Don’t settle for a fudge-it budget

By Eddie A. Jones
AAC Consultant

Remember David Cunliffe? He won the New Zealand Labour leadership in a coup, and then led them to a crushing defeat against the rampant National Party led by Sir John Key. His big criticism of the election year budget was that the much-vaunted surplus achieved by finance minister Bill English was a mirage based on craft accounting. Here in the U.S., we would probably make that statement saying something like “the budget is an optical illusion based on creative accounting” or “it’s just a bunch of bunk based on funny numbers.” Mr. Cunliffe said that Finance Minister English was “fudging it.”

No one, including county government, should hitch their operation to a “fudge-it budget” based on inaccuracies or a “Swiss-cheese budget” filled with holes of missing information. The term county budget refers to a calculated projection of revenue and expenses over a 12-month calendar year and should be compiled and re-evaluated on a periodic basis.

The importance of proper budgeting cannot be overstated. It is imperative that every county have county budget experts that understand fully the County Financial Management System [Ark. Code Ann. § 14-21-101]. Those experts should include the finance officers of the county, which encompass the county judge, county treasurer and the county clerk or comptroller. Some of the quorum court should become budget experts since enacting a budget and adjusting or amending the budget is ultimately their responsibility.

I understand that writing about budgets isn’t exciting. But you have read this far, so just stick with me. Many of you are only in your second year of your first four-year term and have a lot to learn. Don’t we all? Let’s start with some fun facts about budgets.

The word budget comes from the Latin bulga, meaning “small pouch.” In turn, this led to the French term bougette, a nickname for a bouge, or a leather bag or wallet.

The first use of budget relative to financial planning comes from a 1733 pamphlet, The Budget Opened by William Pulteney, the 1st Earl of Bath. He used the term budget to critique the government’s fiscal policy on tobacco and wine.

There you go. When you think of budgets, think of purses/wallets, cigars and wine. Stay with me now.

We all know we should eat healthy, get plenty of sleep at night, exercise, and be proactive with managing our finances. And yet we are a society that hits the drive-thru regularly, stays up too late to get up early, sits on the couch Netflix binge watching, and lives on credit cards. We want all the benefits without being disciplined enough to earn them.

I’m at least 40 pounds overweight, sleep and old age don’t mix, and I only run if I’m being chased by a bear or something of that magnitude. So, don’t look for my expertise on the first three things on the list. However, I do know a thing or two about county finance and budgeting. Through the years I have given dozens of seminars on county budgeting and written numerous articles on the subject. But most importantly I have decades of practical experience in developing revenue projections and expenditure plans for county government operations.

It is no easy task to run a county government — and we have 75 of them in Arkansas ranging in population from 4,739 to 399,125. Most counties struggle to provide everything they would like to provide their citizenry. Some struggle just to fund those things they are required to provide, especially around general operations, which covers so many areas of required services.

What are the required areas of service? They are these, as set forth in Arkansas law in Ark. Code Ann. § 14-14-802(a):

1. The administration of justice through the several courts of record of the county;
2. Law enforcement protection services and the custody of persons accused or convicted of crimes;
3. Real and personal property tax administration, including assessments, collection, and custody of tax proceeds;
4. Court and public records management, as provided by law, including registration, recording, and custody of public records; and
5. All other services prescribed by state law for performance by each of the elected county officers or departments of county government.

Everything else that a county can legally provide for its residents is secondary and can be found listed in Ark. Code Ann. § 14-14-802(b).

Every county in Arkansas should consider forecasting procedures that will result in more accurate revenue and expenditure projections to maximize services to your constituents. Given the funding constraints county governments face, accurate expenditure projections are more important than ever.

In making projections, either of revenue or expenses, use reliable data sources to inform your budgeting and forecasting. Data sources can include historical records, economic research to include trends and analysis, information provided by state sources, budget information provided by the Association of Arkansas Counties, etc. Using reliable data sources helps you avoid assumptions, biases, and errors that can undermine your budget planning. Neither data nor data sources are static, but dynamic and changing. So, you need to update regularly, verify their accuracy and analyze them critically.

