Program

Budgeting
Modernizing Financial Management for Hungarian Local Governments

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TRAINING MANUAL
 Contents

Acknowledgments ........................................................................................................................... 1
Preface........................................................................................................................................... 2
How To Use This Manual ................................................................................................................. 3
Practical Guide............................................................................................................................. 3
Training Guide ............................................................................................................................. 3
Practical Guide ................................................................................................................................ 4
Overview..................................................................................................................................... 4
Objectives ................................................................................................................................... 4
Topic Definition ............................................................................................................................ 4
Purposes a Budget Can Serve ...................................................................................................... 5
Budget Reform and Evolution........................................................................................................ 6
Budget Evolution in Hungary ......................................................................................................... 7
Types of Operating Budgets ......................................................................................................... 8
Steps in Developing a Program Budget ....................................................................................... 10
Multiyear Context of Budgeting.................................................................................................... 14
Introduction of Program Budgeting in Hungary ............................................................................. 15
The Szentes Approach to Program Budgeting.............................................................................. 15
Summary of Key Points .............................................................................................................. 19
Glossary .................................................................................................................................... 21
Training Guide............................................................................................................................... 23
Training Outline.......................................................................................................................... 23
Slides ........................................................................................................................................ 23
Bibliography............................................................................................................................... 24
 Acknowledgments
The Urban Institute (UI), Washington, DC, and the Metropolitan Research Institute (MRI), Budapest,
developed these manuals with funding from the United States Agency for International Development
(USAID).

Several individuals contributed to the content of these manuals. Katharine Mark, UI Program Director in
Hungary, conceived the program and provided overall management with the assistance of her colleagues
Wendy Graham and Margaret Tabler. The program was based on the success of initial municipal budget
reform work with the city of Szolnok carried out by Philip Rosenberg. The training program itself was
developed and implemented by a team of U.S. and Hungarian trainers led by Philip Rosenberg and
József Hegedüs. Ritu Nayyar-Stone coordinated the production of the manuals and edited the early
drafts. Principal authors of the manuals were Róbert Kovács, Mihály Lados, Ritu Nayyar-Stone, Monika
Jáki, and Philip Rosenberg. Other individuals made contributions to specific topics: József Hegedüs,
Andrea Tönkõ, Judit Kálmán, József Kéri, Mária Kürthy, Erzsébet Krajsóczki, András Vigvári, Orsolya
Sebõk, Harry Hatry, Sharon Cooley, Scott Bryant, and Blue Wooldridge. Diane Ferguson provided
professional editing and layout. Ágnes Magyari also assisted with layout and coordination of the printing.
Jeffrey Stevenson Murer designed the cover. Katalin Zsámboki, Gabriella Szabó, and Judit Hegedüs
translated the manuals from English into Hungarian and vice versa.

Principal Author: Philip Rosenberg

Contributions by: József Hegedüs and Erzsébet Krajsóczki

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 Preface
These manuals are based on a three-year training program, Modernizing Financial Management for
Hungarian Local Governments, sponsored by USAID from 1996 to 1999 and executed by UI and MRI.
The training consisted of six seminars each year, following the municipal budget cycle. The objective was
to train municipal officials to improve financial management in their city via financial analysis, alternative
revenue sources, performance measurement, strategic planning, capital improvements programs, and
program budgeting. The program was interactive and used Hungarian local consultants. It was refined
annually based on feedback from municipal finance officers.

As a result of the program, thirty-five local governments have focused on improving financial
management practices and enhancing transparency. Many cities found it beneficial to attend more than
one series of seminars. Often cities sent larger teams to work in detail on reformed budgets for specific
sectors. The modernization brought about by program budgeting has greatly improved municipal
budgeting practices in Hungary.

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 How To Use This Manual
This training manual, like other manuals in the series, can be used in many ways. It can be a guide for all
individuals involved in bringing about financial reform in a citymayors, finance officers, department
heads, and your staff. It can also be a guide for trainers.

Practical Guide
The first part of the training manual is intended for self-instruction. You can also use it as a basis to
develop your own presentation on this topic. Throughout the practical guide you will find slide icons in the
left-hand margin. These show that the topic has a corresponding slide in the second part of the training
manual, which is the training guide.

Training Guide
The second part of the training manual can be used by finance managers to train staff prior to initiating
financial reform. Trainers can also use it in a training workshop for finance managers from different local
governments. This section contains a training agenda, slides, exercises (where applicable), and a
bibliography. You can either use the slides as they are, or you can enhance or change them based on
your experience. Trainers may wish to rearrange or modify the materials to meet the objectives of a
particular training situation.

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 Practical Guide

Overview
The art of budgeting in government is essentially a process of allocating limited financial
resources to services and activities in a manner that will most effectively meet the needs of the
citizens. This training manual has been developed to meet this objective. It is designed for
individuals who are directly involved in preparing the municipal operating budget. Finance
department staff will benefit from this program. Those who prepare budget requests on behalf of
municipal departments within the mayor’s office and budgetary institutions also will benefit.

This training manual will focus on practices and techniques for preparing a program budget. It will
examine the program budgeting process by exploring why municipalities have a budget,
reviewing the types of budgets municipal governments utilize, and defining a program budget and
its advantages.

This training manual should be integrated with manuals on the following topics:
♦ Strategic Planning
♦ Financial Analysis
♦ Capital Improvements
♦ Performance Measurement

Objectives
♦ Integrating recommended practices into municipal budgeting practices and procedures.
♦ Understanding the purposes for which municipalities prepare a budget.
♦ Evaluating alternative budget methods.
♦ Developing a program budget.
♦ Understanding how one Hungarian local government has initiated program budgeting.

