City of Somerville:Using Activity-Based Budgeting to Improve Performance in the Somerville Traffic Unit
Since 2004, City of Somerville Mayor Joseph Curtatone has undertaken a series of fiscal reforms that have allowed the City to improve municipal services during financial hard times. A key reform has been the City's adoption of the budgeting approach called activity-based costing (ABC budgeting). With ABC budgeting, City officials have been able to make budgetary decisions based on detailed information about the expenses and revenues associated with discrete City activities. The transition to ABC budgeting from line-item budgeting that most municipalities use has not been easy, however. As first step, Somerville officials developed an inventory of the main programs of each of Somerville's 18 departments and the costs associated with each program. Calculating costs at the program level required a less detailed analysis than calculating costs at the activity level. They identified the activities associated with each program and established performance objectives for each activity. During the fall of 2004, HKS Prof. Linda Bilmes and her students helped Somerville officials accomplish these steps. Together, this information allowed officials and residents to understand for the first time how the City's expenditure of tax dollars translated directly into the City's delivery of services that constituents valued. Encouraged by the results, the Mayor asked Prof. Bilmes and her students to focus on a municipal activity of particular concern to officials and residents: traffic enforcement. Mayor Curtatone asked whether increasing enforcement of the City's traffic laws might pay for itself through increased citation revenue. The case walks through the steps Bilmes and her students took to determine the answer, including allocating personnel expenditures to the activity of traffic enforcement, allocating non-personnel expenditures to that activity through selection and use of an appropriate cost driver, and calculation of the revenue generated from traffic enforcement.