Introduction
Zero-Based Budgeting is an operational planning and budgeting process that requires managers to justify their entire budget request in detail from scratch. Zero-based budgeting is that technique of decision-making that is the inverse of the current traditional working process. In the standard traditional incremental budgeting, to which ZBB is an alternative, departmental managers are required to justify increases over the previous annual budget, and the previous expenditure is automatically sanctioned as it is assumed to be valid. There is no reference to the past levels of expenditure as this is no longer under consideration. By comparison, in Zero-based budgeting, there is a comprehensive review of every department function and all expenditures require approval instead of just the increases beginning with a zero-base, hence the name. This zero-base is indifferent to any increases or decreases to the total budget. Put succinctly Zero-base budgeting is a method of budgeting whereby all activities are reevaluated each time a budget is set.
Zero-based budgeting offers a number of advantages. For example, it provides for efficient allocation of resources based on existing needs and benefits. Users of this system are driven to find cost-effective ways to improve operations. For the current purpose, it exposes inflated budgets. It also increases staff motivation in providing increase initiative and responsibility in decision-making. There is also greater communication and coordination within the organization. Waste and superfluous operations are detected and eliminated.
Zero-based budgeting also has its own unique set of disadvantages. For instance, Zero-based budgeting requires that it is clearly understood by managers and auditors, hence they must be trained and made more involved than under incremental budgeting. Also, since they are forced to justify every expense, certain departments which provide essential but non-quantifiable service will have difficulty justifying themselves. In large organizations, like municipalities, the volume of forms may be so large that no one manager can read it all, hence honesty of the those who prepared the forms is paramount4. Any dishonesty can grossly skew computations.
The use of zero-base budgeting (ZBB) or a hybrid of ZBB as a management tool in the public sector has increased significantly over the past decade and has gained much more momentum with the increase of open government and transparency. The experiences of Zero-based budget use in the private sector have been well documented; however little has been written about the appropriateness and effectiveness of using a Zero-based budget in the public sector. This paper will be structured to bridge the knowledge gap on Zero-based budgeting by providing background/history of Zero-based budgeting, the aspects/attributes of the use of ZBB in the public sector, and reporting the findings of research exploring the positive features and negative characteristics of Zero-based budgeting practices in municipalities. Finally, this paper will also share the extent that Zero-based budgeting is used in municipalities in the present use of 2010.
Use of Zero Based Budgeting (SBB) In Municipalities
Historical Background
Prior to its adoption in government Zero-based budgeting or ZBB was first introduced in the industry. In industry, ZBB has been successfully used in the United States since being introduced by the Staff and Research Division of Texas Instruments in 1969. In 1970, the use of Zero-based budgeting was subsequently expanded throughout all divisions of Texas Instruments in the preparation of the 1971 budget. At the time Dean and Cowen wrote their article The Use of Zero-base Budgeting in Industry over 100 firms were using ZBB.
Historically, budget reforms, such as the planning-programming-budgeting, reveal that they were generally proposed and pushed by the executive and accepted reluctantly, if at all, by the departments and the legislative branch. As Governance is committed to management excellence, it is committed to transplanting best practices from industry to government. A growing list of management tools in the industry is being transplanted to the government especially at the municipal level. Municipal corporations due to their relatively compact size and autonomy are the best places to first transplant management best practices into government.
Georgia was the first state to implement Zero-based budgeting in 1972 for their budget for the year 1973. The practice was said to be successful and has since spread to a number of states. A recent study shows that approximately two dozen cities now use ZBB. In Fiscal Year 1979, federal agencies were mandated to use ZBB as part of their normal budgeting processes. This comes from the memorandum issued by then-President Carter to all executive agencies and departments expressing his interest in using ZBB in the federal government. This interest hails from his personal positive experiences with ZBB during his time as governor of the state of Georgia.
Concurrently, during the 1977 Session of Congress, a ZBB bill was unanimously approved by the Senate Committee on Government Operations. The committed declared that it is necessary, to challenge the traditional assumption of budgeting – because a program funded last year, deserves to be funded this year at the same or higher level.
The Zero base review concept has a very different assumption as its foundation – programs are not entitled to automatically continued funding once they are created. Instead they a case must be made for continued funding. Depending on how well the case is made, programs can be funded at the current level or lower or higher levels; or revised to reflect the findings of the zero-base review. If the program fails to meet the test of reauthorization it will be terminated. Hence if properly followed government programs subjected to ZBB will now have to justify their existence, versus their past survival on entitlement mentality.
