Local Government Budgeting: Linking Your Budget and Strategy

If your organization is weary of an eight-month budgeting process, ask whether the budgeting process helps it find value or whether everyone is just recycling budget requests from previous years. By tying budget to strategy, you can help staff better understand how decisions are made and create connections to the big picture as you work toward shared goals.

Local Government Budgeting Process

Whatever your budgeting approach, you can link it to strategy so people see the value in budget development. When you link budget to strategy, you can stop dreading the budget process and get inspired by it instead.

With regular management and meetings, a linked budget and strategy allows your organization to achieve its long-term priorities. In 2020, we conducted a survey among local governments to learn more about their budget and strategy alignment, reporting, and results. The results show the positive impact of close alignment between budget and strategy as well as consistent, regular reporting processes.

Here's how to align strategy and budget in your organization:

1. Start by clearly defining long term goals (the first step in building your strategic plan).
2. Define the budgeting process. Four options for approaching your budget: priority-based budgeting (PBB), zero-based budgeting (ZBB), budgeting for outcomes (BFO), and base budgeting.
3. Communicate strategy and budgeting process clearly to departments, and ensure department budgets link to strategy.
4. Compare previous budget to plans (not to continue previous budgeting process, but to check your assumptions).
5. Consider creating a StratEx budget: a separate, cross-departmental part of the bigger budget that designates strategic project funding.
6. Manage your budget within a strategy management cadence. Be aware of strategy reporting and decision making, revisit budgets after strategy meetings, and provide appropriate reporting for decision making.

Linking Your Budget to Long-Term Goals

Just like your strategy, your budget needs to be linked to your long-term goals. Once you’ve developed those long term goals, you can start to build your 3-5 year strategic plan and a 1-2 year associated budget. When building your strategic plan, involve your stakeholders, including staff and residents. Set bold, but realistic goals that take into account your organization’s strengths and weaknesses.

When creating the plan, align departments with the overall strategy. Each department should support the overall strategy, and departmental plans that tie departmental efforts to organizational strategic goals can make this alignment clear.

Any of the budgeting approaches below can link to your strategic plan. One size does not have to fit all; however, some are more comfortable fits depending on your organization.

Four Types of Local Government Budgeting

Different budgeting processes make it easy to link your budget to your long-term goals.

Priority-based budgeting

Priority-based budgeting (PBB) involves linking budget priorities to your strategic plan goals. PBB is driven by the idea that the initiatives and programs that support an organization’s priorities are those that should be funded by the budget. This data driven approach ensures that all funding dollars help the organization work toward its high-level goals and that program budgets are allocated based on true priorities.

If you have communicated your strategy well, and if you have a living strategic plan, your organization should already understand these goals, and thus priority-based budgeting is a natural outcome.

Zero-based budgeting

If you are using zero-based budgeting (ZBB), you take a similar approach: you build your budget from the ground up based on the priorities. However, with zero-based budgets, you don’t build off of last year’s budget; you start from zero, and then build from what you need. This might be a great approach for the current environment.

Zero-based budgeting helps to establish an organizational culture of ongoing cost management. It relies on increased visibility into what drives the costs of each budget item and requires setting aggressive budget targets going forward to ensure a balanced budget. Continuous reviews of cost management and performance are also essential to its success.

Budgeting for outcomes

Budgeting for outcomes (BFO) is similar to priority-based budgeting, but it focuses on outcomes the organization is working towards rather than priorities. Imagine your outcomes are either your strategic plan goals or the measurable results from your strategic plan. Budgeting for outcomes allows local governments to create alignment between what the public wants and what the governments provide.

A key tenet of budgeting for outcomes is a focus on what you want and how much you’re willing to pay for it (as opposed to assessing what you currently have and how much it costs). The process will demand a lot of reorganizing, but your strategy and budget will benefit as a result.

A good place to start with budgeting for outcomes is to look at how much funding you have and then ranking your goals based on priority. You can then allocate money to the outcomes with the highest priority and continue distributing money until the funds are spent.

Base budgeting

Base budgeting uses the current year’s budget as the baseline for the new budget. The current year’s budget and allocations are adjusted according to actual spending that has occurred throughout the year as well as inflation and projections for the upcoming year; this forms the basis of the new budget.

You may be starting to see a pattern in these budgeting approaches. We’re not saying they are the same; certainly, different organizations have seen different results and benefits from each. But with a little creative thinking, you should be able to guide your organization to linking its budgeting approach to the strategy management process.

Linking Budget and Strategy in Healthcare

Hospitals and health systems link budget to strategy the same way, often with two more approaches. A rolling forecast re-forecasts the next twelve months at the end of each quarter. It helps when conditions change quickly, though it takes more meetings and analysis to keep current. Initiative-based budgeting starts from each proposed initiative: identify its key drivers, such as revenue and reimbursements, patient volumes and the cost of delivering care, then model its financial and operational impact over time.

A StratEx Budget Example

A StratEx (strategic expenditure) budget sits above normal department budgets, such as Surgery and Rehabilitation, and funds the cross-departmental projects the strategic plan needs. Imagine a $5M strategy budget allocated 40% to state-of-the-art facilities, 30% to a well-trained workforce and 30% to cutting-edge research. Facilities get $2M: list every project that aligns with improving facilities, prioritize them and fund them in order. Training and research get $1.5M each. Norton and Kaplan first wrote about StratEx in their book The Execution Premium.

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