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HomeMy WebLinkAboutSS3 - Functional BudgetingCITY OF NEWPORT BEACH STUDY SESSION ITEM NO. 3 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: Homer L. Bludau, City Manager DATE: November 13, 2001 SUBJECT: "Functional Budgeting" —George Jeffries' Letter The following comments are made to address the September 30th letter from Mr. George Jeffries titled, "City Budget: Functional Budget Study Session ?" (see attached). First I would like to discuss budgeting practices generally and in Newport Beach, and then make specific comments in response to Mr. Jeffries' letter. BUDGETING PRACTICES What Mr. Jeffries described as functional budgeting is usually called program budgeting in local government. The purpose of this type of budget is to show the City Council and the public the cost of each function performed or each program provided. This is distinguished from the more traditional "line- item" budget, which shows the cost for personnel, operations and maintenance, and capital items in detail by organizational unit (i.e. division or department). Each expenditure category, such as salaries, health benefits, dues and subscriptions, training and equipment, etc., has a line with a budget amount. Line -item budgets typically are organized to show totals by department or function within a given fund (e.g., the general fund). They do not show the cost of programs within departments, or programs that may have staff support from different departments or that may be funded from more than one source. Newport Beach uses a line -item budget with summaries by fund, by department and by major programs or organizational units within departments. In addition to the Budget Detail and Capital Improvements Program documents, we prepare a third budget document called the Resource Allocation Plan. This document includes much of the information typically found in a program budget, such as a summary of expenditures from all funds for each department, mission statement and goals for each department, and staffing, expenditures and services provided City Hall • 3300 Newport Boulevard • Post Office Box 1768 • Newport Beach, California 92659 -1768 "Functional Budgeting" — George Jeffries' Letter Page 2 for each function within departments. In many instances the Resource Allocation Plan also lists current and historical service indicators so the reader can see the functions performed by individual departments. A program budget does not replace a line -item budget. Rather, it is an additional product that presents budget information in a different way. The line -item information is still necessary for budget management, accounting and financial reporting. In some cities, the council is comfortable with reviewing only the program budget, and leaves the line -item detail to staff. Our experience with the Newport Beach City Council is that you are interested in the line -item detail, and would want to continue reviewing the budget at that level of detail. If at some future time the City Council wishes to pursue the implementation of a functional or program budget, it may require a major reorganization of our current account structure to allow for the budgeting and tracking of "program efforts" in addition to our traditional line -item budgeting and control function. The question the Council needs to address is if this type of budget would better measure the success and accountability of the services provided by the City of Newport Beach. I should add that the Government Finance Officers Association (GFOA) is currently studying this issue in detail, and I expect a pronouncement from that organization within the next two years. RESPONSE TO LETTER The following comments are directed separately to the four titled sections of Mr. Jeffries' letter. Summary: I do not agree the current line -item format "prevents' critical analysis of the performance of City personnel. I have been in enough line -item budget reviews with City Councils over the past 21 years to disagree with this statement. Understandably, the line -item budget does not focus on a critical analysis of City personnel performance; rather, it focuses on individual components which make up a department's requested and allocated resources. Oftentimes Council budget discussions do lead to critical review of programs, projects and cost effectiveness issues. Regardless of whether Newport Beach goes to a "functional budget" for one or more departments, a line -item budget would still have to be prepared for their departments. Mr. Jeffries' suggestion that departments be rotated to undergo functional budgets would mean that each year the two or three departments preparing functional budgets would be inexperienced in functional budgeting, therefore requiring a major effort on the part of Administrative Services personnel and the City Manager to assist in the functional budget preparation; this at the time when the workload of these staff people is at maximum capacity. "Functional Budgeting" — George Jeffries' Letter Page 3 The letter also states, "Such review would permit department heads, city administration, and Council Members to ask questions which can not even be asked, much less answered, on the basis of the existing budget format." I disagree with this statement. Budget review for the City Manager involves reviewing proposed department line- items, personnel (both existing and requested), reorganizations, department priorities, special projects, effectiveness issues, and anything else deemed pertinent to the City Manager, the Director and Deputy Director of Administrative Services and the Accounting (budget) Manager. This review is not merely a review of numbers. The line -item budget need not, and does not, foreclose having program and performance related