Program

BudgetingModernizing Financial Management for Hungarian Local Governments

1TRAINING MANUAL

Contents

Acknowledgments ...........................................................................................................................1

Preface...........................................................................................................................................2

How To Use This Manual .................................................................................................................3

Practical Guide.............................................................................................................................3

Training Guide .............................................................................................................................3

Practical Guide ................................................................................................................................4

Overview.....................................................................................................................................4

Objectives ...................................................................................................................................4

Topic Definition ............................................................................................................................4

Purposes a Budget Can Serve ......................................................................................................5

Budget Reform and Evolution........................................................................................................6

Budget Evolution in Hungary .........................................................................................................7

Types of Operating Budgets .........................................................................................................8

Steps in Developing a Program Budget ....................................................................................... 10

Multiyear Context of Budgeting.................................................................................................... 14

Introduction of Program Budgeting in Hungary ............................................................................. 15

The Szentes Approach to Program Budgeting.............................................................................. 15

Summary of Key Points .............................................................................................................. 19

Glossary .................................................................................................................................... 21

Training Guide............................................................................................................................... 23

Training Outline.......................................................................................................................... 23

Slides ........................................................................................................................................ 23

Bibliography............................................................................................................................... 24

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AcknowledgmentsThe Urban Institute (UI), Washington, DC, and the Metropolitan Research Institute (MRI), Budapest,developed these manuals with funding from the United States Agency for International Development(USAID).

Several individuals contributed to the content of these manuals. Katharine Mark, UI Program Director inHungary, conceived the program and provided overall management with the assistance of her colleaguesWendy Graham and Margaret Tabler. The program was based on the success of initial municipal budgetreform work with the city of Szolnok carried out by Philip Rosenberg. The training program itself wasdeveloped and implemented by a team of U.S. and Hungarian trainers led by Philip Rosenberg andJózsef Hegedüs. Ritu Nayyar-Stone coordinated the production of the manuals and edited the earlydrafts. Principal authors of the manuals were Róbert Kovács, Mihály Lados, Ritu Nayyar-Stone, MonikaJáki, and Philip Rosenberg. Other individuals made contributions to specific topics: József Hegedüs,Andrea Tönkõ, Judit Kálmán, József Kéri, Mária Kürthy, Erzsébet Krajsóczki, András Vigvári, OrsolyaSebõk, Harry Hatry, Sharon Cooley, Scott Bryant, and Blue Wooldridge. Diane Ferguson providedprofessional editing and layout. Ágnes Magyari also assisted with layout and coordination of the printing.Jeffrey Stevenson Murer designed the cover. Katalin Zsámboki, Gabriella Szabó, and Judit Hegedüstranslated the manuals from English into Hungarian and vice versa.

Principal Author: Philip RosenbergContributions by: József Hegedüs and Erzsébet Krajsóczki

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PrefaceThese manuals are based on a three-year training program, Modernizing Financial Management forHungarian Local Governments, sponsored by USAID from 1996 to 1999 and executed by UI and MRI.The training consisted of six seminars each year, following the municipal budget cycle. The objective wasto train municipal officials to improve financial management in their city via financial analysis, alternativerevenue sources, performance measurement, strategic planning, capital improvements programs, andprogram budgeting. The program was interactive and used Hungarian local consultants. It was refinedannually based on feedback from municipal finance officers.

As a result of the program, thirty-five local governments have focused on improving financialmanagement practices and enhancing transparency. Many cities found it beneficial to attend more thanone series of seminars. Often cities sent larger teams to work in detail on reformed budgets for specificsectors. The modernization brought about by program budgeting has greatly improved municipalbudgeting practices in Hungary.

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How To Use This ManualThis training manual, like other manuals in the series, can be used in many ways. It can be a guide for allindividuals involved in bringing about financial reform in a citymayors, finance officers, departmentheads, and your staff. It can also be a guide for trainers.

Practical GuideThe first part of the training manual is intended for self-instruction. You can also use it as a basis todevelop your own presentation on this topic. Throughout the practical guide you will find slide icons in theleft-hand margin. These show that the topic has a corresponding slide in the second part of the trainingmanual, which is the training guide.

Training GuideThe second part of the training manual can be used by finance managers to train staff prior to initiatingfinancial reform. Trainers can also use it in a training workshop for finance managers from different localgovernments. This section contains a training agenda, slides, exercises (where applicable), and abibliography. You can either use the slides as they are, or you can enhance or change them based onyour experience. Trainers may wish to rearrange or modify the materials to meet the objectives of aparticular training situation.

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Practical Guide

OverviewThe art of budgeting in government is essentially a process of allocating limited financialresources to services and activities in a manner that will most effectively meet the needs of thecitizens. This training manual has been developed to meet this objective. It is designed forindividuals who are directly involved in preparing the municipal operating budget. Financedepartment staff will benefit from this program. Those who prepare budget requests on behalf ofmunicipal departments within the mayor’s office and budgetary institutions also will benefit.

This training manual will focus on practices and techniques for preparing a program budget. It willexamine the program budgeting process by exploring why municipalities have a budget,reviewing the types of budgets municipal governments utilize, and defining a program budget andits advantages.

This training manual should be integrated with manuals on the following topics:♦ Strategic Planning♦ Financial Analysis

♦ Capital Improvements♦ Performance Measurement

Objectives♦ Integrating recommended practices into municipal budgeting practices and procedures.♦ Understanding the purposes for which municipalities prepare a budget.♦ Evaluating alternative budget methods.

♦ Developing a program budget.♦ Understanding how one Hungarian local government has initiated program budgeting.

Topic Definition

What Is a Budget?The budget is often called an operating plan. You use it to plan expenditures and guide amunicipality through the upcoming fiscal year. The budget serves as the basis for your financialreporting to the mayor and general assembly, Ministry of Finance, municipal departments andbudgetary institutions, and the citizens.

A budget is a powerful tool for allocating limited resources among competing priorities within thecommunity. Because needs always exceed available funds, funds that you give to onedepartment must be denied to another department. You measure the value of the funds youspend not only by the benefits you gain, but by what you have to give up. Budgeting meansmaking choices.