Topic Definition

What Is a Budget?
The budget is often called an operating plan. You use it to plan expenditures and guide a
municipality through the upcoming fiscal year. The budget serves as the basis for your financial
reporting to the mayor and general assembly, Ministry of Finance, municipal departments and
budgetary institutions, and the citizens.

A budget is a powerful tool for allocating limited resources among competing priorities within the
community. Because needs always exceed available funds, funds that you give to one
department must be denied to another department. You measure the value of the funds you
spend not only by the benefits you gain, but by what you have to give up. Budgeting means
making choices.

A municipal budget includes:

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 ♦ Planned activities, projects, and services;
♦ Estimates of the resources or revenues available; and
♦ Estimates of public expenditures necessary to finance planned activities.

In its simplest form, a budget consists of a comprehensive listing of anticipated revenues and
proposed expenditures for each function of government for a future twelve-month period, or fiscal
year. Ideally, the budget represents a comprehensive allocation of limited resources among
potential users.

Why Is It Important To Have a Budget?

The law requires Hungarian local governments to prepare an annual budget for the fiscal year.
Beyond simply meeting the requirements of the law, the budget is important as a statement of
policy about the allocation of limited resources among municipal service areas. A budget is not
just a statement of finances but is the link between mobilization of funds and attainment of
municipal goals and objectives. Activities associated with budget formulation, legislative review,
budget execution, and budget control and audit are major instruments in deciding the shape and
condition of a community and the effectiveness and efficiency of local government programs.

Purposes a Budget Can Serve

Below is a brief discussion of some purposes that a budget can serve.

The Budget as a Contract

The mayor and general assembly promise to provide funds to a department for agreed-upon
purposes. In this sense, the budget is a contract between the policymakers and municipal
departments. The budget also may be viewed as a contract between the citizens and the
municipality. That is, the citizens have agreed to pay taxes so they can receive certain services
from the municipality.

The Budget as a Management Tool

The budget serves as a statement of the decisions and responsibilities that translate into specific
programs and activities. As a management tool, a properly designed budget can help you achieve
administrative efficiency, economy, and honesty through businesslike behavior. The budget
increases management responsibility and accountability.

The Budget as a Motivator

The budget motivates departments by setting forth targets and by serving as a mechanism for
obtaining involvement and commitment. The budget provides a means for measuring accom-
plishments against goals and for comparing actual with planned outcomes. Municipal staff are
more likely to be effective and satisfied if they have a clear sense of program purpose that
enables them to better comprehend where they are going and how they will get there.

The Budget as a Financial Control Mechanism

The budget can serve as a means to define and assign responsibility for financial control. A
budget provides strong control over departmental expenditures and reduces the administrative
discretion of department heads.

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 The Budget as a Plan
The budget is the investment plan for your community. It coordinates choices so as to achieve
desired goals. The budget is an instrument for correlating executive and legislative action. A
budget should include a detailed specification of what objectives are to be achieved by the
proposed expenditures. As a planning tool, the budget can suggest alternative methods of
achieving these objectives.

The Budget as a Major Policy Tool

Whether you intend it to be or not, the budget is a major policy tool. How you decide to spend
your community’s scarce resources is perhaps the most important policy decision you will make
during a fiscal year. Government resources are always less than what is needed to accomplish all
the community’s goals. You must make decisions that contribute the most to municipal goals.
Thus, budgeting can be viewed as the process by which you make government policy. You
should ask yourself how well your budget serves as a policymaking instrument.

The Budget as a Communication Mechanism

The budget document is the mechanism by which you inform citizens, municipal officials,
policymakers, potential investors, and others about community budgetary issues, trends, and
choices addressed in your budget. Your budget document should communicate the significant
information in the budget to the reader. Use charts and graphs, where appropriate, to highlight
financial and statistical information. In addition, use narratives to describe the relationships
among revenues, expenditures, and programs. In the document you also should present
community demographic, infrastructure, and economic data.

The Budget as an Operations Guide

Budget requests describe proposed activities, services, or functions that municipal institutions will
carry out. In the budget requests you should identify qualitative and quantitative measures, or
outputs, by which program performance and results will be evaluated. You should also identify
program beneficiaries, such as the number of citizens served, and specify the number of
employees required to carry out each activity. When you provide these types of information, the
budget that is produced from the requests will serve as an operations guide. The budget of each
institution will not only identify the cost of each activity, but also the outputs to be provided, the
number of citizens who will benefit, and the staffing level required to carry out the activity.

The Budget as an Instrument of Democracy

Historically, a major purpose of budgeting is to promote democracy. The budget should reflect the
will of the citizens and should open government to public scrutiny. The budget is a means of
exercising popular control over public money.

Budget Reform and Evolution

To understand the budget, you need some historical perspective. First, what does the word
“budget” refer to? This was the leather pouch, or purse, in which citizens placed taxes due to the
king. Thus, from its very origins, the budget has been associated with the collection of revenues.
Today, the word budget has a much broader meaning. There are many kinds of budget forms and
formats, each underscoring a particular informational need of management.

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 In Western experience, the budget has evolved from a simple control mechanism to a
management and policy tool. How did this come to be? In the U.S. at the beginning of the
twentieth century, there was great concern with corruption in government and great fear of people
stealing public funds. To protect public funds, financial authority was concentrated in the position
of mayor. The position of controller (in English) was established under the mayor to control
expenditures and revenues. New York City led this reform in 1907, and the U.S. government
followed in 1912.

The concern with corruption was reflected in the control nature of the budget practices of the
times. Control-oriented budgets were simple to understand, thus making them transparent as well
as subject to great scrutiny. Furthermore, the budget process generally accentuated the negative.
That is, the controller would carefully monitor public funds to ensure that departments did not
overindulge with their budgetary requests. Thus, the budget process generally involved saying
“no.”