issues thoroughly discussed. While these discussions are not attended by Council or the public, they do occur with the review of each department's budget. This information can be accommodated if that is the Council's desire, within the public review of the line -item budget. A Little History: Budget review involving City Councils or Library Trustees should be intended to provide these decision makers with the information that they, and not staff, need to develop a comfort level which results in an adopted budget. Good staffing involves giving the decision makers as much information as they need to vote on budgets. This may sound easy, but it is not. Five or seven decision makers want different levels of detail, are interested in divergent programs and projects, some focus on the big picture, while others like detail, etc. Since a line -item budget has to be prepared, the City Manager or department head reporting to a Commission should ask that in addition to line -item detail, what information does the Council want to see during budget review? Line -item budgeting should not, and does not, close the door for other micro or macro discussions regarding budgetary issues. Departments should have the budget and personnel detail to answer the question Mr. Jeffries' letter raised due to their preparation of line -item budgets. This particular City Manager does not recognize any budgetary information as "the exclusive domain of staff'. If staff is reluctant to share budgetary information, the City Manager should address that issue when he is made aware of it. If he does not act, the City Council should take up the issue with the City Manager. The Current City Budget: Mr. Jeffries asked, "Wouldn't a responsible leader want to know what these 60 plus detectives are doing ?" The obvious answer is "yes ", and as responsible leaders, the Detective Commander, the Police Chief and the City Manager are interested in the answer to this question everyday, and not just at budget time. Currently, the Council spends 6 hours (3 -two hour Study Sessions) on budget review. I do believe that doing the kind of critical review Mr. Jeffries is suggesting could easily take 6 hours, just for the Police Department's functions! Does that mean that we should not do it? No, if that's what the Council wants "Functional Budgeting" — George Jeffries' Letter Page 4 and as long as it understands the trade -offs in staff time and effort, then we should do it. But we should do so only if a majority of the Council really believes this kind of time and effort on their part and on the part of staff would be productive. Part of the normal routine with public sector budgets is answering questions about the cost of various activities, functions, projects, services, and so on. The primary difficulty in budgeting by program, especially at the municipal level, is that it requires that the programs be clearly identified and defined in advance. And no matter how carefully we do that, it will likely cause more difficulty than it eliminates. For example, there may be an interest in how much we are spending on detectives, or auto theft, or drug related crimes, so we will identify those as programs and build the budget to that end. The fact that they are overlapping is a bit problematic, but we can deal with it. The budget just gets thicker. But then, later, someone else might want to know how much we spend on police services (in general —and including detectives) in West Newport or some other sector of the City. And the next question will be about police and fire costs related to the fourth of July (of which one component is detective work). The point is that there is virtually an unlimited number of overlapping potential "programs" out there. There are a lot of different ways to slice the budgetary pie. All of them have a purpose. But if we cut it too many ways at once, we end up with mush. MY REQUEST: As a City Manager in another City which transitioned to 2 year budgeting with a performance statistical basis (numbers of trees trimmed, sidewalks repaired, paramedic runs, traffic signs erected), I have learned that functional budgeting or any other type of budgeting is not in itself going to make any City more responsive or be an automatic budgeting improvement. If there was one budgeting technique that would do so, all governments would employ that budgeting method. Every budgeting method has its strengths and weaknesses. I would disagree with anyone who maintains that "functional budgeting" or any other method of budgeting eliminates empire building, waste, inefficiency, etc. When it comes right down to it, budgeting is only as effective as the people who create the budgets, oversee them, and adopt them. This is not to say that more program, cost efficiency, and productivity information should not accompany budgets. But the budgeting process and review should match the needs of the organization and the community. In my experience, having an organization with an administrative structure that is logical and most closely aligns with the functions routinely performed is most helpful. Our City has that. A line item budget that fits with that structure is the "Functional Budgeting" — George Jeffries' Letter Page 5 best tool I have come across to help identify the costs of the myriad of overlapping programs we perform. It doesn't keep us from identifying costs; it facilitates the effort. When cost questions are asked, it is our business to answer them, and in my opinion we do a pretty good job of that. Nothing is more important to our City Manager and Finance staff than providing the best information they can to help the City Council make optimum decisions regarding prioritization of our limited fiscal resources. The City Council is elected to establish priorities and levels of service; it