Budget Variance Analysis: Arapahoe County Expenditures

Introduction to Budget Variances

In essence, budget variances occur because spending did not take place as planned. In basic terms, a variance may represent either under-spending or overspending, both of which can carry diverse implications. It is therefore important to identify the factors that caused under-forecasting or over-forecasting of actual figures, so that corrective action can be taken and future variances reduced. This paper examines the various spending categories presented for Arapahoe County, highlights concerns relating to both overspending and under-spending, and discusses the overall picture across all spending categories with the aim of analyzing the department's effectiveness in budget forecasting.

An analysis of the adopted budget versus the actual expenditures of Arapahoe County reveals several instances of under-spending, in which case some budgeted funds remain unspent. While this could be a red flag in some instances, it is largely understandable in others. Arapahoe County's adopted budget is, in essence, a plan; it may not precisely match actual expenditures and is subject to variances. Nevertheless, the county ought to maintain and embrace best practices in relation to the budgeting process, including robust oversight and monitoring mechanisms.

Under-Spending and Positive Variance Concerns

It is important to note that in some instances, managers may have deliberately failed to report cases where there were reasonable expectations that actual expenditures would come in under budgeted expenditures. In such cases, there may have been concerns that unanticipated uses could arise during the fiscal year. Failure to report or factor in the relevant figures may have been motivated by the fear that anticipated savings could be used as a basis to reduce present or future budgets.

This concern manifests itself most clearly in the supplies category, which recorded a 26.8% positive variance for fiscal year 2013 and a subsequent 41.4% positive variance for 2014. The significant gap between these two figures could have resulted from cost savings in fiscal year 2013 that were not reported. It should also be noted that when unforeseen costs arise during a fiscal year, some managers may rationalize exceeding their expenditure budgets. This dynamic may help explain the transition from a negative variance in 2015 to a 37.4% positive variance in 2016, suggesting that managers in this category may have found it difficult to absorb the costs anticipated for 2016.

Given the imperfect nature of government budgeting, small variances are permissible. However, large variances are often an indicator of deeper issues relating to not only the budgeting process but also expenditure management. Variances falling below 10 percent may not be a significant concern for Arapahoe County, though they should still be examined to improve the budgeting process going forward. The positive variances in supplies for 2013 (26.8%) and 2014 (41.4%) could be indicative of cost-saving measures such as reduced orders for certain items, effectively lowering operating expenses. However, they could also reflect serious inefficiencies in which the department underutilizes available resources. Given the significant positive variance in 2016 (37.4%) following a negative variance of -18.4% in 2015, it is likely that the county overshot its estimates in response to the prior year's shortfall. This is one item that warrants further investigation given the magnitude of the variance percentages.

Salaries, Wages, and Budget Padding

In relation to salaries and wages, forecasting can be complicated by numerous vacant positions that are budgeted for, where offsetting attrition figures are significant. The department does not appear to suffer from this particular problem — especially given the largely minimal variances from year to year — with the exception of 2016, where the negative variance in 2015 may have motivated padding. Budget padding, in the words of Shim, Siegel, and Shim (2011), involves "underestimating revenue or overestimating costs" (p. 311). The motivation in such cases is typically to ensure that the budget is beaten; in this instance, the course of action may have been to overestimate salaries and wages in order to reduce the likelihood of a repeat of 2015's outcome.

It is, however, important to consider other outlier occurrences that may explain positive variances in salaries and wages from time to time. These include, but are not limited to, resignations in which replacements are not hired immediately, retrenchments, and reduced costs for overtime pay. Supplies also reported large variances, as did capital outlay and central services.

References

Shim, J. K., Siegel, J. G., & Shim, A. I. (2011). Budgeting basics and beyond. Hoboken, NJ: John Wiley and Sons.

Snyder, H. (2006). Small change, big problems: Detecting and preventing financial misconduct in your library. New York, NY: American Library Association.