Over time a need evolved for better information upon which to base investment decisions. The
Depression of the 1930s brought forth a number of federal programs to boost the economy, and
out of these programs emerged performance-type budgets. By the mid-1960s there was a
movement to program performance budgets. These reforms were focused at the national level of
government, however. During the so-called “taxpayer” revolts of the mid-1970s, citizens
demanded to know how their taxes were being used at the local level of government. Thus, there
was a movement toward more informed and publicly transparent budgeting. Local governments
moved from control budgets to various forms of program budgetingthe subject of this training
manual.

Despite all the “progress” in budgeting practices, you still have tough decisions to make. As
asked by V.O. Key, Jr. (1940), “on what basis shall it be decided to allocate X dollars to Activity A
instead of to Activity B?” It is important for local governments to specify criteria and keep them in
mind when making budget allocations.

People react to what you place in front of them. If people see a line-item budget, they will ask one
set of questions focusing on the control orientation presented. If you ask people (e.g., general
assembly members, mayors) to judge the same activities in a program budget format, their review
and selection criteria will be totally different. This issue has been phrased by Jess Burkhead
(1956) as follows: “The ‘means’ of budgeting affects the ‘ends’ of budgeting—people think about
what is put in from of them.”

Budget Evolution in Hungary

Hungarian municipalities have some experience in budget planning and preparation. When the
Soviet-style council system was introduced in 1949, municipalities ceased to exist, and general
assemblies were limited to implementing and supervising the objectives of central planners. After
1971 the operating and capital budgets were strictly separated and characterized by a planning
system based on “rule of thumb.” Under this process general assemblies first forecast price and
wage increases and added the increases to the previous year’s budget. Second, they added
costs related to new developments and facilities, and “qualitative” development expenditures
aimed at increasing service levels. Budgets were approved according to “democratic” rules, and
although local government financing was completely centralized, general assemblies had limited
freedom in planning their own revenues from companies operating within the boundaries of the
municipality.

The 1986 reform of general assembly financing affected the capital budget; however, it did not
change the system of planning and financing the operating budget. In the general assembly
system the budget document underwent a formal approval process. Furthermore, the budget was
not a public document, and the budget information was not accessible in practice.

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 The new political and economic system, defined by the 1990 Law on Local Self-Government,
inherited these “traditions.” One of the main objectives of implementing program budgeting is to
eliminate these inherited features.

Even though Hungary had moved away from modernizing budget practices while it had a planned
economy, local governments had introduced some modern elements of budget preparation and
analysis between World War I and World War II:
♦ The national association of cities prepared an annual comparative analysis of Hungarian local
governments’ revenues and expenditures.
♦ Local governments could impose a surchargea piggyback income tax—in addition to the
central income tax.
♦ Loans began to play an important role in municipal financing, and some of them were
specifically for projects.

Because of the experience with these modern budget practices and because Hungarian local
governments did have some financial freedom, the transition to a market-based economy has
been easier for Hungary than for other transitional countries.

Types of Operating Budgets

Many municipalities separate their annual budgets into two components: the operating budget
and the capital budget. Capital budgets are for major, nonrecurring items that last a long time and
require multiyear planning. While you do not have to have a separate capital budget, it is highly
desirable. This manual focuses on operating budgets (for more information on capital budgets,
see the training manual on capital improvements).

Three possible types of operating budgets are described below. Each type has advantages and
disadvantages. The suggested practice for preparing Hungarian municipal budgets blends
features of line-item, performance, and program budgeting. Few, if any, budgets worldwide are
prepared exclusively on a program basis. In reality, there are as many budget formats as there
are budgets. What is important is that your budget serve as the managerial road map to guide
your municipality.

Line-Item Budget
The line-item budget is a financial document that lists how much you will spend on every item a
municipal budgetary organization uses. The focus of the budget is what is bought? The
expenditures for each item are broken out in categories. Expenditures are organized primarily by
objects of expenditure such as salaries, materials and supplies, and goods and services bought.
The line-item budget keeps track of how much you spend on what. While the simplest to prepare,
the line-item budget does not provide any information regarding activities and functions of a
program, department, or municipality. Knowing how much you are spending for salaries, supplies,
maintenance, and utilities does not reveal much about the actual delivery of services. How many
citizens are being provided with social services? How many kilometers of streets are cleaned?
How many children are in school? To answer these questions, you must rearrange expenditures
into programs or activities.

Performance Budget
The performance budget allocates money to various activities or programs of an organization and
at the same time describes the work output that the organization will produce with this money.

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The public works budget, for example, sets aside a specific amount of money to repair a specific
number of kilometers of street.

The principal advantage of the performance-type budget is that it shows both the activities of the
local government and the service levels of these activities. The relative service levels and funds
spent on different activities show where priorities lie. This budget also gives you the information
necessary to decide if the priorities are correct. It is an immense help in assessing the quantity,
quality, and productivity of municipal programs.

Program Budget
This training manual emphasizes the program budget. The program budget differs from the
traditional line-item approach to preparing, reviewing, and presenting the budget. Rather than
focusing on what a community buys (personnel, commodities, etc.), a program budget focuses on
the expected results of services and activities that you carry out. The emphasis is on the
attainment of long-term, community-wide goals. In a program budget, you link revenues and
expenditures to multiyear programs that meet your municipality’s goals, objectives, and
strategies. Importantly, a program budget identifies the anticipated results and outputs of these
investments.

