Performance Based Budgeting Book

Performance Based Budgeting Book
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    LEGISLATIVE RESEARCH COMMISSIONPROGR A M REVIEWANDINVESTIGATIONSCOMMITTEEPerformance-BasedBudgeting:Concepts and ExamplesPrepared by:Greg Hager, Ph.D.Alice HobsonGinny Wilson, Ph.D., Committee Staff AdministratorResearch Report No. 302

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    PROGRAM REVIEW & INVESTIGATIONS COMMITTEESTAFF REPORTGinny Wilson, Ph.D.Committee Staff AdministratorPROJECT STAFF:Greg Hager, Ph.DAlice HobsonGinny Wilson, Ph.D.Research Report No. 302LEGISLATIVE RESEARCH COMMISSIONFrankfort, KentuckyCommittee for Program Review and InvestigationsAdopted: J...

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    iFOREWORDOn September 20, 2000, the Program Review and Investigations Committeedirected staff to prepare a general primer on performance-based budgeting. TheCommittee instructed staff to provide a general guide to budgeting systems, consider howdifferent budgeting systems incorporate information...

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    iiiSENATE MEMBERSDavid L. WilliamsPresident, LRC Co-ChairRichard L. Roeding President Pro TemHOUSE MEMBERSJody RichardsSpeaker, LRC Co-ChairLarry ClarkSpeaker Pro TemDan Kelly Majority Floor LeaderLEGISLATIVE RESEARCH COMMISSIONGregory D. Stumbo Majority Floor LeaderDavid K. Karem ...

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    ivThis quality is not unique to proposed changes in the budgetary system. Publicpolicy reforms are usually adopted based on the quality of the arguments behind themand with a less than ideal amount of practical experience for support. Even thoughperformance budgeting does not have a long track r...

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    vTABLE OF CONTENTSFOREWORD...................................................................................................................... iMEMORANDUM............................................................................................................ iiiLIST OF TABLES .................

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    viLIST OF TABLESFund Structure Used by Kentucky.....................................................................................19Predominant Budgeting System.........................................................................................22Kentucky Office of Aging Services, Current S...

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    Legislative Research CommissionProgram Review and InvestigationsviiEXECUTIVE SUMMARYAt its September 2000 meeting, the Program Review andInvestigations Committee voted to have staff prepare a generalprimer on performance-based budgeting. The Committeeinstructed staff to provide a general guide t...

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    Legislative Research CommissionProgram Review and Investigationsviii3. Linkage. Objectives and performance measures are integralparts of the budgetary process. Appropriations are linked toagencies’ results: how well they are meeting theirobjectives as indicated by performance measures.One of th...

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    Legislative Research CommissionProgram Review and InvestigationsixOutcome indicators measure progress toward achievingobjectives. A problem is that objectives are often not under thecontrol of the agency. For instance, the state police couldinitiate a new program to reduce fatalities in automobil...

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    Legislative Research CommissionProgram Review and InvestigationsxThe Governmental Accounting Standards Board (GASB)established a recommended fund structure for stategovernments. GASB designates three major categories offunds:• Governmental funds track basic government activities (e.g.,General ...

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    Legislative Research CommissionProgram Review and Investigationsxiindicators reported for the Iowa Department for Elder Affairsraised questions about whether they have been appropriatelydefined to capture program effectiveness. The performancebudgeting format has not been adopted by the Iowa leg...

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    Legislative Research CommissionProgram Review and InvestigationsxiiLouisiana. The performance budgeting system in Louisianawas implemented largely due to the efforts of the Chair of theHouse Appropriations Committee. The system shares manysimilarities with that used in Texas. However, coordinati...

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    Legislative Research CommissionProgram Review and Investigationsxiii6. Sufficient technical and staff resources should bedevoted to initial training and ongoing maintenance ofthe system.7. Performance measures should be independentlyvalidated on a regular basis.8. Careful planning should limit th...

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    Legislative Research CommissionProgram Review and Investigations

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    Legislative Research CommissionProgram Review and Investigations1INTRODUCTIONPerformance-based budgeting (PBB) is a budgeting methodthat links appropriations ultimately to the outcomes ofprograms. Agencies create strategic plans that include broadgoals and more specific objectives for achieving t...

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    Legislative Research CommissionProgram Review and Investigations2At its September 2000 meeting, the Program Review andInvestigations Committee voted to have its staff prepare aprimer on performance-based budgeting. The approved studyproposal identified three topics for inclusion:• A general di...

