by Joe Pehlman, Senior Analyst and Krista Morrison, Financial Manage
Now that the Fiscal Year 2017 budget is adopted, the Budget Office is looking forward to Fiscal Year 2018 budget production. A big change in the Budget office this year will be the implementation and use of a new budget system. Another change is the incorporation of the return on investment (ROI) tool for submission along with the Budget Decision Packages. For those new to the City’s budget process, each department submits a budget decision package to request funding for new or enhanced services. Those decision packages are evaluated for those investments that help to move the City of Kansas City towards achieving Council goals, meet citizen priorities, or deliver better service to citizens. It would be an easy task to rank budget decision packages with unlimited resources. This task becomes much more difficult with very limited flexible funding sources available to cover the breadth of services provided by the City of Kansas City.
A desire to enhance the City’s business analysis of budget requests led the Budget Office to produce the ROI tool. This tool will assist departments in evaluating and reporting the costs and benefits of their budget proposals, both qualitative and quantitative. While most departments equate the Budget Office to always saying no, we genuinely want to help departments be successful in obtaining their budget requests if there is a return on investment or a significant positive impact to the services delivered to citizens!
So, what is the ROI tool? The ROI tool creates a standard template for analyzing the financial, social, and service delivery impact associated with a budget request. The ROI tool allows users to: 1) provide a narrative describing the request’s necessity and merits, 2) input expense and revenue data to be calculated into several key financial metrics, 3) project the changes to be realized in Key Performance Indicators (KPIs) such as service delivery measures, and 4) demonstrate how the request will support the adopted Citywide Business Plan and Departmental Business Plan. The information reported through this tool better informs the City Department, the Budget Office, and City Council during the decision making process.
The ROI tool calculates, based on inputs by the user, several key financial metrics which can inform the overall financial viability of the request. The tool compares the current budget plan, or “Current Scenario” with a proposed scenario that would include the request, called “Projected Scenario”. Below is a screenshot from the ROI tool as an illustration of how the user can input the scenarios. A section is available for entry by each expense type in addition to a section for entering estimated revenue impact.
The ROI tool will calculate a lifetime return on investment, modified rate of return, and the payback date or breakeven point. A screen shot of the section where the ROI tool actually calculates those financial indicators is included below. The complicated equations and calculations are automatic after the scenario entry. It is just that simple for the user! It is possible that the ROI calculation can result in negative numbers, which means the request is not projected to recover the financial investments made. Even those proposals with a negative financial ROI are not necessarily precluded from approval, especially if the proposal poses to positively impact service levels for those services that residents consider a priority.
Kansas City is committed to using data, citizen priorities, and customer feedback to drive the decisions that will propel the City on the path toward a stronger and more innovative future. The ROI is another tool that can be used to compare different proposed scenarios against one another, to identify the best overall option, among many choices. Ultimately, the Decision Package and ROI tool is a standard template that can be used to analyze a potential solution, new initiative, or other program activity, to assess the overall financial and social value of a proposal.