What Is a Program? A program classifies all activities in a municipal government by their major
purpose and contribution to overall community goals and objectives. A program structure is a way
for you to organize all municipal activity into a hierarchy of functional categories. For example,
your municipality may establish a “Center City Economic Development Program.”

In large municipalities, programs may cut across organizational lines. Your economic
development program may include the activities of several municipal departments such as
communal services, housing, and water and sewer. In smaller jurisdictions, your programs may
be limited to the activities of a single department. A communal services department may have a
“Neighborhood Street and Sidewalk Improvement Program.”

Ideally, a program should be clearly delineated, have a minimum overlap with other programs, be
results oriented, and lend itself to quantification. You will carry out planning, budgeting,
administrative control, and reporting within the framework of this program structure.

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 What Are the Advantages of Program Budgeting? The benefits of using this systematic
approach to budgeting include:

♦ Producing a transparent budget. A program budget presents budget investments in a

format that enhances community understanding of the purpose and nature of the services
you will provide.

♦ Focusing attention on community goals, needs, and capabilities. With a program budget
you can bring budget investments in line with community objectives, anticipated or desired
growth, priorities, and financial capabilities.

♦ Achieving maximum use of the citizens’ taxes. The planning and management focus of a
program budget establishes an informed basis upon which you can make decisions, thus
helping you avoid costly mistakes. A program budget guides you in making sound annual
budget decisions.

♦ Serving wider community interest. A program budget, once approved, keeps the citizens
and business community informed about community programs and activities that affect their
lives and enterprises. It also provides information on the results of budget investments.

♦ Encouraging a more coordinated and efficient government administration. Using a

program budget to coordinate budget investments of municipal departments will result in
more efficient use of limited resources and will limit conflicts or overlap among projects.

♦ Maintaining a sound and stable financial program. By programming investments over

many years, a program budget can limit the burden that these investments place on the
municipal budget. Where there is ample time for programming, you can select the most
economical means of designing and financing each project in advance.

♦ How Is a Program Budget Different from a Performance Budget? Both types of budgets
use indicators to measure performance (see the training manual on performance
measurement), but they have a different focus. A program budget emphasizes the benefits
that citizens gain from municipal expenditures, while a performance budget emphasizes
management efficiency in expenditure allocations.

Steps in Developing a Program Budget

Step 1: Establish Goals

Goals represent the ends that a program or an organization (e.g., municipality or municipal
department) wants to attain. They define the desired outcome or end result and are typically
general in nature. Your goals should be definitive and concise. For example, a municipality may
articulate the following goal: “Enhance the Economic Viability of the Central Business District.”

Step 2: Establish Objectives

Objectives represent the specific results desired within a fixed period of time. They should specify
what is to be accomplished, for whom, and by what date. In terms of the budget, an objective
represents a targeted achievement for the forthcoming year. Each objective has one or more
performance measures (see the training manual on performance measurement).

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Objectives should reflect planned achievements in service quality or service level; thus, key
words used in stating objectives include increase, reduce, expand, complete, prevent, maintain.
Examples of objectives are:
♦ “Increase the Number of Residential Housing Units in the Next Fiscal Year by 2%.”
♦ “Reduce the Number of Leaks in the Water System by 25%.”
♦ “Expand the Number of Commercial Enterprises in the Downtown by 10%.”

You can develop goals and quantifiable objectives for the activities of individual programs or
departments as well as for the entire municipality.

Step 3: Prepare a Budget Calendar

The budget calendar establishes the process and schedule your community will follow in
developing the budget. The calendar helps you prepare and enact the budget in a timely way. At
a minimum, the calendar should indicate the dates when:
♦ You will distribute budget worksheets, instructions, and guidelines to departments;
♦ You will prepare revenue estimates;
♦ You will compile budget requests and summarize them into a single budget document;
♦ The mayor and the finance and other committees of the general assembly will review budget
requests and make appropriate adjustments to budget proposals; and
♦ The general assembly will adopt the budget.

Step 4: Define Roles in Budget Preparation

There are three major administrative roles in the budget preparation process:
♦ Preparing budget proposals for consideration by the general assembly;
♦ Explaining current fiscal conditions, fiscal prospects, and budgetary proposals to the general
assembly; and
♦ Implementing the budget enacted by the general assembly and monitoring performance to
ensure that programmatic and fiscal policies are followed.

In smaller local governments, one person may be responsible for all these roles. In larger
municipalities, a budget officer or chief financial officer may assist the mayor to fulfill these roles.

While the executive role in local budgeting should always encompass the above responsibilities,
the manner in which the executive function is organized may vary considerably. In some local
governments, department heads deal directly with the general assembly. This is particularly true
where each member of the general assembly directly oversees a particular department. It is
recommended, however, that you assign all executive budget functions to a single executive
official (sometimes called a budget officer). This will ensure that (1) there is consistency in budget
preparation and format among municipal department budget submissions; (2) legislators will have
a focal point to guide the establishment of municipal policy; and (3) priorities for services will be
determined from a central point.

The budget officer plays a key role in budget preparation by serving as a focal point for issuing
guidelines, reviewing materials, and responding to questions. The budget officer’s role may be of
three general types. First, the budget officer may serve simply as a coordinator of budget
materials. Second, the budget officer may perform a significant policy guidance function and
become involved in all the programmatic and financial issues relating to the budget. In this role,

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 the budget officer not only coordinates all materials, but also assumes analytical and guidance
functions, such as:
♦ Issuing guidelines to departmental officials regarding the acceptable level of service increase
or decrease and expected cost limitations;
♦ Evaluating departmental requests and adjusting them to policy guidelines;
♦ Balancing expenditure requests with available revenues (see also the training manual on
financial analysis); and
♦ Making recommendations for budget action to the general assembly.

