a budget from the ground
up,starting from zero.Though the apex of ZBB's popularity in the late 1970s is long
past,there has been renewed interest in ZBB in today's environment of fiscal constraint,
not least because the "zero"in zero-base budgeting sends a powerful message that taxes
and spending will be held in check.However,the time lapse between the zenith of ZBB
and the present,as well as the political rhetoric surrounding it,has obscured the theory
and practice of ZBB for many.
The purpose of this paper is to offer clarification on this sometimes controversial and
misunderstood budgeting method.First,the paper will describe the theoretical process
of ZBB,including its major theoretical advantages and disadvantages.However,because
"textbook"ZBB is very rare/the paper will describe how GFOA research found ZBB is
actually used in practice and the important differences from theory.The paper will then
describe the potential value of ZBB and how public officials can decide if ZBB is right for
their circumstances.Since ZBB won't fit all all situations,the last section of the paper
explores alternative planning and budgeting methods that achieve some of the same
underlying goals while sidestepping the weaknesses of the method.
A Brief History @f ZBS
Zero-base budgeting,also known simply as ZBB,has had a long and sometimes contro-
versial history in the public sector.Zero-base budgeting first rose to prominence in gov-
ernment in the 1970s when u.s.President Jimmy Carter promised to balance the federal
budget in his first term and reform the federal budgeting system using zero-base budg-
eting,a system he had used while governor of Georgia.ZBB,as Carter and budget theo-
rists envisioned it,requires expenditure proposals to compete for funding on an equal
basis -starting from zero.In theory,the organization's entire budget needs to be justi-
fied and approved,rather than just the incremental change from the prior year.
Interest in ZBB had been in decline for many years.The large amount of paperwork and
data ZBB generates,along with doubts about the method's ability to fully meet its theo-
retical promises,were at least partially responsible.2 Also,the improving economic con-
About the Survey
GFOA conducted a survey of participants in its distinguished budget presentation award program,which recog-
nizes governments that exemplify best practices in presenting budget information to the public.Presumably,
budget award winners are interested in pursuing best practices in budgeting and financial management,more
generally.However,they would not necessarily be representative of all local governments.GFOA received a high
number of responses (413),with the result that findings should be accurate within at least +/-3.5%when general-
ized to all budget award program participants,assuming a 90%confidence range.Appendix 1 provides a summary
of all survey results.*
*GFOA sent the survey to the individual listed as the main point of contact for the participating government.Typically this person would
be knowledgeable about the organization's budgeting practices.
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 2
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.3
However,pure ZBB may have largely disappeared,but it wasn't forgotten;vestiges have
lived on.4 In fact,ZBB seems to be experiencing a kind of resurgence.A survey of partici-
pants in GFOA's Distinguished Budget Presentation Award Program shows that an
increasing number of leading public budget practitioners (44%of all respondents)are
considering ZBB.GFOA's survey also showed that actual use of ZBB-like practices is
increasing.Just over 20%of those surveyed say they are now using ZBB,at least in part.
This represents an increase of more than 50%in the number of governments that say
they are using at least some elements of ZBB,compared with the period just before tithe
worst financial impacts of the 2008 recession hit these governments.
Why the apparent resurgent interest in ZBB?At the core is doubtlessly the fact that we
have been experiencing the worst economic slowdown in decades.s These times have
imposed major fiscal challenges on local governments6 and,accordingly,have required
serious changes,for many,to how resources are allocated.7 GFOA's survey shows that
traditional budgeting methods,namely line-item and incremental budgeting,have
declined in use in the last few years,while all forms of budgeting that are thought to be
better adapted to cutting back the budget,not just ZBB,have increased (See Exhibit 1 -
these other forms of budgeting will be briefly explained later in this paper).Finally,
IExhibit1:
Percentage of Respondents Using Majol'Budget Reforms
BeforE!and After the Depths of the 2008 Recession
Zero Base Budgeting
Priority-Driven
Budgeting
Target-Based
Budgeting
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0%10%
mBefore U After
20%30%40%
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 3
behind the apparent resurgence,is that those governments that report using ZBB are
using "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 in local government today.8 The attraction of ZBB,for
many,is that the "zero"in ZBB sends a powerful message to all stakeholders that the
line will be held on spending and that nothing will be taken for granted.Applying the
ZBB label to the budgeting process makes this statement,even if the actual budget
process doesn't conform fully to ZBB theory.
The The@ry @f Zer@~Ba~M!Budgetffing
ZBB promises to move the organization away from incremental budgeting,where last
year's budget is the starting point.Instead,the starting point becomes zero,with the
implication that past patterns of spending are no longer taken as a given.
To deliver on this promise,the organization is first divided up into"decision units"-
the lowest level at which budget decisions are made.Decision units could be formed
along functional or organizational lines -for example,a division of a department is a
common decision unit,but programs could be used as well.Managers in each decision
unit then prepare a detailed description and evaluation of all activities it performs,
including alternatives to current service delivery methods and the spending plans neces-
sary to achieve the decision unit's goals.This information is used to create a number of
"decision-packages,"which show marginal spending level differences that represent
varying levels of effort and cost.There should be at least three decision-packages for
each decision-unit,though there could be as many as ten or even more.The three ele-
mentary categories of decision-packages are presented below.More than one decision-
package could be presented for each category.
•Base package.This type of package meets only the most fundamental service needs
of the decision unit's clientele and represents the minimum level of funding needed
for the unit's services to remain viable.There could be multiple base packages,each
addressing a different way to provide the base service.This represents an important
departure from incremental budgeting in that an incremental budget never considers
what the absolute minimum level of funding a program can survive on is.Rather,
the current level of spending is usually considered a sort of de facto minimum.
•Current service package.This type describes what it takes to continue the level of
service currently provided to the unit's clientele.The difference between the base
package and the current service level may be expressed by multiple decision pack-
ages,with each package representing one aspect of what it takes to get from base
funding to the current service level.There could also be different decision pack-
ages describing different means for achieving the same service level.
•Enhanced package.This category addresses resource required to expand service
beyond current levels.There could be any number of enhanced packages.
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 4
In addition to the detailed information on inputs (dollars,personnel,etc.)needed to pro-
vide the service,decision packages include performance measures that express the
impact of the package on service levels.For instance,a series of decision-packages from
a street repair division might use measures to describe the variation in lane miles that
can be maintained and the smoothness of the car ride that will be experienced (as might
be expressed through a pavement quality index).
Because of the detailed information required and because decision-packages are created
for the lowest levels of budgetary decision making,ZBB requires greater involvement of
mid-level and perhaps even line managers -an important difference between ZBB and
many other budget processes.Because each division is creating between three and ten
decision packages,along with the required supporting information for each,the docu-
mentation can be substantial.
After the decision-packages are completed,they are gathered up and ranked from top to
bottom within the organizational unit in which the decision unit resides.For example,in
a local government,the head of a department might gather the decision-packages from
the divisions of the department and then rank them all together.Decision-packages
could be gathered and ranked on an organization-wide basis,but this is uncommon due
to the amount of paperwork involved and because it is usually easier for a department
director to rank decision-package options within his or her own department than for a
chief executive or budget office to rank packages across departments.
After the packages are ranked,the ranking is then used by central budget authorities
(e.g.,budget office,chief executive,governing body)as the basis for making allocations.
For instance,each department would submit its suggested ranking to the chief executive,
who would use those rankings to formulate a recommended budget for review by the
governing body.
The foremost theoretical advantage of ZBB is that it offers a rational and comprehensive
means to cut the budget.ZBB can be used to make different cuts to different services
based on the perceived value to the organization (rational)and all spending is put under
scrutiny (comprehensive).This compares to a traditional line-item process where only
incremental spending is considered and where there is no ready means to compare the
value of one service versus another,and,thus,to determine different reductions in
spending for different services on a rational basis.Hence,ZBB promises to move budget-
ing away from the use of across-the-board cuts - a budget reduction method that does
not differentiate the value of one service versus another.
The other major advantage is that it gives top management better insights into the
detailed workings of departments.In theory,ZBB clearly differentiates service level
options,the impact of different service levels on what the community will receive from
government (through performance measures),and a detailed plan for the inputs neces-
sary to provide those service level options.
ZBB,of course,is also theorized to have its drawbacks. The most widely known is the
work associated with generating the decision-packages and then reviewing them.
