Step-by-Step Activities in the Budget Process

Now that the roles of all players in the budget process have been described, the next section of this guide will focus on explaining basic steps in the process. As stated earlier, each city has a slightly different approach to developing the budget document. Likewise, the document produced by each city will vary in appearance and complexity. This section describes the steps that are commonly taken in most Georgia cities in the development of the budget.
 

Step 1: Departmental Budget Request

Several months before the beginning of the next fiscal year, the budget officer notifies department heads of all requirements for the upcoming budget process. This can be accomplished through a meeting or workshop where the budget officer provides department heads with:
  • Instructions for submitting budget requests for the next fiscal year
  • Deadlines for all steps in the budgeting process
  • Year to date expenditures for each department
  • Departmental budgets from previous years
Departmental budget proposals should include requests for personnel, operations, and capital needs for the upcoming year. Personnel requests include the salaries, benefits, and any other costs related to current or expected new employees. If a department head anticipates hiring for new positions, a justification should be provided for the additional employees and the salary for those positions. Operating expenses are the costs for everyday operations within the department and include all costs related to the provision of service and supplies. Capital outlays include equipment or other tangible property that a department needs to purchase which exceeds a given dollar amount and expected lifetime. These budget requests may be determined using several different methods including:
  • An incremental approach based on costs from recent years with small changes
  • Yearly adjustments for inflation
  • Internal Service Funds – City predetermines the cost of support activities and sets aside that money each year for all departments
  • Standard Costs – Estimated cost of supplies for one employee multiplied by the number of employees
Some cities operate with council committees responsible for the oversight of assigned departments within the city. If so, the chair or full committee may be involved with the budget request which they oversee along with the department head.
 
Click here for a Sample Cover Memo with Instructions for Forms for Department Heads and here for two Sample Budget Request Forms for Department Heads. In addition, the table below is a Sample Line-Item Departmental Budget Request Form (adapted from an Athens-Clarke County budget document):


Step 2: Budget Officer Review

Once all departments have submitted their budget requests, the budget officer is responsible for reviewing them. The budget officer must understand the management and fiscal policies of the city, the financial condition of the city, and the political climate that influences the budget process. The budget officer creates a single budget spreadsheet based on the requests from departments and the direction given by the governing body. Expenditure details in this spreadsheet will include information on prior-year actual expenditures, budgeted expenditures for the current fiscal year, actual (estimated) expenditures for the current fiscal year, and a recommendation for the new fiscal year. This detail will provide the city manager/administrator and elected officials with a snapshot of spending in recent fiscal years and gives some perspective for the budget request. The form below is an example for a Line-Item Worksheet (adapted from an Athens-Clarke County budget document):


Step 3: Revenue Projection

The budget officer and finance department for the city is responsible for predicting the revenue sources and amounts for the upcoming fiscal year. Cities may rely on several different types of revenue including:
  • Property taxes
  • Sales taxes
  • Excise taxes
  • Service charges and fees
  • Fees for licenses and permits
  • Fines and forfeitures
  • Intergovernmental revenue
Most general fund revenue estimates involve a thorough examination of historical revenue data, taking into account economic and financial conditions in the city, making various assumptions about collections in the upcoming year, and applying good judgment. The best guidance for projecting revenues in any category is to be conservative in making estimates. It is much better to project a revenue number that is too low than one that is too high, which would result in a deficit. A Sample General Fund Revenue Chart can be seen below:

Several different forms of revenue estimation may be needed to accurately predict revenues for up to 18 months in the future. The following table lists revenue estimation models used by some local governments. Regardless of which model your city uses, it is helpful to know about the techniques available for use in completing this task.
 
