The literature on budget preparation is almost redundant in pointing out that librarians insist on sticking with the line-item format despite evidence it is the least effective means of developing the library’s case for support. Perhaps we don’t make the shift because we lack the understanding of the four major budgeting techniques – line item, program, performance, and zero-based – and thus can’t evaluate the usefulness to our institutions.
A group of librarians at the Montclair Public Library decided to ferret out the facts about the budgeting process for our own edification as well as for popular consumption.
We began by settling on a definition of the budget that was acceptable to all of us and then setting out a series of questions. We asked: Is the line-item budget the frequent choice because of its easy applicability? Do program or performance budgets offer better avenues for fiscal control? How? Can zero-base provide the framework for ranking programs so that resources are allocated to the top priorities? When we knew enough to conclude the answer to all of these questions was yes, the most basic question emerged: How do library managers decide what budget format is best for their organizations? We then got more specific: What are the distinguishing features of the four budget types? What are their notable differences? What are their advantages and disadvantages? What type of data is needed for each of the formats and how are they compiled?
A budget is variously defined as an itemized summary of probable expenditures and income for a given time period, usually involving a systematic plan for meeting expenses; a planning document used by an organization, generally prepared and presented in standard accounting formats emphasizing dollar revenues, expenditures, and costs; or an assessment of revenues that can be realistically anticipated. (Richard E. Wacht, Financial Management in Nonprofit Organizations. Atlanta: College of Business Administration, Georgia State University, 1987, p. 480; Ann E. Prentice, Financial Planning for Libraries, Metuchen, N.J. : Scarecrow, 1984, p. 27) We agreed, though, that the most useful definitions connects planning to control, by referring to budgeting as the process by which necessary resources are determined, allocated, and funded.
The logic behind the traditional line-item budget generally involves three steps:
- Last year’s spending level is extrapolated into next year.
- Last year’s level is incremented for increases in costs.
- The spending level is further incremented for new projects and programs. The underlying assumptions in the traditional approach are that all activities making up last year’s spending level are essential to achieving the ongoing objectives, strategies, and mission of the organization: must be continued during the coming year; are now performed in the most cost-effective manner.
This budget format is accounting-oriented and directed toward answering the question “how much?” The line items, or objects of expenditure, serve as the focus for analysis, authorization, and control. Total amounts requested and expended for broad categories—such as personnel, supplies, and communications—are calculated for the entire library, as the excerpted budget in Figure 1 shows.
Figure 1. The Line-Item Budget
Account code Object Actual Expenditure 1987 Request 1984 100300 Personnel 100301 Full Time $748,322 $800,705 100302 Part Time 110,212 117,933 100303 Overtime 8,240 8,817 200300 Benefits 200301 Social Security 51,959 55,596 200302 Pension 75,345 80,619 200303 Health Insurance 32,000 34,240 TOTAL PERSONNEL $1,026,084 $1,097,910 300300 Materials 300301 Books 26,250 28,040 300302 Periodicals 18,611 19,913 300303 Databases 21,816 23,343 300304 Documents 5,300 5,671 TOTAL MATERIALS $71,977 $77,015 400300 Supplies 400301 Office 5,250 5,618 400302 Computer 3,190 3,413 500300 Communication 500301 Postage 12,600 13,482 500302 Telephone 4,500 4,815 500303 Datalines 13,500 14,445 600300 Conferences & Dues 8,500 9,095 700300 Staff Development 4,000 4,280 TOTAL OPENING $123,517 $132,163 GRAND TOTAL $1,149,601 $1,230,073
Incremental budgeting projects line-item numbers as derived from expenditures of the year before. In Figure 1, the 1988 funding request was calculated on a 7% across-the-board increase over 1987.
There are advantages to line-item budgeting. Line-item budgets are simpler to construct than other formats and are easy to compute. The individual lines are clearly defined; they emphasize control and tradition; they are comprehensible; little added explanation is necessary. But, on the downside, line-item budgets do not stress the library’s services to the public. Rather, emphasis is on services or commodities to be purchased by the library. Cost centers are not identified. And there is not sufficient historical data with which to discern major cost trends.
The Program budget
The program budget begins with the library’s goals, and objectives and the derivative goals and objectives of each of the library’s services.
Richard F. Wacht states, “The concept of program budgeting emphasizes the long-range perspective, or goals, in which the single year’s budget allocation represents the results of specific short-range decisions, or objectives, made within the context of the multiyear plan.” (Wacht, p. 320)
Program budgeting is a technique that formulates spending plans and then make appropriations on the basis of expected results. Expenditures are plotted to reflect quantified objectives. The program budget is derived for each area of service within a department, then brought together for the department as a whole. Figure 2, for example, is built for Adult Services.