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 5
Conceivably,an organization could develop hundreds of decision-packages,requiring
substantial time commitments from every level of management to develop,review,and
rank them.
Another important drawback is the reluctance of managers to suggest decision-packages
below current spending.The advantage of an incremental budget process,for risk-
adverse departmental managers,is that only a marginal portion of their budget is on the
line in any given year.Under ZBB,the whole budget is on the line and managers are,in
fact,expected to actively provide far-reaching options for how their budget can be cut
back,including revealing the absolute minimum level of funding they can accept.This
dynamic might lead managers to attempt to "game"the system,such as providing a
very small number of decision-packages that contain a broad array of services,so that
budget decision makers are not able to identify,much less de-fund,discrete service lev-
els.Managers of decision-units might also deliberately give low rankings to services
with high public appeal knowing that budget decision makers will refuse to cut such
services thereby sparing services the department had ranked higher,but which are actu-
ally less valued by the community.
The final theoretical drawback is that ZBB is not associated with an explicit planning
process that is separate from the budget process.This has two primary implications.
First is that ZBB does not provide a structured method for taking account of the commu-
nity's or elected officials'views and long-term priorities.Rather,ZBB is driven largely
by managers'perceptions and preferences.Elected officials may provide input on the
final ranking of decision-packages,but even this is simply reacting to staff recommenda-
tions and,in any event,is too late to make a far-reaching impact on how the budget is
structured.The second implication is that because participants in the ZBB process will
necessarily be preoccupied with putting together the numbers for various decision-pack-
ages,they will not be able to focus on considering significant changes to how service is
provided.Rather,participants will tend to focus on the current service model and divid-
ing that into decision-packages,instead of proposing packages for entirely new alterna-
tives to meet the same underlying demand from the public.
Given the foregoing,how does ZBB help in an environment of fiscal constraint,where
budget cutbacks are required?First,consider three essential questions of planning and
budgeting,as shown in Exhibit 2.These questions are especially germane in a time
where budget cuts are required,because they allow for a more rational and comprehen-
sive approach to reducing budgets.
The first question asks,in the planning stage,what the community's priorities are and
how government might make a positive difference in the lives of constituents.Ideally,
this invites the government to consider entirely new ways of meeting community needs.
With respect to budgeting,the first question asks what programs or services the govern-
ment should fund in the first place.Under a traditional budgeting system,the answer is
simple:the same ones that were funded last year.Ideally,though,the answer will stem
from a consideration of what the community's priorities are and what programs will be
most effective in reaching those outcomes.
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 6
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 the
answer is again,typically:the same level as last year.In a cutback environment,a tradi-
tional budgeting system often seeks to preserve the same service level by making mar-
ginal cuts to "non-essential"expenditures such as training,travel,etc.However,a plan-
ning and budget system should be more circumspect,considering if a basic level of serv-
ice,a premium level,or something in between is best (Le.,best suited to need,most
affordable,etc.).On the planning side,community need and preferences should be
examined when deciding how much and what quality of service to provide.On the
budgeting side,departments and programs are allocated funding according to the level
of service that is deemed most appropriate.
The third question asks directly about the efficiency with which a service is provided.A
planning process should look at all the determinants of efficiency:the processes followed
to deliver a service,the knowledge,skills,and abilities of the people involved,and tech-
nology used to facilitate the work.When it comes to efficiency,a budgeting process
focuses on inputs and outputs,asking if the inputs requested to provide a given service
level are reasonable given the expected output.A traditional line-item budget system is
focused exclusively on inputs,with little consideration given to the output being funded.
Finally,all three questions are preceded by a question of affordability -planning and
budgeting decisions should be informed by knowledge of how much money is available
and what the true costs of service are.
ZBB is of the greatest potential use in answering the second question,and also can pro-
vide value for the budgeting portion of the third question.Decision-packages present dif-
ferent service levels for budget authorities to choose from.The decision packages include
Exhibit 2:
Three Essential Questions of Planning and Budgeting
For a given service level,are the
requested inputs reasonable for the
output we expect to receive?
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Attachment C
Zero-Base Budgeting:Modern Experiences and Current Perspectives 7
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,because
managers are expected to provide ideas for entirely new ways of meeting public
demands on the government.However,as was discussed earlier,theoretical ZBB lacks a
dedicated planning component,which reduces the likelihood of such radical suggestions
being made.
Finally,ZBB theory does not place much emphasis on starting the ZBB process with a
sense of what is affordable.It is not necessary,for example,to start the ZBB process with
a forecast of revenues.Rather,the process begins with decision units developing their
decision packages.These are forwarded to central budget authorities who,then,take
account of available revenues to decide which decision packages to recommend to the
board in order to reach a balanced budget.
So far,the discussion of ZBB has been just theoretical.The next section examines the
practical implications of ZBB,using original GFOA research as well as secondary
sources.
Zero~Biu;e Budgeting in Practice
The pure version of ZBB found in theory appears to be very rare in practice.9 Rather,the
label of "zero base budgeting"has been applied to budgeting methods that borrow ele-
ments of pure ZBB,but that do not conform to the theoretical ideal.According to
GFOA's case study research and survey,those describing themselves as using ZBB tend
to fall into two major categories.(See Exhibit 3 for GFOA's case-study localities.)The
first group,which this paper will call"zero line-item budgeting,"focuses on answering
the third budgeting question from Exhibit 2:are inputs reasonable given the expected
output?This method seeks to create greater transparency in how line items are arrived
at by requiring detailed justifications of line-item requests in lieu of pointing to prior
years'allocations as the justification.The second group,which this paper will refer to as
"service level budgeting,"presents decision-makers with different service levels and
asks decision-makers to choose between them,thus focusing on question #2 from Exhibit
2.In this method,departments concentrate on presenting decision packages and service
levels with associated metrics,while there is less emphasis on detailed input estimates.
Zero Une~~tem Budgeting
This method of budgeting does not start with last year's budget.Rather,departments are
given a blank budget request form with zeros filled in for each line item,instead of last
year's budget or actual expenditures as the starting point -hence,the label of zero-base
is applied.Departments then rebuild their budgets from the ground up,justifying each
line item.Where possible,departments are asked to provide drivers of cost.To illustrate,
for its equipment line item,the police department in the City of O'Fallon,Missouri
describes the precise amounts it will need to spend on portable radio replacement parts,
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 8
flashlight parts,digital voice recorders,polygraphs,and Taser cartridges,including
explanation of the need to make each of these expenditures.In some instances,the
explanation is in narrative form,but in others there is more quantitative justification.For
instance,the O'Fallon Police Department describes the cost per Taser cartridge and how
many they need to purchase.
These requests and justifications are sent to the central budget authority (e.g.,finance
department,budget office,city manager,etc.),who then reviews them -using the justifi-
cations,rather than what was spent last year,as the point of comparison.The budget
requests are often accompanied by service goals set by the departments in order to give
budget authorities a better sense of what the output received for the input will be.
Departments do not develop decision-packages to describe service levels.Central budget
authorities consider the requests,along with the goals,further discuss them with depart-
ments as necessary,and then develop a final recommended budget.
GFOA's research reached a number of conclusions about this form budgeting:
•Changes the discussion about costs.Managers become more cost conscious and
there are more in-depth discussions between budget authorities and departments
about how money is spent.Further,budget discussions focus on more than just
incremental changes in spending -the entire budget is looked at with a new per-
spective.For example,Johnson City,Tennessee,as a result of their prior ZBB experi-
ence,plans to re-conceptualize how they think about Parks and Recreation services
by moving towards a park site-by-site analysis of services,rather than the traditional
department-wide view of major objects of expenditure (e.g.,personnel,supplies,etc.)
Exhibit 3:
01.11'Case Studies
GFOA conducted case studies across governments of many different sizes:
City ofToronto,Ontario
(pop.2,480,000)
City of O'Fallon,Missouri
(pop.74,976)
Hillsborough County,Florida
(pop.1,229,226)
City of Frederick,Maryland
(pop.65,239)
City of Edmonton,Alberta
(pop.752,000)
City of Johnson City,Tennessee
(pop.63,152)
City of London,Ontario
(pop.352,395)
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City of Rowlett,Texas
(pop.54,869)
Manatee County,Florida
(pop.322,833)
Town of Orangeville,Ontario
(pop.26,925)
City of Windsor,Ontario
(pop.216,473)
School Employees Retirement System
of Ohio
(204,412 Active and Retired
Members)
City of Naperville,Illinois (pop.