Third, the budget officer may directly supervise budget implementation. Specific tasks include:
♦ Ensuring that departments do not exceed budget limits by conducting periodic projections of
expenditures and comparing them to available resources;
♦ Maintaining centralized position control to ensure that new staff are hired only into authorized
positions and at salaries no greater than the amount designated in the budget;
♦ Reviewing and approving all requests to transfer funds from one budget to another;
♦ Preparing reports on budgetary performance for the use of the general assembly, mayor,
departments, and citizens; and
♦ Closely monitoring departmental performance to determine potential problems.

Step 5: Distribute Forms and Prepare Departmental Budget Requests

The budget officer distributes budget preparation forms and instructions to municipal departments
and enterprises. Ideally, this package includes the municipal goals and objectives established in
Steps 1 and 2 to guide managers in establishing funding priorities that are consistent with overall
municipal priorities.

The people who manage local activities should be involved in the budget process. However, in a
great number of cases, budget requests are prepared without spending much time discussing the
budget with the department heads who must operate under it.

You should involve department heads in the details of budget development and implementation.
Budget requests for each service should specify what the service is; what level of service has
been provided in the current year; what level of service is needed in the budget year; what will
happen if the service is reduced, discontinued, or increased; and the cost of service at the
requested level. You can convey this information in an informal way, through a formal statement
of specific objectives and workload measures, or through presentations of alternative service
levels.

Department heads must also seek to summarize these details and present information in a way
that complements the legislative policymaking function. The budget requests that department
heads generate will trigger a round of budgetary policy decisions, which, in turn, affect resource
and spending levels and modify budgetary goals.

Step 6: Review the Budget Requests

The mayor and general assembly are in the unique position of reviewing all requests and must
thus be prepared to establish priorities in light of major issues or potential fiscal problems facing
the local government. Your review of departmental submissions should start by ensuring that
proposals are consistent with the budget policies you established at the beginning of the budget
process. Typically, the sum of all budget requests will exceed the total of estimated revenues plus
any estimated surplus from the current year. Departments and programs will compete for access
to limited governmental funding sources. You will have to make tough choices, but you should
make them in the context of your municipality’s overall program and fiscal policy.

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You should make sure that the general assembly budget committee and other appropriate
committees receive all the materials they need to give full, effective consideration to the budget
proposals presented by department heads. For local officials to achieve the most effective
policymaking role, the budgetary materials you present them with should permit them to gain a
comprehensive understanding of local financial conditions, revenue prospects, and alternative
uses of local funds in the provision of services.

The general assembly should not concern itself extensively with administrative and financial
details underlying the budget. This may make you lose sight of important programmatic and
financial issues embodied in the budget proposals. In particular, legislators should avoid
becoming overly involved in considering minor expense items. For example, you may spend
extensive time and effort discussing a request for supplies and totally ignore the issues
underlying major expenditure requests. Such an approach is undesirable because:
♦ It fosters false economy—you may save small amounts of money, but the fulfillment of
service objectives may be impaired; or,
♦ It wastes the valuable time of legislators on insignificant aspects of the budget.

Step 7: Establish the Role of Citizens

Since the budget is your community’s policy tool, you must make a conscious effort to determine
what the citizens think about current policies and services, including where they think services
could be strengthened and what levels of priority they attach to various services. Frequently, local
officials rely on the perceptions of departmental management or the most vocal citizens to
establish budget policy and service priorities. In both cases, the real preferences of citizens may
be distorted. You could undertake a more systematic approach to understanding citizens’ needs
using techniques such as holding hearings on specific budget policies and service priorities.

Another method is to go to the citizens. Explain the kinds of services for which the municipality is
responsible. Discuss municipal fiscal and program policies and obtain feedback. As noted below,
once the budget document is assembled, make the document available to the citizens.

Step 8: Prepare the Budget Document

The budget document is the final product of a lengthy process, and the quality of the budget
depends largely on the quality of that process. At each stage of development, the budget takes
on a different form. Proposed budgets are usually the most comprehensive and largest versions,
because they contain critical decision-making information. Your adopted or final budget, on the
other hand, may be a smaller summary document that you use to communicate final policies and
appropriations.

The budget is a decision-making document: it is the basis for important fiscal and policy
decisions. An effective document encourages debate and proper consideration of budgetary
issues by delineating the issues and informing participants about the implications of specific
actions or inactions.

Communicate budget decisions accurately and clearly. At different stages of development, the
budget reflects input from citizens and decisions made by department heads, the mayor or
administrator, and finally, the general assembly. The budget must accurately reflect the results of
this process. The budget serves as the official action plan for managers and staff charged with
carrying out government functions and programs.

Ultimately, the budget document is the vehicle for informing the public, the business and
investment communities, the central government, and others regarding your community’s

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 investment policies and priorities. You should format and print the budget document in a way that
facilitates understanding and enhances the utility of the budget for the citizens. The document
should be attractive, consistent, and oriented to the readers’ needs. To this end, include reader
guides, budgets in brief, and graphs and other visuals that will communicate these policies and
priorities effectively. Your budget should give readers an understanding of the services you are
providing, the cost of these services, and the benefits they will obtain from these services.

Step 9: Adopt the Budget

Once you submit the proposed budget, and the general assembly (and the general public)
reviews it, it will likely undergo more changes until it is adopted by the general assembly.
Adoption of the proposed budget by the general assembly establishes the legal authority for
administrative officials to incur expenditures in the fiscal year. The adoption of the proposed
budget is the culmination of an exhaustive review of budget proposals by the general assembly
and the mayor.

