IPSPR: Public Policy & Practice - Performance Based Budget Systems

As the literature implies, therefore, performance-based budgeting has four primary characteristics. First, PBB sets a goal, or a set of goals, to which monies are "connected," i.e. allocated. From these goals, specific objectives are delineated and funds are then subdivided among them. Second, PBB provides information and data on past performance and thereby proceeds to allow for meaningful comparisons between "expected" and "actual" progress. Third, adjustments to programs are made either at this point or during a future budget preparation cycle to close any performance gaps that may exist. Fourth, as an ancillary yet important characteristic, PBB provides an opportunity for regular or special (ad hoc) program evaluations. When utilized, these evaluations are valuable in that they give independent and verifiable information to budget decision-makers and program managers alike.

FIGURE 1
Definitions of PBB Terms

INPUT MEASURES. These are the volume of resources used or total expenditures (costs) consumed to achieve a given output.

OUTPUT MEASURES. These are the quantifying of goods and services performed or delivered to customers.

EFFECTIVENESS MEASURES. These are the indices that assess how well a program achieved its goals and objectives; e.g., percent of wetlands preserved as a result of permit issuance; percent of inmates convicted of another crime after release, percent of placements successful after 30 days, etc.

EFFICIENCY MEASURES. These are indices that assess or compare how much output was achieved per unit of input (costs); e.g. cost per complaint processed, cost per license issued, cost per prisoner incarcerated, etc.

WORKLOAD MEASURES. These are indices that assess the level of effort required to carry out an activity; e.g., number of applications processed, number of inspections completed, number of miles patrolled, etc.

SOURCE: See Garsombke, H. and Schrad, Jerry. (February 1999). Performance measurement systems: results from a city and state survey. From Government Finance Review. Chicago, IL: Government Finance Officers Association.

Additionally, it is important to note that many experts in public finance believe that the cardinal aim of PBB is accountability. Performance information and data used in budgeting holds public officials, especially program managers, accountable for service quality, cost-efficiency, and program effectiveness. The focus for PBB is, once again, on results, not simply inputs. Hence, governors, legislators, service or program recipients, and the public generally can determine accountability with a degree of certainty with the use of PBB methods, where this is not possible utilizing traditional or line-item approaches. This ability to assess performance and hold managers accountable serves as a powerful incentive to ratchet up quality or positive service results.

The implications of PBB to stir agency and program officials to meet or exceed performance expectation have, of course, two sides -- one that "rewards" and the other that "penalizes." With regard to "good" or "excellent" performance, rewards can be several. For one thing, agencies or programs might be recompensed with additional or increased funding, or may be allowed to carry "saved" funds, due to efficiencies, forward to the next fiscal year. Agencies or programs could also be absolved from burdensome paperwork requirements, awarded some form of bonus, or perhaps even have agency responsibilities enhanced in some fashion. On the other side, penalties could be handed out to agencies or programs that perform poorly. This might include a reduction in funding or elimination of a program altogether. It might additionally be cause for ordering a management audit or evaluation, transferring program responsibilities to another agency, or the firing of the agency director (Snell and Hayes, 1993, p. 4).

USES

Uses of performance-based budgeting systems can be understood in two ways. One way to make sense of the use of PBB is to speak broadly to the subject matter as it relates to its primary aims. This would include PBB's twin aims of improving decision-making and enhancing service delivery. The other way to understand the use of PBB would be to examine its application or implementation among specific states. This examination would allow for grasp of PBB's use in an actual or "hands-on" way. In this section, a brief discussion of these uses will be presented with the purpose of gaining a more valuable comprehension of performance-based budgeting.

PBB Utilitarian Aims

Governments have pinpointed, according to the literature, two utilitarian aims that PBB readily strives to fulfill. These aims are (1) improved decision-making, and (2) enhanced service delivery (see Epstein, 1984, pp. 6-7; Joyce, 1999, pp. 600-601; Lee and Johnson, 1998, pp. 105-107).

Public budgeting is essentially about making choices. To make better choices, decision-makers need qualitative and complete information and data. PBB can provide this through its various components or devices; e.g., the setting of goals and objectives, the prioritizing of these ends, and the measuring of performance levels (via the indices of efficiency and effectiveness).