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    Legislative Research CommissionProgram Review and Investigations3AN OVERVIEW OF BUDGETINGFunctions of BudgetingThe simplest definition of budgeting is that it is a systematic wayto allocate resources. One reason that budgeting is socomplicated is that there is no widespread agreement aboutexactly...

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    Legislative Research CommissionProgram Review and Investigations4workplace and society in general, much less how changes inresources would alter effectiveness.A budget system can also aid in the management of ongoingactivities to improve effectiveness and efficiency. Administratorscan use informa...

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    Legislative Research CommissionProgram Review and Investigations5systems that require information on activity levels allowaccountability based on efficiency. How much did it cost torepair each mile of highway? A system that mandatesinformation on how well an agency is meeting particularobjectives...

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    Legislative Research CommissionProgram Review and Investigations6After decades of reform efforts, the budgeting systems used bymost governments in the U.S. are hybrids. Budget documentsoften provide information relevant to all functions of budgeting.Still, the typical approach to budgeting has be...

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    Legislative Research CommissionProgram Review and Investigations7with this system of appropriations: financial control andcoordination.The first problem was the lack of financial control. Withnonexistent or loose spending requirements, it was often difficultto determine how public funds were spen...

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    Legislative Research CommissionProgram Review and Investigations8determine how to manage resources and services better. A plus forlegislators would be the inclusion of additional useful informationin budget documents. In practice, this information did not oftenlive up to potential; statistics usu...

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    Legislative Research CommissionProgram Review and Investigations9Zero-based budgeting (ZBB) was implemented by somegovernments in the 1970s as a way to prioritize among differentprograms and to increase accountability. It is important todistinguish between what ZBB is in theory and what it is inp...

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    Legislative Research CommissionProgram Review and Investigations10Performance BudgetingBeginning in the 1990s, reform efforts have centered onperformance-based budgeting (PBB).10 More so than earlierefforts, PBB focuses on the outcomes of programs—the thingsthat citizens want government to acco...

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    Legislative Research CommissionProgram Review and Investigations112. Performance measures. Based on their strategic plans,agencies should develop specific, systematic measures ofoutcomes that can be used to determine how well thatagencies are meeting their objectives. Examples: student testscores...

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    Legislative Research CommissionProgram Review and Investigations12rewarded with more funds, or should excess funds be divertedto other uses? A problem with this carrot and stick approach isthat most objectives are affected by forces outside theagency’s control. An agency may be making effective...

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    Legislative Research CommissionProgram Review and Investigations13eligible for extra funding based on their contribution to achievingparticular objectives in a state’s strategic plan.Increased attention to outcomes may also offer benefits togovernment administrators and citizens. When elected o...

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    Legislative Research CommissionProgram Review and Investigations14Activities—also called outputs—measure what an agency does.Examples would include such things as the number of minesinspected, miles of highway paved, the number of applicationsprocessed, the number of classes taught, and the n...

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    Legislative Research CommissionProgram Review and Investigations15To deal with this problem, a measure of a program’s effectivenessshould determine how much of the attainment of the objective isdue only to the program. Effectiveness is the most difficultmeasure because it requires ruling out th...

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    Legislative Research CommissionProgram Review and Investigations16increase even though services have not increased. For entitlementprograms that must serve anyone meeting eligibilityrequirements, the continuation budget will also depend on thenumber of people who are eligible.Budget bases may be ...

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    Legislative Research CommissionProgram Review and Investigations17they reduce conflict and the time required to make decisions. It isnot, however, required that they be used together. A line-itembudget can be used with a different kind of base, even a base ofzero if decision makers so choose. Wit...

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    Legislative Research CommissionProgram Review and Investigations18• Fiduciary funds track assets held for others and cannotbe used to support the government’s own programs(e.g., employee retirement funds).Under generally accepted accounting principles, mostgovernmental funds are on-budget, wh...

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    Legislative Research CommissionProgram Review and Investigations19Table 1Fund Structure Used by KentuckyOn-BudgetOff-BudgetGovernmental Funds - track basic government activities0100 General FundX0200 Capital Projects FundX0300 Debt ServiceXSpecial Revenues Funds – dedicated to specific operatio...

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    Legislative Research CommissionProgram Review and Investigations

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    Legislative Research CommissionProgram Review and Investigations21BUDGETING IN PRACTICE: STATEEXAMPLESA primary function of any budgeting system is to collect andorganize information on program expenditures and spendingrequests so that legislators can make decisions about the amountof funds to ap...

