TOP-DOWN BUDGETING

One Approach to Controlling Government Spending

 

A financial crisis has engulfed State government.   Today, Governor Rowland announced his plan to reduce the state budget deficit which is expected to grow to $1 billion by next summer.  In addition to state employee layoffs, cuts will be made in municipal aid.  As concerned taxpayers, we must ready ourselves for the upcoming budget season where local town officials will attempt to increase our property taxes.  

We ask that you share with FCTO Members successful budgeting techniques you have promoted in your individual towns to control spending.   We welcome your ideas on  improving government operations which, in turn, have translated to a reduction in government costs.   

The ultimate goal of FCTO is the enactment of Connecticut Proposition CT 13, which is explained in detail on website  www.cttaxreform.com.   Until Proposition CT 13 is enacted, we encourage budgeting techniques which are geared to reducing spending (the root of all taxes).  

I am pleased to offer below one such budgeting approach which East Hampton and Hebron member groups have successfully used called “TOP DOWN” Budgeting.   FCTO believes that this approach has merit.  Through the utilization of Top Down Budgeting, greater control of government costs is given to the taxpayer and the out-of-control spending of town officials is curtailed.   

We appreciate the time which Peter Arcidiacono of East Hampton has dedicated to providing us with a detailed explanation of this budgeting technique.    Peter has also offered a computation form that allows you to compute a top down budget for your town. The form (as given) strictly applies to towns having non-regional school districts. The form for towns with regional districts is similar in concept but requires data from all towns involved. It will be provided in the near future.   If you have any comments, questions, or suggestions, Peter would be delighted to hear from you.  He can be reached at Parcidiacono@msn.com. 

A special thank you is extended to Peter for an exemplary presentation.

 

 

INTRODUCTION

FCTO supports controlled reasonable spending.  In our view, left to their own devices, local officials do not provide the desired level of control for a variety of reasons.  On the other hand, taxpayers need a budget philosophy that they can understand, endorse and rally around.

The top down approach to budgeting arises from a simple “fact of life” namely, that spending requests always exceed resources available. (even Alan Greenspan stated that in recent Congressional testimony). That being the case, some person or some board ALWAYS sets a limit on spending increases. Setting that limit is what is called a "top-down" approach to the budget. (Note that taxpayers impose a top down limit when they reject a budget at referendum saying in effect, “We will not spend that much”.  The State of CT also has a top down limit, but call it a spending cap.)

Local Boards apply limits but often don’t publicize them.  Instead, the public has the impression that all budget line items are thoroughly scrutinized by officials and only absolutely necessary items are asked for.  In reality, it is impossible for citizens serving part time on Boards to successfully debate the legitimacy of items with the full time professional “experts” requesting them.  The experts have too many details and are experienced advocates. The When making decisions the board member is ultimately forced to rely on the expert’s recommendation or on some personal bias/philosophy or on gut feel. In addition, each spending line item usually has a vocal constituency. Questioning or denying the item can result in emotional divisiveness in the town. As a result, there is often reluctance to deny spending requests. Instead, a disproportionate amount of energy is spent seeking additional revenues so that as many requests as possible can be funded.

Given that some imposed top down limit ultimately rules, the limit should be (1) established early in the budget process (rather than at the 11^th hour at referendum) and (2) based on a reasonable philosophy that the voters are likely to support. An early reasonable limit, provides officials with a challengeable yet manageable task, guides department requests, and avoids the need for significant controversial and disruptive budget cuts later.

 

 

APPROACH

To apply a top down approach, several basic questions need to be answered. What is the spending increase limit? On what rationale is it based? Does the public know of and support that rationale? The top down approach used in East Hampton and Hebron has been supported by voters in 16 of 17 referenda. The approach is reasonable, straightforward, and easily understood by voters. It is as follows:

1.      The focus is on a spending increase limit rather than a mill increase limit. Spending, not mill rate is the key. Getting spending right offers the taxpayer the possibility of low (even zero!) tax increases during good revenue years and keeps tax increases lower than they otherwise would have been in bad revenue years. On the other hand, selecting a target mill rate guarantees a tax increase every year.

2.      It is reasonable to allow a cost of living increase for current services (i.e. excluding debt service). To be objective, a consistent method of estimating the cost of living increase should be used. An average based on the 3 most recent calendar year values is used. Using an average avoids the more extreme fluctuations that may occur in any one year.

3.      It is reasonable to not spend 100% of new revenue from Grand List growth to help finance new programs. Rather, some should be reserved to benefit the taxpayer. Spending 80% is suggested. Again, a 3-year average for Grand List growth can be used to avoid large fluctuations. Or, if desired the actual Grand List growth can be used.

4.      It is reasonable to expect officials to improve the efficiency with which they provide basic services. A modest 0.5% improvement per year is considered reasonable. Retirements, consolidation, competitive bidding, computerization, etc can achieve this.

5.      To these amounts would be added changes in Debt Service and major new Capital projects that are not bonded.

6.      One can go further and add money to meet selected tax effort goal such as a given dollars per pupil goal or a given dollars per capita goal. This allows the approach to account for an influx of pupils or people.

7.      Finally, it is reasonable to add money to reflect the impact of extraordinary events such as 9-11 or CRRA. (Hopefully, these were one-time events.)

ADVANTAGE OF TOP DOWN APPROACH

1.                  It is straightforward and easy to develop.

2.                  It is based on a reasonable simple rationale that voters can understand.

3.                  It provides a dollar value and rationale that the voters can endorse and rally around.

4.                  It works with the budget "bottom line" and, thus, avoids potentially divisive and emotional arguments over specific line items.

5.                  It requires officials to develop efficiencies (perhaps even their raises can be tied to their performance in this area).

6.                  It provides early guidance to officials so that they can tailor (via prioritizing) their budgets to fit a level that voters will support. This avoids the need for late controversial "cuts".

7.                  It prevents disruptions to planning when budgets are rejected at 11th hour referenda budget defeats.

8.                  It saves money by avoiding multiple referenda.

9.                  It can help guide contract negotiations since unions will know what level of spending voters will support.

 

 

 

TOP DOWN COMPUTATION

The following example illustrates the type of results obtained by this approach for a 2003-04-budget increase for a hypothetical town.

1. Current budget:	$10,000,000
2. Debt Service:	$2,000,000
3. Current budget less debt service = Line 1 minus Line 2:	$8,000,000
4. Current mill rate divided by 1000:	0.02
5. Current Grand List:	$500,000,000
6. Cost of living percent increase (3 year average):	2.5
7. Grand List percent increase (3 year average or actual value):	3.0
8. Required percent improvement in efficiency:	0.5
9. Percent of new Grand List revenue to be spent:	80%
Spending increase for 03-04 budget:
10. Change due to CPI = Line 3 times Line 6/100:	$200,000
11. Change due to GL new revenue = Line 5 times Line 4 times       (Line 7)/100 times (Line 9)/100:	$240,000
12. Decrease due to efficiency = Line 3 times (Line 8)/100:	-$40,000
13. Change due to Debt Service:	-$50,000
14. Change due to major new unbonded capital projects:	$25,000
15. Change due to extraordinary events like 9-11:	0
16. Change due to maintaining or approaching a tax effort goal:	0

Total Increase:   $375,000 (3.75%). The new spending, except for portions identified for particular purpose (e.g. debt, major new unbonded capital, etc.), would normally be allocated on a prorated basis.