A municipal budget includes:

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♦ Planned activities, projects, and services;

♦ Estimates of the resources or revenues available; and♦ Estimates of public expenditures necessary to finance planned activities.

In its simplest form, a budget consists of a comprehensive listing of anticipated revenues andproposed expenditures for each function of government for a future twelve-month period, or fiscalyear. Ideally, the budget represents a comprehensive allocation of limited resources amongpotential users.

Why Is It Important To Have a Budget?The law requires Hungarian local governments to prepare an annual budget for the fiscal year.Beyond simply meeting the requirements of the law, the budget is important as a statement ofpolicy about the allocation of limited resources among municipal service areas. A budget is notjust a statement of finances but is the link between mobilization of funds and attainment ofmunicipal goals and objectives. Activities associated with budget formulation, legislative review,budget execution, and budget control and audit are major instruments in deciding the shape andcondition of a community and the effectiveness and efficiency of local government programs.

Purposes a Budget Can ServeBelow is a brief discussion of some purposes that a budget can serve.

The Budget as a ContractThe mayor and general assembly promise to provide funds to a department for agreed-uponpurposes. In this sense, the budget is a contract between the policymakers and municipaldepartments. The budget also may be viewed as a contract between the citizens and themunicipality. That is, the citizens have agreed to pay taxes so they can receive certain servicesfrom the municipality.

The Budget as a Management ToolThe budget serves as a statement of the decisions and responsibilities that translate into specificprograms and activities. As a management tool, a properly designed budget can help you achieveadministrative efficiency, economy, and honesty through businesslike behavior. The budgetincreases management responsibility and accountability.

The Budget as a MotivatorThe budget motivates departments by setting forth targets and by serving as a mechanism forobtaining involvement and commitment. The budget provides a means for measuring accom-plishments against goals and for comparing actual with planned outcomes. Municipal staff aremore likely to be effective and satisfied if they have a clear sense of program purpose thatenables them to better comprehend where they are going and how they will get there.

The Budget as a Financial Control MechanismThe budget can serve as a means to define and assign responsibility for financial control. Abudget provides strong control over departmental expenditures and reduces the administrativediscretion of department heads.

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The Budget as a PlanThe budget is the investment plan for your community. It coordinates choices so as to achievedesired goals. The budget is an instrument for correlating executive and legislative action. Abudget should include a detailed specification of what objectives are to be achieved by theproposed expenditures. As a planning tool, the budget can suggest alternative methods ofachieving these objectives.

The Budget as a Major Policy ToolWhether you intend it to be or not, the budget is a major policy tool. How you decide to spendyour community’s scarce resources is perhaps the most important policy decision you will makeduring a fiscal year. Government resources are always less than what is needed to accomplish allthe community’s goals. You must make decisions that contribute the most to municipal goals.Thus, budgeting can be viewed as the process by which you make government policy. Youshould ask yourself how well your budget serves as a policymaking instrument.

The Budget as a Communication MechanismThe budget document is the mechanism by which you inform citizens, municipal officials,policymakers, potential investors, and others about community budgetary issues, trends, andchoices addressed in your budget. Your budget document should communicate the significantinformation in the budget to the reader. Use charts and graphs, where appropriate, to highlightfinancial and statistical information. In addition, use narratives to describe the relationshipsamong revenues, expenditures, and programs. In the document you also should presentcommunity demographic, infrastructure, and economic data.

The Budget as an Operations GuideBudget requests describe proposed activities, services, or functions that municipal institutions willcarry out. In the budget requests you should identify qualitative and quantitative measures, oroutputs, by which program performance and results will be evaluated. You should also identifyprogram beneficiaries, such as the number of citizens served, and specify the number ofemployees required to carry out each activity. When you provide these types of information, thebudget that is produced from the requests will serve as an operations guide. The budget of eachinstitution will not only identify the cost of each activity, but also the outputs to be provided, thenumber of citizens who will benefit, and the staffing level required to carry out the activity.

The Budget as an Instrument of DemocracyHistorically, a major purpose of budgeting is to promote democracy. The budget should reflect thewill of the citizens and should open government to public scrutiny. The budget is a means ofexercising popular control over public money.

Budget Reform and EvolutionTo understand the budget, you need some historical perspective. First, what does the word“budget” refer to? This was the leather pouch, or purse, in which citizens placed taxes due to theking. Thus, from its very origins, the budget has been associated with the collection of revenues.Today, the word budget has a much broader meaning. There are many kinds of budget forms andformats, each underscoring a particular informational need of management.

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In Western experience, the budget has evolved from a simple control mechanism to amanagement and policy tool. How did this come to be? In the U.S. at the beginning of thetwentieth century, there was great concern with corruption in government and great fear of peoplestealing public funds. To protect public funds, financial authority was concentrated in the positionof mayor. The position of controller (in English) was established under the mayor to controlexpenditures and revenues. New York City led this reform in 1907, and the U.S. governmentfollowed in 1912.

The concern with corruption was reflected in the control nature of the budget practices of thetimes. Control-oriented budgets were simple to understand, thus making them transparent as wellas subject to great scrutiny. Furthermore, the budget process generally accentuated the negative.That is, the controller would carefully monitor public funds to ensure that departments did notoverindulge with their budgetary requests. Thus, the budget process generally involved saying“no.”

Over time a need evolved for better information upon which to base investment decisions. TheDepression of the 1930s brought forth a number of federal programs to boost the economy, andout of these programs emerged performance-type budgets. By the mid-1960s there was amovement to program performance budgets. These reforms were focused at the national level ofgovernment, however. During the so-called “taxpayer” revolts of the mid-1970s, citizensdemanded to know how their taxes were being used at the local level of government. Thus, therewas a movement toward more informed and publicly transparent budgeting. Local governmentsmoved from control budgets to various forms of program budgetingthe subject of this trainingmanual.

Despite all the “progress” in budgeting practices, you still have tough decisions to make. Asasked by V.O. Key, Jr. (1940), “on what basis shall it be decided to allocate X dollars to Activity Ainstead of to Activity B?” It is important for local governments to specify criteria and keep them inmind when making budget allocations.

