Operational budgeting in municipalities is one of the key tools for improving the efficiency, transparency and accountability of the urban financial system. The present study, with the aim of designing an operational budgeting model in Tabriz Municipality, has used a mixed method of Grounded theory and systems dynamics. In the qualitative part, data collected from three sources of literature review, laws and expert reports, and semi-structured interviews with experts were analyzed in three stages of open, axial and selective coding in the Maxqda2020 software and the system components were identified. Based on the findings, three main subsystems were identified, including budget sources, budget expenditures and performance evaluation subsystem. Then, using the systems thinking approach and CLD diagram, causal relationships between the variables of each subsystem were drawn and analyzed. In order to develop a dynamic operational budgeting model, the final model was developed in the form of a stock-flow model that shows the dynamics between revenue sources, costs, and performance indicators. Then, using the causal relationship structure, a performance-based budget allocation formula was designed. This formula, by combining multi-criteria weighting (efficiency, effectiveness, transparency, and urban development priorities), allows for optimal and fair allocation of resources. The simulation results showed that changing the components of the performance indicator has a great impact on the way the budget is distributed and allocated between municipal activities and projects. Therefore, it is recommended to allocate based on performance in order to increase productivity and reduce waste of budget resources.