Introduction to Budgeting

Overview

The operating budget is probably a municipality's most important work product. The budget serves a number of functions. At the most basic level it is a legal document that gives local government officials the authority to incur obligations and pay expenses. It allocates resources among departments, reflecting the legislative body's priorities and policies, and controls how much each department may spend. In most jurisdictions, the budget has evolved to include more than just financial data. Mission statements, goals, and objectives convey how budget decisions relate to a wider vision for the future of the municipality. A budget can also be an evaluation tool, comparing commitments made in the previous year's budget with actual accomplishments.

The Budget Process

All cities, towns, and counties have statutes that specifically outline the procedures for the annual and/or biennial budget process. The graphic below shows the general budget process for cities and towns. Counties have a similar overall process, although some of the roles and deadlines are a little different.

For more information, see our pages on:

• City and Town Budget Procedures
• City and Town Budget Calendars
• County Budget Procedures
• County Budget Calendars
• Biennial Budgeting

Tools for Developing Your Budget

For those new to the budget process, there are a few tools that you may find helpful. We have provided links to budget development resources and tools to assist with this important financial planning document.

MRSC Tools

• Budget Preparation Checklist for Small Entities
• Budget Document Scorecard
• Glossary of Budget Terms
• Sample Budget Ordinance
• 2024 Budget Suggestions

Other

• AWC and WFOA: Budgeting for Cities and Towns in Washington State (2002)
• SAO: Budgeting for Cash Basis Cities and Towns (2006) – Section E from Small Cities Handbook, Washington State Auditor's Office (SAO)

What Funds Must Have Budgets?

All cities, towns, and counties in the State of Washington must prepare a comprehensive entity-wide budget for all funds, including those funds for which appropriated budgets are not required and including estimates of the annual or biennial portion of continuing appropriations.

Typically, all general (current expense), special revenue, and enterprise funds must have an appropriations budget. (An appropriation is the legal spending level authorized by a budget ordinance or resolution.) Debt service and capital project fund requirements may be met by continuing appropriations contained in the enabling ordinance or resolution. Permanent funds are often subject to trust agreements and their use is restricted by such. Fiduciary funds are not generally subject to budget requirements.

Below are some rules by fund type. These definitions have been obtained from resources such as the State Auditor’s Office; if you are in doubt about whether or not to include a fund in the appropriations budget, we recommend including it.

Funds Requiring A Budget Appropriation

• General Fund (Current Expense) – All general funds must have an annual or biennial appropriated budget. These funds set tax levies and are therefore required by statute to have a lawful appropriation.
• Special Revenue Funds – Normally, special revenue funds must have a budget appropriation. The nature of a special revenue fund is that the funds are restricted, committed, or assigned to a specific type of activity but these accounting restrictions do not eliminate the statutory budget requirements for a lawful appropriation.
• Enterprise Funds – Typically, all enterprise funds must have an annual or biennial appropriated budget. It is important to note that if you have established separate managerial funds for capital projects in enterprise funds, you must appropriate on either an annual/biennial basis or on a project basis.
• Permanent Funds – These funds are typically subject to trust agreements and their use is restricted. However, when agreements allow for the expenditure of funds it would be prudent to include them in the appropriations budget.

Funds That May Not Require a Budget Appropriation

• Debt Service Funds – Appropriations for debt service funds are not normally required. While Washington State budget statutes do not exclude debt service funds from annual/biennial appropriated budget requirements, RCW 39.48.020 requires that all resolutions or ordinances authorizing the sale of general obligation debt must include an amortization schedule that fixes the annual maturities of the debt throughout the life of the bond. Accordingly, the bond resolution or ordinance serves as a perfectly adequate budget for the entire life of the issue. This also applies to installment purchases and lease purchase agreements.
• Capital Project Funds – These may be budgeted either on an annual/biennial basis or on a project basis. The budget statutes for cities and counties provide that most appropriations lapse at the end of the fiscal period, but that the lapses do not prevent payments on “uncompleted improvements in progress” (RCW 36.40.200). City statutes are also explicit about the unlapsed status of appropriations in capital project funds (RCW 35.32A.080, 35.33.151, and 35A.33.150). These statutes are interpreted to permit project budgeting of capital project funds. If your jurisdiction does not adopt a continuing appropriations budget for capital projects, it will need to include this in the annual/biennial budget.

