Let’s explore the common characteristics of successful smart city brands. What are the key attributes that define what smart cities are?  Today we focus on a new way of looking at  public budget. Can you be a Smart City without a Smart Budget?  We asked Alan Mitchell (Executive Director of KPMG’s Cities Global Center of Excellence) what smart budget  means to him and why is it so important  for all citizens , public administrations and companies.

SMART BUDGET:  AN ABSOLUTE MUST OR A MIRAGE?

mirage


BY ALAN MITCHELL 18/05/2016

Consider for a moment that most cities around the world prepare one strategic plan among many every year! It’s called a budget. A city budget is a financial plan for a city. Funny thing about city budgets is that they come in two parts – one part is called a Capital Budget and it gives approval for the investment in new assets or infrastructure. A second budget deals with financing how the city operates from one year to the next and is called the Operating Budget. Furthermore, these two budgets tend to be organized by the department or division that prepared the budget. So what’s wrong with two budgets organized by organization unit?

For many cities … nothing is wrong with this and in fact they’ve been doing this for decades, if not longer. A new dawn emerges and Smart Cities are the rage. These rages tend to take on a life of their own and when it comes to financial plans or budgets, the Smart Budget has emerged as one of the latest innovations. While it may have an Information and Communication Technology (ICT) component, the really smart element is the fact that the budget is prepared by services that the city offers and it combines the operating and capital budget into one document. One may ask: “Why is this important or smart?

Imagine that you are a taxpayer in a city and you’re reviewing your city’s budget today. Without a doubt you will scratch your head and wonder what value you are getting because you have no idea what the Public Works Department budget request is about. It lists things like “salaries and benefits” and also lists categories such as “other expenditures”. From a citizen’s perspective, you have no idea that buried in that budget for Public Works are seven (7) services, including: Water Supply, Roads, Sewers (Storm & Sanitary), Waste Collection & Disposal, Snow Clearing, etc. Furthermore, there is no indication how well or how poorly the city is providing these seven services.

Consider an elected official also trying to make sense out of these documents. They realize that they don’t want to increase taxes but could the administration just give them a hint about why the budget is increasing? Most elected officials try asking questions about a budget for a department only to be more confused as to where they are going to make budget cuts given salaries and benefits will be increasing due to union contracts that have been approved! So what do they do?

The elected officials tend to throw their hands up in the air and make a unilateral budget cut. Such a cut may be seen as: 10 percent cut across the board; or a 3% cut per department. So what’s wrong with this? There is no short answer to this question but essentially these unilateral cuts are left to the departments to make when they then go back with 10% / 3% less money to deliver their services. But services are not all equal. Some city administrators need to cut ‘essential services’ in the same way that ‘non-essential / discretionary’ services are cut. But this is clearly wrong!

Now we have Smart Cities as a concept coming along, and someone is proposing that we actually budget by services – a Smart Budget! What does a service based budget look like? Imagine for a moment a Water Supply Budget. In the budget for a Water Supply Service a city would combine the operating and capital expenses, maybe even distinguishing the two but clearly adding them up. There may also be revenue generated for a service and in the case of Water Supply there is considerable revenue generated, perhaps enough to cover the combined operating and capital costs. Ideal! However, along with the financial information, the Water Supply Service may also provide details such as:

• Amount of water supplied
• Unit cost to supply a cubic meter of water
• Fee for water supplied by cubic meter
• Water quality indicator
• Projected demand for water in the next fiscal period
• Improvements to the water supply network that will reduce operating / capital costs
• Improvements to the water supply network that will improve the quality of water supplied
• Other pertinent facts and figures about water supply

When this information is now supplied to elected officials and the public, the audience of the budget can now better understand where the tax money is currently spent and what is being proposed as a budget for next year.
Consider for a moment the following diagram that illustrates how one city put together a service based budget.

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Figure 1- Sample Smart Budget

The Smart Budget separates services by program (a high level management concept that addresses public needs). The size of the circle for each service represents both operating and capital costs combined (without revenue). The displacement of the circle within each program represents a proxy “value” that the city senior and middle management rated the contribution of the service to the program goal / outcome it is trying to achieve. In short, this diagram is packed with information that would allow management, elected officials and the public to wonder why one service costs more than another, why a service is rated so low / high in value, and foster discussion on whether the city should put its scarce financial resources into one service or another.

For most municipalities around the world this picture would be the first time they have seen such an image and the dialogue that would result would surely spark interest that had never before been experienced in the city. Believe it or not, the reaction to seeing this diagram in the city that produced it resulted in a wonderful dialogue and a much richer explanation of costs / value contribution than the city had ever witnessed. But a Smart Budget shouldn’t stop there!
Consider for a moment that a city is now faced with tough budget decisions. Using the service based model the city can chose to increase / decrease the cost (option 1), increase or decrease the value (option 2) or eliminate the service altogether (option 3).

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Figure 2- Options for Changing a Service Based Budget

In an ideal world a city wouldn’t have to make these hard decisions, but unfortunately city growth may temporarily stop, the economy might take a downturn, elected officials may not want to increase taxes, and/or there simply isn’t enough money. The following mid-sized Canadian city came to the following conclusion: the City’s finances are ‘good’ only because property tax revenues increased sufficiently over the past five years to cover the increased expenditures. The problem is the City’s current spending pattern is not sustainable. If this pattern continues while tax revenues increase at a slower pace or stall (a strong possibility in the present economic downturn), the City may soon face serious challenges. 

This city is not alone. Having a smarter way to budget for services seems like a very sensible path for all cities to take more a must than a mirage!

About the Author:  Alan Mitchell

allan mitchel smart budgetAlan is currently the Executive Director of KPMG’s Cities Global Center of Excellence.  In this role he is responsible for working with KPMG member firms around the world putting together best in class proposals using innovative methodologies and approaches.  Over the last 30+ years, Alan has either worked for or consulted with cities around the world.  Among his many specialties, Alan is also one of the cofounders of the Municipal Reference Model (MRM) – a model of a city’s business based on the services cities offer.  He can be contacted by email at: amitchell@kpmg.ca.

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