Step 10: Execute and Monitor the Budget

The main purposes of budget execution are to make the appropriations authorized in the adopted
budget and to monitor spending. The goals of budget execution are to: (1) provide for an orderly
approach to achieve budgetary goals and objectives; (2) ensure that funds are expended only on
approved activities; and (3) have adequate stewardship over entrusted financial resources.

Responsibility for budget execution rests with municipal departments. They must account for the
expenditures and program outputs. Responsibility for monitoring may rest with the budget officer,
chief financial officer, or the deputy mayor, depending on your local government organization.

You should have a reporting system that compares actual expenditure and output against
budgetary plans. For most municipalities, your system should generate such reports monthly. The
person responsible for budget monitoring should identify any problems and meet with the
appropriate department to identify causes and resolve the problems. This person’s role is to
provide technical assistance and support so that departments can take corrective action.

Multiyear Context of Budgeting

Although the budget identifies programs, activities, and their related revenues and expenditures
for the upcoming fiscal year, you should view it in a multiyear context. The prior and current year
budgets guide you in estimating the next fiscal year’s revenue and expenditure levels and
program costs. Investment decisions for the upcoming year will have long-term program and cost
implications. Consider the following when preparing the budget for the upcoming fiscal year:
♦ How much did the municipality receive and spend last fiscal year? Were the amounts more or
less than planned? If yes, why? Is the municipality meeting its projections for the current
fiscal year?
♦ What are the bases for revenue and expenditure projections?
♦ How does the proposed budget compare to last year and the current year? Is it higher or
lower? Why?
♦ What are the criteria for establishing budget priorities and funding levels?
♦ What are the multiyear liabilities hidden in the proposed budget (e.g., additional staff
requirements, new projects that will require ongoing staff and operating costs, added costs,
etc.)?

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 ♦ What is a realistic estimate of future revenues and expenditures? Will future revenues be
sufficient to support on-going projects and staffing levels?
♦ Will the budget investments you make generate long-term benefits to the community? If not,
re-evaluate these investments.

If you view the budget in this multiyear context, you will be better positioned to minimize the
impact on your municipality of inflation, revenue declines, and increases in service costs.

Introduction of Program Budgeting in Hungary

As local government responsibilities in Hungary are defined and categorized by sectors (as are
institutions and departments of the mayor’s office), the easiest way to introduce program
budgeting is to take a sectoral approach. Hungarian local governments that have initiated
program budgeting have focused their efforts first on a single sector and then expanded their
efforts to other, more complex sectors.

Some of these local governments started program budgeting in the communal services sector.
This sector is not subject to central government mandates on functions and expenditures (thus
giving local governments more freedom), and sub-programs can be easily specified. The social
services sector, on the other hand, is very complex, and some local governments have taken the
approach of specifying sub-programs based on the tasks and activities mandated by the central
government. This may be a useful approach; however, a detailed sector analysis can contribute
to a clearer definition and management of sub-programs. A detailed sector analysis examines the
legal framework; analyzes strengths, weaknesses, opportunities, and threats (SWOT); traces
revenues and expenditures; and details the economics and clients of the service. In some cases,
a sector analysis may identify sub-programs that combine several tasks. In practically all cases
the sector analysis will permit the development of sector goals and objectives, fiscal indicators,
and measurable performance outcomes.

Thirty-five local governments in Hungary have now adopted a program budget in varying
degrees. Of these, practically all have undertaken a sector analysis in the sector chosen to initiate
program budgeting, and all now have budgets that are more transparent and results oriented.

A case study of one of the Hungarian local governments that pioneered program budgeting,
Szentes, documents the profound changes that program budgeting has effected in modernizing
municipal budgeting practices in Hungary. This study identifies the steps that Szentes took to
implement these changes and how the municipality addressed the challenges it faced throughout
the process.

The Szentes Approach to Program Budgeting

Before 1997, the Szentes budget was traditional and contained no extra information beyond what
was required by central regulation. The budget was essentially in a line-item format, with no
details on service accomplishments and program results. This lack of information did not facilitate
objective decision making by the general assembly. Nor did it explain to citizens the governments’
policies or use of revenues.

Some municipal officials felt that in order to make informed decisions about service delivery, they
required a completely restructured budget document. The new document needed to provide
information so that policy decisions could be made based on facts and data rather than subjective
judgement.

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 A program budget cannot be initiated without the political support and guidance of the mayor,
finance director, and budget committee. In Szentes the “champions” of program budgeting were
the mayor and the finance director. They initiated the reform process by:
♦ Informing general assembly members about the proposed budget reform for 1997 in the
semiannual reportrequired by lawin June 1996.
♦ Outlining the needed reform in two sub-programs of the communal services sector (park
maintenance and green areas) and developing a work plan.
♦ Holding internal meetings with general assembly members, budget staff, and department
staff to make them aware of the budget reform and concepts of program budgeting.
♦ Submitting a proposal at the August 1996 session of the general assembly, who agreed to
adopt program budgeting in the communal sector.

By the time the general assembly discussed the proposed budget in February 1997, each
member understood the changes that had been made in the structure and content of the budget,
and practically all of the members supported these changes.

Szentes developed its program budget as follows:

♦ 1997. Program budget for two sub-programs in the communal services sector.
♦ 1998. Program budget for the entire communal services sector (three sub-programs) and for
the entire social services sector (three sub-programs).
♦ 1999. Program budget for all sectors and programs: the communal services sector, social
services sector, education sector, and other sectors (culture, library, sport, tourism, etc.).
Also, separate operating and capital budgets.