Funds That Do Not Typically Require A Budget Appropriation

• Internal Service Funds – Based on the local government’s own policy, these funds are not subject to budget requirements.
• Fiduciary Funds – While these funds are not generally subject to budget requirements, there are some exceptions. Agency funds that are used to account for pass-through resources may require budgetary integration for adequate fiscal control over sub-grants. Additionally, trust and agency funds typically are not included in the comprehensive budget.

Budget Types and Methods

There are several different budget methods used by local government to achieve the goals and priorities of the community. It can be said that local government budgeting has had a succession of methods with each one emphasizing financial control, management, and planning in varying degrees.

Over time, local governments have used line-item budgets, program budgets, capital budgets, performance budgeting, budgeting for outcomes, and zero-base budgeting. The majority of local governments in Washington currently use a combination of program and performance budgeting.

Most recently, attention has turned to a priority-based budgeting model which is based on building the budget around the community’s priorities. For an example of priority-based budgeting process and timeline, see Clark County: Priority Based Budgeting (adopted in January 2017).

Here are just a few resources that explore these optional budget types:

• GFOA: Anatomy of a Priority-Based Budget Process (2011) – Expands on the model in budgeting for outcomes, using examples from cities and counties they have worked with, including Snohomish County. Redmond has also worked with GFOA in developing its "Budgeting by Priorities" process.
• OpenGov: Best Practices in Local Government Budgeting (2014) - Free registration required
• GFOA: Zero-Based Budgeting: Modern Experiences and Current Perspectives (2011)

Fund Level vs. Departmental Level Budgets

The budget authorizes and provides for control of financial operations. Upon adoption, the expenditure levels in the comprehensive budget are enacted into law through the appropriations ordinance (city/town/county) or resolution (county). Budget level refers to the level of detail as well as the level of legal authority that is authorized for expenditure during the budget period.

Budget levels may vary depending upon local policy, management practices, and the needs of your entity. These budget levels of appropriation typically come in two different levels: the fund level budget and the department/program level budget.

• Fund Level – This refers to an appropriation level at the broadest level of authority. A fund level budget allows for the greatest amount of flexibility and therefore requires monitoring throughout the budget cycle to ensure that actual expenditures fall within the various program or department projections that were established during the budget process. Fund level appropriations are typically used for special revenue, capital project, and enterprise funds. Depending on the entity, they may also be used for the general fund.
• Department/Program Level – This refers to a budget appropriation level that limits expenditures to department or program activities. During the budget development process the various program managers and department heads will prepare budget proposals that often fall within the same fund (general fund for example). These programs and departments may be appropriated at this level as a tool for managing the budget. In counties, where many of the programs and activities are managed by separately elected public officials, it is required that the budget be appropriated at these program levels. Examples of programs or activities that can be appropriated at the department level are:
  • Legislative
  • Executive
  • Clerk's Office
  • Finance Department
  • Police Department
  • Fire Department
  • Economic & Community Development
  • Parks & Recreation
  • Public Works

There is also a third alternative budget level known as the line-item level, but it is typically used as a management tool for monitoring the budget after adoption and not as a budget level appropriation.

Fund Balance

"Fund balance" has different meanings depending upon whether you are using it for budgeting purposes or financial reporting purposes. For budget development, fund balance is what is left over at the end of the year after all revenues have been accounted for and all expenditures have been recorded against the lawful appropriations of the budget period.

Cities are required to estimate what the beginning fund balance will be for the forthcoming budget year or more specifically, what the “unencumbered fund balance” is estimated to be at the close of the current fiscal year (RCW 35.33.051, 35A.33.050, 35.34.070, and 35A.34.070). In the current fiscal year this is called ending fund balance, which becomes the beginning fund balance at the start of the new fiscal period (January 1).