141,853)
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 9
•Helpful for reallocating funding within a department.Case study participants
were enthusiastic about zero line-item budgeting's ability to identify better uses of
available resources within a department's budget.For example,one department
came to the realization that the money being spent on uniforms for civilian
employees could probably be better used elsewhere.On the whole,case study par-
ticipants were less enthusiastic,however,about the ability of zero-line item budg-
eting to explicitly shift resources between departments.Generally,zero-line item
budgeting does not have the decision-making procedures to support this more
potentially controversial kind of resource shifting.
•There are efficiency gains,but not systematic.The increased scrutiny applied to
inputs leads to efficiency gains.For instance,The City of Frederick,Maryland real-
ized that some resources were being duplicated between departments.The
Johnson City Public Works department realized when examining maintenance
costs for public lands that a crew for right-of-way maintenance would visit a given
location to perform basic maintenance,while,at a later date,a crew for weed-
ing/mosquito spraying would visit the same site.The department came to the con-
clusion that it did not need a separate budget for spraying and that these tasks
could be handled by the other crews already working at these rights-of-way.
While these gains are important,in zero-line item budgeting the identification of
efficiency gains is a by-product of the increased scrutiny on inputs,not the primary
objective of the process.Hence,gains tend to be uneven across the government.
•Managers are engaged.Upper and mid-level managers have a prominent role in
building the detailed budget requests and,therefore,gain familiarity with the
assumptions behind the budget.As a result,these managers better understand the
financial implications of the resource-use decisions they make during the succeed-
ing year.Managers also may gain a new appreciation of how costs are accounted
for.For instance,in Johnson City,the Public Works department,also as result of
their examination of rights-of-way maintenance costs,came to appreciate the
importance of how much it cost to service different locations in the community.
•Becomes the basis for more centralized control.Unsurprisingly,central budget
authorities can learn a lot about the inputs that underlie a department's budget
through zero-line item budgeting.This knowledge can be used to create more
exacting budget-to-actual variance analysis and control.The School Employees
Retirement System of Ohio monitors the level of inputs used by departments in
order better understand if the department will remain within budget over the
course of the fiscal year.
•Probably more suited to smaller governments.Most of GFOA's cases studies and
survey respondents who used this form of budgeting were smaller organizations.
It is likely more practical for top decision-makers to digest detailed line-item infor-
mation for the entire organization when the organization is of more limited size.
•Only partially addresses service levels.Zero-line item budgeting is focused on
inputs.The detailed discussion of inputs does help make it clearer that cutbacks
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 10
will have service implications,compared to using more general,across-the-board
cuts.Also,including a narrative of department goals along with the budget sub-
mission helps put the budget requests into context.However,the detailed selection
of different service options contemplated by ZBB theory is absent -hence,zero-
line item budgeting does not provide a great deal of initial insight into the results
obtained through public spending.
Service Levem Budgeting
Service level budgeting emphasizes the decision-package feature of ZBB theory.The
detailed estimate of inputs found in zero-line item budgeting receives less emphasis.
GFOA examined a number of governments using this type of budgeting,but the text
will focus on the example of Hillsborough County,Florida,because Hillsborough
County had used this system of budgeting for more than twenty years,thus providing
substantial experience to draw upon.Also,the County's experience is representative of
the approach.In Hillsborough County,departments were responsible for developing
decision-packages to represent the various services and projects they would like funded.
Because the department was the decision-unit (rather than divisions)it limited the total
number of decision-packages produced and,therefore,the total amount of paperwork.
For the most part,departments had a great deal of latitude in how to develop their deci-
sion-packages,though the central budget office did provide guidance in a few key areas:
•Foremost,departments were strongly encouraged to avoid submitting too few
decision-packages.Too small a number of decision-packages would have put cen-
tral budget authorities in an all-or-nothing position vis-a.-vis selecting service lev-
els.However,departments were also discouraged from submitting so many pack-
ages that employee positions were split between packages.This would make it dif-
ficult to understand the true cost the County could avoid by not funding a deci-
sion-package,since,in many cases,it would not be practical to fund only part of a
position.Departments were not provided with a number of packages to aim for,
but were expected to exercise professional judgment to provide budget authorities
with meaningful and useful choices.
•The departments were provided context for developing decision packages,such as
a five-year Countywide pro forma from the budget office and the County Board's
strategic plan.
•The budget office had a Manager of Performance Management position dedicated
to helping departments identify performance measures,benchmark against others,
and tie those measures to the County's strategic plan.
In each decision-package,the department incorporated various pieces of supporting
information.This included:
•The positions included in the decision-package
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 11
•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 were finished,departments ranked them top-to-bottom,
while placing them into various categories similar to those described by ZBB theory (see
Exhibit 4 for an example of ranked decision packages for a Library).They then sent their
rankings to the budget officer and County Administrator.The Administrator then exam-
ined the decision-packages,asked questions as needed,selected packages based on the
Exhibit 4:
Representation of Decision-Packages for a library'·
Rank Decision Package Cost
Main and Regional Libraries at 52.5 Hours Weekly $17,761,003
2
3
4
5
6
7
8
9
10
11
12
13
14
Community Area Libraries
Neighborhood/Expanded Community Area Libraries
Expansion of Main and Regional Library Hours
Full Neighborhood Library Hours
Operating Grants to Municipals at 90%
Enhanced Staffing for Circulation and Operations
Books and Materials at 78%of Continuation
Operating Grants to Municipals at 95%
Books and Materials at 87%of Continuation
Full Main and Regional Library Service
Operating Grants to Municipals at 100%
Books and Materials at 100%of Continuation
Computer Rotation and Replacement
$5,607,436
$5,296,036
$5,960,425
$3,090,026
$46,4646
$527,365
$500,000
$23,323
$550,000
$392,186
$11,662
$750,000
$100,000
15
16
17
Replacement of Integrated Library System (ILS)
Fund Stand-by Pay for Librarians
Achieve Library Strategic Goal No.5 -Client Satisfaction
GRAND TOTAL
n4C"IT't'()f
''fCALGARY
$824,900
$2,800
$15,000
$41,458,808
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 12
departments'rankings as well as his own understanding of the Board's goals,and may
have made direct modifications to decision-packages as well.In cases where depart-
ments submitted too few decision-packages,the departments would be instructed to
revise their submission.
Finally,all of this information,plus other considerations such as unit costs to provide a
service and the proportion of the eligible population served by a service,would be used
by the County Administrator and central budget office to put together a final recom-
mended budget for the County Board.This would sometimes include reallocations
between departments (compared to the prior year)based on the Administrator's sense of
the County Board's priorities and which decision-packages were best aligned with those
priorities.
GFOA reached the following conclusions about service-level budgeting:
•Decision-packages have to provide detailed service level choices.The decision-
packages presented by decision-units have to be sufficiently granular to allow for
meaningful selection between different service levels,and not present an all-or-
nothing decision.This leads to the next conclusion.
•Articulating service levels may be difficult.Managers rarely have a clear under-
standing of the relationship between service inputs/costs and outputs (much less
outcomes).Hence,translating service levels that are different from what is provided
currently into dollar amounts can be a challenge.
•It is paperwork intensive.Service level budgeting will generate significant docu-
mentation.Those who have used this sort of budgeting took many different
approaches to mitigate the paperwork.Hillsborough County went to a biennial
budget process so that the work would only be required every other year.
Hillsborough County used departments as the decision-unit,rather than a lower
level of the organization.Similarly,Manatee County,also in Florida,uses pro-
grams as the decision-unit,which are not the lowest level of budgetary decision
making available to the County.Manatee County also developed standard costs
for different types of services to make it easier for departments to calculate the
costs of their decision-packages.The City of Windsor,Ontario,only asked a third
of departments to participate every year (Le.,the entire organization received a
zero-base review over three years).The Town of Orangeville,Ontario,limits the
use of ZBB to select issues where it promises to provide the most value,such as
user fee reviews or build-versus-buy decisions (e.g.,should Orangeville provide
police services itself or contract with another level of government?).