People react to what you place in front of them. If people see a line-item budget, they will ask oneset of questions focusing on the control orientation presented. If you ask people (e.g., generalassembly members, mayors) to judge the same activities in a program budget format, their reviewand selection criteria will be totally different. This issue has been phrased by Jess Burkhead(1956) as follows: “The ‘means’ of budgeting affects the ‘ends’ of budgeting—people think aboutwhat is put in from of them.”

Budget Evolution in HungaryHungarian municipalities have some experience in budget planning and preparation. When theSoviet-style council system was introduced in 1949, municipalities ceased to exist, and generalassemblies were limited to implementing and supervising the objectives of central planners. After1971 the operating and capital budgets were strictly separated and characterized by a planningsystem based on “rule of thumb.” Under this process general assemblies first forecast price andwage increases and added the increases to the previous year’s budget. Second, they addedcosts related to new developments and facilities, and “qualitative” development expendituresaimed at increasing service levels. Budgets were approved according to “democratic” rules, andalthough local government financing was completely centralized, general assemblies had limitedfreedom in planning their own revenues from companies operating within the boundaries of themunicipality.

The 1986 reform of general assembly financing affected the capital budget; however, it did notchange the system of planning and financing the operating budget. In the general assemblysystem the budget document underwent a formal approval process. Furthermore, the budget wasnot a public document, and the budget information was not accessible in practice.

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The new political and economic system, defined by the 1990 Law on Local Self-Government,inherited these “traditions.” One of the main objectives of implementing program budgeting is toeliminate these inherited features.

Even though Hungary had moved away from modernizing budget practices while it had a plannedeconomy, local governments had introduced some modern elements of budget preparation andanalysis between World War I and World War II:♦ The national association of cities prepared an annual comparative analysis of Hungarian local

governments’ revenues and expenditures.

♦ Local governments could impose a surchargea piggyback income tax—in addition to thecentral income tax.

♦ Loans began to play an important role in municipal financing, and some of them werespecifically for projects.

Because of the experience with these modern budget practices and because Hungarian localgovernments did have some financial freedom, the transition to a market-based economy hasbeen easier for Hungary than for other transitional countries.

Types of Operating BudgetsMany municipalities separate their annual budgets into two components: the operating budgetand the capital budget. Capital budgets are for major, nonrecurring items that last a long time andrequire multiyear planning. While you do not have to have a separate capital budget, it is highlydesirable. This manual focuses on operating budgets (for more information on capital budgets,see the training manual on capital improvements).

Three possible types of operating budgets are described below. Each type has advantages anddisadvantages. The suggested practice for preparing Hungarian municipal budgets blendsfeatures of line-item, performance, and program budgeting. Few, if any, budgets worldwide areprepared exclusively on a program basis. In reality, there are as many budget formats as thereare budgets. What is important is that your budget serve as the managerial road map to guideyour municipality.

Line-Item BudgetThe line-item budget is a financial document that lists how much you will spend on every item amunicipal budgetary organization uses. The focus of the budget is what is bought? Theexpenditures for each item are broken out in categories. Expenditures are organized primarily byobjects of expenditure such as salaries, materials and supplies, and goods and services bought.The line-item budget keeps track of how much you spend on what. While the simplest to prepare,the line-item budget does not provide any information regarding activities and functions of aprogram, department, or municipality. Knowing how much you are spending for salaries, supplies,maintenance, and utilities does not reveal much about the actual delivery of services. How manycitizens are being provided with social services? How many kilometers of streets are cleaned?How many children are in school? To answer these questions, you must rearrange expendituresinto programs or activities.

Performance BudgetThe performance budget allocates money to various activities or programs of an organization andat the same time describes the work output that the organization will produce with this money.

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The public works budget, for example, sets aside a specific amount of money to repair a specificnumber of kilometers of street.

The principal advantage of the performance-type budget is that it shows both the activities of thelocal government and the service levels of these activities. The relative service levels and fundsspent on different activities show where priorities lie. This budget also gives you the informationnecessary to decide if the priorities are correct. It is an immense help in assessing the quantity,quality, and productivity of municipal programs.

Program BudgetThis training manual emphasizes the program budget. The program budget differs from thetraditional line-item approach to preparing, reviewing, and presenting the budget. Rather thanfocusing on what a community buys (personnel, commodities, etc.), a program budget focuses onthe expected results of services and activities that you carry out. The emphasis is on theattainment of long-term, community-wide goals. In a program budget, you link revenues andexpenditures to multiyear programs that meet your municipality’s goals, objectives, andstrategies. Importantly, a program budget identifies the anticipated results and outputs of theseinvestments.

What Is a Program? A program classifies all activities in a municipal government by their majorpurpose and contribution to overall community goals and objectives. A program structure is a wayfor you to organize all municipal activity into a hierarchy of functional categories. For example,your municipality may establish a “Center City Economic Development Program.”

In large municipalities, programs may cut across organizational lines. Your economicdevelopment program may include the activities of several municipal departments such ascommunal services, housing, and water and sewer. In smaller jurisdictions, your programs maybe limited to the activities of a single department. A communal services department may have a“Neighborhood Street and Sidewalk Improvement Program.”

Ideally, a program should be clearly delineated, have a minimum overlap with other programs, beresults oriented, and lend itself to quantification. You will carry out planning, budgeting,administrative control, and reporting within the framework of this program structure.

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What Are the Advantages of Program Budgeting? The benefits of using this systematicapproach to budgeting include:

♦ Producing a transparent budget. A program budget presents budget investments in aformat that enhances community understanding of the purpose and nature of the servicesyou will provide.

♦ Focusing attention on community goals, needs, and capabilities. With a program budgetyou can bring budget investments in line with community objectives, anticipated or desiredgrowth, priorities, and financial capabilities.

♦ Achieving maximum use of the citizens’ taxes. The planning and management focus of aprogram budget establishes an informed basis upon which you can make decisions, thushelping you avoid costly mistakes. A program budget guides you in making sound annualbudget decisions.