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    Legislative Research CommissionProgram Review and Investigations22StatePredominant Budgeting SystemKentuckyIncremental program budgeting based on line-itemexpenditure information.IowaCombination – Modified zero-based budget withsome performance information.LouisianaPerformance-based budgeting n...

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    Legislative Research CommissionProgram Review and Investigations23eliminated, and reduce the Current Services budgetrequest accordingly.2. Submit detailed Additional Budget Requests for newprogram expenditures or expenditures for existingprograms that exceed the allowable Current Servicesbudget a...

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    Legislative Research CommissionProgram Review and Investigations24Exhibit KY-1Kentucky Office of Aging ServicesCurrent Services Budget SummaryFY 1999ActualFY 2000BudgetFY 2001BudgetModified Current Services BudgetBy Fund SourceGeneral Fund23,241,65523,337,00024,021,100Restricted Funds122,14012,64...

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    Legislative Research CommissionProgram Review and Investigations25As part of the required program narrative, agencies are instructedto submit information that justifies current services expenditures.Agencies are encouraged to submit quantitative data onperformance or outcome measures. Examples o...

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    Legislative Research CommissionProgram Review and Investigations26Finally, the reported performance measures are not linked tofunding amounts in the base budget. They are reported toprovide overall support for the base budget, but do not allowlegislators to tie direct funding amounts to particul...

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    Legislative Research CommissionProgram Review and Investigations27Exhibit KY-4Kentucky Office of Aging ServicesAdditional Operating Budget ItemsAdditionalBudget ItemPriorityDescriptionFY 2001RequestIn-HomeManagement1Maintain current services for 130 clients130,000Community-Based Services2Expand c...

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    Legislative Research CommissionProgram Review and Investigations28Exhibit IA-1Iowa Department for Elder AffairsMission Statement and Policy Goals• Mission Statement – The Iowa Department of Elder Affairs exists to respond to theneeds and opportunities of an aging society by promoting the deve...

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    Legislative Research CommissionProgram Review and Investigations29Exhibit IA-2Iowa Department for Elder AffairsPerformance Measures• State Policy Objective- Length of time older Iowans areindependent.• Program Purpose – Increase time that older Iowans stayin communities independent, product...

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    Legislative Research CommissionProgram Review and Investigations30Funding Request by Program AreaProgram PurposeFY 98 GFActualFY 99 - 00GFRequestDifferenceProgram ResultImpact onState PolicyObjectiveand ProgramResultData SupportingRequestCase ManagementIncrease time that olderIowans are able to s...

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    Legislative Research CommissionProgram Review and Investigations31is not measured by the total number of days that clients spend onCMPFE before they access nursing home Medicaid.In fact, such a measure, particularly if coupled with incentives orsanctions for program managers, could cause a result...

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    Legislative Research CommissionProgram Review and Investigations32principles of his suggested system in his FY 1993 budget message(Exhibit MA-1).Exhibit IA-3Legislative Budget-Briefing DocumentDepartment for Elder AffairsRankDescriptionFunding SourceFY 2000DepartmentRequestBaseStateFederal Suppor...

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    Legislative Research CommissionProgram Review and Investigations33The Governor’s recommended budget reduced 731 line-itemexpense categories in the budget to 128. The number ofaccounting funds fell from 35 to 5. Within these five funds, 342service delivery groups were identified. A service del...

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    Legislative Research CommissionProgram Review and Investigations34Table of Budgetary FundsFund NameFY92FY93 (3)General Fund010010Commonwealth Stabilization Fund (1)011011Commonweath Tax Reduction Fund (1)012012Intragovernmental Service Fund (2)015015Revenue Maximization Fund016Highway Fund101101L...

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    Legislative Research CommissionProgram Review and Investigations35Fiscal Year 1991 Fiscal Year 1992 Fiscal Year 1993ExpendituresAppropriationGovernor's Appropriation RecommendationEXECUTIVE OFFICE OF ELDER AFFAIRSOffice of the Secretary of Elder Affairs91000000 Office of the Secretary of Elder Af...

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    Legislative Research CommissionProgram Review and Investigations36Secretariat DepartmentBudgetary Appropriation Number and Description*Service Delivery Group Number and DescriptionBudgetaryAppropria-tionFederal GrantSpendingTrust &OtherSpendingFY93TotalSpendingFringe &IndirectCost Est.Exe...

