Zero-Based Budgeting

In the thread discussing the city’s expenditures in February, commenter Harry Lime brought up the “zero-based” budgeting (zbb) method.

The concept behind zero-based is pretty simple and probably best explained by contrasting it with the traditional method, which is often called “incremental” budgeting. In incremental budgeting, you take this year’s budget and figure out how much more (or less, at least hypothetically) each program will require next year. In zero-based budgeting, your challenge is first to justify the continuing existence of each program in terms of the organization’s strategic goals, and then talk money.

The advantage with zero-based is obvious: When all programs are scrutinized to the same degree as new or proposed programs are, you are much more likely to rid yourself of the dysfunctional or obsolete. It would appear to be a great antidote to the bureaucratic imperative to defend all allocations in perpetuity just because “that’s the way it’s always been done.”

So in regards to the city, does that mean we request that council unleash city staff on the FY2009 budget using zbb? Maybe not.

Besides being quite time-consuming, the other main drawback of zbb is that doing it wrong or with the wrong motives can be worse than not using it at all. Here are some cautions from public policy expert Michael D. LaFaive, who has studied zbb:

Zero-based budgeting can be useful for shaking up a process that may have grown stale and counterproductive over time. But I must offer three serious warnings.

First, the success of such a change like this hinges strongly on leadership that is dedicated to the task. If those appointed to conduct budget reviews are unwilling to truly assess every item in their budget, word will get out quickly that this new budgeting technique is more symbolism than substance. Indeed, it is incumbent upon proponents of zero-based budgeting to ensure that those reviewing the budget do not have a pecuniary interest in maintaining the status quo. Allowing people who will be most affected by the elimination of programs to conduct their own reviews may be counterproductive, since most people are quick to defend their own interests.

Second, don’t attempt to do zero-based budgeting for every department, every year. Such a move may prove impossible to manage. Instead, choose several departments and/or agencies, and rotate through every facet of state government over time. In Oklahoma, which has recently adopted zero-based budgeting, officials are applying the method to two departments and several agencies each year. Once those reviews are complete, the same departments and agencies will not see another zero-based review for eight years.

Third, ensure that each review is conducted by referencing all aspects of a department, agency or program to what its goals are. This makes the very purpose of the entity being reviewed transparent, and can increase the opportunities available for making objective measurements of a department, agency or program’s success rate.

As with most programs or reforms of programs, it must be done right, or it should not be done at all. For example, department, agency or program directors who feel endangered by this kind of scrutiny will be delighted to be placed in charge, so that they can do it wrong, waste everyone’s time, and give a cutting-edge management tool like zero-based budgeting a bad name, all at the same time.

I like the thought of measurable objectives, and indeed DeKalb’s FY2008 budget includes strategic and operational goals as well as departmental initiatives and summaries of the past year’s performance, most impressively involving Administrative Services. However, that is not true of each program within the department. Also, the Legislative Department and the Office of the City Clerk appear to be exempt from including initiatives and performance measures that relate to the strategic goals and I wonder if that’s wise.

Something else that strikes me as unwise would be for department heads to analyze their own programs without some sort of check. This may be an area where a revived Budgeting Advisory Board would come in.

One thought on “Zero-Based Budgeting”

  1. “Also, the Legislative Department and the Office of the City Clerk appear to be exempt from including initiatives and performance measures that relate to the strategic goals and I wonder if that’s wise.”

    Well, that explains a lot . . .

    I think department heads at any kind of job can look at their own budgets and come up with recommendations for reductions, as long as someone gives them a targeted goal of reducing X% of the budget. Anybody blowing that much money on coffee can figure out ways to reduce budget expenditures. Reducing little things can add up, and those are often easy targets for cuts.

    If meetings are that boring, people should start bringing in their own coffee to stay awake. :-)

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