♦ Serving wider community interest. A program budget, once approved, keeps the citizensand business community informed about community programs and activities that affect theirlives and enterprises. It also provides information on the results of budget investments.

♦ Encouraging a more coordinated and efficient government administration. Using aprogram budget to coordinate budget investments of municipal departments will result inmore efficient use of limited resources and will limit conflicts or overlap among projects.

♦ Maintaining a sound and stable financial program. By programming investments overmany years, a program budget can limit the burden that these investments place on themunicipal budget. Where there is ample time for programming, you can select the mosteconomical means of designing and financing each project in advance.

♦ How Is a Program Budget Different from a Performance Budget? Both types of budgetsuse indicators to measure performance (see the training manual on performancemeasurement), but they have a different focus. A program budget emphasizes the benefitsthat citizens gain from municipal expenditures, while a performance budget emphasizesmanagement efficiency in expenditure allocations.

Steps in Developing a Program Budget

Step 1: Establish GoalsGoals represent the ends that a program or an organization (e.g., municipality or municipaldepartment) wants to attain. They define the desired outcome or end result and are typicallygeneral in nature. Your goals should be definitive and concise. For example, a municipality mayarticulate the following goal: “Enhance the Economic Viability of the Central Business District.”

Step 2: Establish ObjectivesObjectives represent the specific results desired within a fixed period of time. They should specifywhat is to be accomplished, for whom, and by what date. In terms of the budget, an objectiverepresents a targeted achievement for the forthcoming year. Each objective has one or moreperformance measures (see the training manual on performance measurement).

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Objectives should reflect planned achievements in service quality or service level; thus, keywords used in stating objectives include increase, reduce, expand, complete, prevent , maintain.Examples of objectives are:

♦ “Increase the Number of Residential Housing Units in the Next Fiscal Year by 2%.”♦ “Reduce the Number of Leaks in the Water System by 25%.”♦ “Expand the Number of Commercial Enterprises in the Downtown by 10%.”

You can develop goals and quantifiable objectives for the activities of individual programs ordepartments as well as for the entire municipality.

Step 3: Prepare a Budget CalendarThe budget calendar establishes the process and schedule your community will follow indeveloping the budget. The calendar helps you prepare and enact the budget in a timely way. Ata minimum, the calendar should indicate the dates when:

♦ You will distribute budget worksheets, instructions, and guidelines to departments;♦ You will prepare revenue estimates;♦ You will compile budget requests and summarize them into a single budget document;

♦ The mayor and the finance and other committees of the general assembly will review budgetrequests and make appropriate adjustments to budget proposals; and

♦ The general assembly will adopt the budget.

Step 4: Define Roles in Budget PreparationThere are three major administrative roles in the budget preparation process:♦ Preparing budget proposals for consideration by the general assembly;♦ Explaining current fiscal conditions, fiscal prospects, and budgetary proposals to the general

assembly; and♦ Implementing the budget enacted by the general assembly and monitoring performance to

ensure that programmatic and fiscal policies are followed.

In smaller local governments, one person may be responsible for all these roles. In largermunicipalities, a budget officer or chief financial officer may assist the mayor to fulfill these roles.

While the executive role in local budgeting should always encompass the above responsibilities,the manner in which the executive function is organized may vary considerably. In some localgovernments, department heads deal directly with the general assembly. This is particularly truewhere each member of the general assembly directly oversees a particular department. It isrecommended, however, that you assign all executive budget functions to a single executiveofficial (sometimes called a budget officer). This will ensure that (1) there is consistency in budgetpreparation and format among municipal department budget submissions; (2) legislators will havea focal point to guide the establishment of municipal policy; and (3) priorities for services will bedetermined from a central point.

The budget officer plays a key role in budget preparation by serving as a focal point for issuingguidelines, reviewing materials, and responding to questions. The budget officer’s role may be ofthree general types. First, the budget officer may serve simply as a coordinator of budgetmaterials. Second, the budget officer may perform a significant policy guidance function andbecome involved in all the programmatic and financial issues relating to the budget. In this role,

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the budget officer not only coordinates all materials, but also assumes analytical and guidancefunctions, such as:♦ Issuing guidelines to departmental officials regarding the acceptable level of service increase

or decrease and expected cost limitations;

♦ Evaluating departmental requests and adjusting them to policy guidelines;♦ Balancing expenditure requests with available revenues (see also the training manual on

financial analysis); and

♦ Making recommendations for budget action to the general assembly.

Third, the budget officer may directly supervise budget implementation. Specific tasks include:

♦ Ensuring that departments do not exceed budget limits by conducting periodic projections ofexpenditures and comparing them to available resources;

♦ Maintaining centralized position control to ensure that new staff are hired only into authorizedpositions and at salaries no greater than the amount designated in the budget;

♦ Reviewing and approving all requests to transfer funds from one budget to another;♦ Preparing reports on budgetary performance for the use of the general assembly, mayor,

departments, and citizens; and♦ Closely monitoring departmental performance to determine potential problems.

Step 5: Distribute Forms and Prepare Departmental Budget RequestsThe budget officer distributes budget preparation forms and instructions to municipal departmentsand enterprises. Ideally, this package includes the municipal goals and objectives established inSteps 1 and 2 to guide managers in establishing funding priorities that are consistent with overallmunicipal priorities.

The people who manage local activities should be involved in the budget process. However, in agreat number of cases, budget requests are prepared without spending much time discussing thebudget with the department heads who must operate under it.

You should involve department heads in the details of budget development and implementation.Budget requests for each service should specify what the service is; what level of service hasbeen provided in the current year; what level of service is needed in the budget year; what willhappen if the service is reduced, discontinued, or increased; and the cost of service at therequested level. You can convey this information in an informal way, through a formal statementof specific objectives and workload measures, or through presentations of alternative servicelevels.

Department heads must also seek to summarize these details and present information in a waythat complements the legislative policymaking function. The budget requests that departmentheads generate will trigger a round of budgetary policy decisions, which, in turn, affect resourceand spending levels and modify budgetary goals.