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    Legislative Research CommissionProgram Review and Investigations37Secretariat DepartmentBudgetary Appropriation Number and Description*Service Delivery Group Number and DescriptionOutput DescriptionOutputGoalEXECUTIVE OFFICE OF ELDER AFFAIRSOffice of the Secretary of Elder Affairs9100-000 Office ...

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    Legislative Research CommissionProgram Review and Investigations38Governor Weld’s performance budgeting system forMassachusetts was never actually implemented by the legislature.House leaders agreed with the basic idea, but differed with theGovernor on the specifics of defining service delivery...

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    Legislative Research CommissionProgram Review and Investigations39working round-the-clock on a document he believesultimately was ignored.27According to staff of the National Conference of StateLegislatures, the Massachusetts experiment in performancebudgeting failed because there was not broad a...

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    Legislative Research CommissionProgram Review and Investigations40performance measures” to be used by policy makers as theymake budgeting decisions.29Among the stated objectives of the Texas legislature inadopting a system for strategic planning and performancebudgeting were to:• Focus the ap...

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    Legislative Research CommissionProgram Review and Investigations41Members are supported by a staff of approximately 140employees. The LBB was given statutory authority for anextensive set of budget responsibilities. These include theresponsibility to:• Adopt a constitutional spending limit,...

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    Legislative Research CommissionProgram Review and Investigations42Once the budget is adopted, agencies have the responsibility tomeet their performance targets and must explain a significant(10 percent or more) failure to do so in the next budget request.Although rewards for exceeding targets, an...

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    Legislative Research CommissionProgram Review and Investigations43performance measures mandated by LBB and the Office ofBudget and Planning are adequate or appropriate for measuringdesired agency outcomes.Texas Department on Aging. The Texas Department onAging is used to provide an example of ho...

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    Legislative Research CommissionProgram Review and Investigations44percent of clients served who are low-income.35 Thesepercentages would not necessarily change even if fewer clientsare served.Exhibit TX-1Funding for Aging Services in Texas $10.0 $35.0 $13.8 $2.2 FY 1999 $MillionsNutriti...

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    Legislative Research CommissionProgram Review and Investigations45Exhibit TX-2Legislative Budget Board: Legislative Budget Estimates for the 2000-2001 BienniumDEPARTMENT ON AGINGMission: The Department on Aging is the state's visible advocate and leader in providing for acomprehensive and coordi...

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    Legislative Research CommissionProgram Review and Investigations46Exhibit TX-2 (Continued)DEPARTMENT ON AGINGRequested2002Recommended2002A.1.3. Strategy: Independence/Productivity$16,346,292$11,476,292Provide a statewide, locally-based system of services designed to maintain person independence...

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    Legislative Research CommissionProgram Review and Investigations47Exhibit TX-3Summary of Exceptional Items RequestTexas Department on Aging FY 2002PriorityItemAll FundsFTEs1Volunteer Programs Expansion$3,465,0000.02Texas Caregiver Initiative$2,500,0000.0Total$5,965,0000.0Source: Texas Department...

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    Legislative Research CommissionProgram Review and Investigations48Exhibit TX-4

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    Legislative Research CommissionProgram Review and Investigations49Exhibit TX-4 Cont’d

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    Legislative Research CommissionProgram Review and Investigations50The most recent audit of the performance measures reported bythe Department indicated that most of them were inaccuratebecause of weak data control systems (Exhibit TX-5).However, in theory, some of the measures represent a serious...

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    Legislative Research CommissionProgram Review and Investigations51percentage (65%) believed that performance budgetingsignificantly improved accountability in the use of publicresources.Exhibit TX-5Results of Performance Measures ReviewDepartment on AgingAgency 340Department on AgingFiscal Year 1...

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    Legislative Research CommissionProgram Review and Investigations52As would be expected, approximately three-fourths oflegislators responding said that they get budget informationfrom a variety of sources, including agency testimony, publictestimony, staff, and constituents. This indicates thatpe...

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    Legislative Research CommissionProgram Review and Investigations53In response to this lack of control, the legislature adopted Act1465: The Louisiana Government Performance AccountabilityAct of 1997. The Act mandated four major agencyrequirements:1. Long-Term Strategic Planning – Agencies arer...

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    Legislative Research CommissionProgram Review and Investigations54As in Texas, Louisiana executive and legislative budget andauditing staff play key roles in guiding the development ofagency performance budgets and performance measures.Budget staffs in both states impose both a general structure ...