Figure 2: The program budget for adult services
Account Code Object Actual Expenditures, 1987 Request, 1988 100300 Personnel 100301 Full Time $140,971 $150,839 100302 Part Time 29,680 46,758 100303 Overtime 200300 Benefits 200301 Social Security 18,320 19,326 200302 Pension 13,840 14,352 200303 Health Insurance 10,303 11,028 TOTAL PERSONNEL $213,314 $242,393 300300 Materials 300301 Books 24,600 24,950 300302 Periodicals 14,760 15,245 300303 Databases 16,810 15,731 300304 Documents 4,500 4,500 TOTAL MATERIALS $60,670 $60,426 400300 Supplies 400301 Office 2,500 1,500 400302 Computer 2,109 1,100 500300 Communications 500301 Postage 10,010 11,011 500302 Telephone 10,308 10,300 500303 Datalines 18,402 13,462 600300 Conferences & Dues 4,210 4,210 700300 Staff Development 4,200 4,200 800300 Programming 8,250 8,250 900300 Van Maintenance 500 TOTAL OPERATING $59,839 $54,533 GRAND TOTAL $353,973 $357,352
The department’s budget is projected for the personnel, materials, supplies, communications, and other categories of expenditure necessary to meet objectives outlined for 1988. If one of the department’s goals is to make service accessible to all community residents, it might be a good idea to initiate selection and delivery for the handicapped, aged, and shut-ins. The steps involved for that program budget might include:
- Defining the program objectives for 1988 in terms of the output desired. For example: To establish within Adult Services a new selection and delivery service—called HAS—that reaches 20% of the community’s handicapped, aged, and shut-in residents in the first 12 months of operations.
- Delineating the major activities necessary to accomplish the objective. For example: Within the first month, assign the task of coordinating the service and initiate contacts with other agencies, including the Fire Department, to locate the target audience. Complete a needs assessment of the HAS clientele by the end of the second month. By the end of the third month, provide in-house staff training for those who will provide the service.
- Determining the nature and level of resources needed to support the activity. For example: One new staff member, a part-time professional librarian, is projected, assigned one-half time to coordinate the service and assist in fulfilling requests, creating patron profiles, and recording materials received; staff training can be accommodated with no increase over the 1987 allocation; delivery can be accomplished by streamlining current Branch trips. The materials needed are already incorporated into the library’s yearly acquisition program.
- Developing the budget requirements, given the resources defined in step 3. For example: The salary request for a new half-time librarian is projected at $15,000; there is no benefit package since the job is 15 hours per week. The prorated share of van maintenance is $500.
- Stating the requirements for all programs within Adult Services, using the same four-step process, as illustrated with HAS, then tallying the exact figures under categories common to all library operations and submitting them in one projected budget for the department.
Note that the program budget is not a formula approach. That is, unlike the line-item budget, the same percentage increase is not added to each 1987 line.
Program budgeting is a complex process. It is difficult to assign fiscal responsibility for programs that span several departments. And if goals and objectives are vague, the strength of the resulting data is vague.
But, clearly, when set out correctly, program budgeting can be much more useful than line-item budgeting. It not only provides the necessary data for costing out services based on objectives; it also provides historic data with which to assess cost trends.
The performance budget
While program budgets look at the expected results of services, performance budgets define the work performed to provide that service. Performance budgets emphasize output measures. Calculation of unit cost is added. Services are subdivided so that they can be described in terms of work input and service output. Program elements are broken down into their functions; activities into their individual work components. As Ann E. Prentice notes, performance budgeting helps administrators to “assess the work efficiency of operating units by: a) casting the budget in functional terms and b) providing work-cost measurements to facilitate the efficient performance activities.” (Prentice, p. 96)
One way to identify unit costs, as Figure 3 shows, is to divide the output totals for each program objective into the input costs. This is a simple but sometimes misleading method. A more accurate reflection takes painstaking measurements, as Michael Vinson’s article on costing the acquisitions function, on page 70, demonstrates.
