1

Modern budgeting is a relatively new concept. It

actually did not develop until the latter part of
the 19th Century.

The United States government did not have

a budget before 1900.

When people visualize a budget, often they

think in terms of accounting’s spreadsheets
with rows and columns, account numbers,
and amounts. In reality, the spreadsheets
are just the quantitative summaries of the
entire process.

Traditionally, public park and recreation

organizations viewed budgeting primarily as
an allocation process to disperse general
funds to cover the cost of operating
programs and facilities.
The primary budgeting tasks were to
2

 estimate future operating costs,

 allocate increases or reductions in general

fund moneys across alternative facilities
and programs,

 insure that spending was consistent with

what was appropriated.

Budget preparation and management is

vastly more complicated and strategically
important than receiving, generating or
balancing revenues and expenditures one
year at a time.
 3

Budgeting is a thoughtful, on-going,

decision-making process for allocating
resources and setting priorities and
direction.

It is strategic in nature, encompassing a

multi-year financial and operating plan that
allocates resources on the basis of
identified goals. (National Advisory Council
on State and Local Budgeting [NACSLB])

Budgets should be flexible multi-year plans

for receiving and monitoring different types
of revenues, and distributing specific
amounts of these revenues across programs
and facilities that produce benefits in
support of an organization’s mission and
objectives.
Budgets are operating and financial plans
4

that should establish and review an

organization’s goals and objectives. A
budget is the guide that determines the
direction of the organization. It is arguably
the single most important document
routinely prepared by an organization.

A budget should serve four major functions.

(Government Finance Officers Association
[GFOA])

 A policy document

The goals and objectives of the

organization should be identified and
described in the document. Financial
policy, particularly in the allocation of
resources, should be clearly explained.
 An operations guide
5


The budget should describe and explain

how an organization is organized and
operated. Objectives, performance
measures, and evaluations of performance
should be included so that an
organization’s operations can be
evaluated.

 A financial plan

The budget should explain the financial

structure of the organization and how
accounts are configured. The budget
should describe sources and amounts of
anticipated revenue and allocated
expenses.

In addition, the financial plan should

identify emerging problems and
opportunities that could enhance or
prevent an organization from achieving
6

goals and objectives.

 A communication device

 Budgets should facilitate stakeholder

understanding of different decisions and
supporting resource allocation

 Budget documents should provide

information that enables various
stakeholders to:

1. determine organizational purposes,

priorities, and future directions;

2. comprehend the rationale and the

likely benefits vs. costs for key policy
and programming decisions, e.g., type
and level of programs, facilities and
services;
 3. evaluate the allocation of resources
7

to current (operating budgets) and

future (capital budgets) programs,
facilities and services; and

4 relate spending with important public

needs and benefits.

Budgeting is essential to successful

management. It involves five aspects:

1 Planning

 determination of priorities and objectives

direction of resources to uses that will

favorably position an organization for
future success

 identification and evaluation of alternative

courses of action
 establishment of multi-year plans for the
8

development, financing, and assessment

of programs, services and capital assets.

2. Authorization of select programs and

expenditures.

3. Management

 programming of approved goals into

specific projects and activities,

 designing organizational units to carry out

approved programs,

 staffing of these units, and

 procuring necessary resources

4. Control
 9

 insuring that operating officials adhere to

policies, plans and spending
authorizations.

5. Evaluation

 monitoring and assessing budget and

program performance (e.g., variances,
impacts).

Strategic budgeting -- More and more it is

required that budget requests be linked to
strategic planning. This is referred to as
strategic budgeting.

1. direct resources toward accomplishing

feasible organizational objectives and
priorities,
2. better link financial planning and
10

operational decisions,

3. encourage organizations to consider

alternative approaches for meeting
current and future recreation needs,

4. actively involve different stakeholders,

e.g., users, special interest groups,
elected officials, in productive debate
concerning organizational direction and
priorities and alternatives,

5. help identify and anticipate the financial

and stakeholder implications of these
alternatives,

6. identify what is necessary, e.g.,

revenues, improvements, to both sustain
and create new programs, facilities and
services,
 7. provide a basis for evaluations and
11

performance reviews including measures

of operating effectiveness and efficiency,
and,

Review of budgets

 Public sector agencies are generally

mandated to let the public review and
provide input into the budget process.
Then the budget is submitted to their
official governing (legislative) body for
approval.

