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Weekly UpdatesIn 1998, GFOA approved a recommended practice endorsing the work of the National Advisory Council on State and Local Budgeting, encouraging state and local governments to look to the NACSLB recommended budget practice statements as a model for improving their own budget processes. The NACSLB recommended practices encompass the entire budget cycle, from establishing goals to monitoring and adjusting the adopted budget. Many governments are now using these practices to make systematic improvements to their financial planning and budgeting processes.
One of the 59 recommended budget practices specifically addresses the importance of budget presentation. The NACSLB calls the budget document "arguably the single most important document prepared by governments." As such, the NACSLB recommends that "budget documents and related materials made available to stakeholders should be presented in a clear and readily comprehensible format." This recommendation goes hand in glove with GFOA's Distinguished Budget Presentation Awards Program, which is designed to encourage governments to prepare budget documents of the highest quality to meet the needs of decision makers and citizens. This program has grown substantially over the years and has done much to improve the quality of budget presentation in the public sector.
GFOA recently revised the criteria for the budget awards program--the first such revision in 10 years. While the criteria themselves remain essentially unchanged, the accompanying explanations have changed substantially and, in many cases, incorporate specific new program requirements. The revisions are the product of a year-long effort to clarify the proper application of the program criteria. This article highlights some of the major changes to the program so that governments can prepare better entries and, more importantly, improve the quality of their budget documents.
Evaluation of budget documents is based on 27 criteria in the following four categories: (1) the budget as a policy document, (2) the budget as a financial plan, (3) the budget as an operations guide, and (4) the budget as a communications device. The major program modifications are discussed below by category.
THE BUDGET AS A POLICY DOCUMENT
Long-Range Financial Policies (PDI). Previous to the program's modifications, long-term financial and program policies were combined under the same criterion. Now, financial and program policies have been separated, with the presentation of financial policies becoming a mandatory criterion.
GFOA recommends that, at a minimum, financial planning, revenue, and expenditure policies be developed and formally adopted by a jurisdiction's governing board, as well as the governing boards of any component units under its jurisdiction. A major new focus is that governments include in the budget document their definition of a balanced budget and state whether their budget is balanced. Finally, the budget document should include a comprehensive listing of financial policies in one section of the document.
Budget Message (PD4). Major issues facing the governing body in developing the budget (e.g., policy issues, economic factors, regulatory and legislative challenges) should be included in the transmittal letter or executive summary. The message should also describe the actions to be taken to address these issues.
Unit or Department Goals and Objectives (PD5). The unit or department goals and objectives section has changed. Goals have now been defined as long-term in nature. Unit goals should be consistent with entity-wide goals. A matrix is a good way to show the linkage between these goals. Objectives are now considered more short-term in nature and should be quantifiable. Quantifying objectives allows for benchmarking with other similar organizations to gauge the effectiveness of selected programs.
THE BUDGET AS A FINANCIAL PLAN
Consolidated Financial Overview (FP2). This mandatory criterion has had one of the highest frequencies of insufficient data from program participants. Merely listing revenue and expenditure totals by fund does not satisfy this criterion. Revenues should be presented by major type (e.g., property taxes, intergovernmental, sales taxes, fees and charges), while expenditures should be presented by function, organizational unit, or object. Revenues and expenditures should appear together (1) in a single schedule, (2) in separate but adjacent/sequential schedules, or (3) in a matrix.
Major Revenues (FP4). A change in this mandatory criterion now requires entities to describe at least 75 percent of their total appropriated revenues. In the past, many entities described only general fund revenues. However, because other funds may also have large revenue totals (e.g., water sales and sewer charges), it is incumbent that entities describe all major revenue sources, discuss significant trends in those revenues, and identify any underlying assumptions behind revenue estimates.
Changes in Fund Balance/Equity (FP5). Notable modifications to the mandatory criterion on changes in fund balance or equity include the following:
* The definition of fund balance or fund equity is now required. The entity can determine its own definition.
* Fund balance information should be included for the prior year, current and/or estimated budget year, and the proposed budget year.
* Appropriated governmental funds should show beginning fund balances, changes, and the ending fund balance.
* Fund balance information must be provided for all funds that comprise at least 10 percent of the appropriated total budget (major funds).
* As a rule of thumb, if the change is more than 10 percent between years, the government should discuss the causes and consequences of the change.
* Entities with no governmental funds should now report changes in fund equities.
Capital Improvements (FP6). Entities are now required to define capital expenditures in their budget documents. They must also include the total dollar amount of capital expenditures, as well as a description of significant nonrecurring capital projects and the associated dollar amounts.
Capital Impact on Operations (FP7). The extent to which capital projects affect the operating budget should now be described. The most common method is to quantify the operating impact through either savings or additional costs.
Debt (FP8). A few minor modifications have been made to this mandatory criterion, including the following:
* While the debt policy is still required, make sure that it is included with the other financial policies.
* Debt limits should be specifically described in terms of total dollars, millage rates, or percentages of assessed value. Debt coverage ratios may also be included.
* If the entity has no debt, this fact should be specifically stated in the budget document. The same holds true if there are no plans to issue debt in the future or if there are no debt limits.
* Show principal and interest payments for each major appropriated fund at least through the budget year.
Basis of Budgeting (FP9). This mandatory criterion requires that entities describe the basis of budgeting for all funds. The three most common bases of budgeting are accrual, modified accrual, and cash. Entities should not only identify the basis of budgeting for each fund, but they should also note any differences between the basis of budgeting and the basis of accounting.
THE BUDGET AS AN OPERATIONS GUIDE
Performance Measures (OG2). While the specific questions related to performance measures have not changed much, the explanation is much more precise. The measures should be related to the mission, goals, and objectives of each unit. As entities implement performance measures, they should work toward including information for at least three years--the prior year actual, the current year estimate or budget, and the budget year. Performance measures should include the outputs of individual units and provide a meaningful way to assess the effectiveness and efficiency of those units.
Position Counts (OG4). Position summary information must be included for the prior year, current year, and budget year. This information also must be presented in a summary format so the reader can get the total position count. Entities often fail to include these two items in their budget documents.
THE BUDGET AS A COMMUNICATIONS DEVICE
Relationship Between Functional Units and Funds (CD5). The cross-classification criterion has often been misunderstood by program participants. The focus here should be on an explanation or illustration of the relationship between functional units, major funds, and nonmajor funds in the aggregate. Many entities use a matrix to describe this relationship.
Understandability and Usability (CD9). The explanation in this criterion has become a little more specific. While the old explanation discussed ease of use in general terms, more precise measures will now be used, such as the following:
* Page numbering should be easily identified and consistent.
* Main sections of each document should be identifiable.
* The level of detail should not be such that readers cannot follow major points.
* Font size should be appropriate and print quality should be good.
* Numbers should tie from one schedule to another and match graphs and accompanying text.
CONCLUSION
This article highlights the major changes in the explanations to the revised budget criteria. Detailed explanations of the 27 criteria can be found on GFOA's Web site at http://www.gfoa.org/forms/BudgetCriteria Explanations.doc. By familiarizing themselves with these explanations, governments will be better prepared to produce budget documents that meet the needs of stakeholders and qualify for the Distinguished Budget Presentation Award.
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