•Include revenue impacts in decision-making process.A political goal commonly
underlying the adoption of "zero-base budgeting"is "zero tax increases."Hence,
the process of selecting and ranking decision-packages should account for the rev-
enue producing potential of a service.This points out how a service contributes to
the "top line"with out increasing tax rates.
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 13
•Efficiency is not addressed directly.Service level budgeting does not encourage
efficiency directly.Managers are not provided incentives to be more efficient and
the ability to propose different service levels does not produce efficiencies either.
To the extent efficiencies are realized,they are more likely be a by-product of
reduced budgets and the resulting need for managers to find ways to get along
with reduced funding.
•Good performance data is helpful to getting the most of the process.Measures
make the strategic intent behind the budget clearer.For example,a "base"deci-
sion-package will describe more modest objectives than a "current"or "expanded"
package.The measures help decision-makers pick the level of service they want.
Benchmarking might also be particularly helpful to service level budgeting as it
provides additional context for selecting service levels.
•Makes implications of cutback decisions clear.Service level budgeting enables
decision-makers to follow a more rational cutback strategy than across-the-board
cuts.This method of budgeting makes it clear what the government will stop
doing when a budget is cut.
•Often connected to strategic planning.A weakness of the theoretical model of
ZBB is that it does not have a strong tie to organization-wide strategy -spending
strategies are coming from the bottom up,rather than the top down.Practitioners
of service-level budgeting often mitigate this weakness by developing an organiza-
tion-wide strategic plan and using that as guidance for formulating a final budget
recommendation to the governing board.However,there tends to be loose connec-
tion between the ZBB process and the strategic plan -the strategic plan helps cen-
tral budget authorities to put selection of service levels into context,but the plan is
not translated into a structured method to guide departments in developing deci-
sion-packages.
Our discussion of text book ZBB and its practical incarnations ends with Exhibit 5 (on
the following page),which presents a summary of the ZBB typology.
D@es ZSS Work?
Given that governments who report using"zero-base budgeting"are using budgeting
systems that are actually quite different,satisfaction with ZBB varies quite a bit.GFOA
research found little commonality in opinion on ZBB.For example,in our survey,budg-
et offices using one of the two practical versions of ZBB described in this paper or who
were using select ZBB concepts were firmly"satisfied"with the results,on average.The
budget office perceived that other stakeholders of the budget process (e.g.,department
heads,elected officials,chief executive)were less satisfied than the budget office,but still
above the survey's "neutral"score on average.However,among those governments that
were not using ZBB,GFOA found a good deal of skepticism of ZBB.Among govern-
ments that had seriously considered ZBB and decided not to use it,the perception that
ZBB is "too much work for the benefits it would produce"was,by far,the leading rea-
son for rejecting ZBB -cited by almost 60%as being one of their reasons.When the
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 14
ExhibitS:
ZBS Typology
Textbook ZBB Zero Line-Item Budgeting Service Level Budgeting--Budgets are built from the ground up.
Decision units propose decision
packages,which describe detailed
resource requirements and which
budget authorities use to choose
service levels.
Line items require detailed justification,
in some cases including unit costs and
quantities.Last year's spending is not
the key reference point.Decision
packages are not used.
Departments develop decision-pack-
ages to allow budget authorities to
choose service levels.Less emphasis
on detailed examination of line-item
composition.
o Decision-makers can select different
service levels.
o Implications of cut back decisions
are very clear.
o Often supplemented by strategic plan.
o Approaches rationality and
comprehensiveness of textbook ZBB.o Can lead to efficiency gains.
o Changes conversation about costs for
the better.
o Helps reallocate spending with
departments.
o Engages managers in budget
discussions.
o Rational and comprehensive means
for cutting budget
o Gives decision makers insight into
operations
o Highlights entirely new ways of
providing services.
o Engages lower-level management
in budgeting.•o Amount of work to develop 0 No structured means for considering 0 Paperwork intensive,but less than
decision packages.different service levels.textbook ZBB.
o Reluctance of managers to propose 0 Does not have a separate planning 0 Efficiency is not addressed directly.
decision packages that are less than process.0 Loose connection between strategic
current spending.0 Efficiency gains are not systematic.plan and budgeting.
o Does not have a planning process 0 Requires good performance data.
that is separate from budgeting.-Very rare in practice.The GFOA found Case examples include:City of O'Fallon,Case examples include:Hillsborough
only two governments from a sample Missouri;City of Frederick,Maryland;County,Florida;Manatee County,
of 413.City of Johnson City,Tennessee;School Florida;City of Windsor,Ontario;
Employees Retirement System of Ohio.Town of Orangeville;Ontario.
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 15
views of governments who had not seriously examined ZBB are considered,a total of
almost a third of all governments surveyed held this view.Exhibit 6 summarizes the
respondents'views on ZBB.Among those not accounted for in the 53 %of respondents
addressed in Exhibit 6,most have not seriously considered ZBB,so there was no strong
opinion expressed.The remainder cited various reasons for not using ZBB -ranging
from insufficient training to resistance from different stakeholder groups -with no single
reason predominating.GFOA's survey findings parallel earlier academic research,which
all found a range of opinions on ZBB.
Given the findings of GFOA's research,it is not possible to come to global conclusions
on the efficacy of ZBB,practical or theoretical.Instead,this section will summarize major
strengths and weaknesses of the practical incarnation of ZBB by drawing on GFOA's
findings as well as the work of others.The strengths of ZBB include:
•ZBB moves the organization away from incremental budgeting.ZBB helps partic-
ipants think about the whole budget,not just the increments.
•ZBB rationalizes budget cuts.Our case studies showed that users of ZBB tend to
have high confidence in their cutback decisions and often are able to avoid across-
the-board cuts.The service-level budgeting variety of ZBB is especially good for
arraying alternative funding levels for decision makers,or,in other words,dis-
playing the marginal utility of additional dollars in programs.ll
•ZBB makes the trade-offs between inputs and outputs more transparent.Across-
the-board cuts are often associated with the view that departments will need to
provide the same level of service for less money.ZBB highlights changes in what
departments will provide in relation to the dollars spent.
Exhibit 6:
What Survey Respondents Think of lSB
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 16
•ZBB can be used to centralize budget decision-making,if that is a goal of budget
reform.The detail provided by ZBB helps central authorities understand depart-
ment budget requests more precisely and the decision-packages allow authorities
to make more fine-grained distinctions on what to fund and not fund.
•ZBB is effective for re-allocating resources within departments.GFOA's case
study research found that many users of ZBB were enthusiastic about ZBB's value
for re-allocating from higher to lower priorities within a department.There was far
less enthusiasm when it came to re-allocating between departments.This is under-
standable because the ranking of decision-packages within a department provides
for a reasonably objective and uncontroversial method for the former.However,
ZBB provides no structured method for comparing decision-packages between
departments.The governments that did use ZBB to re-allocate between depart-
ments tended to do so based on a more subjective,less structured determination
on the part of empowered central budget authorities.
•ZBB does not preclude use of other budget-balancing techniques.Governments
that use ZBB also can use other methods of balancing the budget such as changing
employee benefits,improving revenues,or seeking efficiencies in the delivery of
services.
The weaknesses of practical ZBB that GFOA found are presented below.Some of the
issues,such as finding alternative service delivery options and efficiencies,stem from
weakness in theoretical ZBB.Other issues,such as the increased paperwork and the
need for good performance measures,are,to some extent,issues with any budget reform
that attempts to introduce a more rational,comprehensive perspective.
•ZBB is managerially driven.ZBB,in any form,entails digging into the details of
the budget as a starting point.While there is potential value to this,as the advan-
tages of ZBB attest,it does color the role of elected decision-makers.With the zero-
line item approach to ZBB,it means that elected officials are asked to use detailed
operational information in order to make their budget decisions,rather than to use
the bigger-picture strategic questions to which elected officials are best suited.12 In
the service level approach,elected officials primarily respond to staff rankings of
services.Because ZBB does not necessarily include a strategic planning element,
whether these rankings are reflective of elected officials'priorities will depend on
the extent to which staff has made an effort to understand officials'priorities and
integrate them into the budget process.
•ZBB does not directly address whether a government should be in the business
of providing a service in the first place.It largely assumes the current mix of pro-
grams and services and focuses on the level at which they should be provided.
