Bringing Rigor to cutback management: Eugene's constrained prioritization process.

Ashrinking revenue base and increased demand for public services has made the need to prioritize government services critical the last few years. The federal budget has gone from a $127 billion surplus in fiscal 2001 to an estimated $480 billion deficit in fiscal 2004 because of the recession, ongoing military actions, and expansionary fiscal policy. (1)

While the federal government can run a deficit, state governments must maintain a balanced budget. Despite ongoing spending reductions and a host of revenue measures, the states' yearend balances decreased from a combined total of $38 billion in fiscal 2001 to an estimated $16 billion in fiscal 2004. (2) States employed several strategies to balance their budgets, including across-the-board cuts (28 states), use of rainy day funds (22 states), and employee layoffs (17 states).

The State of Oregon has been under extreme fiscal duress for the past several years. The technology bust of 2001 hit the timber turned high-tech state hard. There is no sales tax, so state coffers were not buffered by unrelenting consumer activity. A significant reliance on income tax revenue did not help matters in a state with one of the nation's highest unemployment rates. Further adding to fiscal instability is the lack of a rainy day fund to stabilize state services during economic downturns. The combination of these factors forced legislative action to reduce spending by $1.7 billion (15 percent) at the end of fiscal 2003.

Local governments nationwide must also juggle resources and expenditures. Many local governments are buffered from income tax issues, but rely on state aid and fees and charges for services. State budget problems have reduced aid to local governments and indirectly forced costs on municipalities as they absorb public safety and social service cuts. Further, municipalities find it difficult to raise fees and charges for services during difficult times.

Balancing a budget in this environment is a most difficult proposition--one that necessitates difficult resource allocation decisions concerning public services and programs. Formal priority-setting methods can make this process a little easier by introducing a degree of objectivity and rationality. This article describes a priority-setting framework used by the City of Eugene, Oregon, to balance its fiscal 2004 budget.

A HISTORY OF PRIORITIZATION

Eugene is a community of 140,000 located in the western part of central Oregon. The city's service system was prioritized twice in the 1990s in response to citizen-initiated changes in the state's tax structure. Oregonians are known for their civic involvement and willingness to challenge decisions made by the state's legislative body. The most visible vehicle for citizens to propose and enact statewide changes is through state ballot initiatives and referendums. As taxation is a prominent issue, several state ballot measures (BM) have changed local property tax calculations and significantly limited local government's ability to collect property tax revenue.

The first budget prioritization came about because of the passage of BM 5 (1990), which established constitutional limits on local property tax rates for all taxing districts and established state funding for education. (3) The property tax rate limits reduced the amount of revenue collected by local governments. The projected impact on Eugene was a 13 percent reduction in general fund revenue. In preparation for potential service reductions to respond to this loss of revenue, the city undertook a large citizen involvement budget building exercise called Eugene Decisions that spanned 18 months. The basic premise of the exercise was for citizens to build their own budget and submit it to the city. Eugene Decisions was a multi-layered process involving a budget balancing survey, two tax option surveys, and a set of community workshops.

The first part of the process asked citizens how to balance the city's budget. The survey walked citizens through the budget shortfall and asked them to specify needed service improvements, as well as the dollar amounts of service reductions and/or new revenue options. In the second step, citizens selected from the identified options to balance the fiscal year 1994 budget. The Eugene Decisions process produced three budget balancing strategy options, including the one the City Council ultimately used to balance the fiscal 1994 budget. This process also was the catalyst for developing a service view of the operating budget to supplement the traditional department view.

The second need to prioritize Eugene's service system came as a result of the passage of BM 47 (1996) and BM 50 (1997). BM 47 rolled back property taxes paid (not assessed value) to 90 percent of their 1995-1996 level, required a double majority to pass local tax levies, and capped existing assessed value growth at 3 percent per year. BM 50 (1997) repealed BM 47 and corrected a number of problems in its enactment, but worked to maintain the emphasis on property tax relief. BM 50 enacted permanent tax rates, reduced assessed values to 90 percent of their 1995-1996 level, allowed for time-limited local option levies, and maintained the double majority and 3 percent cap tenets of BM 47. The projected impact on Eugene's general fund was a 13 percent budget shortfall in the fiscal 1998 budget. The city again needed a method for developing sustainable budget reductions.