Revenue Estimation Models
Educated Estimation
An estimation based on recent revenue levels and any changes that would affect the revenue stream, including demographic trends, revisions to tax regulations, changes in tax or fee enforcement, and economic cycles. Forecasters often must make an educated guess with the information they have available.
Deterministic Spreadsheets Uses equations with known coefficient values, such as the city millage rate, to model the assessment and valuation of a particular tax or fee.
Break-Even Analysis
This model uses the break-even point, the point at which revenue received equals the costs associated with receiving the revenue, to assess the cost-effectiveness of government programs, as well as to structure fees and rate schedules.
Different Forms of Averaging Revenue estimates are made by averaging data points from a dataset of historical revenue information.
Trending Methods Estimates future revenue based on a relationship between the actual revenues for past years and their comparable forecast estimates.
Linear Regression Analysis Uses historical data to form a mathematical relationship between past revenue levels and one or more explanatory factors; this relationship is then used to estimate expected future revenue levels.
Systems and Models of Regression Equations A complex forecasting technique used to combat the growing size and contribution of revenue sources, whereby several linear regression equations are linked together into a system with a multitude of factors to explain economic conditions.

For the easiest review, revenue and expenditure data should be entered into a computer spreadsheet in a line-item format. A history of prior-year actual revenues should be included in this chart to show the trend in revenues for the previous two or three years compared to the current revenue estimate. Revenues and expenditures are balanced before an executive review of the budget. See below for a Sample Balanced Budget Summary:



To develop a financially sound budget that will withstand economic fluctuations, generally accepted budgeting and finance practices recommend that city officials should attempt to diversify revenue sources so that they do not become overly dependent on one particular revenue source. Cities should also routinely evaluate revenue and fee levels to make sure they are maximizing revenues from all sources. The four basic considerations cities should make when deciding how to pay for city services are:
  • Acceptability – city officials should consider how the community as a whole would be impacted by and react to the city’s use of a particular funding source.
  • Stability – city officials should attempt to maintain revenue sources that will remain stable regardless of economic fluctuations or political changes.
  • Self-Sufficiency – cities should not become overly dependent on state or federal grants to fund services.
  • Cost Efficiency – city officials must constantly perform a balancing act with revenues to be sure that the best quality of services is provided most efficiently.

Step 4: Review by City Manager, CAO, and/or Mayor

The “first draft” of the budget is reviewed by the city manager, CAO, and/or mayor, whose primary goal in the budget review process is to make sure that the policies and priorities set by the mayor and council are met. The executive will review recommended departmental budgets to ensure that each one is appropriate and not excessive. Department heads may be asked to sit in on the budget review process at this stage to explain any major increases or decreases in budget requests. The executive’s goal is to anticipate any questions the council may have and prepare responses to these questions. Adjustments to the budget are entered by the budget officer, and the modified budget is prepared for review by the mayor and council. Some cities may use a finance committee to review and make budget recommendations before submitting a proposed budget to the city council. See the table below for a Sample Departmental Budget:


Step 5: Legislative Body Review

The manager will explain how the mayor and council’s priorities are being met through the recommended budget. The presentation should also include an explanation of any changes in the millage rate or anticipated changes in other revenue sources. At this time, the city council may choose to add or delete items from the budget or make other adjustments. The city council seeks to adopt a balanced budget that fulfills its established goals. See the table below for a Sample Departmental Budget (Annotated for Executive and Council Review):


Step 6: Budget Public Hearing

The requirements for advertising and conducting public hearings for local government budget adoption are listed in O.C.G.A §§36-81-5 and 36-81-6 and summarized below:
  • On the day that the proposed budget is submitted to the city council for consideration, a copy of the budget must be placed in a public location that is convenient to the residents and made available to the media, upon request.
  • During the week the proposed budget is submitted to the council the city must have a statement published in the local newspaper of where the proposed budget is available for viewing along with a notice of the date, time, and location of a public hearing for any resident to provide comments before the governing authority. The statement shall be a prominently displayed advertisement or news article and shall not be placed in that section of the newspaper where legal notices appear.  Notice shall be published at least one week before the public hearing.
  • At least one week prior to the meeting of the city council at which adoption of the budget ordinance or resolution will be considered, the city council must conduct a public hearing, at which time any persons wishing to provide comments on the proposed budget may appear.   
Click here for a Sample Public Notice and here for a Sample Letter/Request to the City Newspaper.