The Szentes approach to program budgeting reflects many features identified in the model “Steps
in Developing a Program Budget” but also shows how each local government will adapt the
process to its own needs and understanding. Szentes made both enormous progress and some
mistakes as it developed its budget, and its experience is useful in showing how a city introduces
program budgeting in practice in Hungary. Following are the steps followed by Szentes based on
its three year experience.

Step 1: Preparation for the Budget Process

The preparatory phase of the budget process involves designing the budget calendar and work
plan, defining the role of the head of the finance department, identifying staff who will participate
in the budget process, analyzing the legal framework, and soliciting citizen input. During this
phase all the documents that help smooth the planning process are prepared. Guidelines enable
the uniform interpretation of tasks, requirements, and the main elements stated in step 2.

The design of the budget calendar and the work plan requires special attention. In the traditional
budget process, municipal officials did not prepare work plans that identified and coordinated the
different steps. Therefore, the process was often disorganized and confusing, and activities
frequently overlapped. The new budget process introduced in 1997 proved to be efficientthe
work flows more smoothly, responsibilities are shared even though a manager oversees the
entire process, and cooperation among the different departments and institutions is more
effective. In several cases the financial and other sectors collaborate with fewer problems. They
learn about and as a consequence respect each other’s tasks. As a result of the budget reform,
the indifferent attitude of the sectors toward budgeting has been replaced by active participation.
The different sectors not only provide data for the budget process, they also evaluate the
usefulness and outcome of their programs.

The budget calendar and work plan specify who should do what, and when. Strict enforcement of
the budget calendar and work plan deadlines ensures the timely preparation of the budget.

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Role of the Head of the Finance Department. The head of the finance department is
responsible for the preparation of the budget. He/she coordinates, manages, and organizes the
work and plays the following roles:
♦ Acts as a liaison with the municipal institutions, committees, and leaders;
♦ Develops the guidelines concerning the contents, structure, and format of the budget;
♦ Informs the municipal leaders and harmonizes needs and resources;
♦ Organizes the management of the budget process;
♦ Supervises the planning process;
♦ Develops clear rules related to the process; and
♦ Prepares the budgeting guide and other documents to ensure uniform and straightforward
interpretation of the budget’s contents.

Role of Staff Participation and Cooperation. It is a misconception that budget preparation is

the task of the financial officers onlyrepresentatives of different sectors are essential to the
process. Explaining the costs and benefits of the “new” budget process enables the staff to
understand their role and is necessary to obtain political support for implementing the process.

The advantages of cooperation among institutions, experts, and sector representatives are:
♦ The partners have an opportunity to learn about each other’s essential features that may
prove useful in the following steps of the budget process.
♦ Tension among the managers and officers decreases, and trust increases.
♦ A kind of creative collaboration develops.
♦ The partners share ideas.
♦ The partners can define needs more realistically.

Analysis of the Legal Framework. Another essential element in preparing for the budget
process is analyzing the legal framework, as service delivery is regulated by several sector-
specific local decrees and guidelines. Accurate, up-to-date information and observance of
regulations is necessary for efficient budgeting and financial management.

It is also necessary to analyze the interior and exterior factors that influence the municipality’s
financial management, strengths and weaknesses, traditions, and economic and political
conditions. This helps the municipality know where it is coming from and what it would like to
achieve.

Solicitation of Citizen Input. It is important to collect information from citizens regarding their
needs, demands, and expectations of service delivery. This work requires much time and effort
from several experts, which may be difficult for smaller and less experienced municipalities to
provide.

The current channels of communication with the citizens include:

♦ customer service representatives
♦ complaints
♦ mayor’s consulting day
♦ consulting day of the general assembly members
♦ meetings of civil society organizations
♦ professional forums (e.g., a sociopolitical roundtable)
♦ open houses
♦ local media outlets

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 ♦ public hearings
♦ meetings of the general assembly.

Szentes has also initiated other methods, such as surveys, to evaluate the citizens’ satisfaction
with kindergarten care and to learn about the needs of the inhabitants concerning social care.

Step 2: Budget Process Management

This is the most important phase of the budget process. It is the longest and involves many
people. In this phase the municipality defines the sectoral objectives, targets, and programs on
the basis of its strategic objectives (see the training manual on strategic planning). Municipal staff
carry out the work in teams according to the criteria defined in the work plan and budget
guidelines. Staff should receive regular and continuous feedback, so that they can clarify
questions quickly and explore alternative ways of achieving objectives.

This phase involves designing appropriate sector indicators, defining measurable outcomes, and
preparing short- and long-term forecasts. It is very important to devote enough time to structuring
the collected information and indicators, begin the planning process in time, adhere to the
deadlines set in the work plan, and provide reliable data.

Step 3: Preparation of Budget Requests

Once the data are collected, the process of preparing budget requests begins. Municipal
institutions should take into account all local operating revenues, including locally-generated
income and the grants and resources available for capital improvements. Budget requests should
contain the following information: costs to be incurred by the institutions, investment needs of the
individual programs, and the expenditures necessary to achieve the development objectives of
the municipality.

Step 4: Evaluation and Reconciliation of Budget Requests

In this stage the different institutions present their budget proposals at a meeting of the managers
of the institutions, financial managers, department heads, representatives of the financial and
other sectoral committees, and representatives of civil society organizations. The institutions use
detailed analysis, forecasts, and indicators to determine trends, draw conclusions, and justify their
sectoral and financial goals. This helps the decision makers prioritize tasks, decide whether to
discontinue funding to certain institutions, and focus on important needs that may have been
ignored before. The municipality can achieve a balance of expenditures based on real needs and
scarce resources only through a strict budget policy and rigorous enforcement of program
objectives. Alternative budget plans can be presented after the reconciliation of objectives, taking
into consideration the results and performance of different institutions.