The first step in this process was to prioritize services. A new priority instrument was needed, as the Eugene Decision process was dated by then. The mayor and each member of the City Council were asked to rank 36 general fund services on two dimensions. In the first dimension, the elected officials rated each service on a four-point scale, with the low end of the scale representing community amenities and the high end community health and safety services. In the second dimension (also a four-point scale), the officials indicated whether each service should be maintained, subject to a moderate or major reduction, or eliminated. Next, five town hall meetings were held to educate the public on the impact of the ballot measures on the general fund budget and to obtain public input on the service rankings. Through this process, the city identified core services that should be preserved either at their current funding levels or with minor reductions. The other services received reductions based on their priority level.

A third and most recent need to prioritize city services stems from rising service costs and weak revenue growth that is expected to continue over the forecasted six-year horizon. As Eugene began developing the fiscal 2004 budget, the city was looking at a $3.8 billion general fund deficit. It was clear that reserves were inadequate to fill the budget gap and balance the service system for three years. Even after $1.8 million in service reductions, the service system was balanced for only two years. (4)

In light of the grim financial outlook and growing concerns about whether the last service priority rankings reflected the priorities of current policymakers, Eugene's Budget Office created a new survey instrument for policymakers to use in prioritizing general fund direct services. The new priority-setting process departed from past practices in that it did not include a citizen involvement component. Instead, it relied on survey responses from members of the city's Budget Committee. To streamline what was a difficult budget building process for policymakers, the Budget Committee was consulted at key decision-making points during the process, such as the formulation of reduction strategy options.

CONSTRAINED PRIORITIZATION

The Budget Office distributed the priority-setting survey to each member of the Budget Committee, which is comprised of eight members of the City Council and eight citizens. (5) The task of each of these officials was to categorize 27 general fund direct services into four groups. The highest priority services were to be assigned to Priority Level 1, the next most important services to Priority Level 2, and so on down the line to Priority Level 4. (6)

The survey package consisted of a service priority precis, the survey instrument itself, and instructions. The service priority precis included summary information on each general fund service, such as mission statement, goals, general fund versus non-general fund net reliance in terms of dollars and FTEs, and service level changes over the past two years. The survey instrument consisted of four sheets of paper, each bearing a watermark denoting one of the four priority levels, as well as a committee member's name. The 27 general fund services were printed on re-attachable labels that could be applied to the paper in designated spaces and pulled off and reapplied elsewhere. The committee members used these labels to assign each service to one of the priority levels. Only a specific number of services could be assigned to each priority level, thus creating a constrained prioritization process.

The survey instrument also ascertained from the committee members each service's target level of funding for fiscal 2004. In a space next to the label placement spot, respondents were asked to indicate whether the general fund budget for that service should be increased, maintained at the current level, or reduced by either a small amount or a large amount. Reducing any given service meant reducing that service's reliance on the general fund, which could be accomplished through fee increases, alternative funding sources, or service level reductions. Exhibit 1 illustrates the system used by members of the Budget Committee to prioritize general fund services and funding (the blue rectangles represent the labels referred to in the last paragraph).

The Budget Committee reviewed the results (shown in Exhibit 2) of the constrained prioritization activity at a public meeting. (7) To focus the discussion on the most controversial service rankings, each committee member was provided two green dots and two red dots. If, for example, one of the committee members felt that a particular service deserved a higher priority ranking, he or she would place a green dot next to that service on one of four poster board-sized priority levels. This action would then be offset by placing a red dot next to a second service, indicating that the service merited a lower priority ranking. The green and red dots were to be used as pairs to maintain the constrained prioritization process. Previously agreed upon rules required that a service receive at least five dots for discussion to occur. As no service received five dots, the Budget Committee passed a motion adopting the general fund service priority level rankings for direction in building the fiscal 2004 budget.

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