Zero-Based Budgeting in practice
At the height of Zero-based budgeting use in 1979, many municipalities were using ZBB ranging in size from Wethersfield, Connecticut with a budget of $7 million to Nashville, Tennessee with a budget of $273 million. The median budget for a ZBB city is $112 million. The main reasons for the adoption of ZBB were that it complemented an already existing budget another reason was that the municipal government was in the process of leveling off revenues and needed a system that would present them with a menu of budget alternatives for better control of costs. ZBB was also seen as improving the policy review process that was being performed by the city council. Finally, ZBB was seen as more flexible as a management tool than the previous budget systems.
Implementation in most ZBB cities was implemented across the board as opposed to the piecemeal approach that is used in industry. This was done because the ZBB system was used as a mode of budget justification and presentation. By way of example, Wichita Falls, Texas employed ZBB as a means to justify budget requests as well as a method of presenting the budget to the city council. As against the previous practice of the council receiving the budget in the traditional line-item-of-expenditure format, it was presented with a budget consisting of prioritized decision packages including those packages not recommended for funding by the mayor or city manager. The city councils were given the final authority to establish budget cutoffs and allocate resources. Such an approach contrasts the procedures of ordinary practice in the industry and in the federal government where rejected packages are not submitted to the final decision-making body, congress, or the board of directors. In these cases, Zero-based budgeting is typically used as a method of budget justification. The across the board approach was used by cities to maximize the commitment of line and staff personnel to the Zero-based budgeting process. The budget managers generally felt that anything less than a comprehensive approach would undermine the usefulness of Zero-based budgeting as a management tool in identifying trade-offs and assessing the implications of funding reductions.
Zero-based budgeting is most effective in controlling the discretionary cost activities of an organization thereby reducing overhead. During implementation, it was shown that ZBB was least appropriate and effective in controlling the staff and support areas and most effective in controlling operating departments. In the latter outputs could be more easily identified and measured; hence the use of cost-benefit analysis could be facilitated. In contrast, it was more difficult to prepare and rank decision packages for the staff and support areas because their output was so far removed from their main task of the organization. In general, the budget officers believe that the results of using Zero-based budgeting in these departments were consistent with the results achieved with prior systems.
Those who experienced ZBB suggested that modifications be made to its complexity, the paperwork, and the time required in the ZBB preparations. The most common suggestion was to generate fewer decision packages and not have to analyze so many activities each year. Complexed with the fact that ZBB was, at the time, still in its infancy, its tendency to appear as a disruption of the routine was not insignificant. Additional experience with the system is believed to be able to help eliminate this problem. Another suggested modification to reduce the time and paperwork demands is to dispense with requiring all agencies to create minimum funding levels every year. After all, when a ZBB is already in place it may no longer be necessary to conduct the process on a yearly basis.
Present Status of Zero-Based Budgeting
Historically, budget reforms, such as the planning-programming-budgeting, reveal that they were generally proposed and pushed by the executive and accepted reluctantly, if at all, by the departments and the legislative branch. In fact, ZBB is viewed by department heads as additional paperwork having a little substantive impact, at best, or as a central executive device that may curtail their departmental budgets at worst. Since the goal of Zero-based budgeting is to produce more information for the chief executive about the programmatic impact of increments or decrements to a department’s budget. More information indicates potentially more power for the chief executive, and the import of this development is not ignored by the department heads. Under the previous status quo, the program department heads assumed that their previous budget is the best indicator of their current year’s needs. Hence in the past, they felt little need to have to justify how their budgets were used. Under ZBB the very existence of a program could be terminated if the department heads fail to justify the benefits of their programs.
The epitaph for ZBB was not particularly laudatory, though Carter and the OMB hailed it as a success. Lauth (1980) pointed out, Georgia did not substantially reduce program costs nor change program activities as a result of ZBB, though it might have facilitated the redistribution of resources among programs. ZBB was the precursor to the bare-bones budget, the maintenance budget, the intermediate budget, and the improvement budget. Some ideas about process are associated with, if not attributable to Zero-based budgeting. Under ZBB top managers send lower-level managers a set of policy objectives and the lower-level managers consider different alternatives to meet those objectives, ranking them for presentation to upper management. The process is both bottom-up and top-down, but lower-level managers have a stronger role to play than in a traditional budget process.