Step 6: Review the Budget RequestsThe mayor and general assembly are in the unique position of reviewing all requests and mustthus be prepared to establish priorities in light of major issues or potential fiscal problems facingthe local government. Your review of departmental submissions should start by ensuring thatproposals are consistent with the budget policies you established at the beginning of the budgetprocess. Typically, the sum of all budget requests will exceed the total of estimated revenues plusany estimated surplus from the current year. Departments and programs will compete for accessto limited governmental funding sources. You will have to make tough choices, but you shouldmake them in the context of your municipality’s overall program and fiscal policy.

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You should make sure that the general assembly budget committee and other appropriatecommittees receive all the materials they need to give full, effective consideration to the budgetproposals presented by department heads. For local officials to achieve the most effectivepolicymaking role, the budgetary materials you present them with should permit them to gain acomprehensive understanding of local financial conditions, revenue prospects, and alternativeuses of local funds in the provision of services.

The general assembly should not concern itself extensively with administrative and financialdetails underlying the budget. This may make you lose sight of important programmatic andfinancial issues embodied in the budget proposals. In particular, legislators should avoidbecoming overly involved in considering minor expense items. For example, you may spendextensive time and effort discussing a request for supplies and totally ignore the issuesunderlying major expenditure requests. Such an approach is undesirable because:♦ It fosters false economy—you may save small amounts of money, but the fulfillment of

service objectives may be impaired; or,

♦ It wastes the valuable time of legislators on insignificant aspects of the budget.

Step 7: Establish the Role of CitizensSince the budget is your community’s policy tool, you must make a conscious effort to determinewhat the citizens think about current policies and services, including where they think servicescould be strengthened and what levels of priority they attach to various services. Frequently, localofficials rely on the perceptions of departmental management or the most vocal citizens toestablish budget policy and service priorities. In both cases, the real preferences of citizens maybe distorted. You could undertake a more systematic approach to understanding citizens’ needsusing techniques such as holding hearings on specific budget policies and service priorities.

Another method is to go to the citizens. Explain the kinds of services for which the municipality isresponsible. Discuss municipal fiscal and program policies and obtain feedback. As noted below,once the budget document is assembled, make the document available to the citizens.

Step 8: Prepare the Budget DocumentThe budget document is the final product of a lengthy process, and the quality of the budgetdepends largely on the quality of that process. At each stage of development, the budget takeson a different form. Proposed budgets are usually the most comprehensive and largest versions,because they contain critical decision-making information. Your adopted or final budget, on theother hand, may be a smaller summary document that you use to communicate final policies andappropriations.

The budget is a decision-making document: it is the basis for important fiscal and policydecisions. An effective document encourages debate and proper consideration of budgetaryissues by delineating the issues and informing participants about the implications of specificactions or inactions.

Communicate budget decisions accurately and clearly. At different stages of development, thebudget reflects input from citizens and decisions made by department heads, the mayor oradministrator, and finally, the general assembly. The budget must accurately reflect the results ofthis process. The budget serves as the official action plan for managers and staff charged withcarrying out government functions and programs.

Ultimately, the budget document is the vehicle for informing the public, the business andinvestment communities, the central government, and others regarding your community’s

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investment policies and priorities. You should format and print the budget document in a way thatfacilitates understanding and enhances the utility of the budget for the citizens. The documentshould be attractive, consistent, and oriented to the readers’ needs. To this end, include readerguides, budgets in brief, and graphs and other visuals that will communicate these policies andpriorities effectively. Your budget should give readers an understanding of the services you areproviding, the cost of these services, and the benefits they will obtain from these services.

Step 9: Adopt the BudgetOnce you submit the proposed budget, and the general assembly (and the general public)reviews it, it will likely undergo more changes until it is adopted by the general assembly.Adoption of the proposed budget by the general assembly establishes the legal authority foradministrative officials to incur expenditures in the fiscal year. The adoption of the proposedbudget is the culmination of an exhaustive review of budget proposals by the general assemblyand the mayor.

Step 10: Execute and Monitor the BudgetThe main purposes of budget execution are to make the appropriations authorized in the adoptedbudget and to monitor spending. The goals of budget execution are to: (1) provide for an orderlyapproach to achieve budgetary goals and objectives; (2) ensure that funds are expended only onapproved activities; and (3) have adequate stewardship over entrusted financial resources.

Responsibility for budget execution rests with municipal departments. They must account for theexpenditures and program outputs. Responsibility for monitoring may rest with the budget officer,chief financial officer, or the deputy mayor, depending on your local government organization.

You should have a reporting system that compares actual expenditure and output againstbudgetary plans. For most municipalities, your system should generate such reports monthly. Theperson responsible for budget monitoring should identify any problems and meet with theappropriate department to identify causes and resolve the problems. This person’s role is toprovide technical assistance and support so that departments can take corrective action.

Multiyear Context of BudgetingAlthough the budget identifies programs, activities, and their related revenues and expendituresfor the upcoming fiscal year, you should view it in a multiyear context. The prior and current yearbudgets guide you in estimating the next fiscal year’s revenue and expenditure levels andprogram costs. Investment decisions for the upcoming year will have long-term program and costimplications. Consider the following when preparing the budget for the upcoming fiscal year:♦ How much did the municipality receive and spend last fiscal year? Were the amounts more or

less than planned? If yes, why? Is the municipality meeting its projections for the currentfiscal year?

♦ What are the bases for revenue and expenditure projections?♦ How does the proposed budget compare to last year and the current year? Is it higher or

lower? Why?♦ What are the criteria for establishing budget priorities and funding levels?♦ What are the multiyear liabilities hidden in the proposed budget (e.g., additional staff

requirements, new projects that will require ongoing staff and operating costs, added costs,etc.)?

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♦ What is a realistic estimate of future revenues and expenditures? Will future revenues besufficient to support on-going projects and staffing levels?

♦ Will the budget investments you make generate long-term benefits to the community? If not,re-evaluate these investments.

If you view the budget in this multiyear context, you will be better positioned to minimize theimpact on your municipality of inflation, revenue declines, and increases in service costs.

