Zero-Based Budgeting Today

March 15, 2016 – Mike McCann


March 15, 2016

We have all heard the term “zero-based budgeting” (ZBB) tossed around for years, and probably have some idea what it means. A quick search on Google finds many hits, including quality research and whitepapers by GFOA and others. The literature reveals that ‘pure ZBB’ is difficult to implement and impacts the entire team. But governments have developed practical applications and alternatives around the core concept.

As budget managers, we find ways to use ZBB principles effectively while minimizing the process’s most expensive, bureaucratic and time-consuming aspects. ZBB is not a panacea, but it offers large benefits in some areas. My budget team recognized four types of expense accounts, each of which is addressed in specific ways in the budget process. We used ZBB concepts primarily around project and capital areas.

  1. Salaries and Benefits were budgeted centrally by Finance and HR. Departments requested positions by title, but did not calculate amounts, instead leaving them to us.
  2. Service, Supplies, and Professional Services were budgeted by the departments but we included overall guidance that covered inflation factors, utilities, and internal cost allocations.
  3. Capital Projects were budgeted by the lead department or project team on a project life basis. We required a current year breakout as well.
  4. One-time departmental project and capital expenses were initially set to zero. Departments created project lists which included supporting narratives and documentation: pictures, plans, work orders, bids, etc.

Using zero-based techniques on the most volatile areas of our budget gave us the best of both worlds: cost-effective management of routine budget elements, and fine-grained documentation for and control of the highly variable elements.

ZBB principles can be used across the organization to help with line-item budgeting.

Zero Line-Item Budgeting

As one example of this approach, department special projects accounts are zero-based across the government. Budgeters could use the same technique to selectively zero-base individual departments, programs or any other subdivision present in their chart of accounts.

For the accounts that were zero-based, departments are asked to prepare project and purchase lists in priority order of their one-time activities for the upcoming year. The budget committee meets with the department team and reviews the list, approving, modifying or denying projects, while watching the overall bottom line.

For example, the IT shop has requested funding to replace servers and upgrade the Wi-Wi system. The IT department would write a narrative around their plans, attaching technical documents detailing the status of the aging servers, bandwidth issues on wi-fi, new equipment specs, and cost information.

The budget committee’s responsibility would be to first read the on-platform documentation assembled by IT, then to meet with the department and decide on each item, approve the recommended amounts, cut them back, or deny the item entirely. Armed with background and current facts, the committee is in much better position to make good strategic decisions on competing needs for the entire government.

Pure Zero-Base Budgeting

Governments can also use these techniques to create a pure zero-base budget to build on: The mechanics are simple, All revenue and expense accounts are included and set to zero. This results in a full working budget at zero dollars, including historical data. It is ready to build on, using ZBB processes, documenting spending options in all areas, per the government’s budget instructions.

For those interested in full ZBB processes the work is significant. I would encourage starting with review of the literature, and the three citations below would be a great starting place.

For further reading

GFOA: Zero-Base Budgeting: Modern Experiences and Current Perspectives

Deloitte: Zero Based Budgeting: Zero or Hero?

McKinsey: Five myths and realities of Zero Based Budgeting


Mike McCann moved into government service in Ukiah, then Monterey CA, after beginning his career in corporate (ADP, Wells Fargo Bank, Blue Shield of CA), not-for-profit (Blue Shield of Ca, Mendocino Private Industry Council), and start-up accounting. For the last 20 years, Mike has been hands-on with budget, financial reporting and accounting operations, including City budgets and CAFRs. He holds a B.S.  in Accounting from SJSU and M.S. in Instructional Technology from  CSUMB.

Contact Mike with questions or comments at mmccann@opengov.com.

Category: Government Finance