This is partially a product of the fact that the ZBB process is managerially driven
(most managers would probably think the government should continue to provide
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Attachment C
Zero-Base Budgeting:Modern Experiences and Current Perspectives 17
their program).However,it is mainly because managers tend to concentrate on
looking for opportunities to make cuts to the current way of doing things to an
extent that will be acceptable to central budget authorities (e.g.,find a way to cut
10%),rather than looking for ways to spend the bulk of their budget (e.g.,90%)in
newways.13
•ZBB is more effective when good performance measures are in place.However,
few governments have a detailed,quantified understanding of what their service
levels are,much less of the relationship between service levels and cost.Hence,
they cannot accurately select a service level and then estimate the cost for that new
service level.Rather,they tend to budget by inputs,and then estimate service
impacts at different input levels.While lack of good performance measures will be
a drag on any budget process that looks to introduce more objective performance
information into resourcing decisions,it can be particularly problematic in ZBB.
This is because ZBB is predicated on the assumption that decision-makers will be
able to make choices between detailed service level options,which then will drive
resourcing decisions.A lack of good measures to support decisions means that
ZBB is less likely to result in serious examination of significantly different ways of
providing service.
•ZBB is perceived to require too much paperwork.GFOA's case study governments
rarely cited paperwork as an important problem in practice,likely because they
were using a modified,streamlined approach to ZBB.However,the perception is
important because it elicits resistance.This challenge is most acute when ZBB is
rushed into place in response to financial distress because insufficient planning and
preparation result in a less clear and harder to follow process.It is important to
note,though,that even modified ZBB does require substantial documentation and
what is deemed"excessive"is often relative.For example,some of our case studies
pointed out that elected officials,at first,appreciated learning about the details of
services,but later tired of the amount of documentation.
•ZBB doesn't address alternative service delivery options.In theory,ZBB does
allow and even encourages managers to submit decision-packages for alternative
service delivery options (i.e.,entirely different methods for achieving the same out-
come).However,this very rarely works in practice.Because the ZBB process is
intensive,departments are unlikely to seriously think about alternatives at the
same time as putting together spending plans.Also,ZBB assumes that managers of
departments will know the best means of delivering a service.This means that ZBB
is really more about managerial preferences than true alternatives.In many cases,
managers are likely to believe that they've been doing the right things all along,so
will concentrate on doing more of the same.14 Finally,the environment of financial
austerity that is often associated with ZBB is not generally conducive to the risk
taking associated with proposing alternatives.
•ZBB doesn't directly address efficiency of services.Making inputs more transpar-
ent doesn't make for more efficiency by itself.Increased scrutiny on inputs may
inspire some cost saving innovations on an ad hoc basis,and reducing budgets will
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Attachment C
Zero-Base Budgeting:Modern Experiences and Current Perspectives 18
force managers to think of better ways to use their more limited resources,but
these 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 enhancing programs
along side of ZBB (e.g.,an employee suggestion program,managed competition).
While,certainly,no budget process will ever be all things to all people,it is important to
understand what ZBB can and cannot accomplish.In light of the strengths and weak-
nesses of ZBB,the next section presents considerations for deciding if ZBB may be a
good fit for your organization.
ms zes for Vou?
GFOA's research has shown that there is a variety of opinions on ZBB and that experi-
ences with ZBB vary widely.Here are questions to consider when deciding if ZBB is
right for yoU.15
What is ZBB replacing?If the current system of budgeting is not working -for example,
it is incremental,relies on across-the-board budget cuts,or does not recognize that serv-
ice impacts are sometimes an inevitable trade-off for budget cuts -then ZBB could repre-
sent an improvement.
Is performance data available to help make different funding levels meaningful?If the
organization has good experience with performance measures and understands the rela-
tionship between costs and service levels and between service levels and community
impact,it could make more effective use of ZBB.Also,management's attitude about
using data to describe service levels and make decisions is important.If managers,espe-
cially at the top,don't place much importance on using data to drive decision,then con-
sideration of service levels will be less meaningful.
How much work will be required to implement ZBB?The availability of central budget
staff to develop forms and training for ZBB is crucial to ZBB success.Also important are
the analytical skills and capacity of department managers to engage in ZBB analysis.The
availability of these resources needs to be compared to the time available and the goals
for ZBB.If the organization is facing a large budget deficit and needs to come to a solu-
tion in short time,ZBB may not be the answer.However,if a longer time frame is avail-
able or if central budget staff are able to develop good supporting forms and tools then
ZBB could have potential.
There are methods to spread out the work associated with ZBB,such as rotating ZBB
through departments on a multi-year (e.g.,three year)cycle or conversion to a biennial
budget process.However,either approach requires the discipline to rely on the most
recently available ZBB information to address unexpected budget shortfalls.
How "comprehensive"a budget process does the organization want?Do elected officials
want to delve into the details of operating departments?In some of our case studies,ZBB
was driven by elected officials'interest in knowing what the organization does at a
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Attachment C
Zero-Base Budgeting:Modern Experiences and Current Perspectives 19
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 conversations
about funding "basic"or "core"services?Some organizations may be able to use these
conversations to question long-standing assumptions.In others,such conversations might
be not be seen as worthwhile because there is little expectation that much will change as a
result.
How sustainable should budget reform be?Many organizations begin ZBB with the
intention of only using it for a set period of time or for certain parts of the organization.
For instance,the City of Windsor reviewed one-third of the organization each year for
three years and then discontinued ZBB.The logic behind such an approach is that ZBB
analysis will provide diminishing returns over time -the first analysis may provide
large benefits,but subsequent analysis will provide much less.If the organization has
the willingness to experiment with a budget approach that could provide important,but
potentially temporary,net benefits then ZBB ideas may be worth exploring.If the organ-
ization is looking for a budget process than can be reliably repeated year-after-year,then
a different approach may be called for.
How does the organization's leadership view ZBB?Given the theoretical and practical
challenges associated with ZBB,it takes a clear endorsement from the organization's
leadership to make it work.For example,the case study governments that have found
Inspired by ZBB:Using Zero-Based Concepts for Better Budget Decisions
While this paper presents two major archetypes of practical ZSS,GFOA's research found that a number of
governments were using methods inspired by ZSS to make better budgeting decisions without commit-
ting to a full ZSS process.
In one case,the Town of Orangeville,Ontario,has found success using ZSS as a tool to analyze specific
issues on an as-needed basis,rather than as an organization-wide budgeting system.For example,ZSS was
used to analyze a proposal to increase after-school programs by 30%.The gut reaction of some decision-
makers was that this would be unaffordable.A ZSS-Iike analysis showed this could be accomplished at no
cost to the taxpayer by using existing capacity and new user fees.
In another example,the City of Naperville,Illinois developed what it called "service-based budgeting;'tak-
ing inspiration from ZSS's emphasis on selecting service levels.The intent was to reframe the budgeting
conversation with the Council-moving away from departments and divisions,towards services provided
to constituents.Focusing on the services enabled a conversation about what level of performance the
community expected and what could be provided with the money available.Departments made recom-
mendations for how service levels could be reduced with the least negative impact on the community,but
without going through the process of developing formal decision-packages.Council,for their part,appreci-
ated the greater understanding of what,precisely,the City was giving up because of budget cuts and the
ability to better articulate which services they would prefer not be negatively impacted by budget cuts.
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 20
success with ZBB reported minimal problems with the budgetary"game-playing"that is
theorized to afflict ZBB.This is likely because top leaders in those organizations made it
clear that attempts to game the system would not be tolerated.Hence,if ZBB is thought
by organizational leadership to provide a useful frame on information for budgetary
decision-making,then it could be successful.For example,ZBB may have value where
leaders have a desire to understand services inputs and outputs at a detailed level or
wish to change service levels.
What issues are driving interest in ZBB?ZBB is,of course,a means to an end,not an
end unto itself.As such,consider the issues that are driving interest in ZBB and deter-
mine if there is a better way to solve them.For example,the next section of this paper
presents three major alternatives to ZBB.These alternatives can sometimes better answer
questions that ZBB is used to address.More generally,though,ZBB's strength is in look-
ing at what is done today,understanding it in more depth,and making marginal adjust-
ments to inputs and,consequently,service levels.ZBB is less effective for making major
changes in how services are delivered or how community needs will be met.