Introduction of Program Budgeting in HungaryAs local government responsibilities in Hungary are defined and categorized by sectors (as areinstitutions and departments of the mayor’s office), the easiest way to introduce programbudgeting is to take a sectoral approach. Hungarian local governments that have initiatedprogram budgeting have focused their efforts first on a single sector and then expanded theirefforts to other, more complex sectors.

Some of these local governments started program budgeting in the communal services sector.This sector is not subject to central government mandates on functions and expenditures (thusgiving local governments more freedom), and sub-programs can be easily specified. The socialservices sector, on the other hand, is very complex, and some local governments have taken theapproach of specifying sub-programs based on the tasks and activities mandated by the centralgovernment. This may be a useful approach; however, a detailed sector analysis can contributeto a clearer definition and management of sub-programs. A detailed sector analysis examines thelegal framework; analyzes strengths, weaknesses, opportunities, and threats (SWOT); tracesrevenues and expenditures; and details the economics and clients of the service. In some cases,a sector analysis may identify sub-programs that combine several tasks. In practically all casesthe sector analysis will permit the development of sector goals and objectives, fiscal indicators,and measurable performance outcomes.

Thirty-five local governments in Hungary have now adopted a program budget in varyingdegrees. Of these, practically all have undertaken a sector analysis in the sector chosen to initiateprogram budgeting, and all now have budgets that are more transparent and results oriented.

A case study of one of the Hungarian local governments that pioneered program budgeting,Szentes, documents the profound changes that program budgeting has effected in modernizingmunicipal budgeting practices in Hungary. This study identifies the steps that Szentes took toimplement these changes and how the municipality addressed the challenges it faced throughoutthe process.

The Szentes Approach to Program BudgetingBefore 1997, the Szentes budget was traditional and contained no extra information beyond whatwas required by central regulation. The budget was essentially in a line-item format, with nodetails on service accomplishments and program results. This lack of information did not facilitateobjective decision making by the general assembly. Nor did it explain to citizens the governments’policies or use of revenues.

Some municipal officials felt that in order to make informed decisions about service delivery, theyrequired a completely restructured budget document. The new document needed to provideinformation so that policy decisions could be made based on facts and data rather than subjectivejudgement.

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A program budget cannot be initiated without the political support and guidance of the mayor,finance director, and budget committee. In Szentes the “champions” of program budgeting werethe mayor and the finance director. They initiated the reform process by:♦ Informing general assembly members about the proposed budget reform for 1997 in the

semiannual reportrequired by lawin June 1996.♦ Outlining the needed reform in two sub-programs of the communal services sector (park

maintenance and green areas) and developing a work plan.

♦ Holding internal meetings with general assembly members, budget staff, and departmentstaff to make them aware of the budget reform and concepts of program budgeting.

♦ Submitting a proposal at the August 1996 session of the general assembly, who agreed toadopt program budgeting in the communal sector.

By the time the general assembly discussed the proposed budget in February 1997, eachmember understood the changes that had been made in the structure and content of the budget,and practically all of the members supported these changes.

Szentes developed its program budget as follows:♦ 1997. Program budget for two sub-programs in the communal services sector.♦ 1998. Program budget for the entire communal services sector (three sub-programs) and for

the entire social services sector (three sub-programs).♦ 1999. Program budget for all sectors and programs: the communal services sector, social

services sector, education sector, and other sectors (culture, library, sport, tourism, etc.).Also, separate operating and capital budgets.

The Szentes approach to program budgeting reflects many features identified in the model “Stepsin Developing a Program Budget” but also shows how each local government will adapt theprocess to its own needs and understanding. Szentes made both enormous progress and somemistakes as it developed its budget, and its experience is useful in showing how a city introducesprogram budgeting in practice in Hungary. Following are the steps followed by Szentes based onits three year experience.

Step 1: Preparation for the Budget ProcessThe preparatory phase of the budget process involves designing the budget calendar and workplan, defining the role of the head of the finance department, identifying staff who will participatein the budget process, analyzing the legal framework, and soliciting citizen input. During thisphase all the documents that help smooth the planning process are prepared. Guidelines enablethe uniform interpretation of tasks, requirements, and the main elements stated in step 2.

The design of the budget calendar and the work plan requires special attention. In the traditionalbudget process, municipal officials did not prepare work plans that identified and coordinated thedifferent steps. Therefore, the process was often disorganized and confusing, and activitiesfrequently overlapped. The new budget process introduced in 1997 proved to be efficientthework flows more smoothly, responsibilities are shared even though a manager oversees theentire process, and cooperation among the different departments and institutions is moreeffective. In several cases the financial and other sectors collaborate with fewer problems. Theylearn about and as a consequence respect each other’s tasks. As a result of the budget reform,the indifferent attitude of the sectors toward budgeting has been replaced by active participation.The different sectors not only provide data for the budget process, they also evaluate theusefulness and outcome of their programs.

The budget calendar and work plan specify who should do what, and when. Strict enforcement ofthe budget calendar and work plan deadlines ensures the timely preparation of the budget.

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Role of the Head of the Finance Department. The head of the finance department isresponsible for the preparation of the budget. He/she coordinates, manages, and organizes thework and plays the following roles:♦ Acts as a liaison with the municipal institutions, committees, and leaders;

♦ Develops the guidelines concerning the contents, structure, and format of the budget;♦ Informs the municipal leaders and harmonizes needs and resources;♦ Organizes the management of the budget process;

♦ Supervises the planning process;♦ Develops clear rules related to the process; and♦ Prepares the budgeting guide and other documents to ensure uniform and straightforward

interpretation of the budget’s contents.

Role of Staff Participation and Cooperation. It is a misconception that budget preparation isthe task of the financial officers onlyrepresentatives of different sectors are essential to theprocess. Explaining the costs and benefits of the “new” budget process enables the staff tounderstand their role and is necessary to obtain political support for implementing the process.

The advantages of cooperation among institutions, experts, and sector representatives are:♦ The partners have an opportunity to learn about each other’s essential features that may

prove useful in the following steps of the budget process.♦ Tension among the managers and officers decreases, and trust increases.♦ A kind of creative collaboration develops.

♦ The partners share ideas.♦ The partners can define needs more realistically.