Figure 3. 1987 performance and unit costs for adult services
Input allocated Service Program objective Output Unit cost $171,032 Reference Provide telephone and walk-in responses to queries 117,955 $1.45 $77,461 Reader's Advisory Provides assistance in selecting reading and other information sources 49,946 $1.65 $85,480 I & R Provide information on and referral to community agencies 40,705 $2.10 TOTAL $333,973 Adult Services Make services accessible to all community residents 205,604 x=$1.73
Because costing is explicit, performance budgets are useful in evaluating alternative means of carrying out the same activities. But, this technique does require a high level of accounting detail, time-consuming procedures to determine costs, and the capacity to handle more complex record keeping. Output measures must accurately reflect the key work performed in order to translate accurately into dollar requirements for support. For example, deriving unit cost for bookmobile costs inflates the cost per unit of service and disregards the more important and meaningful statistic in meeting program objectives—namely, the number of people served. In many quarters, these difficulties are combined with skepticism about the impact of performance data in the budget process; there is doubt that the level of effort results in a concomitant level of budgetary benefit.
The Zero-base budget
The Zero-Base Budget (ZBB) is popularly defined as an operating plan through budgeting that requires managers to justify their entire budget in detail from scratch – hence zero-base or cut back management – and to show why they should spend any money at all. This approach requires that all activities are identified in decision packages that are evaluated systematically and ranked in the order of importance (Peter Pyhrr, Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses, John Wiley, 1973, p. 5-7).
Wacht’s presentation of ZBB directs library managers to ask three questions: Should your area of responsibility be abolished? Can its functions be performed at a lower level of activity and remain as productive as last year? If your budget increases next year, will the incremental costs outweigh the incremental benefits?
There are four basic steps in ZBB:
- Identifying decision unit. Current departments, or major service components like Adult, Young Adult, Children’s, Reference, and Technical Services, are frequently designated as the decision units.
- Formulating decision packages. A decision package is a document that defines the activities of each decision unit, the activities of each decision unit, so that managers can compare it to other decision units competing for limited resources. Two types of alternatives are considered when formulating decision packages—different ways to perform the same functions and different levels of effort needed to perform the function. The levels are: the minimum necessary to achieve the most important objectives, usually calculated at 50% to 75% of the current level of support; the status quo, or support at the current level; the higher level, which projects an increase.
A series of questions is put to each of the library’s major services in creating decision packages: How many ways can the library’s objectives be accomplished? Which is the most effective way? What levels of functions and costs are possible? Following this review, the service’s activities are segmented into one of the alternative service levels—minimum, status quo, or increased.
- Ranking decision packages. Ranks are assigned by evaluating the cost of the decision packages and their order of importance in reaching the library’s objectives.
- Priority ranking of all decision packages. Following the initial ranking within the departments, the decision packages are forwarded to the appropriate managers, who merge them into a single list of prioritized packages.
For example, under ZBB, the program managers within Adult Services would each prepare a decision package and submit it to the head of Adult Services, who would combine them into a budget request such as the one shown in figure 4.
Figure 4: Zero base budget (ZBB) decision package
Then the head of Adult Services, together with his or her program managers, would rank all the Services’ decision packages and send them to higher management in a prioritized format, such as the one shown in Figure 5.
Figure 5. Decision Package Ranking
(1) Rank (2) PACKAGE NAME
(3) Cumulative (4) 1988 PROPOSED Positions Total Expended
Change Positions Total Expended
1 Reference 4 171,032 0 4 $171,032 2 Reader's Advisory 1 77,461 0 1 77,461 3 I & R 2 85,480 0 2 85,480 4 HAS 0 - 100% -
23,379 5 6 TOTAL 7 $333,973 7% 7
Next, the heads of all the major library programs, together with the library’s top administrators, would look over the entire group of decision packages and reevaluate them to establish a single priority for support for the entire organization.
ZBB adds priorities to unit cost data, all of which are presented in relation to goals and objectives. This technique calls for setting priorities within the base of the budget as opposed to using an incremental approach. But while prioritizing is appealing to many library managers, its worth is offset by the amount of paperwork required and the difficulty in identifying and justifying each activity. A good deal of time is consumed in documenting programs and in reviewing the documentation.
Which budget is for your library?
In retrospect, the four budget types represent a hierarchy of decision-making information, planning, documentation, and record-keeping. The program budget focuses the process on the service aspect of librarianship by linking goals and objectives to fiscal requests. The performance budget adds measures of efficiency or productivity to supply current cost data. ZBB includes the strong points of the first two techniques and calls for priority ranking and the assumption that not all current programs are worthy of continued funding. Each of the three can be turned into a line-item budget with little added effort. If the library must submit a line-item budget to the ultimate funding decision-makers, it can employ any internal format it deems appropriate and then make the necessary translation.
After careful study, we would conclude all four approaches to budgeting are needed to meet the many requirements of successfully representing the library’s case for support.