JUternath,es to ZOB
This section presents three major alternatives to ZBB.Each alternative addresses some of
the planning and budget questions that ZBB is often intended to address.This section
will use the framework presented in Exhibit 2 in order to explain the alternatives to ZBB:
priority budgeting;program review;and target-based budgeting.
Priority Budgeting
Under this system,the government first determines how much revenue it has available,
then identifies the community's most important priorities and allocates resources to the
priorities rather than directly to departments,and then ranks programs according to
how well they align with the priorities."Budgeting for Outcomes"is the most well
known variant of priority budgeting.Governments have applied variations of
Budgeting for Outcomes to fit their own circumstances.GFOA's survey shows that pri-
ority-focused budgeting is the fastest growing type of budget reform,with a 90%
increase in the number of respondents using it (see Exhibit 1)-11 %of respondents used
it prior to the 2008 Recession versus 21 %afterwards.GFOA has also recognized priority-
focused budgeting as a public finance best practice'6 and has published a whitepaper on
the topic.'7
Priority budgeting combines a planning and budgeting system to focus on the first ques-
tion of Exhibit 2.Priority budgeting systems represents an alternative to ZBB for the fol-
lowing reasons:
•Explicit spending vs.service trade-offs.Like ZBB,priority budgeting makes
explicit trade-offs between what is spent and what is to be provided.However,it is
important to note that ZBB does this while focusing on only the budgeting half of
question #2 from Exhibit 2.ZBB theory does not provide for a planning component
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 21
that asks explicitly about /I community need./I Rather,management is expected to
use 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 than cutting from
last year's base costs.Priority budgeting provides a transparent,structured
approach for allocating funding both between and within departments by directly
funding priorities and programs,rather than departments (once programs have
been funded,departmental budgets reflect the total of all approved programs by
department).Hence,the budget is balanced rationally and strategically rather than
arbitrarily (for example,through across-the-board percentage cutting).ZBB theory
has a structured approach for re-allocating within departments,but not between
them.As mentioned earlier in this paper,the service level budgeting variety of
ZBB often has a strategic planning element to mitigate this weakness of ZBB.
However,GFOA observed ZBB tends to be a less structured and less transparent
decision-making approach for allocating funding between departments compared
to priority budgeting.
•Not incremental.Priority budgeting is not based on incremental spending deci-
sions -programmatic spending is comprehensively prioritized and spending allo-
cated accordingly.
However,given that priority budgeting seeks to introduce a more rational-comprehen-
sive approach to budgeting,compared to traditional incremental approaches,it can be
complex to use.Like ZBB,it also is more effective when used with a good set of per-
formance data.Hence,it does require more analytical work than traditional budgeting.
That said,priority budgeting appears to entail less administrative effort than a pure
form of ZBB.
Program Review
Program review is a planning method used to examine,outside of the budget process,
how a program is provided.A program review can consider any or all of the three plan-
ning questions in Exhibit 2.A program review is often designed to reveal alternative
service delivery and efficiency opportunities.Theoretically,ZBB can be used to consider
alternatives,but research shows this rarely happens because of time constraints in the
budget process and because the managers who put together decision-packages tend to
be focused on status quo means of service provision.ZBB's limitations for improving
efficiency have been discussed earlier.The experiences of the City of Toronto and the
City of Windsor illustrate how program review can provide an alternative to ZBB.
At the City of Toronto,Ontario,ZBB had been raised as a potential means to address a
chronic structural deficit,but staff did not believe that ZBB would adequately tell the story
of what the City was spending it on and how it was being spent -put another way,ZBB
wouldn't adequately answer the planning questions shown in Exhibit 2.lnstead,Toronto
embarked on a comprehensive program review method to answer the following:
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 22
•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 to
determine which services were truly "mandatory."The City also reviewed the
level of service provided by each program to see if it was above or below stan-
dards consistent with legislation,best practices,or relevant benchmarks from other
cities.Finally,the public was engaged in order understand the relative priority
that citizens place on different programs.
•How well is the City doing it?Efficiency reviews were undertaken for each pro-
gram to identify opportunities for efficiency and economies.The opportunities
revealed covered a wide spectrum including,but not limited to:outsourcing,con-
solidating similar services,and even divestment of programs.
•How is the City paying for it?The City conducted a review of revenues generated
by programs in order to get a better sense of the extent to which a program sup-
ports itself from user fees,grants,or other program-generated revenues versus
relying on general tax dollars.The objective was to apply the full cost (direct and
indirect costs)of providing a service to the user fee calculation.A subsequent step
is to determine the level of property tax subsidy appropriate for each of those serv-
ices,ranging from no subsidy (fully user fee supported)to partial subsidy to full
subsidy (no user fee).
As of this writing,Toronto is still working through their program review process,so
definitive results are not yet available.However,the City can say that the program
review has been successful in identifying many opportunities for improvement,has
aligned with the Toronto's elected officials'desire to take a hard look at what the city
spends money on how it spends it,and has engaged citizens in a discussion about the
right balance of taxes and services.
The City of Windsor had been facing financial distress for a number of years.As one
approach to better sizing and shaping the services offered by City government to this
environment,the City used ZBB over a three year period.However,the City found that
ZBB was not very useful for answering the question of:what services should the City be
in the business of providing (essentially,the first planning question from Exhibit 2)?
This question was of special interest to Windsor because persistent low economic
growth meant that Windsor might have to consider discontinuing some municipal serv-
ices in order to balance the budget.Windsor's Mayor,therefore,initiated a program
review project.Currently,Windsor has inventoried its programs and services (between
2008 and 2010)and just this one activity led to a number of serendipitous opportunities
to improve efficiency.For example,the inventory revealed opportunities for consolidat-
ing similar services across departments,leading to $2.5 million in operating budget sav-
ings for 2010.
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 23
Program review appears to be a promising alternative to ZBB for governments who are not
dissatisfied with their current budget process,but feel that more insight is needed on the
three planning questions in Exhibit 2.Program review may be particularly helpful for gov-
ernments that want to consider far-reaching changes for how a given service is provided.
TargetmBased Budgeting
Target-based budgeting (TBB)gained popularity in the 1980s,perhaps as a simplifying
response to the perceived complexity of ZBB.1S TBB makes no attempt to comprehensive-
ly re-examine base spending.Rather,each decision unit (typically a department)is given
a target spending amount (e.g.,90%of what was spent last year)and is asked to submit
a budget for that amount.The total target for the organization is necessarily less than
what is affordable.This is because the difference between the target and what is afford-
able is used to fund additional activities through decision-packages.19
Departments submit decision-packages to request funding for activities they cannot fit
within target spending -either continuation of existing services or entirely new services.
Like ZBB,departments prioritize their decision packages,but they are often guided in
what decision-packages to propose and prioritize by a set of organization-wide goals
distributed by central management.Central authorities then examine the decision-pack-
ages and decide which to fund and which not to fund.Unlike ZBB,there is no emphasis
on discovering and examining the minimum feasible funding for a program (Le.,the
base package).Rather,departments fit as much service as they can within the target
spending and decision-packages are used to evaluate additional spending.
The City of Edmonton,Alberta,illustrates TBB.The City of Edmonton initially consid-
ered ZBB in response to a serious financial challenge,going so far as to conduct a pilot
project with its fire inspection services.Edmonton found that ZBB did not meet its
needs,particularly because the large amount of work required didn't provide for the
efficiency gains Edmonton was looking for and because the performance data required
to make meaningful service level decisions was not available.
Instead,Edmonton used a TBB approach they called their "service review method."
Edmonton selected 80%as their target because their forecasts showed that the City
would have to make a 20%cut to balance its budget without raising any taxes.Each
department was asked to develop four decision-packages of 5%net impact to the budget
(either revenue enhancements or spending cuts),thereby equaling 20%.Departments
prioritized their decision-packages and the City's central management then reviewed
them and made the decision on which packages to accept.Ultimately,just under half of
the packages were selected and new taxes were used to cover the rest.
