ZERO-BASED BUDGETING. A managementoriented system in which executive branch agencies develop budget requests at different funding and service levels for each activity or program and present the requests in order of decreasing benefit to the agency. It is intended to improve efficiency in allocating available resources. The most important features of the system are decision packages and the ranking process. As a budgeting reform it often has been characterized as an alternative to incrementalism, but in practice it is a refined form of incrementalism.
Zero-based budgeting was developed for Texas Instruments by Peter Pyhrr in 1969. Garland, Texas, was the first city to use it, followed by Wilmington, Delaware, and numerous other cities. It was adopted by Georgia for the 1973 fiscal year, by New Jersey and Texas shortly thereafter, and by the end of the decade more than half the states had adopted some version of zero-based budgeting. President Jimmy Carter, who had introduced zero-based budgeting as governor of Georgia, made it the budgeting system of the federal government during 1977-1981. In 1962, the U.S. Department of Agriculture used a variant of zero-based budgeting to prepare the 1964 fiscal year budget, but results were disappointing. Sluggish economic conditions of the 1970s made many governments receptive to a budget system that promised greater efficiency in the allocation of available resources.
The core techniques of zero-based budgeting are decision packages and the ranking process. Agencies begin the zerobased process by identifying cost-centers, agency subunits, or programs for which it is feasible and appropriate to assign costs for activities or services. Decision packages are prepared for each cost center. Decision packages provide to management at the next higher organization level the following kinds of information: a statement of goals, a description of the work program by which goals are to be achieved, a statement of benefits expected from activities or services in relationship to costs, an assessment of alternative methods of achieving goals, alternate levels of funding for the decision package, and a statement of the consequences of not funding the decision package. Decision packages also may contain line-items. Zero-based budgeting is compatible with various budget formats, such as the line-item format in Georgia or the program format in Idaho.
The requirement of alternate funding levels is one of the features that distinguishes zero-based budgeting from other forms of budgeting. Decision packages typically contain at least three funding levels: minimum-below the current level of operations; continuation-maintenance of current operations; and improvement-activities of services not funded in the previous budget. Labels identifying the different funding levels may vary among governments, but meanings tend to be quite similar. Continuation level sometimes is called "current," or "maintenance," level, and improvement level sometimes is called "enhancement" level. Operational definitions may be more specific. For example, in Georgia, the minimum level was defined as a level of effort below which it would no longer be feasible or realistic to operate the program at all. The current level was defined as a level of effort that represented continuance of the previous year's objectives. Salary and price increases were to be reflected in that calculation while nonrecurring costs were to be eliminated. The improvement level was a higher level of spending for ongoing programs. More than one improvement level of funding could be prepared in a decision package. Each level of effort is expressed in terms of objectives and costs associated with achieving those objectives. Pyhrr noted that the advantage of requiring decision packages to contain different levels of effort and funding is that higherlevel managers may chose from among alternate levels rather than having to arbitrarily reduce, request reworking, or reject the only funding level presented in a request. Defining the minimum level has posed a special problem for many governments. Although there is agreement that minimum is a funding level below the base (the funding level of the previous year), governments differ from each other in whether they permit agencies latitude to define the minimum or whether a fixed level such as 75 or 85 percent is specified as the minimum level for all agencies.
Perhaps the most unique feature of zero-based budgeting is the ranking process. Each decision package is ranked in order of decreasing benefit to the agency. When ranking, managers usually give higher priority to the packages that satisfy essential operating requirements and lower rankings to more discretionary packages. Minimumlevel requests are placed higher than current-level requests, and current-level requests for most cost centers tend to be ranked ahead of improvement level requests. Each funding level for a decision package may be identified by a priority number for that package such as 1 of 3, 2 of 3, and 3 of 3 (for a decision package containing three funding levels). For example, if a budget request from a state agency that performs inspections of banks and thrift institutions contained only three activities-administra-