Financial Management: A Balancing Act for Local Government Chief Financial Officers

Abstract

INTRODUCTION Citizens expect their governments to do needed activities but within fiscal constraints.1 Financial management seeks to carry out this fiscal imperative. The private economy generates the wealth that elected representatives of the public extract in part to provide for public goods and services. Public law prescribes the form of this taxation, the method of getting other forms, and the handling of these resources once they are in the custody of the public treasury. Further, the budgeting process offers a structured means for gaining a modicum of political consensus on how to address local goals for the upcoming fiscal period. Civic results, therefore, hinge on the jurisdiction's financial management. Managing local finance requires more than the accounting of funds, however. Chief financial officers (CFOs) have to do a fiscal balancing act within the local body politic, requiring strategic integration of budgeting, accounting, and financial management in pursuit of the public good. BALANCING PROCESS AND RESULT Public budgeting reflects the values of those involved in making the allocation. This means that there is no one best way to conduct budgeting or to judge the outcome. By default, the focus turns to the study of the process of budgetary decision-making and the results of those decisions. Looming on the near horizon, however, is a serious attempt by many to hold governments accountable for their service delivery and the accomplishment of articulated goals. The process of budgetary decision-making examines the relationship of participants and the sequencing of those decisions. Two broad theories capture that thinking: bottom up and down approaches to fiscal decision-making (LeLoup, 1988). Traditional bottom up budgeting emanates from fragmented decision-making with significant influence by program managers who build the budget from the bottom-up, one line-item at a time. Although both operating and capital budgets follow a linear sequence, the behavior of each budgetary actor relates to the behavior of others in the process (Kiel and Elliot, 1992; Forrester, 1993). Decision-makers, moreover, adopt simplifying rules to limit the scope of analysis. Stable fiscal environments allow relationships to develop and mature, often with recognizable rules and predictable results governing the budgetary debate. Despite its rejection as a general explanatory theory of budgeting (Berry, 1990), incrementalism retains a theoretical and practical grip on the field of local government budgeting (Hendrick, 1989, 1992a, 1992b; Rubin, 1992). In down budgeting, top leaders impose macro constraints, by that limiting the role of lower-level managers in setting fiscal goals. A program may receive notice that it will lose its funding or can only propose a budget of a certain level. This preempts a program's desire to define its own budget and offers an opportunity for more comprehensive thinking about broad fiscal policy, forcing micro-level tendencies to yield to macro goals. Besides, macrobudgeting offers a way to respond to resource scarcity since a dynamic environment interrupts routine patterns of decision-making. Macro-decisions, however, can imperil the fiscal health of a local government that otherwise follows fiscally-sound practices. Orange County, California, for example, declared bankruptcy in 1994 because of its aggressive investment practices. In 1996, the city of Miami, Florida, declared a fiscal emergency due to central finance problems. Traditionally, the results of budgetary decisions appear as dollar allocations. Incremental budget theory posits that history decides budget results, meaning that past funding levels are likely to extend into future allocations. Specifically, in a bottom-up process, the budget of each successive organizational level is an aggregation of lower level decisions (Hendrick, 1992b). In contrast, a centralized, top-down decision-making environment holds that primary decisions are on the total budget size and broad priorities and all other decisions flow from these macro choices. …