Step 7: Budget Adoption

At least one week after the public hearing, the city council may move forward with adopting a balanced governmental fund budget by ordinance or resolution at a public meeting advertised in a local newspaper (not in the legal section) at least one week before the meeting. To save on advertising costs, all notice requirements may be combined into one ad. It is also good practice to post the information on the city’s website. The format of the final budget and ordinance or resolution is up to the discretion of the city, as long as it complies with state law. Click here for a Sample Ordinance and here for a Sample Resolution for Budget Adoption.


Step 8: Budget Implementation

Once the budget is adopted and the new fiscal year begins, the plans outlined in the budget may be implemented. Department heads carry out their approved budgets, and appropriations are spent to deliver services. The city manager or budget officer is responsible for exercising general fiscal control over the budget, making sure department heads stay within their budgets, providing regular reports on budget activity to departments, and tracking actual revenues against forecasted amounts. Monthly budget reports are also provided to elected officials.

Budget implementation and monitoring systems vary in complexity among city governments. These systems allow city officials to:
  • monitor, adjust, and control spending
  • maximize effectiveness and efficiency, and
  • develop long-term revenue and expenditure strategies.
Even though budget implementation practices and terminology vary from city to city, they consist of five basic components:
  • Authorization – the law which permits spending for a specified purpose.
  • Appropriation – the legal authority to spend up to a certain amount during the budget period (in cities, the budget document is the source for most appropriations).
  • Allocations – used by the budget officer to provide further detail to the appropriations approved by the city council (e.g., lump-sum appropriations may need to be further divided into allocations for specific programs the department operates).
  • Allotments – divide appropriations or allocations (if any) into periods such as quarters or months of the current fiscal year (allotments help assure that money is available to fund operations throughout the year).
  • Adjustments – changes to the budget may be necessary as revenues and/or spending varies from the approved budget. Procedures for making adjustments vary from city to city. Unless provided in the city charter or by city ordinance, state law allows some flexibility to make minor changes to the budget while maintaining sufficient control over the use of resources.

Legal Level of Control

O.C.G.A. §36-81-3(d) states, “Nothing contained in this Code section shall preclude a local government from amending its budget to adapt to changing governmental needs during the budget period. Amendments shall be made as follows unless otherwise provided by charter or local law:
  1. Any increase in appropriation at the legal level of control of the local government, whether accomplished through a change in anticipated revenues in any fund or a transfer of appropriations among departments, shall require the approval of the governing authority. Such amendment shall be adopted by ordinance or resolution. Click here for a Sample Ordinance to Amend the Budget.
  2. Transfers of appropriations within any fund below the local government’s legal level of control shall require only the approval of the budget officer; and
  3. The governing authority of a local government may amend the legal level of control to establish a more detailed level of budgetary control at any time during the budget period. Said amendment shall be adopted by ordinance or resolution.”
The legal level of control means the lowest level of budgetary detail at which a local government’s management or budget officer may not reassign resources without the approval of the governing authority. Per O.C.G.A. §36-81-2 (14), the legal level of control shall be, at a minimum, expenditures for each department for which a budget is required.

Spending Authority

Every city in Georgia has its practice for spending funds appropriated in the budget, but generally, the following steps are taken:
  • Each department head has the discretion to obligate funds that have been budgeted. Competitive bidding is used to receive quality goods and services at the lowest price.
  • Department heads request/initiate a purchase order which identifies the items being purchased, the budget line item the payment will come from, and the name of the vendor who will receive payment. Click here for a Sample Purchase Order.
  • Purchase orders are verified by the designated procurement officer to ensure that all applicable protocols and laws are being followed.
  • Transactions are recorded according to the city’s accounting system for financial reporting purposes.

Expenditure Controls

Spending is subject to many limitations and controls beyond the procedures just described. The purpose of using budgeting practices and Generally Accepted Accounting Principles (GAAP) is to control spending and to generate a record of accountability that proves city funds are spent as directed by the mayor and city council.