Use appropriate tools in your budgeting work. Tools can include software applications, templates, and other methods that help you organize, visualize, and communicate your data and plan. Using appropriate tools can help you save time, reduce errors, improve consistency, and enhance clarity. But remember this; tools are not a substitute for your judgment, creativity, and intuition in developing a county budget.

I believe what we must do here in Arkansas to achieve better and realistic county budgets that will help put our counties on sound financial ground is use some good “common sense.”

• Understand the budget. Discipline yourself to spend the time to learn and understand the county’s financial condition — including the monthly flow of expenditures; the flow of revenues; the revenues available to a county; whether those revenues have been availed for your county; how those revenues can be spent; what you must fund; and what you don’t have to fund. In other words, get a handle on the county budget process and what’s available to you. Know the law inside and out to maximize the funding available in the most advantageous way for your county.
• Be creative in solving your problems. Many of us fall into the trap of doing things the same old way. Just because it’s always been done that way doesn’t mean it should still be done that way. There may be a better way. If there’s a better way, and you can stay within the law, then do it. Do what is best for your county but still provide services and compensate fairly.
• Leaders must be willing to make tough decisions. There are counties in Arkansas near financial collapse because tough decisions have been delayed too long — decisions that should have been made years ago to avert the current financial crisis. It does no good to bellyache about what should have been done four years ago but wasn’t. Make the decision now. Make a well-reasoned financial decision for your county. Don’t make some rash decision or a decision based on personalities. You were elected to make good, sound, and right decisions for all residents of your county.

One of the worst budget habits counties have developed is the reliance on one-time money for on-going expenses. It may buy a little time, but it is not the solution. A county that year after year develops a budget calling for the use of carryover fund balances and other one-shot revenues is a county that has repeatedly failed to address the recurring structural imbalance in its annual budget.

It must be difficult for many of you to imagine making a county budget without relying on the assistance of surplus dollars. It may be impossible to cut it out completely for counties that have historically used carryover fund balances to make the following year’s budget. But it can be done. That’s where discipline, creative problem solving and tough decision making come in. Counties will not become structurally balanced financially and have good positive cash flow until they refrain from relying on carryover fund balances and other one-shot money sources for ongoing budget expenses. This is most important for the two major funds of the county: County General and Road & Bridge.

If a county must rely partially on the assistance of surplus dollars, it needs to be a managed use. While one cannot ignore the external factors that force the issue of appropriating at least part of the carryover fund balances, there are things that can be done to mitigate the adverse effects of such a decision.

• Use one-shot money on one-shot expenses. Use it for infrastructure or capital items that won’t have to be replaced for a number of years. Don’t use one-time money for on-going operations.
• Keep a record of a multiple year trend of the available carryover fund balances. At most, the appropriation thereof should not exceed the county’s trend. And never appropriate the full 90 percent allowed by law of a carryover fund balance. Yes, the 90 percent Rule applies to carry-over balances (AG Opinion No. 1986-51). It is the building of a carryover fund balance that can and should become your county’s reserve for capital needs and emergency situations.

I’ve seen some great county budgets … but I’ve seen bad ones more often. Ones, that if I was presenting them for passage, I would have to say, “Now keep in mind that these numbers are only as accurate as the fictitious data, ludicrous assumptions, and wishful thinking they’re based upon.”

County budgeting is the process through which governments decide how much to spend on what, limiting expenditures to the revenues available and preventing overspending. A county must actively plan, manage, monitor, and enforce budget execution. I have many times defined a budget as a math problem where the answer is always “not enough.”

I realize this has not been a ‘magnum opus’ on county budgeting but hopefully it has provided some insight. I have said it before, but I’ll say it again. County budgeting is tedious, time-consuming and detail oriented. If you don’t care about tiny details, you’ll produce bad work because good work is the culmination of hundreds of tiny details. The world’s most successful people all sweat the small stuff.

When you see a county doing well, it means one of two things: (1) they have a ton of money and can blow it all at will, or (2) they have a budget and stick to it. Trust me … it is No. 2.