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    Legislative Research CommissionProgram Review and Investigations55listing of objects of expenditure to focus only on performanceinformation, Louisiana displays the budget documents inperformance terms, but maintains extensive line-iteminformation on planned expenditures for inputs in backgrounddo...

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    Exhibit LA-1EXCERPT OF DOCUMENTS PREPARED BY THE LOUISIANAOFFICE OF PLANNING AND BUDGET 3/22/001Means ofAs of 12/3/99EXECUTIVEFinancingExistingTotalCOMPARISON OF BUDGETED FISCAL YEAR 1999-2000&OperatingTotalRecommendedTO TOTAL RECOMMENDED FISCAL YEAR 2000-2001Table ofBudgetRecommendedOver/(Un...

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    Legislative Research CommissionProgram Review and Investigations57Although program objectives and performance targets arereported for the continuation budget, the specific fundingamounts are not tied to particular objectives, nor are theobjectives assigned priority rankings. Requests for funding...

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    Legislative Research CommissionProgram Review and Investigations58Executive planning staff also expressed frustrationat reaching agreement on plans and indicators: It isvery difficult to get five or six key players to speakwith a common voice. Each of them has their ownagenda, or his own percept...

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    Legislative Research CommissionProgram Review and Investigations59level, and a few of the items that caused that. Then,our performance analyst goes to the table and gives anoverview of the program structure, talks about majorchanges in performance, and the major factorsaffecting that performance...

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    Legislative Research CommissionProgram Review and Investigations

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    Legislative Research CommissionProgram Review and Investigations61CONCLUSIONSAt the request of the Program Review and InvestigationsCommittee, staff reviewed the literature and selected casestudies on states’ use of performance budgeting. Based on allthe information that forms the basis for thi...

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    Legislative Research CommissionProgram Review and Investigations62Second, legislators must decide whether they want tocontrol agency spending on categories of inputs (e.g.,salaries for elder case workers) or whether they want tohold agencies more accountable for results (e.g., reductionin cases o...

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    Legislative Research CommissionProgram Review and Investigations63program. This type of long-term tracking could beexpensive.Finally, most of the performance budgeting systems usedby states are geared toward helping decision makersprioritize spending among strategies for meeting variousobjective...

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    Legislative Research CommissionProgram Review and Investigations646. Sufficient technical and staff resources should bedevoted to initial training and ongoing maintenance ofthe system. Most of the work in developing andmaintaining a performance budgeting system is done bybudget staff of the exec...

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    Legislative Research CommissionProgram Review and Investigations65questioning by legislators in budget hearings. If legislatorswho are making budget decisions do not demonstrate thatthey care about the performance reports, then agencies willnot devote significant resources to efforts to demonstr...

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    Legislative Research CommissionProgram Review and Investigations

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    67BIBLIOGRAPHYAristigueta, Maria Pilar. Managing for Results in State Government. Westport, CT: QuarumBooks, 1999.Axelrod, Donald. Budgeting for Modern Government. New York: St. Martin’s Press, 1995.Epstein, Paul and Wilson Campbell. “GASB SEA Research Case Study: Iowa,” in State andLo...

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    68National Conference of State Legislatures, Legislative Budget Procedures(http://www.ncsl.org/programs/fiscal/lbptabls/lbpc3t1.htm), accessed February 12,2001.Osborne, David and Ted Gaebler. Reinventing Government, How the Entrepreneurial SpiritIs Transforming the Public Sector. Reading, MA: Ad...

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    69APPENDIX A

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    PREDOMINANT BUDGET APPROACHState or other JurisdictionTraditional/IncrementalPerformance-BasedProgram-BasedZero-BasedCombinationCommentsAlabamaIAlaskaIArizonaIThe state is required to convert all agencies to a program-based budget by FY 2006.ArkansasICaliforniaIGenerally, traditional budgeting is...

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    PREDOMINANT BUDGET APPROACHState or other JurisdictionTraditional/IncrementalPerformance-BasedProgram-BasedZero-BasedCombinationCommentsMichiganIThe budget is performance-based, although appropriation bills contain objects ofexpenditure in some instances.MinnesotaIThe budget is mostly traditional...

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    PREDOMINANT BUDGET APPROACHState or other JuridctionTraditional/IncrementalPerformance-BasedProgram-BasedZero-BasedCombinationCommentsUtahIVermontIA combination of traditional and performance-based budgeting is used.VirginiaIProgram budgets organize the Appropriation Act, and performance measures...