Pragmatically, and quite simply, measurement of performance assists government officials to assess "what" and "how well" a program is doing. For instance, what is Program X intended to do? Is Program X achieving these intended ends? Are Program X’s activities or operations cost-efficient? Asking and answering these and other similar questions will permit decision-makers to make wiser, more intelligent program policy and spending determinations.

Consider further, for example, the corresponding improvement of the decision-making process with the addition of differing levels or tiers of performance information and data. Let's assume that a state's mental health agency wants to fund a program to treat individuals with alcohol and drug addiction. The first budget tier of information might speak only to personal services, operating expenses, and assistance payments. A decision-maker (a governor, a legislator, a program manager, etc.) has little to work with here -- just broad expenditure classifications. However, add a second tier of performance information, i.e., "program objectives," and the decision-maker has more meaningful information with which to base and make a judgment. Objectives for an alcohol and addiction program might include, for example, "(1) to increase the number of community programs available for involuntary alcohol and drug services by three by June 30, 2002, and (2) to provide six scheduled treatment hours per patient per day for inpatient alcohol and drug addiction programs."

Additionally, now consider adding a third tier of performance data. With another tier the decision-maker gets a picture of the effectiveness of the program as measured from previous fiscal years. Effectiveness indices show, for example, "that the number of community programs providing involuntary services increased from three in FY 1999 to six (6) in FY 2000." Also, indices for "scheduled treatment hours per patients indicate that these have increased from 4.5 to 5.5 for the same period." Add information as to the "number of voluntary alcohol and drug admissions" and the decision-maker has workload data – a fourth tier. Add information on "cost per patient per day" and a fifth tier of efficiency data is made available. The upshot of these multiple tiers of information obviously becomes clear -- the more tiers of information available, the more informed, intelligent the decisions are going to be.

The other functional aim of PBB is, once again, enhanced service delivery. Performance-based budgeting strives to provide individuals with quality services that meet individual needs in a prompt and complete fashion. It does this through the establishment of specific objectives and measurement indices. In other words, the budgeter or decision-maker establishes performance targets and simultaneously provides for some measuring device to monitor efficiency and effectiveness of service delivery efforts. The intent or design is again enhanced service delivery.

Sometimes so-called "industrial engineering" techniques are employed to improve operations and service delivery. "Quality management" approaches are also used in many organizations to increase service performance. Particularly in the public sector, program evaluations or "performance audits" are a commonly used method to evaluate service delivery and recommend improvements.

Many authors and practitioners of public budgeting especially believe that the focus of a PBB process should center on the notion of “quality” services. The emphasis here is placed on the satisfying of customer (constituent, client, consumer or user) needs. According to the Council of State Governments, 32 states have some form of statewide quality management program in place.

Total Quality Management (TQM) and similar quality schemes are, and have been for some time, a leading philosophy and management process embraced and utilized at all levels of the public sector. TQM and other quality programs concentrate on customer satisfaction, teamwork and employee participation, performance measurement, and open or flexible organizational structures (Young, September 1998, pp. 4-5).

FIGURE 2
The Elements of Quality Management (QM)

QM KEY FACTORS

Top management leadership and support.

Focus on the customer.

Long-term commitment.

Enhanced rewards and recognition.

Commitment to training.

Employee empowerment and teamwork.

Effective and renewed communications.

Application of statistical process analysis.

SOURCE: See Federal Quality Institute. ( May 1991). Introduction to total quality management in the federal government. Washington, DC: Federal Quality Institute.

PBB State Practices

According to the National Association of State Budgeting Officers (NASBO), states using PBB systems are on the increase. Additionally, governors and legislators, and in some cases both, are finding performance-based budgeting mechanisms useful. Currently, all 50 states, plus Puerto Rico, utilize some form of performance measures. Twenty-five states surveyed by NASBO indicate that they actively use performance measures at some stage in their budgeting and appropriating processes. An additional eight states attest that while they do not use PBB per se, they do use some "public accountability" or "goal /priority building" processes in their funding decisions. Finally, of the 50 states and Puerto Rico using some form of performance measurement, with or without linkages to budgeting practices, 38 maintain that they do regularly monitor performance (NASBO, 1999, p. 48).