Analysis of the Legal Framework. Another essential element in preparing for the budgetprocess is analyzing the legal framework, as service delivery is regulated by several sector-specific local decrees and guidelines. Accurate, up-to-date information and observance ofregulations is necessary for efficient budgeting and financial management.

It is also necessary to analyze the interior and exterior factors that influence the municipality’sfinancial management, strengths and weaknesses, traditions, and economic and politicalconditions. This helps the municipality know where it is coming from and what it would like toachieve.

Solicitation of Citizen Input. It is important to collect information from citizens regarding theirneeds, demands, and expectations of service delivery. This work requires much time and effortfrom several experts, which may be difficult for smaller and less experienced municipalities toprovide.

The current channels of communication with the citizens include:♦ customer service representatives♦ complaints

♦ mayor’s consulting day♦ consulting day of the general assembly members♦ meetings of civil society organizations

♦ professional forums (e.g., a sociopolitical roundtable)♦ open houses♦ local media outlets

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♦ public hearings

♦ meetings of the general assembly.

Szentes has also initiated other methods, such as surveys, to evaluate the citizens’ satisfactionwith kindergarten care and to learn about the needs of the inhabitants concerning social care.

Step 2: Budget Process ManagementThis is the most important phase of the budget process. It is the longest and involves manypeople. In this phase the municipality defines the sectoral objectives, targets, and programs onthe basis of its strategic objectives (see the training manual on strategic planning). Municipal staffcarry out the work in teams according to the criteria defined in the work plan and budgetguidelines. Staff should receive regular and continuous feedback, so that they can clarifyquestions quickly and explore alternative ways of achieving objectives.

This phase involves designing appropriate sector indicators, defining measurable outcomes, andpreparing short- and long-term forecasts. It is very important to devote enough time to structuringthe collected information and indicators, begin the planning process in time, adhere to thedeadlines set in the work plan, and provide reliable data.

Step 3: Preparation of Budget RequestsOnce the data are collected, the process of preparing budget requests begins. Municipalinstitutions should take into account all local operating revenues, including locally-generatedincome and the grants and resources available for capital improvements. Budget requests shouldcontain the following information: costs to be incurred by the institutions, investment needs of theindividual programs, and the expenditures necessary to achieve the development objectives ofthe municipality.

Step 4: Evaluation and Reconciliation of Budget RequestsIn this stage the different institutions present their budget proposals at a meeting of the managersof the institutions, financial managers, department heads, representatives of the financial andother sectoral committees, and representatives of civil society organizations. The institutions usedetailed analysis, forecasts, and indicators to determine trends, draw conclusions, and justify theirsectoral and financial goals. This helps the decision makers prioritize tasks, decide whether todiscontinue funding to certain institutions, and focus on important needs that may have beenignored before. The municipality can achieve a balance of expenditures based on real needs andscarce resources only through a strict budget policy and rigorous enforcement of programobjectives. Alternative budget plans can be presented after the reconciliation of objectives, takinginto consideration the results and performance of different institutions.

Step 5: Submission of the Budget ProposalThe above process results in a budget proposal that includes alternatives for the continuation ofthe budget planning work. After the general assembly approves the budget proposal, furtherreconciliation takes place, including the clarification of data and political discussions in thecommittees.

In Szentes, the general assembly continues to discuss and analyze the budget even after it hasbeen approved but prior to the budget decree. The assembly analyzes information on thefinancial capacity of the municipality, issues that are important for the citizens, details regardingalternative actions, and the expected results and impacts of necessary measures.

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Step 6: Approval of the BudgetIn recent years the approval of the budget decree has been rather smooth due to the multistepreconciliation process. Compared to previous years the discussions are more productive, and theassembly members focus more on important professional issues, as the details are usuallyreconciled during the planning phase.

Step 7: Budget ImplementationBudget implementation involves monitoring, enforcement, and evaluation of budget plans andrequirements. The finance officers’ work does not end with the approval of the budget. They areresponsible for the following:

♦ Development and operation of an appropriate accounting system to monitor the outcome ofdefined objectives;

♦ Maintenance of the database and provision of accurate information to those who helpimplement the budget;

♦ Monitoring and evaluation of budget appropriations;♦ Supervision of the use of funds;

♦ Financial management of the mayor’s office based on the same principles relevant forinstitutions; and

♦ Performance measurement, forecasting, and impact analysis.

Program budgeting has facilitated the preparation of a better reporting system on theimplementation of the budget, has improved the quality of financial management in certainsectors, and has led to easier decision making. The budget has now become a tool to conveyinformation (originally available only for financial experts) to those involved in the budget process,the citizens, and outsiders.

Summary of Key Points♦ A budget is used to plan and guide a municipality through the upcoming fiscal year and

serves as a basis for financial reporting to the citizens.

♦ The budget can serve several purposes. It can be a contract, management tool, motivator,financial control mechanism, plan, policy tool, communication mechanism, operations guide,and instrument of democracy.

♦ There exist several types of operating budgetsline-item, performance, and programbudgets, for example.

♦ A program budget focuses on the expected results of services and activities carried out bygovernment.

♦ In Szentes, program budgeting has facilitated the preparation of a better reporting system onthe implementation of the budget, has improved the quality of financial management incertain sectors, and has led to easier decision making.

The steps in developing a program budget are as follow:

♦ Establish goals.♦ Establish objectives.♦ Prepare a budget calendar.

♦ Define roles in budget preparation.

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♦ Distribute forms and prepare departmental budget requests.

♦ Review the budget.♦ Establish the role of citizens.♦ Prepare the budget document.

♦ Adopt the budget.♦ Execute and monitor the budget.

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GlossaryBudget A plan of financial activity for a specified period of time (fiscal year) indicating all plannedrevenues and expenses for the period.

Budget Calendar The schedule of key dates in the budget preparation and adoption process.

Budget Document The official written statement, prepared by the budget office and supportingstaff, that presents the proposed budget to the legislative body.

Capital Budget A plan of proposed capital improvements and the means of financing them,usually based on the first year of the capital improvement program and typically enacted as partof the complete annual budget, which includes both operating and capital outlays.