Compared to their original reasons for rejecting ZBB,Edmonton found TBB to be an
adequate solution.Performance measures were used for those decision-packages where
they could be applied for the least cost and greatest usefulness.In order to bring objec-
tivity to the selection of decision-packages,central management was guided by a set of
decision-principles derived from previous strategic and master planning work the City
had done.In terms of efficiency gains,Edmonton relied on ideas offered through deci-
sion-packages and the natural need for managers to find more efficient ways to accom-
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 24
plish their jobs within their reduced base/target spending.This isn't much different
from 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 compares to
ZBB as an alternative:
•Greater emphasis on revenue forecasting.TBB places a greater premium on rev-
enue forecasting in order to set a viable target up front and also tell departments
how much extra is available for funding decision-packages.Under ZBB,forecasts
are less important because departments are expected to build their budgets from
zero regardless.
•Answers same basic questions of cut-back budgeting.TBB focuses on question 2
and touches upon question 3 from the budgeting questions in Exhibit 2.It does not
examine the questions in as much depth as ZBB would.However,TBB does tend
to be associated with a more in-depth planning component,used to help guide
decision-package formulation and selection.2o
•Some rationality to cuts.TBB lends greater rationality to cut-back decisions than a
traditional budget process by way of decision-package creation,ranking,and
selecting.In this way,funds are re-allocated from lower to higher priority areas.
However,the initial target setting is often undifferentiated (e.g.,all departments'
targets are set at X%of last year's spending),so may have a significant across-the-
board character.ZBB,by contrast,makes no such assumptions based on prior
years'spending.
•Not comprehensive.The spending that is fit within the target does not receive as
high a level of scrutiny as base and continuation spending in ZBB.In fact,TBB
gives departments significant latitude to shield favored programs from cuts by fit-
ting in within target spending.In contrast,under ZBB,all spending must be put
into decision-packages and ranked,including the most basic services.Whether
there is value to applying such scrutiny to base spending is something each organi-
zation will need to decide for themselves.Still,TBB does question a greater mar-
ginal portion of spending than a purely incremental process.
•Fewer options for decision-makers.A product of its less comprehensive nature,
TBB provides fewer options to decision-makers for cutting the budget.Under ZBB,
decision makers can select from packages all the way down to the base package.
Under TBB,decision-makers can only select down to the target amount.Having
only a limited set of options could be a particularly important problem when large
cuts are required.
•Less work.As the foregoing two points imply,there is much less analytical work
involved in TBB.Also,academic evaluations of TBB show that it is common for
governments to make long-term use of TBB,21 whereas ZBB tends to have more
temporary or at least intermittent use.22 In GFOA's survey,TBB was the most pop-
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 25
ular budgeting reform of all those presented in this paper,with about one-third of
respondents using it.This could also imply that TBB requires less administrative
effort than ZBB.
Our discussion of the alternatives to ZBB ends with Exhibit 7,which recapitulates the
alternatives.
Exhibit 7:
Alternatives to zas
Priority Budgeting Target-Based Budgeting Program Review
Explicit planning process used to
identify organization-wide priority
goals.Funding then allocated to
programs according to how well they
achieve goals.
Departments given a spending target,
set at some percentage of last year's
spending (e.g.,85%)and must submit
decision packages and justifications for
spending above the target.
A planning method to examine,outside
of the budget process,how a program
is provided.Can consider community
need,service levels,efficiency,or
alternative service delivery programs.
•Explicit spending versus service
tradeoffs.
•Not incremental -last year's
spending is not the basis for the
next year.
•Rationally considers relative value of
different programs versus community
need.
•Provides some rationality to cuts
through decision packages.
•Less work involved.Fewer decision
packages are produced,and less
scrutiny is applied to total spending.
•Offers in-depth look at questions
of community need,service levels,and
efficiency.
•The analysis is free from the immediate
pressures of the budget process.
•No firmly established means for
eventually integrating results into the
budget process.
•It is an additional level of effort beyond
what is required for budgeting.
•More administrative and analytical •Does not comprehensively examine
work than traditional budgeting,but spending -base spending is not
less than textbook ZBB.heavily scrutinized.
•Requires performance for best results.•Fewer options for decision makers.
•Less focus on service level options Decision packages only cover above-
than ZBB.base spending.
_mm~-lIiml'1ll·_
The GFOA survey found that 21 %of GFOA survey found 33%of respondents Case examples include:City of Toronto,
respondents use it.use it.Ontario;City of London,Ontario;City of
Windsor,Ontario.
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(ondU5i@ns
Like most budget reforms that promise to bring more rationality and comprehensive
decision-making to cut-back budgeting,zero-base budgeting has limitations.Budget is
always art as much as it is science,and it is up to public officials to decide the extent to
which ZBB,or at least elements of it,facilitates the presentation of financial and service
information to decision-makers in a way that will help them reach a structurally bal-
anced budget that meets the needs of the community.Public officials might consider the
essential questions of planning and budgeting found in Exhibit 2 as basis for defining
which questions are of greatest interest to stakeholders,which the organization most
needs to address,and whether ZBB ideas,the alternatives presented in this paper,or
some other budget reform can provide the answer.
Bibnography
Robert L.Bland and Irene S.Rubin.Budgeting:A Guide for Local Governments.
International City/County Management Association:Washington,D.C.1997.
Logan M.Cheek.Zero-Base Budgeting Comes ofAge:What It Is and What It Takes to Make It
Work.American Management Association:New York,New York.1977.
Frank D.Draper and Bernard T.Pitsvada."ZBB-Looking Back after Ten Years"Public
Administration Review,Vol.41,No.1 Oan.-Feb.,1981),pp.76-83
Robert K.Goertz."Target-Based Budgeting &Adaptations to Fiscal Uncertainty."Public
Productivity &Management Review,Vol.16,No.4.(Summer,1993),pp.425-429.
Perry Moore."Zero-Base Budgeting in American Cities."Public Administration Review,
Vol.40,No.3 (May -Jun.,1980),pp.253-258.
Irene S.Rubin."Budget Reform and Political Reform:Conclusions from Six Cities."
Public Administration Review,Vol.52,No.5 (Sep.-Oct.,1992),pp.454-466.
Irene Rubin."Budgeting for Our Times:Target Base Budgeting."Public Budgeting and
Finance,(Fall 1991),pp 5-14.
Irene S.Rubin and Lana Stein."Budget Reform in St.Louis:Why Does Budgeting
Change?"Public Administration Review.Vol.50,No.4 Oul.-Aug.,1990),pp.420-426.
Allen Schick and Harry Hatry."Zero Base Budgeting:The Manager's Budget."Public
Budgeting &Finance Vol.2,No I,pages 72-87,1982.
Mark J.Versel."Zero-Base Budgeting:Setting Priorities through the Ranking Process."
Public Administration Review,Vol.38,No.6 (Nov.-Dec.,1978),pp.524-527.
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 27
Appendix 'I:Survey Results Summary
This appendix presents the results of the GFOA.Each table describes how our respon-
dents replied to key questions or series of questions.
Less than $10 million 4.9%
$10-24 million 9.7%
$251-50 million 15.8%
$50-100 million 17.4%
$100-300 million 26.3%
$300-500 million 5.8%
More than $500 million 20.2%
5.3%
1.0%
2.4%
11.0%
61.4%
18.9%
State/Province
Utility
Other Special District
-Municipality
County
School
34.0%24.0%
Extreme Challenge.They had to make major adjustments
including significant layoffs,raising taxes,and/or cuts to
core services.19.3%10.1 %
-Minor challenge.They have been able to get by using minor
retrenchment techniques like hiring freezes,deferring capital
projects,etc.
j~::~ljl:$I~lijlil~1iln~!:iilJjn~j;~I.jj.'l:~jj::I:)j:jjjj:::j::jjj:~jU:::::;:;:;~:::~mlj:jjj:jj:j::'~~
No challenge at all.Things have been better than before.0.5%1.6%
CY 2006
CY 2007
CY 2008
CY 2009
CY 2010
1.8%
0.8%
5.0%
28.9%
35.3%
Worst Level of Fiscal Stress Since 2006 and
Fiscal Stress Right Now
No Challenge
Status Quo
Minor Challenge
Major Challenge
Extreme Challenge
0%10%0%30%40%50%60%
Ii!Right Now ~Since 2006
*Budget defined as total projected operatmg,capital,and debt service expenditures in
the upcoming budget year.