 Many non-profit associations make their

annual budgets available to interested
members and potential donors for public
relations purposes. Budget approval
usually is by a citizen board of directors.
 For-profit businesses typically develop
12

budgets entirely within their organization

and without external review. The budget is
finalized by top-level management and
reported to the corporate board or
owner(s).

When the amount of general fund support provided was inadequate to maintain or expand services, many
public park and recreation agencies pursued additional funding through grants and donations. Government
grants were often a primary source of funding for land acquisition and capital improvements. However,
continued reductions in general fund allocations, along with a more market-driven and benefits pay approach to
government provision of services, has required public agencies to use corporate partnerships and market-driven
ideas from the private for-profit sector, such as fees and charges.

BUDGETING AS A PROCESS

Budget processes incorporate many

activities and decisions that lead to the
development, implementation, and
evaluation of a plan for the provision of
programs, services and capital assets.

However, many park and recreation

organizations still view and approach
budgeting as an isolated annual event
rather than a continuous and connected
13

process.

More attention is focused on the "behind

closed doors politics," negotiating, and
gamesmanship often associated with
budgeting, rather than the strategic and
analytical aspects.

Effective budgeting processes are often

described as having the following
characteristics:

 Defines, verifies and re-defines

organization objectives and priorities

 Is both present and future-oriented

 Simultaneously focuses attention on

expenditures and outcomes
 Identifies populations to be served,
14


standards of performance, full costs, and

expected benefits

 Recognizes and responds to local politics

 Enhances coordination across divisions

and functions

 Connects and supports other planning,

operations, and performance evaluation
functions

 Characterizes the linkages between

expenditures, organization objectives and
stakeholder benefits.

 Actively involves internal and external

stakeholders in identifying priority needs,
evaluating current performance, and
developing alternative approaches for
addressing these needs
 Generates information, builds in flexibility,
15


and offer incentives to encourage

managers and staff to enhance efficiency
and effectiveness

 Is in compliance with state and local laws

and regulations

 Produces understandable information and

documents that communicate and guide
implementation and evaluation of budget
decisions

Budgeting process (National Advisory

Council on State and Local Budgeting
[NACSLB])

1. Establish broad goals as guidelines for

decision making.

 Develop an understanding of the

condition of the community, and trends
and issues that may affect it in the future.
 16

 Assess stakeholder issues, concerns,

needs, and desires.

 Assess community needs, priorities,

challenges and opportunities.

 Identify opportunities and challenges for

government services, capital assets, and
management.

 Develop broad program, facility and

service goals.

 Disseminate goals and directions to

stakeholders.

2. Develop approaches to achieve these

goals.

 Develop financial policies.

 Develop policy on fees and charges.

 17

 Develop policy on revenue

diversification.

 Develop policy on contingency planning.

 Prepare policies and plans to guide the

design of programs and services.

 Prepare policies and plans for capital

asset acquisition, maintenance,
replacement, and retirement.

 Develop programmatic, operating, and

capital policies and plans.

 Develop programs and services that are

consistent with policies and plans.

 Develop programs and evaluate delivery

mechanisms.
  Develop options for meeting capital
18

needs and evaluate acquisition

alternatives.

 Identify functions, programs, and/or

activities of organizational units.

 Develop performance measures and

benchmarks.

 Develop management strategies,

 Develop strategies to encourage

attainment of program and financial
goals

 Develop mechanisms for budgetary

compliance

3. Develop a budget consistent with

approaches to achieve goals.
 Develop (comply with) a process for
19


preparing and adopting a budget

 A budget calendar.

 Budget guidelines and instructions to

departments and divisions.

 Mechanisms for coordinating budget

preparation and review.

 Procedures to facilitate budget review,

discussion, modification, and adoption.

 Identify opportunities for stakeholder

input.

 Achieve stakeholder buy-in to the overall

budgeting process.

