Zero based Budgeting (ZBB)

ZBB, developed as a governmental accounting and planning tool, was adopted by both governments and businesses under the impetus of the Carter Administration. Each “decisions unit” (generally an administration unit large enough to have its own budget) develops a “decision package”: a set of alternative combinations of activities designed to meet the unit’s objective. Each combination represents a different level of effort and funding, beginning with a minimum level which is funded at an amount below the current budget. Each other element in the decision package includes one or more increment to the minimum level, and is ranked according to its perceived importance.

Information on objectives, activities, costs and benefits, and workload and performance measures is provided by the decision unit for each element in the decision package. Higher level administrators can then decide (1) whether the benefits of the minimum level justify any funding whatever for the decision unit, and (2) which increments, if any, are justified. The ranking of increments provides a straightforward way of adding or deleting activities if the available budget funds increase or decrease.

Suppose, for example, that you have just made your final monthly car payment of $ 139.50.Your car is now four years old and in bad shape. You, as the decision unit, establish the following decision package:

1. Buy a stripped down version of an inexpensive car. After trade-in allowance, your monthly payment will be $109.75 (below your current level of expenditures).
2. Buy the inexpensive car, but add some luxury options such as air conditioning and a stereo radio. This would require a monthly payment of $139.50 (your current level of expenditure).
3. Buy amore expensive car, but without luxury options, at a monthly cost of 159.50.
4. Buy a more expensive car, with options, at a monthly cost of $179.50.

The first decision to be made – the zero base decision – is whether to buy a car at all. Do you need a car for basic transportation (the minimum benefit level)? Then you must decide what increment to the basic package is justified by their additional benefits in such terms as comfort entertainment and prestige. Your decision might be partially based on whether or not you get a raise (i.e. whether available budget funds increase).

ZBB requires that each decision unit justify its very existence in each budget cycle (usually a fiscal year: in some state governments, there is a two year budget cycle).Traditionally, administrators only had to justify additions to their previous budget. ZBB requires a great deal of analysis. Communication, and paperwork however, and many bureaucrats feel threatened by its implications. The added paperwork is a major cost that can be analyzed using benefit-cost analysis for deciding whether ZBB is worthwhile.

Each of the planning and decision making tools outlined above has implication for control, because each requires the setting of goals or objectives which can later be compared with what actually happens. Because of the measurement problem faced by government, however, it is sometimes difficult to determine the extent to which goals were achieved in a given period. Thus a public administrator can elude effective control more easily than can a business manager.

Although effective control seeing that an agency’s objectives are achieved can be eluded by a public administrator, public organizations are generally laden with procedural controls. The history of public administration is filled with examples of the misuse of public funds; hence along with the professionalism of administration which began in the late nineteenth century has become an ever tighter system of controlling public expenditures. Moreover procedural controls have often been extended to all activities of public agencies not merely those directly involved with spending money. Thus elaborate systems of internal review have developed in many public agencies, which often unnecessarily delay the needed action.

These procedural controls are facilitated by an intensely steep hierarchical organizational structure in public agencies. That is, there are many levels in the hierarchy, and thus many “officials”. Actions proposed by occupants of lower “slots” in the organization must often be approved and /or modified and forwarded by officials at each higher level until either the original idea is lost, or final approval comes too late.

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