25 – Budgeting in local government. Is it capex, opex or a new initiative?

It is budget time again. In conjunction with ‘planning time’ (see posts 11 and 12) councils are starting to compile their proposed budgets for 2015/16. Capital bids are being evaluated to determine ‘logistically’ whether they can be completed within the financial year and ‘strategically’ whether or not they should proceed. Recurrent budgets are being submitted by managers, either built from a zero base or simply last year’s budget with the Consumer Price Index (CPI) increase. Councils will be comparing the amounts requested with the estimates in the long term financial plan to see whether they match. So where is the problem?

What if you have had growth in demands for services? Service levels may have to be increased in response to community needs. More services may be needed to cater for population growth. What if you have had significant increase in the number of assets to be maintained and renewed? More parks, more roads, more buildings. Somewhere in between the funding available for capital and recurrent budgets sits the ‘new initiative’ (NI) funding that is set aside for budget or staff increases in the recurrent budget. Councils know that costs can increase by more than CPI. They just don’t cope with it very well.

For starters, the amount available for NI’s is usually inadequate and is over bid by the organisation.  It is not unusual for $1 million to be available and for bids to add up to $3 million or more. When this happens there are often no predetermined criteria for prioritising amongst the bids. The orderliness of the budget process then comes under pressure. When criteria are developed, they struggle to effectively assign priorities. How do you decide whether expenditure to mitigate risks or increase compliance is more important than making efficiency or performance improvements to existing services? What about investment in developing new and better services now and for the future?

As you can imagine, local government will tend to eliminate risk. So the first category of NI’s are usually funded. Councils also like to satisfy the community, so improvements to services the community says are important but performing below expectations, will also be funded if at all possible. The last priority to be funded, unless there is a political imperative, is new and better services. This correlates with one of Christopher Stone’s findings in his report False Economies – unpacking public sector efficiency, that ‘two significant barriers to public sector innovation are an overly risk averse orientation within organisations, and a lack of resources invested in developing and implementing innovative ideas’. The whole process is hardly a sure-fire way to ensure that the available financial resources are allocated in the way that best meets community needs now or in the future.

Part of the solution lies in a better planning process that actively considers the relative benefits from investment in risk reduction, service improvement or new services. In a business balancing these considerations is essential. Owners and managers must ensure that there is sufficient investment in compliance, and satisfying customer needs, and developing new services for the future. Why not local government?

Posted by Whistler

Stone, Christopher, 2014. ‘False Economies – unpacking public sector efficiency’.

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