 Involve stakeholders early in process

 Develop and evaluate financial options.

 20

 Prepare projections of different

revenues.

 Prepare expenditure projections.

 Compare revenue and expenditure

projections and options.

 Develop a capital improvement plan.

 Explain the budgetary basis of

accounting.

 Prepare a budget summary.

 Present the budget in a clear, easy-to-

use format.

4. Monitor and analyze performance:

budget-to-actual performance;
performance of programs
 and facilities.
21

 Monitor, measure, and assess

performance.

 Budget-to-actual revenues and

expenses.

 Program performance.

 Stakeholder satisfaction.

 Capital program implementation.

Calendars and Timelines (Budget

Cycle)
Organizations usually develop a schedule
22

for their budget process that includes a

budget development sequence or cycle.

 Public agencies and non-profit

associations, the review process usually
includes internal review and public input
opportunities.

 For-profit operations generally do only

internal reviews, though in some cases,
external lenders and investors may be part
of the process.

Budget Instructions and Policies

Instructions are the directive which sets the
parameters and guidelines for preparing the
budget, and usually include a cover letter
from the top executive to those managing
the various functions which have to prepare
budgets .
It summarizes the approach and
23

expectations

Enclosed/attached then will be a document

with the major budget policies, such as the
budget target policy/reduced base
budgeting/increased budget flexibility;
strategic planning and performance
measurement; budget preparation
procedures; budgeting for information,
technology; federal funding; statutory
language; due dates/budget submission
procedures.

Types of Operating Budgets

Budget formats can have a significant result

on budgeting results
A line-item budget focuses attention on
24

items of expenditure, and not on purposes,

alternatives, or what is intended in terms of
accomplishments, the value of activities
that are rendered the public or the degree
of efficiency with which activities are
conducted.

It supports hierarchical authority and control

and encourages micro-management rather
than strategic management.
A program budget, the emphasis is much
more on planning, program purposes and
cost-effectiveness. A program budget brings
more attention to program levels and
alternatives.

The zero-based budget (ZZB) is often

referred to as a priority-based budget
because it requires a comparative
assessment of input and outputs of existing
and proposed programs and facilities
 25

A performance budget links the resources it

takes to produce certain outputs, with the
focus on the product costs as related to
objectives..

OPERATING BUDGET - Line-item budgets

1. Line-item budgets support legislative and

hierarchical control over government
activities and allocation of resources.

2. Attention is diverted away from what is

to be accomplished by the spending, the
long-term implications and costs, and
whether the spending contributes to the
organization’s purpose and stakeholders’
satisfaction.

3. Line-item budgets are disaggregated

and reported as income and expense lines
 into specific categories and groupings
26

called accounts.

4. Budget allocations are made for each

account and there are often statutory and
administrative controls that limit and
restrict reallocation from one line item to
others.

5. Easy to understand and control and

therefore are preferred and perpetuated
by many elected officials

6. . They also have the political advantage

of focusing attention and debate on
budget details (e.g., why do we have to
mow the fields so often?) rather that more
substantive and difficult to arrive at
decisions (e.g., should a program continue
at any level?).

7. They also make it politically easier to

reduce budgets because there is no clear
 understanding of the implications and
27

impact of specific reductions on different

stakeholders.

8. A major weakness of line-item budgets is

that the focus is on items of expenditure
rather than goals. Individual items can be
debated and decided without considering
the entire program, or implication of that
decision on the overall program

9. One continuing weakness of line-item

budgeting is that it does not require, or
support the evaluation of programs, or
decisions relating to curtailing or reducing
levels of support to current programs and
facilities. Line-item budgets often
perpetuate the status quo.

10. Line-item budgets also encourage

certain strategies on the part of those who
 prepare and review budgets that may not
28

result in efficient allocation of resources,

such as:

 never ask for less money that your are

currently allocated,

 spend all the moneys that are allocated,

 never encourage legislative or central

office scrutiny by suggesting major
changes in programs,

 ask for more than is needed to provide

budget reviewers something they can
suggest to be cut,

 eliminate request for new personnel or

capital expenditures that will be a
continuing expense and

 allocate reductions and increases equally

across departments.
 29

Program Budgets

1. Program budgets redirect attention away

from only expenditures to the purpose,
benefits, beneficiaries and performance of
programs and facilities.