FIGURE 3
Performance Measurement Use among the States

State	Performance Measures	Measurements Monitored	Implications of Performance Measurement	State	Performance Measures	Measurements Monitored	Implications of Performance Measurement
Alabama	X	X	P	Nebraska	X	X	P,GP,B
Alaska	X	NA	P, GP	Nevada	X	X	P,GP,B
Arizona	X	X	P, GP, B	New Hampshire	X
Arkansas	X	X	B	New Jersey	X	Selectively	B,GP
California	X	X	P, GP, B	New Mexico	X	X	B,GP
Colorado	X	X	P, B	New York	X	NA	NA
Connecticut	X		P, GP	North Carolina	X	X	P,GP,B
Delaware	X	X	P, B	North Dakota	X
Florida	X	X	P, GP, B	Ohio	X	X	P,GP,B
Georgia	X	X	P, GP, B	Oklahoma	X	X	P,B
Hawaii	X	X	B	Oregon	X	X
Idaho	X	X	P, GP, B	Pennsylvania	X	X	P,GP,B
Illinois	X	X	P, GP	Rhode Island	X	X	P,GP,B
Indiana	X	X	B	South Carolina	X		P
Iowa	X	X	P, GP, B	South Dakota	X
Kansas	X	X	B	Tennessee	X		B
Kentucky	X	X	P	Texas	X	X	P,GP,B
Louisiana	X	X	P, GP, B	Utah	X	X	P,GP,B
Maine	X			Vermont	X	X	--
Maryland	X			Virginia	X	X	P,GP
Massachusetts	X	X	B	Washington	X	X	P,GP,B
Michigan	X			West Virginia	X	X	GP,P
Minnesota	X	X	P, GP, B	Wisconsin	X		P,GP,B
Mississippi	X	X	P, GP, B	Wyoming	X	X	P,GP,B
Missouri	X	X	P, GP, B	Puerto Rico	X	X	P,GP,B
Montana	X	X	P	TOTAL	51	39

SOURCE: See National Association of State Budgeting Officers. (October 1999). Budget processes in the states. Washington, DC: National Association of State Budgeting Officers.

Codes:

P…Public Accountability

GP…Goal/ Priority Building

B…Budgeting Decisions

NA…Not Available

As Figure 3 above shows, each state uses performance measurement in a differing or particular way. This can be ascribed to the different economic, social, cultural, and political aspects of the states. NASBO (1999) describes, for example, Minnesota, Oregon and Texas as having "broad, comprehensive PBB approaches" that have a long history. Oppositely, Virginia and California are relatively new states to the practices of PBB and are more limited in their applications.

A more recent study of performance measurement systems among the states was published by H. Perrin Garsombke and Jerry Schard in 1999. In this study, 105 questionnaires were sent to state auditors, controllers or treasurers, in early 1998, to inquire as to their "extent of use" and "satisfaction with" performance measurement. According to their survey results based on a 60% response rate (63 questionnaires completed and returned), 67% of state governments used performance measurement systems "to some degree." Eight additional states said that while they did not use performance measurements, they were in the planning stages to do so. The Garsombke and Schard study also found that 45% of the states responding to the survey linked performance measurement, in some way, to budgeting and planning. Thirty-eight percent of these stated specifically that they linked performance measures or incorporated them into their strategic planning processes (Garsombke and Schard, 1999, pp. 9-10).

Another set of survey findings was published in the spring of 2000 by Robert Lee and Robert Burns in the Journal of Public Budgeting and Finance (see Lee and Burns, 2000). In this article, a determination of the extent of "advancement" or "backsliding" of PBB methods and uses was made for the period between 1990 and 1995. One key question of Lee and Burns was: "What changes occurred between 1990 and 1995 in the use of performance measurement in state budgeting?" Another critical question was if there was significant change, "What were the reasons for either advancement or backsliding?"

Overall, the findings were diverse. The survey results found that, between 1990 and 1995, states requiring agencies to submit program effectiveness and efficiency measures when proposing new programs dropped 16%, from 39 states requiring this information in 1990, to 31 in 1995. The survey conversely found that 6% of the states indicated that they had revised their performance measures for the same period. Additionally, effectiveness measures actually utilized in budget documents increased by 8%, from 19 to 23 states, for the same 1990-1995 period. Efficiency measures used in budget documents also increased by 8%, from 15 (in 1990) to 19 (in 1995) states (Lee and Barnes, 2000, pp. 38-32).