Department A basic organizational unit of a jurisdiction that is functionally unique in its servicedelivery.

Fiscal Policy A government’s policies with respect to revenues, spending, and debt managementrelated to government services, programs, and capital investment. Provides an agreed-upon setof principles for the planning and programming of government budgets and their funding.

Fiscal Year A twelve-month period designated as the operating year for accounting andbudgeting purposes in an organization.

Function A group of related activities aimed at accomplishing a major service or regulatoryprogram for which a government is responsible (e.g., public safety).

Goal A general and timeless statement of broad direction, purpose, or intent based on the needsof the community.

Line-Item Budget A budget prepared along departmental lines that focuses on what is to bebought.

Object of Expenditure Expenditure classification based upon the types of categories of goodsand services purchased. Typical examples include personnel services (wages and salaries),contracted services, supplies and materials, and capital expenditures.

Objective Something that is to be accomplished in specific, well-defined, and measurable termsand that is achievable within a specified time frame.

Performance Budget A budget that bases expenditures primarily on measurable performance ofactivities and work programs.

Performance Indicator (Performance Measure) A specific quantitative and qualitativemeasure of work performed within an activity or program (e.g., total miles of streets cleaned).Also, a specific quantitative measure of results obtained through a program or activity (e.g.,reduced incidence of vandalism due to new street lighting program).

Program A group of related activities performed by one or more organizational units toaccomplish a function for which the government is responsible.

Program Budget A budget that allocates money to the functions or activities of a governmentrather than to specific items of cost or departments.

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Program Performance Budgeting A method of budgeting whereby the services provided tocitizens are broken down into identifiable service programs or performance units. A unit can be adepartment, a division, or a work group. Each program has an identifiable service or output andobjectives to provide the service effectively. The effectiveness and efficiency of providing theservice is measured by performance indicators.

Service Objectives The specific achievements that a government hopes to make throughout theprovision of a service; the intended result of an activity.

Strategic Plan The written strategy defining a department’s public services and how thoseservices will be delivered.

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Training Guide

Training Outline♦ What Is a Budget?♦ Why Do We Have a Budget?♦ Purposes a Budget Can Serve

♦ Budget Reform and Evolution♦ Budget Evolution in Hungary♦ Budget Types

♦ The Program Budget♦ Steps in Developing a Program Budget♦ Managing Budget Reform♦ Program Budgeting In Hungary

♦ Sample Program with Goals and Objectives

SlidesThe slides can be found at the end of this training guide.

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Bibliography(All documents listed below, except those marked with an asterisk, are available in Hungarianthrough the Metropolitan Research Institute, Budapest, and the Hungarian Municipal FinanceOfficers Association.)

Bestor, Mike. “Negotiating Skills for Budget Officers.” Government Finance Review 9, no. 6(December 1993): 15-19.

*Burkhead, Jess. Government Budgeting. New York: John Wiley & Sons, 1956.

Gúbanyi, Lászlóné. “New Regulations in the Budgeting of the Government Agencies.” Workingpaper. Prepared for the Modernizing Financial Management for Hungarian LocalGovernments Program, United States Agency for International Development. March 1998.

Hayes, Frederic O.R., David A. Grossman, Jerry E. Mechling, John S. Thomas, and Steven J.Rosenbroom. “Linkages between Budgeting and Other Fiscal Systems.” Chap. 5 in Linkages.Washington, DC: The Urban Institute Press, 1982.

*Key Jr., V.O. “The Lack of a Budgetary Theory.” In Hyde and Shafritz, eds., GovernmentBudgeting, pp. 18-23. 1940.

Lehan, Edward A. “What is ‘Good Budgeting’?” Chap. 1 in Simplified Government Budgeting.Chicago: Government Finance Officers Association, 1981.

Lehan, Edward A. “Budgets as Literature.” In Effective Budgetary Presentations: The CuttingEdge, edited by Gerard Miller, ix-xii. Chicago: Municipal Finance Officers Association, 1982.

Lehan, Edward A. “Budget Formulation.” Chap. 5 in Budgetmaking: A Workbook of PublicBudgeting Theory and Practice. New York: St. Martin’s Press, 1984.

Lehan, Edward A. “A Note on Work Plans.” In Simplified Government Budgeting. Manuscript ofrevised edition. Chicago: Government Finance Officers Association, 1996.

Nayyar-Stone, Ritu, and and Andrea Tönkõ. "An Evaluation of Municipal Budget Reform inHungary. The Szentes Case Study." The Urban Institute. Project No. 06610-533. February1999.

O’Toole, Daniel, James Marshall, and Timothy Grewe. “Current Local Government BudgetingPractices.” Government Finance Review, 12, no. 6 (December 1996): 25-29.

Powdar, Julie Carol. “Implementing and Monitoring the Budget.” Chap. 6 in The OperatingBudget: A Guide for Smaller Governments. Chicago: Government Finance OfficersAssociation, 1996.

Rosenberg, Philip. “Tips for an Oral Presentation of a Budget.” Working paper. Prepared for theModernizing Financial Management for Hungarian Local Governments Program, UnitedStates Agency for International Development. January 1997.

Rosenberg, Philip. “Program Budgeting.” Working Paper. Prepared for the Modernizing FinancialManagement for Hungarian Local Governments Program, United States Agency forInternational Development. June 1998.

Strachota, Dennis. “Budget Document Score Card.” Appendix C in The Best of GovernmentalBudgeting: A Guide to Preparing Budget Documents. Chicago: Government Finance OfficersAssociation, 1996.

Szentes Local Government, Hungary. “1997 Szentes Work Plan.” Excerpt from the SzentesAnnual Budget 1998.

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Wildavsky, Aaron B. “Budgeting as a Political Process.” In vol. 2 of the International Encyclopediaof the Social Sciences, edited by David L. Sills, 192-199. Crowell Collier and Macmillan,1968.

Wooldridge, Blue, and Claire Alpert. “Identifying Obstacles to the Implementation of BudgetaryReform in Government.” The Government Accountants Journal 32, No. 2 (Summer 1993):48-54.