2. Program budgeting links expenditures

with organization policy, objectives, and
impacts.

3. In its simplest form, program budgeting

consists of identifying projected revenues
and items of expenditures for distinct
programs.

4. A program can be defined as a specific

group of activities that are organized to
meet a distinguishable goal.
5. There are advantages to even the
30

simplest forms of program budgets. They

can

 communicate better how resources are

allocated and expended within an
organization and
across various programs,

 provide a comparison of the costs of

providing different programs and facilities,

 allow a better understanding of the

programmatic implications of proposed
budget cuts,

 identify the extent to which fee-supported

programs are covered by the fees that are
generated.

More sophisticated program budgets

 31

(1) requiring identification of program

objectives, full costs, benefits, and
beneficiaries,

(2) encouraging consideration of alternative

approaches (e.g., program levels and
delivery approaches)

(3) facilitating cost-benefit evaluations and

comparisons.

Program budgets should be much more than

spreadsheets or line-item budgets for
individual programs

 a program description including: current

delivery approach, program objectives,

 outputs identified along with output

beneficiaries.

 expenditures associated with the outputs.

 32

 performance measures:
 workload - number of participants, acres
of parkland managed, number of teams
in a league, number of program
participants
 efficiency - cost per acre of parkland,
staff per participant, use of community
centers
 indicators - number of satisfied users,
skills acquired, enhanced self-esteem

 alternative approaches for delivering the

program, facility or service

Zero-based Budgets (ZBB)

ZBB entails a continuing review of existing

and proposed programs and facilities in an
effort to
(1) determine whether existing programs
33

and facilities should be continued in light

of changes in external environment,

(2) assess their relevance and contributions

with future organizational priorities and
capabilities,

(3) assess the organization’s capacity to

continue the program at acceptable levels

(4) increase the efficiency of resource

allocation across existing and new programs
by making adjusting approach and
methods.

ZBB involves the following steps:

1. clarification of program goals and

planning assumptions, e.g., future
demand, alternative opportunities,

2. identification of decision units,

 34

3. development of activity-decision
packages including: description of the
activity, organizational goals supported
by activity, alternative levels and
approaches to providing the
activity/facility/service performance
measures and the implications of
alternative funding, e.g., benefits and
costs of more or less of service,

4. ranking of decision packages,

5. decide allocations based on ranking,

6. execute and evaluate program

performance.

For example, a swimming pool operation

might present three alternate budgets.
Alternate one would operate the pool from 9
AM until 6 PM daily except Saturday for a
total cost of $25,000. Alternative two would
operate the pool from 9 AM until 6 PM every
35

day of the week for $30,000. Alternative

three would operate the pool from 9 AM until
9 PM every day of the week for $36,000. The
last alternative could be to close the pool
and rent much less time from other pools
operated by other organizations for $10,000
Using this information and information on
other program and facility decision
packages, decision-makers can compare
and rank decision packages, and then build
an overall budget choosing preferred levels
of service and costs for each operation.
They might choose to operate the pool for
longer hours and shorten the hours for other
operations.

Revenue Budgets
Many park and recreation organizations,
including government agencies, are now
more dependent on a greater variety of
revenue sources, including fees and
charges, grants, donations and product
36

sales.

It is important that organizations, especially

ones whose operations are sensitive on the
timing and amounts of alternative sources
of revenues, employ different methods for
projecting and monitoring revenues.

In some organizations, the projections of

available revenues, not needs or goals, are
the base-line for budgeting. A revenue
budget anticipates the types, amounts and
timing of revenues for different budget
periods.

Some organizations forecast revenues

budgets for three to five in the future in
order to assess the need for additional
efforts to generate additional revenues
and/or diversify revenue sources.
 Most often revenues projections are
37

performed by:

(1) examining past revenue performance,

e.g., sources, amounts and timing,

(2) identifying internal and external factors

that are correlated with and have the
most influence on revenues,

(3) making assumptions relating to the

future condition and behavior of these
factors

Cash-flow Budgets
Although cash-flow budgets are a form of
operating budget, the emphasis is not on
expenditures, but on the amounts and
timing of cash in-flows and out-flows.
Cash flow is the amount of cash from
38

various sources coming into and going out

of an organization during a specified period
of time.

