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MRSC has joined with Toni Nelson, Small Cities Specialist, State Auditor's Office, Gayla Gjertsen, Finance Director, City of Tumwater, and Mike Bailey, Administrator of Finance and Information Services, City of Renton, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*
Biennial Budgets in Washington’s Cities and Counties
December 2005
By Mike Bailey, City of Renton and Judy Cox, MRSC
Budgeting for a two-year biennium has been permitted in Washington for cities since 1985 and for counties since 1995. This article will discuss the various experiences of those cities and counties that have switched to a biennial budget and draw some conclusions about the usefulness of such an approach.
Approximately twenty-five cities and three counties have worked with some form of biennial budgets since the legislature created this alternative. While the law generally describes how biennial budgets can be structured, we found that there were a variety of approaches used. Of the twenty-five cities that used the multi-year approach, five have reverted back to a traditional one-year budget.
Legislative Authority
In 1985, the Washington State Legislature adopted the Municipal Biennial Budget Act, which permits all cities in Washington State to establish a biennial, or a two-year budget. The legislature granted the same authority to counties in 1995. The law permits cities and counties to adopt a two-year appropriation. An appropriation represents a local government’s legal authority to expend funds. Traditionally, the appropriations have been for one-year terms. Biennial budgets have extended this legal authority such that the legislative body for a city or county can approve an appropriation, or budget, for a full two-year term, without subsequent action.
Cities are required to make the decision for a biennial budget by ordinance. The legislative authority for cities is found under Ch. 35.34 RCW (or 35A.34 for “Code” cities). This ordinance must be completed at least six-months before a biennium can start and a biennium must start on an odd numbered year. For instance, to begin using a biennial budget for 2007/2008, the city council must adopt an ordinance choosing to use a biennial budget by June 30, 2006. Once a city is using a biennial budget, it can revert back to an annual budget, by ordinance, at the end of a biennium.
Counties find the authority for biennial budgets in RCW 36.40.250. They have more flexibility in choosing when to start their first biennia and when the ordinance or resolution providing for a biennial budget must be adopted.
Reasons for Using a Biennial Budget
Saves Time. The most common reason for using a twenty-four month appropriation seems to be to consolidate the amount of effort invested in the budget development and approval process. This is true of both staff preparing the budget materials and of the councils who review the materials and eventually adopt a budget.
While it is agreed that it takes more effort and time to prepare a twenty-four month budget than one for the traditional twelve months, it does not take significantly more time. As a result, over the two year period, there is a substantial time savings. While this benefit may be obvious as it relates to the staff, the council will also realize a significant time savings which can be invested in other matters.
While I was at the City of Lynnwood, we chose to invest this time savings in other budget related matters, such as strategic planning and performance measurement. We created a team of managers who oversee our performance management program. This team realized that the significant amount of time devoted to the annual budget made it difficult to invest adequate time in the performance management aspects of our budget and control systems. As a result, the team recommended to the city council that we adopt a biennial budget process. Now in their second biennium, the success of this strategy is already apparent. This summer and fall, staff worked to refine their strategic plans. The council also devoted additional time to use these plans more effectively in directing city resources over future years.
Longer Perspective. Another advantage for the use of biennial budgets is the longer perspective they give the organization in its budgetary planning. Multi-year financial planning has been a recommended practice for a long time (see Government Finance Officers Association Recommended Practices). Some cities and counties use these “financial plans” to guide the formal budgeting that occurred each year. These financial plans do not have the form of an appropriation in an ordinance, so while they helped provide focus, they did not take the place of a budget. A biennial budget extends the planning horizon of the official budget appropriation itself. This can be good and it can also introduce difficulties to the process related to forecasting (discussed below).
Potential Improvement in Policy View. A variation on the “Longer Perspective” argument is the substantial time available to the policy makers to address financial issues strategically. It seems that while budgeting every year, we are continually focused on how to balance each budget rather than on overall strategic planning. We have difficulty finding time to think strategically. The biennium helps create this time and focus attention on future biennia rather than just finding a way to balance revenues and expenditures.
Political Implications. Currently, an annual budget means that every other budget is developed in the context of elections for many of the policymakers. By design, the city biennial budget is considered in non-election years, as you must start the biennium in odd numbered years. Counties can also choose this timing as well. Even if politics do not complicate the budget decision making, the elections take a significant amount of a policymaker’s time.
Reasons Against Using a Biennial Budget
Some (five by our count) have tried biennial budgets and reverted back to annual budgets. Their reasons coincide with the reasons we have heard that argue against using a biennial budget.
Loss of control. One of the concerns we heard was a loss of control over budgeted expenditures. While we did not hear of any examples of serious budget problems which could be attributed to the use of a biennial budget, this was identified as a problem significant enough to lead some cities to revert back to an annual budget. In one of these situations, it was the city council who felt they did not have adequate control over the budget and initiated the return to an annual budget.
Change in leadership. We heard of a few examples where the new finance director or city manager did not want to use a biennial budget. Their reasons were concern over the extended term of the forecasts and the potential for changes in economic conditions. This is likely even more true in the situations where someone who is new to the city is faced with making these important recommendations.
Difficulty in forecasting. Another reason cited against the use of biennial budgets is the difficulty in forecasting variable expenditures. Two year budgets require that all the estimates and forecasts which were already difficult enough to do for twelve months are now to be done for a twenty-four month period. Forecasting sales taxes, medical benefit costs, changes in pay for staff and many other variables in a budget can be tricky. It is more than twice as tricky for twice the period of time. Changes in the economy, in state and local laws, and other changes may further complicate the ability to develop accurate estimates for budget development.
Forms of Biennial Budgets
The concept of a two-year appropriation is pretty straightforward. Rather than a twelve month window during which the appropriated funds can be legally committed to accomplish the purpose of the government, a biennium provides for a twenty-four month window. However, while a true biennial budget simply doubles the length of time for which the budget is effective, many cities and counties have adopted variations of this theme.
The reasons why governments choose to use a biennium, and some of the arguments against such a choice, help describe some of the various forms of biennial budgets that we see in use today. The two-year budget is touted as an opportunity to widen the budget planning horizon and allow more long-term thinking to be a part of the financial planning that the budget represents. This is one of the most common reasons we hear for the use of a biennial budget. On the other hand, we do not hear governments choosing this approach because of the greater latitude it provides staff to spend their appropriation over the course of the twenty-four months. Consequently, we see many examples where the cities and counties have restricted the ability of their staff to commit funds from the second year of the biennium.
Some of the concerns about using a biennial approach are that staff may not discipline themselves adequately and may spend more of the budget too early in the biennium than they should. As a result, many cities choose to restrict access to the second year of the biennium. We do not see this same approach in the three counties that use biennial budgets. This restriction is often adopted through the actual ordinance adopting the biennial budget itself.
In many cases the council’s adopt two, one-year budgets in the ordinance (or place the two years along side each other). This is actually a common approach. While nine cities use a true two-year appropriation, another nine separate the two years in some fashion.
The most common reason for using the two, one-year budgets approach as compared to the true 24 month biennium is concern over spending the appropriations too quickly. In some cases, staff is not permitted to expend more than the first year’s appropriation in the first twelve months. In other cases, there is no real limitation, but all the reports and budget analysis is done for each separate year.
Requirements for a Biennial Budget
As previously discussed, an ordinance (or resolution for counties) must be adopted which opts for a biennial budget process. In the case of cities, the biennium must start on an odd numbered year (2007 would be the next opportunity). The ordinance to use a biennial budget must be adopted at least six months prior to the start of the biennium (again this applies to cities only).
The requirement for cities spells out the steps for developing a biennial budget while the county statute refers to the annual budget process for guidance. Actually, the required steps for an annual budget development and a biennial budget are very similar. One distinction is the requirement for a “mid-biennium review.” This review is to start no sooner than September 1st and be complete by the end of the year. The purpose of the review is essentially to tune up the budget for any needed refinements. The review requires a public hearing if any changes are recommended to the budget. As in many of the other provisions related to biennial budgets, the requirements for the mid-biennium review are spelled out in detail for cities and very generally for counties. One thought on the mid-biennium review is whether it turns into another budget process itself. In cases where this review expanded beyond the “tune-up” envisioned, we see a more likely reversion to an annual budget.
As previously indicated, the decision to revert to an annual budget must be made by ordinance and can be effective only at the end of a biennium.
More on Personal Experiences
Implementing the biennial budget in Lynnwood was in many respects not overly difficult. There were some problems, especially in fully understanding the extent to which the second year would require changes to the final consideration of budget decisions.
The development of the forms and assumptions used in the budget was pretty straight forward. Adding the second year to the forms was easy with the exception of the payroll and benefits forms and the forms for new program proposals. While adding a second year to these was not difficult, we had to agree on which assumptions to use for pay and benefits. The year that different new programs were to begin was also unclear at times based on the formats we chose. Our success depended on constant communication and the cooperation of department staff working to develop the budget.
I would say the biggest difficulty we had involved focusing on the full twenty-four month period during budget deliberations with the city council. It seemed that our discussions focused far more on the first twelve months at the expense of the second half of the biennium. This was so extensive that there was a fair amount of confusion about what the second twelve months included. It didn’t help that difficult economic issues at that time also significantly complicated the budget process.
Overall, I believe the advantages of the biennial budget significantly outweigh the disadvantages. It is my hope that the discussions in this article have enabled you to evaluate whether a biennial budget is right for you. If you still have questions, feel free to contact Mike Bailey (City of Renton) or Judy Cox (MRSC).
Mike Bailey is currently the Administrator of Finance and Information Services for the city of Renton. Previously, he worked as the Director of Finance for the city of Lynnwood for six years. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.
*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.