As the literature generally suggests, a few states have been specifically recognized as using intensively or well-developed PBB approaches. Among those frequently mentioned are Arizona, Florida, Minnesota, Oregon, Texas, Virginia and North Carolina.

Arizona, for example, uses a budgeting system that combines strategic planning, performance measurement, and program evaluation. The system, called Program Authorization Reviews (PAR), requires all agencies to submit a one-page overview of its performance measurements for the upcoming fiscal year along with its regular detailed budget request. The recent FY 1998-1999 budget also required an extensive PAR budget submittal from 14 select agencies that included complete performance information and data on 30 programs and subprograms (Freidman, 1997, p. 17).

More specifically, PAR required these 14 agencies to answer four main questions in their budget submittals. One question addressed how programs and their objectives related to their agency mission statements. Another question asked was how efficient and effective programs were in carrying out their activities and in attaining their objectives. The two remaining questions inquired as to how well programs measured up in comparing expected to actual results and, additionally, as to the use of cost-effective alternatives (Freidman, 1997, p.17).

Arizona’s PBB approach has been applauded for not “overloading” its budget document with superfluous performance information and data. Providing decision-makers with a manageable, yet thorough, set of performance data for making good spending choices is a time-consuming and hard won endeavor. Arizona appears to have proven that this can be done.

Another state that has worked diligently to establish a working, useful PBB system is North Carolina. In 1991 North Carolina instituted a statewide agency performance-based budget system. Most recently, its FY 1998-1999 budget request process produced performance measures for more than 3,000 agency or departmental activities. These measures were “outcome focused,” with particular emphasis placed on the “effectiveness” of programs (Freidman., 1997, p. 18).

North Carolina’s PBB system includes all state and federally funded activities. These activities are grouped into ten mammoth programmatic areas that are distinguished mainly by program recipients and analogous program outcomes. These ten broad program categories include, for instance, area designations such as “human services,” “education,” “commerce,” and “justice and public safety.” By using this budget method, decision-makers are forced to make spending choices based on programs – their activities and performance – without relation necessarily to agency jurisdictions or boundaries (Freidman, 1997, p.18.).

North Carolina decision-makers are, therefore, freed – relatively speaking -- from contrived budget decisions due to agency advocacy or similar organizational influences. This is perceived as a plus, since concentration and judgments about budgets are oriented towards programs and results, not by favored or well-liked agency lobbyists and directors.

CRITERIA

At this juncture, a few brief observations on "choosing" performance measures will be useful. In nearly all cases, performance-based literature speaks to the necessity and priority of establishing "specific criteria" to discriminate between "good" measures and "bad" ones. Based on common sense and practical experience, most observers and experts believe that in order to have a truly successful PBB system, performance measures must meet pre-established, written criteria that are set early in planning stages prior to actual PBB implementation. (See Mikesell, 1999, p. 189; Lee and Johnson, 1998, pp. 103-104; Joyce, 1999, pp. 613-615; Grizzle, 2001, pp. 357-361.)

What is meant by performance criteria? Criteria are a set of standards, guidelines or "yardsticks" by which performance measures are determined to be adequate or satisfactory. These criteria, for example, would include such standards as "relevance," "validity," "clarity," and so on.

Each criterion (of the total set of criteria) would be individually defined and, in turn, this definition would aid the budgeter or decision-maker with the task of determining if each performance measure satisfactorily met the criterion. For instance, if "relevance" is a criterion, these questions would be asked of the performance measure: "Is this information or data constituting the performance measure useful to decision-makers?" "Is there a clear, logical connection between the measure and the program objective?"

Criteria to determine the sufficiency and adequacy of performance measures have been identified fairly well given the history, relatively speaking, of PBB. All governments, however, decide which set of criteria most benefits their unique circumstances and preferences. Governments also usually place emphasis on some individual criterion or criteria more than others. Thusly, one state's PBB system may have eight criteria, another a dozen or more. In one state, "validity," clarity," and "quantification" may be much more valued or weighted greater than other criteria, while in another state these may be important but other criteria such as "reliability" and "accuracy" may rank much higher in terms of significance to decision-makers.

FIGURE 4
Performance-based Budgeting Criteria
for Selecting "Good" Measures

CRITERIA

Relevance -- Is this information useful to decision-makers? Is there a clear, logical relationship between the measure and the program objective?