If available cash exceeds out-lows there is a

positive cash flow. Conversely, when cash
expenditures exceed cash on-hand, then
cash flow is negative.

Cash-flow budgets assist in

(1)projecting the amounts and timing of

cash flows,

(2) predicting periods of expected cash

surpluses and deficiencies, and

(3) identifying possible strategies for

dealing with shortages and surpluses
Performance budgeting
39

Performance based budgeting is a system of

budgeting that links inputs, resources
consumed by the system, to outcomes, the
extent that results have been achieved
relative to customer or program objectives.

With defined outcomes and outcome

measures, the organization is able to make
more informed decisions which reflect the
needs of the public and the best
stewardship of its resources.

Integral to performance budgeting are

workload measures (a work plan that
justifies the budget total), cost and output
measures (a basis for comparing the cost
and quality of services, whether service
delivery is efficient and economical), and
outcome and impact measures (to check to
what extent programs are achieving their
goals).
 40

Capital Budgeting

Capital and operating budgets are usually

separated because:

1. they differ in their sources of funds,

2. the decision-making process,

3. time-frame,

Capital items have the following

characteristics:

 They provide relatively large benefit to the

organization that accrues over a period
longer than a year. They can increase
capacity, such as adding sports fields or
additional community center space, and
improve operating efficiency, such as a
new bus or tractor will have fewer repairs
and perhaps even lower fuel consumption
 rates. New computer systems can increase
41

the operating efficiency of an organization

by automating tasks.

 They are usually difficult to reverse once

started. Once construction has begun on a
community center, it takes great effort to
change or greatly modify the plan.
Likewise, once a new vehicle or computer
system has been purchased, it is relatively
difficult to go back and start again.

 Due to the expense and effort required to

develop capital projects, they usually have
a more formal review process than that
used in operating budgets.

Function and Purpose

A plan, processes, and criteria to insure the

strategic and cost-effective acquisition,
replacement, and retirement of capital
42

resource.

These plans identify priorities and timing

for acquiring capital based in consideration
to long-range organization and client needs
and goals, alternatives acquisition methods
(e.g., purchase, lease, contracting) for
acquiring capital assets, and funding
implications.

Capital acquisition and improvement

planning should provide a linkage between
service/programs and capital acquisition.

Capital budgeting can also be employed to

better understand the implications of
proposed new programs and facilities once
they are fully implemented including
affordability of programs and the "return-on-
investment" compared to other
opportunities.
 43

Purposes of capital budgeting are to:

1. assess and compare the likely impacts

and performance (e.g., additional
revenues, cost savings, improved
customer service, increased capacity)
and financial requirements of alternative
capital projects,

2. determine and clarify the relationship

between proposed capital projects and
priority programs and facilities,

3. forecast the financial requirements,

4. evaluate whether different capital

projects, and alternative procurement
and financing methods comply with
policies, and
 5. identify the "best" (e.g., affordability,
44

return-on-investment) possible
investments .

Decisions relating to existing capital should

be based on:

 contribution and support of program and

service goals and objectives;

 the future capacity and capability of the

organization to deliver priority programs
and services;

 regulatory and performance requirements

acceptable condition/performance,

 replacement criteria, full-life costing,

return-on-investment; and
 linkage of acquisition and replacement to
45

goals and performance requirements of

programs and facilities.

Evaluating Alternative Investments

Organizations should maintain lists of

prospective capital projects consistent with
mission and objectives.

1. Determine whether the project is an

independent investment or a mutually
exclusive investment.

A project is an independent investments when

an organization chooses to accept or reject a
project regardless of action taken on other
projects.

An example of an independent investment

might be a citizen offering to donate a particular
parcel of land to the city for use as a nature
area.
The city evaluates the land, development costs,
46

operating costs, community needs, and

potential benefits then accepts or declines the
gift. Accepting or rejecting the new park has no
impact on other projects.