does so through the adoption of its budget. Looking at a budget reveals the Council's priorities. The City Council should determine the type of information it needs to adopt its documented priorities and request that information of the City Manger. The City Manager and all staff are ready and willing to make whatever changes the Council decides will enable it to better fulfill this critical responsibility. September 30, 2001 GARY ADAMS, MAYOR CITY OF NEWPORT BEACH Date J W i Copies Sent TO: �ayor 6uncil Member Manager 0 Attorney ❑ ---- 3300 Newport Boulevard 0 Newport Beach, CA 92660 0 City Budget: Functional Budget Study SessiOW — Dear Mayor Adams, Attachment 1 RECEIVED ( '01 OCT -3 A 7 .57 OFFICE OF '4E CITY CLERK CITY 0, "EWPORT BEACIi I was gratified to hear that you intend to conduct a study session regarding privatization of city functions. Privatization is one of two major areas, which should be studied further by the city. The other is a functional budget supplement, by department, to the city's line item budget. Summary: The city currently employs a traditional line item budget supplemented by a partial description of the application of funds. The existing format prevents critical analysis of the performance of city personnel. The city finance department has a staff member experienced in the use of functional budgets. A major change in the budget format would be unduly burdensome, but the city would benefit from a financial review of, say, two departments annually by function, on a rotating basis. Such review would permit department heads, city administration, and council members to ask questions which can not even be asked, much less answered, on the basis of the existing budget format. A little history: I had the privilege of serving on the Library Board for approximately three years ending approximately three years ago. I am trained as a business lawyer. At that time, another trustee was the former President of Northrup Corporation, and a third was a PHd. in business, teaching Entrepreneurship at UCI. In board meetings, we frequently laughed and threw up our hands at making any sense out of what should have been the meat of the library budget, namely personnel costs. (For example, only about 15% of the library budget goes to materials.) The city's line item library budget, like the rest of the city budget, fails to permit critical analysis of what city personnel are doing. Personnel costs represent the major item of library, and I believe, city expense. The library budget, at the time, told us only that here were 63 full time equivalent employees, for whom the city was paying a given amount, plus add -ons. It did not tell us how many employees, of a particular level of seniority, were doing what. We could not determine, for example, how many librarians were in administration, reference, circulation, purchasing, children's services, or other functions, so we could get a hand, much less a hold, on how library resources were being allocated to these functions. L This information was within the exclusive domain of the staff, and staff was extremely reluctant to share it. The staff told us it would take too much time to provide this information, and that they did not have people to do the job. Our response was, in part that, if this type of information was not at their disposal, it should be. The second problem we encountered, after overcoming initial staff resistance, was establishing the degree of detail required so that there was a balance between the burden on staff and benefit to the city. It took about two years and a lot of discussion until, working with staff, we simplified the functions to permit appropriate breakdown. When we got the breakdown, it revealed where the fat was (in my opinion.) The Current City Budget: The small library budget is a microcosm of the city budget, but the principle is the same. The city employs the traditional line item budget with an appendix summary containing a little additional detail. However, the details are too inadequate to permit critical review. There is still no functional breakdown of major expenses. For example, the summary tells us that the police department employs approximately sixty plus detectives. Wouldn't a responsible leader want to know what these 60 plus detectives are doing? What have they accomplished in their particular functions? How much is the city paying to close a case? Does the council agree with how department heads are allocating personnel and other resources in response to public concerns? Are there duplications? Are there blind spots? Is anyone building an empire? Are portions of the department top heavy? Neither voters nor Councilpersons can even ask, much less answer these questions by reviewing the current budget. Many believe that department heads should have this information readily available and should not be resistant to disclosing it. The city should be concerned if they do not. We are not talking about micro - management. We are talking about disclosure and reasonable information for our leaders before they approve one hundred million dollar plus annual budgets. It could be counter - productive to ask every department head to provide this information annually. Dennis Danner, in finance, has had substantial experience with functional budgeting in connection with his military service. He suggested to me (at a SpeakUp Newport meeting on the city budget) that such information could, working with his department, be provided on a rotating department basis. (We found at the library that the prior year's functional budget pretty much was the same for the following year.) My Request.