Some of the most commonly used techniques to control expenditures include:
  • Line-item appropriations - spending is confined to very specific purposes (category) approved during the budget process. This technique is the most costly and time-consuming control measure, but it is useful if a situation is politically sensitive or there is (actual or perceived) potential for waste, fraud, or abuse.
  • Unallocated reserves – the city manager, acting through the budget officer, ensures that sufficient funds are set aside and available to meet expenditure demands throughout the year in the event of unforeseen circumstances.
  • Encumbrances – funds designated out of appropriations that can only be spent for specific purchases in the future and the funds are no longer available for other uses unless the encumbrance is canceled. A purchase order is the most common encumbrance and guarantees that sufficient funds are available for planned purchases.
  • Position control – this technique is used to ensure that all new personnel is hired only for positions that have been authorized and approved in the budget.
  • Ceilings and freezes – this technique is the final and most drastic control measure. Ceilings impose an arbitrary limit on expenditures for some or all purposes, while freezes represent a prohibition on further spending for some or all purposes. Usually, these measures are only used during severe fiscal or political crises.

Step 9: Auditing

The final part of the annual budget cycle is the annual external audit of all city financial records. The audit involves an examination of the city’s accounting systems, procedures, programs, and financial data from a city. The final product is a report issued by an independent auditor describing how well a local government’s financial statements describe its financial condition and the results of its operations.

Georgia law (O.C.G.A. § 36-81-7) requires cities with a population of over 1,500 or expenditures of $550,000 or more to complete an annual audit of all city financial statements. Cities with expenditures less than $550,000 are required to complete an audit every two years, and the audit must cover both fiscal years. In place of the biennial audit, cities with expenditures less than $550,000 may elect to prepare an annual report of agreed-upon procedures.

The auditor reviews financial statements to provide an opinion on the city’s financial condition, its control over financial reporting, and to test for the city’s compliance with provisions and requirements of federal, state, and local laws, regulations, contracts, and procedures.

The State Auditor has developed several documents to assist local government officials and certified public accountants performing audits and agreed-upon procedures for local governments to ensure that all audits meet state requirements. These documents can be viewed in the Audit and Accounting Resource Library.


Performance and Program Audits

Cities are not required to conduct performance or program audits, although some cities that employ management or financial analysts may choose to conduct them. Performance audits are designed to measure the efficiency of the performance of various activities in each department. Program audits are useful in evaluating the overall effectiveness of city programs. Both program and performance audits help city officials make better decisions about whether services and programs are worth the investment of revenues by the city.


Accounting Systems

Government officials entrusted with public resources have a responsibility to provide a full accounting of their activities. Accounting systems provide the tools necessary for city officials to assemble, analyze, track, and report financial information so that it can be used for planning, decision making, compliance, and control. The purpose of accounting is to provide financial information that is accurate, complete, timely, and can be understood by users. The four parts of an accounting system include:
  • Source documents and forms – include invoices, receipts, time and attendance reports, contracts, and purchase orders which record the details of every financial transaction including authorization for each transaction.
  • Journals – summaries of all transactions of a certain type in chronological order (e.g., payroll journals record all payments to employees).
  • Ledgers – based on the summary totals in journals, these show the balance in any revenue, expenditure, or other account at any given time.
  • Procedures and controls – include forms and instructions for classifying, recording, and reporting financial transactions in source documents, journals, and ledgers.

Financial Reporting Requirements: Uniform Chart of Accounts

In 2001, all local governments in the state were required to adopt and use the state developed uniform chart of accounts in their accounting records, audited financial statements including CAFRs, and reports to state agencies for consistency in reporting. They are also required to classify their transactions in conformity with the fund, balance sheet, revenue, and expenditure classification descriptions contained in the uniform chart. The Uniform Chart of Accounts is an evolving document, and cities should be aware of updates to the chart. The most recent update is available on the Department of Community Affairs’ (DCA) website.