Validity -- Does it accurately gauge what is supposed to be measured?

Significance -- Is it important? Is it worth measuring?

Uniqueness -- Does it contain information not supplied by any other measure?

Clarity -- Will decision-makers understand it? Is it lucid, distinct and intelligible?

Timeliness -- Will the information be collected in time for decision-makers to use it for making policy?

Reliability -- Will the data be collected from the same source in the same way every time?

Quantification -- Can the measure be expressed in the form of a numerical value? Does it measure quantity and/or quality of service provided?

Practicality -- Can the data be collected and processed on a regular basis, at a reasonable cost, without undue strain on staff resources?

Completeness -- Does the measure(s) cover all major elements of the program objective(s)?

Control -- Is the activity or objective being measured within the control, authority or power of the agency?

SOURCE: See State Reorganization Commission. (1984). Program Performance Workshop Manual. Columbia, SC: State Reorganization Commission.

One study of performance measurement criteria consisted of a review of 24 books and articles to determine which criteria were most frequently used and how they were generally defined. The criterion most cited, and presumably most used, was "validity." It was cited 15 times and was defined commonly as a "measure that logically represented the concept or construct to be measured" (Grizzle, 2001, pp. 358-359).

Other criteria most frequently cited were "clarity" (14), "reliability" (13), "relevance to objectives or decisions" (11), "accuracy" (10), and "sensitivity" (8). The criterion sensitivity was defined as "the distinguishing power of the measurement procedure or operation that is ample enough to capture the change and diversity that occurs in the object, event, or situation being measured" (Grizzle, 2001, pp. 358-359).

This study further identified a total of 22 separate criteria used to determine the sufficiency of performance measures. Of the varying criteria, the study's author organized them into broad categories that captured their group-type similarities. For example, "practicality" was a category used to capture the sense of both "cost" and "ease of data collection." Another category was "utility-user independent" which encompassed the criteria of "comparability," "sensitivity," and "clarity." Alternatively, the category of "utility-user dependent" included "relevance," "timeliness," and "controllability" (Grizzle, 2001, pp. 358-359).

STRATEGIC ASPECTS

What is strategic planning? Drawing on Olsen and Edie (1982), I define strategic planning as a disciplined effort to produce fundamental decisions and actions that shape and guide what an organization is, what it does, and why it does it. To deliver the best results, strategic planning requires broad yet effective information gathering, development and exploration of strategic alternatives, and an emphasis on future implications of present decisions. Strategic planning can help facilitate communication and participation, accommodate divergent interests and values, foster wise and reasonably analytic decision making, and promote successful implementation. In short, at its best strategic planning can prompt in organizations the kind of imagination--and commitment--that psychotherapist and theologian Thomas More thinks are necessary to deal with individuals' life conundrums.

John M. Bryson, 1995

Performance-based budgeting, when linked to strategic planning methodologies, is a powerful and advantageous decision-making tool. Today, many states are utilizing PBB systems along with strategic planning, recognizing that the two systems taken or applied together are a logical and practical fit. In fact, according to the survey conducted in 1998 by Garsombke and Schrad, 38% of states using PBB systems were also combining such efforts with formal strategic planning practices (Garsombke and Schrad, 1999, p. 10.)

Strategic planning is a process of developing a long-term plan to guide an organization, for example, a state agency, department or commission, towards a clearly articulated mission, goals and objectives. It is a process of assessing where an organization is presently, ascertaining the challenges and opportunities that present themselves, and determining what destination is most desirable and how to get there. PBB adds or emphasizes the critical, additional step of measuring progress (see Southern Growth Policies Board, 1996, pp. 6-7).

A review of recent literature suggests that states could benefit from the strategic planning process mainly for the reason that the development of multi-year policy plans could link present situations or circumstances with a more meaningful vision of the future. In other words, a strategic planning process would enable, let's say, the governor and the legislature, to understand more clearly where their state is now and where they would like it to be in the future. Basically, a strategic plan would indicate to state leaders -- more lucidly -- what is state government’s (or more particularly an agency's) overall mission, its goals and objectives, its strategic or programmatic activities, and its resources (people, monies, technologies, facilities, etc.). This process would further allow state officials to have a solid grasp of the state’s on-going performance and what results are actually being achieved (Young, 1998, p. 13). More specifically, the benefits of a statewide strategic planning process would be: