How Are City Budgets Decided?

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By: Jeongwoo Kim, Ph. D., associate professor, EKU Department of Government

A local government budget is a financial plan that details the government’s revenues and expenditures for a defined period of time. Local government budgets have two primary components: operating budget and capital budget. A capital budget funds major improvements to municipal facilities and infrastructure such as city halls, police stations and fire houses. It is typically based on the municipality’s five-year capital improvement plan that is financed through bonds, grants, and other sources of funding. An operating budget is a plan of annual spending and the means to pay for it through taxes, fees, revenue transfers, etc. In Kentucky, the fiscal year for cities runs July 1 through June 30. The city budgets must be adopted by ordinance on or before the beginning of the fiscal year. If the city fails to adopt a budget before July 1, the city must operate on the prior year’s budget until a new budget is adopted.

When a local government’s budget process is fully integrated with the planning and management functions of government, it leads to improved government operations. Though the budget process varies from city to city, the process generally consists of preparation, legislative approval, executive implementation, and auditing. A budget proposal is prepared by the manager or the elected chief executive. The budget proposal is submitted to a council or governing board for adoption. The budget is adopted through an appropriation ordinance. The budget is then implemented by the executive branch throughout the fiscal year. At the end of the fiscal year, a comprehensive annual financial report of all city activities is prepared and audited for accuracy.

Usually, local governments do not have sufficient resources to fund everything, and the budget process is an important tool to establish policy priorities and allocate limited resources to their programs and services. Local government budgets are affected by socio-economic realities that are frequently beyond the control of municipalities. Legally, local governments have to work under the debt limit, balanced budget requirements, and tax and expenditure limits. Lastly, local budgets are affected by citizen involvement, and public opinion plays an important role in shaping spending decisions.

Despite criticism, the reality is that most annual budget decisions are incremental. Most budget decisions that are made during the budget process begin with the base, the prior year’s budget. Along with the line-item budget format, the budget decisions tend to focus on marginal change from the previous year. Of course, local governments may use the rational decision-making approach and examine the full spectrum of a new initiative. But often, decisions are made simply based on what was decided the previous year and then focus on the incremental changes.

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