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34.7%
75.8%
91.1 %
Attachment C
Zero··Base Budgeting:Modern Experiences and Current Perspectives 28
Making existing personnel,processes,&services more efficient
:::jj:~ii!i!jiill~hmiiij~.ljit!~;ljij!~gi'f.jl'lljle!ij:j~iIIf~j:ij::iijjjL;j;:{,,:::::I:t:::::,:::::::j:j~!1
Improving economy
jjjjjml!r:!iili*!iRJJ:g~l!i!i:ftm4i~:R,iijf:iijrilli~:::jj:;:;';:;:;};.,.:::......{:i""ii:i}::::~~:•.
Changes to the budget process 56.6%
JIJIJiJli'I'I"'fljlllll'III::i~llill;lilllll~JIIIIJ:JIJiJ:JIJlliJII:::J:Jil:iIJli:liJII:JiiiJI:iJIIIJiJ ::Iil:lililjlilli
Raising existing fees 50.3%
jj::,t!m:igfj!!~@i!j:g!,!mQli:i~!S,!~g!lfi,~,jet:~!::R,rm,!:ijri!!!Li,i,i::::,:::::j:;:'j:j'::;j.,:ij"j:;;::j :Mitt
Creating new fees or taxes
Line-item budget (budgeting is done primarily by spending or
revenue line items like personnel,materials,personal services,etc.)81.6%74.5%
IJIJill::.rllr.IIII.'liiIIIIJIIII~lilltl]iJiJII:IJJJ:Ji::JJJIIIJ:JJJ!iiIIIJJ:liil:iIIIJJIJil::iIIIJI::ji~..1
Performance budgeting (performance measures are included for
each budgetary unit of analysis and used in budget discussions)24.2%34.0%
!11::!:llilllil.III.'III~i11!lllillll~IIII:IIJliiJli::il:ii::JIJ::II::I:li,lli:iJi:liliiiIJil:iiJIJI,11
Zero-base budgeting (departments or programs must completely
re-justify their spending,starting from zero)13.7%20.8%
Business plans (departments or divisions are required to produce
detailed operating plans for the next one to three years and budgets
are then derived from these plans)13.7%17.1 %
!JliJ'III"IQ"lill~illl~~IJllltIJ:~1111IJifIJ~~lilliJ:JIJlliJI::iJj:l:j:::iiiiliiljij::diijjli:jiljf~jjjii:
Other priority-driven budgeting system (budgeting other than
budgeting for outcomes that allocates resources according to how
well a given program accomplishes organization objectives and not
based on what was spent on that program in the past)6.6%13.2%
*Respondents were allowed to pick more than one,recognizing that many governments
use hybrid systems.
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Attachment C
Zero-Base Budgeting:Modern Experiences and Current Perspectives 29
Budget Systems Before the 2008 Recession and Today
Other Priority Driven Budgeting
Budgeting for Outcomes
Business Plans
Target-Based Budgeting
Zero Base Budgeting
Incremental Budgeting
Performance Budgeting
Budgeting by Programs
Line-Item Budget
0%20%40%60%80%100%
III Today II Before
Zero-base budgeting is perceived as being too much work 42.8%
::::N~:.:II:m!l!:II:il!:i.~jl::~i::i:iifW!i::~Ji1~ij:::::J:L::::::::::::::::;::::~~t,l'=:::::::::::?:}/
Insufficient knowledge,training,technical support available 14.8%
::1:ml!.ml:f:i'l:fi!.:~!:I~~!li:~I~i~I::::::::::::::::::::::::::::::::1:::::::::::::::::::::::L:::;:::::l:~;il::::f:::::{::::::
Central management was resistant to ZBB 8.5%
::::'!.':im~!I~:.I:I:.:::::::::::::::::::l::::::i:::::iii:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::~B::::::::::::::::::::::::::::::::::::::::
Central budget staff were resistant to ZBB 5.6%
Other**30.0%
Central budget office 71.0%
Governing board 57.9%
*Respondents could pick more than one.
**A variety of other reasons were offered,many having to do with bad prior
experiences of doubts about the effectiveness of ZBB.
+Satisfaction levels based on respondents'perception.
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 30
N@tes
1 GFOA's survey found only one government that reported using "textbook"ZBB.As
the paper explains,others that reported using ZBB are using budgeting methods that
are,in part,inspired by ZBB ideas.
2 ZBB was subject to a great deal of academic evaluation in the early 1980s.These evalu-
ations document many of these perceived short-comings.See,for example:Perry Moore.
"Zero-Base Budgeting in American Cities."Public Administration Review,Vol.40,No.3
(May -Jun.,1980),pp.253-258 and Allen Schick,Harry Hatry."Zero Base Budgeting:
The Manager's Budget."Public Budgeting &Finance Volume 2,Issue I,pages 72-87,arch
1982.
3 Irene Rubin and Lana Stein point out that poor economic conditions cause a demand
for more activist local government,which,in turn,creates a demand for budgeting sys-
tems that feature greater flexibility and responsiveness (See Rubin and Stein,"Budget
Reform in St.Louis,"1990).Presumably,when conditions improve a budgeting process
that suits a caretaker approach to governing becomes acceptable.
4 See:Robert L.Bland and Irene S.Rubin.Budgeting:A Guide for Local Governments.
International City/County Management Association.1997.pg 14.
5 The five-year average real GDP growth for the United States for 1982 and 1983 was by
far the worst of the entire post-World War II era,until 2009 and 2010.In Canada,one has
to go back to the early 1990s to find a period of GDP growth so consistently low as it
was at end of the first decade of the 21st century.
6 GFOA's survey shows that almost three-quarters of respondents have experienced
either"major"or "extreme"fiscal stress in the last few years.
7 More than half of our survey respondents rated "budget reform"as either very impor-
tant or important to successfully dealing with financial distress.
8 GFOA's survey found only one government that reported using "textbook"ZBB.As
the paper explains,others that reported using ZBB are using budgeting methods that
are,in part,inspired by ZBB ideas.
9 GFOA's survey research found only two governments that reported using "textbook"
ZBB.
10 Exhibit adapted from Hillsborough County budget documents,but simplified for
presentation purposes.
11 Allen Schick,Harry Hatry."Zero Base Budgeting:The Manager's Budget."Public
Budgeting &Finance Volume 2,Issue I,pages 72-87,arch 1982.
12 The work of John Carver describes how governing boards in mission driven organiza-
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Zero-Base Budgeting:Modern Experiences and Current Perspectives 31
tions create the mostvalue for their constituencies when they focus on strategic concerns
and create less when engaged in issues of operational detail.See for example:John
Carver.Boards That Make a Difference:A New Design for Leadership in Nonprofit and
Public Organizations.Jossey-Bass.2006.
13 Allen Schick,Harry Hatry."Zero Base Budgeting:The Manager's Budget."Public
Budgeting &Finance Volume 2,Issue 1,pages 72-87,arch 1982.
14 Schick and Hatry."Zero Base Budgeting."1982.
15 Questions adapted from:Frank D.Draper and Bernard T.Pitsvada."ZBB-Looking
Back after Ten Years"Public Administration Review,Vol.41,No.1 Gan.-Feb.,1981),
pp.76-83.
16 See GFOA's "Best Practice:Budgeting for Results and Outcomes."2007.at
www.gfoa.org.
17 See"Anatomy of a Priority Driven Budgeting Process"at www.gfoaconsulting.org.
18 See:Robert L.Bland and Irene S.Rubin.Budgeting:A Guide for Local Governments.
International City/County Management Association.1997.pg 14.
19 The use of decision-packages in TBB is fully described in:Irene S.Rubin."Budgeting
for Our Times:Target Base Budgeting."Public Budgeting and Finance.Fall 1991.Pg.5 -
14.
20 See Goertz."Target-Based Budgeting and Adaptations to Fiscal Uncertainty."1993.
While Goetz does not suggest the planning is a major strength of TBB,he does suggest
that it is characterized by better up-front direction to departments from central manage-
ment with respect to the goals and priorities that will guide selection of decision-pack-
ages.
21 See Irene S.Rubin."Budgeting for Our Times:Target Base Budgeting."Public
Budgeting and Finance.Fall 1991.Pg.5 -14.
22 Most of organizations GFOA conducted research with made temporary use of ZBB to
address a perceived need at a point in time and/or cycled departments'participation in
ZBB over a three to five year cycle.
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