The preparation of four budgets took more agency time than the preparation of one, and most of the four were simply percentage increases or decreases over the current budget. Budget justification replaced budget preparation as the dominant activity. It was impossible to isolate single goals for agency activities, and interaction effects among activities made considering the budget for any activity without regard to the others questionable. The amount of paperwork was significantly increased under Zero-based budgeting but there were very few changes in budget outcomes as a result of it. Reagan abandoned it immediately upon taking office, but he kept one feature of ZBB, the multiple budget formats. Now the emphasis would shift to cost-cutting, and the relevant spending categories were, appropriately, the reduction budget, the maintenance budget, and the agency request budget. In other words, strictly speaking, ZBB died as a government policy in the 1980s. There are still some cities that continue to implement ZBB but they are more the exception than the rule. The lessons of ZBB have carried over to its hybrids such as the bare-bones budget, the maintenance budget, the intermediate budget, and the improvement budget.
The pros and cons of Zero-Base Budgeting for Municipalities
There are varied opinions concerning the usefulness of zero-base budgeting as a budget review tool for government agencies. Some hare expressed concern that this budgeting procedure may be too difficult to achieve, partly because it will add heavily to the burdens of budget making and partly because it would be resisted by those who feel their pet programs will be jeopardized by a system that subjects every activity to periodic scrutiny of its costs and results.
Among the difficulties identified in adopting Zero-based budgeting is the fact that it can not be adopted overnight, Time is needed to develop budget forms properly and to train budget and agency personnel in their use. As a result, budget preparation time should be lengthened during the system’s implementation. Furthermore, Top management may be seen as ignoring and displaying only lip service to ZBB. It is imperative in a Zero-based budgeting system that upper-level budget officials actively demonstrate to budget staff and appropriate agency officials their support and utilization of zero-base budgeting in reviewing agency budget requests, analyzing budget staff recommendations, and making final budget decisions.
Training is important because some agencies may have considerable difficulty in interpreting forms and in understanding zero-base concepts. Close coordination and follow-up set be conducted by the budget office to ensure proper understanding and completion of budget request forms by the agencies. To support this, performance measures should be reviewed beforehand to assure that data that the agency submits for budgetary purposes will be provided by the agency in the proper manner. Likewise, an educational seminar for legislators, especially for those on the finance committees, should be held in order that they will be better able to understand the concepts of the new system.
A new budgeting system is not instituted by fiat. Budget system reforms usually take years of slow and painful development. The main cons cited above represent teething problems that may occur during a shift in budgeting method. It can not quickly be made effective. Expertise must be developed; more important, the presumed beneficiaries must become familiar with this approach. Familiarity takes years and the benefits will be visible over time.
However, Zero-based budgeting need not add heavily to the burdens of budget making. In fact, effectively planned and properly managed, Zero-based budgeting can actually reduce the burdens of budget-making while significantly improving decision making and the allocation of resources.
Zero-based budgeting provides managers with additional information to make informed, discriminating decisions based on the information given to them. ZBB would end the entitlement mentality in some government programs which believe that they have a right to exist that is justified by their mere existence. Government-funded programs are required to prove that they’re worth it. Even those who are preparing the ZBB will also benefit because they are able to determine for themselves which budget items bring the most benefits and which they are best able to defend to their superiors as necessary and desirable in the continuance of the programs.
ZBB literature also notes that it is perceived as being a useful tool for its potential to cut budgets or limit the increases in budgets. ZBB is seen as a worthwhile alternative to the time-consuming process of creating minimum funding levels which had the additional con of being of little use as most agencies were aware that their budgets will never be truncated below present funding under that system. At the height of ZBB use it was a very useful tool with a much as 50% of budget directors in the 1980s believing that ZBB produced an absolute decrease in some of the agency budgets for which it was used. During that era of high inflation, this was a significant boon. In the current era of low inflation and a declining tax base, a similar reduction will be highly desirable.
Perhaps the greatest benefit of ZBB was its ability to shift resources because it provides more information and more credible justifications to support budget requests. Almost 60 of respondents surveyed by Moore (1980) reported that ZBB was a very good or a good tool for this purpose. A similar number believed that ZBB gives top management better insights into the detailed workings.
Despite any negative impact of ZBB it is generally supported by budget managers and had the merit to justify its continuation. ZBB is able to reduce agency budgets and control the rate of increase in others. ZBB has also nurtured better line management participation in budget management and educating and informing the city manager, mayor, and council about the activities and operations of municipal departments all these benefits serve to encourage the continuation of the ZBB over the disadvantages.