- If 1 had the power to make one improvement to make city government more responsive, it would be for the council to include a functional budget analysis of at least two or three departments annually, on a rotating basis. This change would expose a major component of the city budget to the light of day for the first time, and benefit the department heads, city management, 1 the council, and the voters (not necessarily in that order.) Please understand that I am very pleased with city personnel and the quality of services provided by the city. However, I am concerned about the large number of city employees, and I believe their performance should be reviewed by function and cost so that our leaders can confirm that our taxpayers are paying appropriately for the level of services provided. Could this issue be made the subject of a study session? Nov 30 01 07:46a GEORGE J. JEFFRIES 949 - 644 -6999 p.2 STUDY SESSION ITEM NO. 3: FUNCTIONAL BUDGET C1 DEC 10 All 1 :36 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNQII_ FROM: George J. Jeffries DATE: December 8, 2001 SUBJECT: "Functional Budgeting:" -George Jeffries' Letter INTRODUCTION: The following is intended as a summary of my prior letter, a summary of the staff report of the city manager, and a modest proposal. I regret that I was out of state on the original study session date. I thank the Mayor for his kindness in continuing the session to this date. Unfortunately, I am again out of the area on a pre - planned one -week trip to the bay area. I have requested a further continuance because of my absence, which has been denied. In my absence I have requested Phil Arst to present portions of this document to the council orally. Mr. Arst differs with several statements herein which are mine. Please do not shoot the messenger. EXECUTIVE SUMMARY: Our current budget process is flawed. The line item budget and resource allocation plan format provide insufficient information for a harried counsel to make informed decisions in the six hours devoted to budget matters. A performance program budget, developed with the assistance of consultants incrementally by department, focusing on the value of services, will allow the council to make informed decisions on operations now largely made by the city manager and ratified by the counsel. SUMMARY OF MY LETTER. By my letter of September 30, 2001, 1 expressed my concern, as a former Library Trustee, with the city budgeting process insofar as it appears to provide inadequate data "to permit critical analysis of what city personnel are doing." I described our frustration in obtaining basic information to make informed decisions concerning budgeting. The "Line Item Budget' tells us what we spend but not how we spend. While the budget "Resource Allocation Plan" provides some detail, and may provoke discussion, it still does not permit analysis In depth. My further concern was that the existing budget format pretty much prevents critical questions from being asked, much less answered by the presented data. To the best of my knowledge there are no performance standards, established by independent experts with the assistance of staff, to which existing performance can be compared. I acknowledged the limitations on city staff in totally changing the budget format to permit this approach and, Nov 30 01 07:46a GEORGE J. JEFFRIES 949 - 644 -6999 adopting a comment of Dennis Danner, suggested an annual review of perhaps I wo departments. REPLY OF MR. BLUDAU: In Mr. Buludau's reply, he describes the budget process, and the character of the three major budget documents. He does not mention that he inherited this format from his predecessors. He acknowledges that the line -item process is currently under review by the Government Finance Officers Association. He points out that a program budget does not replace a line item budget which, as described, is mainly for staff (i.e. budget management, accounting, and financial reporting). He points out that some councils do not even review the line item budget. (That, ultimately is what happened to the last library board I was on.) He disagrees that the line -item format "prevents" critical analysis but states that it oftentimes does "leads to" critical review. Mr. Bludau states that our busy city council devotes three two -hour sessions to budget review of our annual one hundred thirty -five million dollar budget. He points out that his office conducts a budget review in detail including discussion of performance related issues. He states that this information can be "accommodated" within the public review of the line -item budget, if the council desires. He further states that department leaders should have this information as part of their preparation of line -item budgets. However, concerning preparation of a functional budget he suggests that department leaders are inexperienced and would have difficulty presenting this information. He acknowledges the difficulty of creating a format for such a budget: "There are a lot of different ways to slice the budgetary pie. All of them have a purpose. But if we cut it too many ways at once, we end up with mush." Mr. Bludau concludes, opining that the line item budget that aligns with functions routinely performed and is helpful "to identify the costs of the myriad of overlapping programs we perform." However, he states the city council is elected to establish priorities and levels of service through the adoption of its budget and to request appropriate information through the city manager. REPLY TO MR, BLUDAU: It has become reasonably clear that in approaching this issue I may have confused substance with form. There is a grave danger that we may become bogged down in a debate over the relative merits of the line -item budget vs a program budget. This would ignore the essential issue, namely: a budget which demonstrates to the council, staff and the public, the value of city services received for the amount spent. We live in an affluent