While estimating the beginning fund balance (ending fund balance from the previous year) is a requirement of the budget process, it does not necessarily need to be used for appropriations in the forthcoming budget. If all available resources are appropriated, then the fund balance at the end of the year would be zero and the fund would have to borrow operating cash to pay bills, which is a red flag and an audit concern.

Many jurisdictions have developed policies on how much fund balance should be maintained, often based on a percent of the fund's expenditures or revenues. For more guidance on this topic, including key questions to consider and examples of fund balance policies, see our page on Fund Balance and Reserve Policies.

What is a Balanced Budget?

A balanced budget refers to the budgeting concept that appropriations should not exceed resources available to cover these expenditures. Cities and towns are required to pass a balanced budget (RCW 35.33.075, 35A.33.075, 35.34.120, and 35A.34.120). The statute provides:

Appropriations shall be limited to the total estimated revenues contained therein including the amount to be raised by ad valorem taxes and the unencumbered fund balances estimated to be available at the close of the current fiscal year.

The county budget chapter does not address the issue of a balanced budget in the same direct manner that city statutes do. RCW 36.40.040 provides:

The revenue section shall set forth the estimated receipts from sources other than taxation for each office, department, service, or institution for the ensuing fiscal year, [...] the estimated surplus at the close of the current fiscal year and the amount proposed to be raised by taxation.

While the county budget process is different from that of cities and towns, the premise behind a balanced budget is the same.

It's important to note that a budget that may fit the statutory definition may not be fiscally sustainable. A balanced budget for some jurisdictions may include non-recurring resources such as unencumbered fund balance (also known as beginning/ending fund balance) to cover ongoing expenditures.

A more appropriate use of the term “balanced budget” should consider the concepts of a structurally balanced budget. The GFOA has issued a best practice for adopting a structurally balanced budget, which is described as a budget where recurring revenues are sufficient to cover recurring expenditures.

The definition of recurring revenues will differ for each local government entity depending upon the financial/budget policy that it adopts, but it is based upon the premise that recurring revenues can reasonably be expected to continue from year to year with some degree of predictability. The same can be said for recurring expenditures. Expenditures such as salaries, benefits, materials, supplies, and asset maintenance costs are examples of recurring expenditures.

A good example of a project used to provide a structurally balanced budget is:

• Shoreline Ten Year Financial Sustainability Project – City developed this project after finding its staffing and service levels unsustainable. City Council formed a subcommittee to address the problem and over the first quarter of 2014 held six meetings to identify options and alternatives which were then used to balance revenues with costs.

Budget Reserves

Governments should establish budget reserve funds to save money to finance all or part of future infrastructure, equipment, and other fiscal needs. Usually governments have their own policies and guidelines for budget reserves. The more common types of budget reserve funds are:

• Cash Flow Requirements: Sufficient cash on hand to satisfy cash flow needs.
• Rainy Day Funds: Provides resources when revenues decline due to economic downturn.
• Repairs and Improvements: Purchases for operating equipment and vehicles as they become obsolete.
• Capital Reserves: Provides resources to meet the objectives of the capital improvement plan.
• Contingencies: Funding for times of emergencies and disasters.

For guidance, including key questions to consider, links to best practices, and examples from local jurisdictions, see our page on Fund Balance and Reserve Policies.

Recommended Resources

• GFOA Budgeting Best Practices – See separate tabs for Budget Policies, Budget Process, Budget Document, and Monitoring and Performance Measurement
• GFOA Distinguished Budget Presentation Awards – Recognizes high-quality local and state government budgets
• GFOA Financial Foundations Framework – Information to help local governments create a financially sustainable organization
• Association of Washington Cities: Budgeting Basics – Series of 10 relatively short (5-12 minute) videos on budgeting basics
• MRSC: Washington City and Town Profiles – Click on a city or town for a link to its budget
• MRSC: Washington County Profiles – Includes links to each county's budget