Recommended Use
Given the present era of recession, it is recommended that ZBB once again become the standard budgeting system used in municipalities with some changes. For instance, instead of requiring yearly minimum level funding reports, these can be done every fifth year instead of after the first. During the first year all will be required to submit but after that reporting would be done on a staggered basis with different departments being called to account every year. This is because, baring hyper-inflation or another calamity, the minimum funding levels needed by agencies are unlikely to change drastically over a number of years. Another suggestion would be to have a dry run of ZBB and training for its implementation before the actual roll-out in order for the users and managers to get their feet wet with the system before they begin to rely on it.
In the current regime of recession, it is imperative that cities understand the linkage between budget requests and activities. ZBB could be instrumental in allowing this to happen because it is designed to provide more information and control to the central budget office. Hence it is worthwhile to consider its wide-scale implementation. While ZBB would not be a magic elixir in the sense that it will not fix the problems of declining income yet spiraling costs. It would help the cities determine which programs they should preserve and which they should let go in consideration of the greatly reduced available funds. It would balance the needs of increasingly costly programs with the declining tax income and subsidies.
Conclussion
Conclusion as was a popular trend in the 1970s when there was continual pressure upon local governments to reduce expenditures and maintain financial solvency. ZBB as an approach forced managers to become more fiscally conscious and aware of possible means to reduce funding levels. The essential result of a ZBB review was that it made managers do what they should have been doing, that is planning, objective-setting, programming, budgeting, and controlling.
While ZBB is not a panacea for curing management ills when it is properly implemented and operated, it can effectively increase the efficacy of the budgeting process. The initial key to success is a commitment by top managers to develop and implement a ZBB system tailored to the needs of the organization. In addition, the budget system must be flexible and responsive to the constraints and needs of the budget cycle.
In the present era of recession and economic downturn, ZBB is an idea whose time has returned. As the Federal budget deficit continues to rise and some cities are even on the verge of declaring bankruptcy perhaps it is time to return to a ZBB system. This proposal gains strength in light of the fact that vast sums of money are being spent on programs like TARP, bail-outs, and other programs meant to mitigate the effects of the recession. It is imperative that only those programs which truly achieve the stated goals remain funded by the increasingly limited funds available for such programs. A Zero-based budgeting system will allow those who are actually involved in these programs to defend their right to exist before the appropriate government body.
While Zero-based budgeting will not be the panacea to cure the nation’s ills it will help solve the problem of rampant overspending on sundry projects whose benefits to the people far outweigh their costs to the people, the tax-payers. Implementation will find itself faced with problems from two major groups. First, the people assigned to implement them will have to deal with the inertia of their past practices under the present regime of incremental budgeting. The second source of opposition will be those who benefit from the entitlement mentality of the status quo. In other words, those who have benefited from the prevailing idea that programs should continue to exist, or even have their budgets increased, perpetually until such time as the budget for the programs runs out. At the end of the day, ZBB might bring some immediate pain to those who are entrenched in the status quo but will bring long-term benefits to the people in this moment of crisis.
References
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Burton V. Dean and Scott S. Cowen The Use of Zero-Base Budgeting in Industry: Some Observations Interfaces, Vol. 9, No. 4 (1979), pp. 55-60 Published by: INFORMS
Theodore H. Poister and Gregory Streib Municipal Management Tools from 1976 to 1993: An Overview and Update Public Productivity & Management Review, Vol. 18, No. 2 (Winter, 1994), pp. 115-125 Published by: M.E. Sharpe, Inc.
Perry Moore Zero-Base Budgeting in American Cities Public Administration Review, Vol. 40, No. 3 (1980), pp. 253-258 Published by: Blackwell Publishing on behalf of the American Society for Public Administration
William C. Rivenbark and Janet M. Kelly Management Innovation in Smaller Municipal Government State and Local Government Review Vol. 35, No. 3 (2003): 196–205
Herbert P. Dooskin Zero-Base Budgeting: A Plus for government National Civic Review Volume 63 Issue 3 p. 118 – 144. 2007
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Janet M Kelly. 2003. The long view: Lasting (and fleeting) reforms in public budgeting in the twentieth century. Journal of Public Budgeting, Accounting & Financial Management 15, no. 2: 309.
SHERLEKAR, V.S. and DEAN, B.V., “Development of Portfolios in Large Technology Based Organizations” 1979
T.P LAUTH, (1980). Zero-base budgeting in Georgia: Myth and reality. In A. Schick (Ed.), Perspectives on Budgeting (pp. 114-132) Washington, DC: American Society for Public Administration.
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