Tips for Government Budgeting and Financial Management
A government’s budget plays numerous roles, from allocating resources among departments to planning for the future of the community. Create a balanced and sustainable budget by keeping these tips in mind.
Clarify what is available before building the budget.
Are you starting from last year’s budget? How much money is available this year? Knowing where your budget stands in comparison to previous budgets can help you set realistic expectations about what you’ll be able to accomplish.
Communicate your priorities.
The community you serve should understand how you will use your budget to address government priorities. What results are you achieving using their tax dollars? How you allocate resources is key to ensuring the community gets the desired results, so be clear about how you intend to use the budget to get there.
Demographics and population growth will impact finances.
A growing population will allow for lower per-cost units, while a declining population may have rising costs. For a population that has a higher concentration of elderly citizens, programs such as Social Security and Medicare may take up a significant portion of the budget. Increased life expectancy also means individuals must work longer to save up for retirement, which impacts labor force participation. Having a good understanding of the age distribution in the community you serve will help you create a budget that accounts for and offsets these changes.
Recurring revenues should exceed recurring expenditures.
Recurring revenues, such as property taxes, sales taxes, and wheel taxes, are a reliable source of government income each year. Recurring expenditures, such as salaries, debt payments, benefits, and asset maintenance costs, are necessary for maintaining government operations and service levels. In a structurally balanced budget, recurring revenues will exceed or equal recurring expenditures. Underestimating recurring expenditures or overestimating recurring revenues can result in an imbalance that can cause financial challenges years later.
Take economic factors into account.
The economy can strongly affect government budgets. Noting shifts in your community’s economic environment is necessary for aligning your resources with your needs. When a recession hits and inflation soars, revenue from sales and income taxes tend to decline. Rising interest rates can increase borrowing costs. Building up reserves, which we’ll discuss more next, helps governments stay prepared in the event of an economic downturn.
Establish different types of reserves.
Reserves are a type of emergency fund that protects against risks. In the case of natural disasters, economic challenges, or overly optimistic revenue projections, reserves can help finance government needs. The most common types of budget reserves include capital reserves, contingencies, cash flow requirements, rainy day funds, and repairs and improvements. It’s also vital to create a plan to replenish reserves. If the reserves are maintained, this is a good indicator of a structurally balanced budget.
Focus on the long-term.
One mistake public leaders make is looking at the next fiscal year in isolation. Even an annual budget should take into account the next several years. Program expansion, routine maintenance, and asset replacement will contribute to costs down the line. To ensure the longevity of the organization and make use of resources, you’ll want to consider how this year’s budget will affect your decisions in the future.
Implement public feedback.
Opinions and feedback from local citizens are a powerful way to strengthen the efficacy of your budget. Use a combination of surveys, either online or via mail, and events, such as town hall meetings, focus groups, and neighborhood forums, to gather information about service preferences and encourage the public to engage in conversation. Public participation can increase government credibility, responsiveness, and trust among the community.
Sources:
https://www.oecd.org/gov/budgeting/Recommendation-of-the-Council-on-Budgetary-Governance.pdf
https://www.gfoa.org/materials/recommended-budget-practices-a-framework-for-improved
https://www.gfoa.org/materials/adopting-financial-policies
https://icma.org/blog-posts/4-factors-influencing-local-government-financial-decisions
https://www.nlc.org/article/2019/09/11/making-sense-of-municipal-budgets/
https://icma.org/articles/pm-magazine/local-government-annual-budget-process
https://www.gfoa.org/materials/achieving-a-structurally-balanced-budget
https://comptroller.tn.gov/office-functions/lgf/resources/keys-to-a-well-managed-government.html
https://mrsc.org/explore-topics/management/financial-management/introduction-to-budgeting