The fire service in America is in the midst of change. While the workload in many areas is moving toward an all-time high, the resources to perform the tasks are shrinking or, at best, remaining static. Fire chiefs are being urged to hold the line on costs, while facing increased service requirements.
It is hard to avoid the harsh glare of the spotlight that is employed by the people who fund fire department operations. Whether it is a municipal council or committee, a county board of governors, municipal administrator of the public themselves, each demands accountability in the expenditure of public monies. A properly designed budgetary system can work toward informing them all.
With all this in mind, one of the primary tasks facing every fire service manager involves the control of organizational resources. Even the smallest fire department must ensure that receipts are properly received and recorded. It must also account for disbursements to cover expenses. In the drive to manage fire financial resources, knowledge of budgeting and financial controls is essential.
Types of budgets
In its simplest form, a budget spells out needs of the community for a given period of time. While public sector budgeting techniques appear similar to those used in private industry, there are usually statutory requirements imposed by various levels of government.
Simply stated, budgets are a plan for future operations expressed in financial terms. It is crucial that the relationship between dollars and program be understood. All that a jurisdiction may wish to do hinges on the availability of adequate resources.
Budgeting usually calls for the CEO—be it the city manager, district administrator or mayor—to submit a proposal to the body having approval authority. They then review the proposal and approve, alter or veto it.
There are two basic types of budgets that a government will use in its daily operations—the expense budget and the capital budget.
Items of a recurring nature—salaries, fringe benefits, supplies and small equipment purchases—fall under the expense budget. These are items of operational expense that a fire administrator knows must be covered every year.
Those cases where the cost of a piece of equipment or project must be spread over a number of years fall into the capital budget. Fire apparatus is a costly item of fire department equipment. While some fire departments set up a line item in their budget for apparatus replacement, this is an area frequently cut by the governing body. While this is a decision that does not lie within the fire department, it has an impact on department operations and should be planned for accordingly. The same holds true for the location and building of fire stations.
Budgetary control systems
There are two basic budgetary control systems currently in use. They are the line-item budget and the program budget. While each has its advantages and disadvantages, either is acceptable to certain types of situations. The choice as to style is made by local government so that all departments can employ the same format.
The line-item budgetary system is the most familiar. In this type of budget, there is a line by line accounting for every penny to be spent. One line will cover salaries, while another will cover office supplies. Still another might cover fuel for apparatus and another, heating oil for the fire stations.
Advantages of the line-item system lie mainly in the area of control. No money is spent unless it is available in the appropriate line. All funds must be accounted for with a voucher indicating to whom the funds are disbursed, the date of the transaction and who approved the expenditure.
Line-item budgets are very simple to construct. The various classifications of expenses are set forth in a line-by-line format. Since these budgets cover a set period of time and allow a prescribed level of expenditure, they are easy to follow (unless a person wishes to spend more money than they have).
However, the very factor of control that makes the line-item budget so appealing to administrators, can act to stifle creativity and individual initiative within an organization. People become more concerned with counting pencils than developing new and innovative approaches to solving community fire protection problems.
Experience has shown that many government bodies opt for a line-item system because of the strong control it gives over the use of funds. This can stifle initiative and limit service flexibility in service delivery.
In a program budget, the desired outcomes are listed for the various departments and agencies of government. In addition to the outcomes, a mechanism for their achievement is presented and the cost is assessed for each program. In this way, it is easier to develop a cost-benefit profile for an agency on a program-by-program basis.
In this approach, managers are forced to look at their organization in terms of actions and activities. Resources can then be targeted to address the various elements that make up each individual program. In this way, the flow of dollars within an agency can be traced on an activity-by-activity basis. This can be a crucial element in making resource-allocation decisions during times of tight financial resources.
While the program budget allows a manager to see where the dollars are going, there are certain weaknesses that arise from the development of artificial measurements of programmatic success. Further, in many cases only costs are assessed and not the actual accrual of benefits to the jurisdiction. Managers are left to guess whether what they said would happen really did happen. Additionally, competing programs within an organization may use misleading figures to skew the study of performance in their operational areas.
The ZBB approach
A variation of the program budget has been developed that combines a line-by-line accounting of costs set forth in a programmatic format. This approach holds great promise for the fine-tuning of resource allocation decisions. The fire administrator using this combined program/line-item system is better able to see where dollars actually flow. When reductions are called for, a budget can be adjusted rather than dismembered.
Zero-based budgeting (ZBB) is an approach that originally arose from the private sector’s desire to eliminate unnecessary costs and steps in their production processes. Under ZBB an administrator is called upon to justify the expenses of their program every year. Departments are broken down into a series of decision units and the cost for each unit is developed.
Justifications are developed for each decision unit. If a program manager could show how separate decision units might be combined into a package, at a lower total cost, so much the better. Once these units and packages are put together, the effect of various funding levels for each is then determined. This approach makes sense though, because an administrator can fine-tune their programmatic options to secure the greatest overall amount of success for a given funding level. This is done by prioritizing the various decision unit and program packages. Once armed with this type of information, an administrator can maximize the benefit of whatever level of funding is eventually approved.
The problem with ZBB is that it leads to a great deal of paperwork, supervisory effort and intra-agency squabbles, as the various competing decision units fight for their share of the funding. Because decision units, rather than whole programs, are at the heart of the battle, it is difficult for administrators to maintain the proper focus for their agency as a whole. This, along with an inability to conduct a rational study of available alternatives, was found to be a frequent criticism of the ZBB approach.
The choice is yours
Computer simulations of various levels of program funding are also frequently used as forecast tools to help public administrators set levels of spending geared to a number of different revenue projections.
In fact, it is the wise administrator who develops a range of budgetary requests that can be changed to meet the flighty nature of government funding levels.
The line-item approach to budgeting remains the most frequently used format. While other forms of budgeting can be more effective, they require a lot of effort on the part of people in the communities that use them. It takes a lot of time and paper to document all of the effort that goes into justifying programmatic performance. The decision on which approach to use remains a local option. Ease of use, time available for budget formulation, level of control and need to achieve jurisdictional goals should be factors in which guide is the choice.
Next time around, we will look at the system for developing your local fire department’s annual budget.