community. Our residents have come to expect and enjoy receiving city services consistent with that affluence. However, affluent people are generally clever shoppers. They do not like to spend more for something p.3 Nov 30 01 07:47a GEORGE J. JEFFRIES 949 - 644 -6999 than it is worth, but they are willing to pay immure for an exceptional item or service. I think I represent a majority of residents in saying that I have no interest in reducing the city budget just as I do not want to reduce my lifestyle. I have no nterest in privatization of city services because I believe it will reduce their quality. However, while I know we are spending more than most for city services I cannot define the degree of our excess. To use cars driven by our residents as a metaphor is our city a Rolls Royce Silver Cloud, a Cadillac, or a Honda? I nope 't is a Cadillac, but I do not believe anyone has the information to judge. While others and I are critically concerned about the quality of services we are getting for the substantial sums we spend, our budget format is of virtually no assistance in providing assurances of value. Our budget supplement recites the number of employees in a division and suggests a few service levels, but no performance standards against to measure the cost of service to demonstrate their value. We also have a current budget process, while well intended, is not reflective of the quality of other city services, and needs improvement. In comparison to most issues resulting in council decisions, the budget approval process is disappointing because of its format. Ordinarily, in connection with non - budget issues, the council has the background of personal experience, lobbying, and comprehensive staff reports. However, in considering the budget request, the council, with limited expertise in the multiple specialties covered by the budget, is presented with a mountain of data in a format designed to serve staff reporting needs, without significant interpretation or evaluation, and a limited time to frame pithy questions to test the soundness of pre- determined assumptions. At the end of the six -hour process involving more than one hundred and thirty million dollars of taxpayer money annually, it still has a take it or leave It decision The data is presented in detail by a dedicated, but overworked staff, largely and properly concerned with other aspects of financial reporting. With all due respect, such a process is ripe for inefficiency to say nothing of abuse. Compare this to a process in which outside independent experts in the specific fields working with the departments involved, evaluate programs and performance, establish levels of service, and a new and more informative budget reporting formant. . Which would serve the council, and more importantly the public, best? Let us assume that we have a Cadillac budget. Would it not be fair to have a reporting system of that caliber? At one point I thought my concept of a "performance" based budget was insightful, only to find out that I was reinventing the wheel. In the city's Resource Allocation Plan, Glossary at page 104, 1 found several budget definitions, including the line -item and program types, and a budget approach not really previously discussed by name. The "Program Performance Budget" is defined as "A method of budgeting whereby the services provided to the residents are broken down in identifiable service programs or performance units. A unit can be p.4 Nov 30 01 07:47a GEORGE J. JEFFRIES 949 - 644 -6999 a department, a division, or a workgroup. Each program has an identifiable service or output and objectives to effectively provide the service. The effectiveness and efficiency of providing the service by the program is measured by performance indicators." This is what our council deserves to have a budget process paralleling the quality level of other city services. It goes without saying that, if this concept were found to be desirable, a prompt and comprehensive change in the budget process would be out of the question. However, the city could find consulting assistance for further evaluation, and if still found to be desirable, could attempt a piecemeal change over an extended time. Each of our public safety departments, on an annual basis, would be a prime candidate for individual review. A one per cent reduction in one year's expenses would likely pay the consulting cost. BOTTOM LINE: I believe that the following facts are without substantial controversy. 1. The prime duty of the city council of the city of Newport Beach, in running its operations, is to create policies and to authorize and carefully monitor the city resources to achieve them. 2. The foregoing responsibilities should not be delegated to the city manager. 3. The city council is over worked and under paid. With its other duties, it has limited time to consider budget issues. 4. The city manager and the Administrative Department are also overworked. 5. The current budget format has reporting limitations, which inhibit the proper performance of the council's primary duty The council would benefit from more information concerning the cost of programs and whether performance standards represent a value to the city for their cost. 6. While the current budget reflects "service levels," Little, if any, information is currently available to assure the city council that funds spent are assuring good value for the services performed. 7. With assistance of consultants, and adequate time, this information could be acquired by staff, and could be put in a useful format for the benefit of staff and the council. 8. Public Safety Departments, one each year, representing a major portion of the city budget, should be the initial focus of this endeavor. Thank you for the opportunity to present this information. p.5