Mutually exclusive investments are projects

where only one of a group of alternatives can be
chosen.

An example of a mutually exclusive project

occurs when a city wishes to purchase a new
van for the recreation department. They
consider a Ford, a Plymouth, and a Chevrolet.
Each of these alternatives is evaluated on such
things as purchase price, operating costs,
capacity, comfort etc., then only one alternative
is selected for purchase.

When evaluating mutually exclusive

investments, two relatively simple to calculate
criteria can be used along with several more
sophisticated methods: cost/benefit analysis,
payback period, and internal rate of return.
More sophisticated evaluation methods also
deal with the timing of cash flow and
47

discounting the future value of money. These

calculations use net present value calculations
to discount future cash flows.

1. Cost/Benefit Analysis.

In a cost/benefit analysis, the costs of a

particular project are estimated, quantified and
totaled, and the benefits are measured. The
total benefits are then compared to the costs of
the project.

Independent investments are generally

considered good investments if the cost/benefit
ratio is greater than 1. This indicates that
overall the benefits outweigh the costs for that
particular project. When evaluating mutually
exclusive investments, the alternative with the
greatest ratio of benefit to cost would be
chosen.

2. PAYBACK METHOD
Payback Method works on the length of time it48
will take to recover the cost of the purchase
from earned net income (after taxes).

For example, replacing old equipment with a

newer model-total cost will amount $28,000,
you’re convinced that it should help you turn
out about 30% saving in cost than the old
equipment.

Cost Saving = $ 9,200

By dividing the cost ($28,000) by the annual

earnings ($9200), you can assume that the
original outlay will be repaid in a little over
three years.

Payback period is the number of years it takes

to recoup the initial investment.

When the cash will be available for other

investments.

Essentially, one must calculate the average

annual net revenues or benefits produced by an
investment and divide this amount into the
49

original investment cost

Payback = Initial Investment/Annual Net Income

or Benefits.

10,000 Investment

4,000 = Cost savings or Increased Net Revenue

[ TR-TC]

10,000/4,000 = 2.5 years

Weakness of Payback =

$10,000 investment , 4,000 Year NI, 2.5 Years

Payback , Useful Life = 4 years

$ 20,000 investment, 4,000 Year NI, 5 years

Paback, Useful Life = 8 Years
 50

Internal Rate of Return.

The internal or accounting rate of return

provides a measure of the net returns (profit). It
does this by comparing the amount invested to
future flow of net income.

Assume that the $10,000 investment described

has a useful life of six years.

There is no salvage or re-sale value of the

investment after five years.

10,000/ 6 = 1,667

10,000 - 3,000(disposal value) = 7,000/ 6 years

The IRR is 3% [cash inflows - depreciation/initial

investment; $2,000 - 1,667/$10,000].

Time Value of Money.

 51

The simplest explanation begins with a process

called compounding.

If a person put $2,000 in the bank for five years

at five- percent interest, he or she would expect
the investment to be worth more in the future.
The following table shows the investment
growing from $2,000 to $2,553 in five years.

Year 1 2 3 4 5
Amount 2,000 2,100 2,205 2,315 2,431
Interest (5%) 100 105 110 116 122
Investment Value: $2,100 $2,205 $2315 $2431 $2553

Future Value (1 + i)n I= interestrate

n
Factor = = number of
years
For our example: (1+.05)5 =
FVF for 5% for 5 1.2763
years
Future Value = $2,000 *
FVF * Amount 1.2763 =
 52
$2,553

The opposite of compounding is discounting.

Discounting calculates the present value of future

revenue.

The example indicates $2,553 in five years would be

worth slightly less than $2,000 in present value. This
is important when an investment promises to return
an amount of cash in future years. Discounting uses
a present value factor that is the reciprocal of the
future.

1 i= interest
Present Value (1 + i)n rate
Factor = n
= number
of years
(1 + .05)5
FVF for 5% for 5 2000 *
years 1.2763 =
$ 2553
Future Value = FVF $2,500 * .
* Amount 78353 =
$1959 53