Step 5: Submission of the Budget Proposal

The above process results in a budget proposal that includes alternatives for the continuation of
the budget planning work. After the general assembly approves the budget proposal, further
reconciliation takes place, including the clarification of data and political discussions in the
committees.

In Szentes, the general assembly continues to discuss and analyze the budget even after it has
been approved but prior to the budget decree. The assembly analyzes information on the
financial capacity of the municipality, issues that are important for the citizens, details regarding
alternative actions, and the expected results and impacts of necessary measures.

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 Step 6: Approval of the Budget
In recent years the approval of the budget decree has been rather smooth due to the multistep
reconciliation process. Compared to previous years the discussions are more productive, and the
assembly members focus more on important professional issues, as the details are usually
reconciled during the planning phase.

Step 7: Budget Implementation

Budget implementation involves monitoring, enforcement, and evaluation of budget plans and
requirements. The finance officers’ work does not end with the approval of the budget. They are
responsible for the following:
♦ Development and operation of an appropriate accounting system to monitor the outcome of
defined objectives;
♦ Maintenance of the database and provision of accurate information to those who help
implement the budget;
♦ Monitoring and evaluation of budget appropriations;
♦ Supervision of the use of funds;
♦ Financial management of the mayor’s office based on the same principles relevant for
institutions; and
♦ Performance measurement, forecasting, and impact analysis.

Program budgeting has facilitated the preparation of a better reporting system on the
implementation of the budget, has improved the quality of financial management in certain
sectors, and has led to easier decision making. The budget has now become a tool to convey
information (originally available only for financial experts) to those involved in the budget process,
the citizens, and outsiders.

Summary of Key Points

♦ A budget is used to plan and guide a municipality through the upcoming fiscal year and
serves as a basis for financial reporting to the citizens.
♦ The budget can serve several purposes. It can be a contract, management tool, motivator,
financial control mechanism, plan, policy tool, communication mechanism, operations guide,
and instrument of democracy.
♦ There exist several types of operating budgetsline-item, performance, and program
budgets, for example.
♦ A program budget focuses on the expected results of services and activities carried out by
government.
♦ In Szentes, program budgeting has facilitated the preparation of a better reporting system on
the implementation of the budget, has improved the quality of financial management in
certain sectors, and has led to easier decision making.

The steps in developing a program budget are as follow:

♦ Establish goals.
♦ Establish objectives.
♦ Prepare a budget calendar.
♦ Define roles in budget preparation.

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 ♦ Distribute forms and prepare departmental budget requests.
♦ Review the budget.
♦ Establish the role of citizens.
♦ Prepare the budget document.
♦ Adopt the budget.
♦ Execute and monitor the budget.

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Glossary
Budget A plan of financial activity for a specified period of time (fiscal year) indicating all planned
revenues and expenses for the period.

Budget Calendar The schedule of key dates in the budget preparation and adoption process.

Budget Document The official written statement, prepared by the budget office and supporting
staff, that presents the proposed budget to the legislative body.

Capital Budget A plan of proposed capital improvements and the means of financing them,
usually based on the first year of the capital improvement program and typically enacted as part
of the complete annual budget, which includes both operating and capital outlays.

Department A basic organizational unit of a jurisdiction that is functionally unique in its service
delivery.

Fiscal Policy A government’s policies with respect to revenues, spending, and debt management
related to government services, programs, and capital investment. Provides an agreed-upon set
of principles for the planning and programming of government budgets and their funding.

Fiscal Year A twelve-month period designated as the operating year for accounting and
budgeting purposes in an organization.

Function A group of related activities aimed at accomplishing a major service or regulatory

program for which a government is responsible (e.g., public safety).

Goal A general and timeless statement of broad direction, purpose, or intent based on the needs
of the community.

Line-Item Budget A budget prepared along departmental lines that focuses on what is to be
bought.

Object of Expenditure Expenditure classification based upon the types of categories of goods
and services purchased. Typical examples include personnel services (wages and salaries),
contracted services, supplies and materials, and capital expenditures.

Objective Something that is to be accomplished in specific, well-defined, and measurable terms

and that is achievable within a specified time frame.

Performance Budget A budget that bases expenditures primarily on measurable performance of

activities and work programs.

Performance Indicator (Performance Measure) A specific quantitative and qualitative

measure of work performed within an activity or program (e.g., total miles of streets cleaned).
Also, a specific quantitative measure of results obtained through a program or activity (e.g.,
reduced incidence of vandalism due to new street lighting program).

Program A group of related activities performed by one or more organizational units to

accomplish a function for which the government is responsible.

Program Budget A budget that allocates money to the functions or activities of a government
rather than to specific items of cost or departments.

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 Program Performance Budgeting A method of budgeting whereby the services provided to
citizens are broken down into identifiable service programs or performance units. A unit can be a
department, a division, or a work group. Each program has an identifiable service or output and
objectives to provide the service effectively. The effectiveness and efficiency of providing the
service is measured by performance indicators.

Service Objectives The specific achievements that a government hopes to make throughout the
provision of a service; the intended result of an activity.

Strategic Plan The written strategy defining a department’s public services and how those
services will be delivered.

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Training Guide

Training Outline
♦ What Is a Budget?
♦ Why Do We Have a Budget?
♦ Purposes a Budget Can Serve
♦ Budget Reform and Evolution
♦ Budget Evolution in Hungary
♦ Budget Types
♦ The Program Budget
♦ Steps in Developing a Program Budget
♦ Managing Budget Reform
♦ Program Budgeting In Hungary
♦ Sample Program with Goals and Objectives

Slides
The slides can be found at the end of this training guide.

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Bibliography
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Officers Association.)

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