Performance Budgeting (with CD): What Works, What Doesn't

By William G. Arnold CDFM-A, CCA

Improve Your Agency's Performance Budgets and Accountability Reports

Performance Budgeting: What Works, What Doesn't is a must-have resource for government officials implementing performance budgeting within their organizations. The author examines performance budgets and accountability reports from a cross-section of federal agencies and offers an objective critique of both their form and content. Examples of the best—and the worst—federal performance budgeting efforts offer insights and lessons for agency officials charged with determining the best performance budgeting techniques to put into practice. Readers will benefit from reviewing examples of other organizations' work and will learn how to use evaluation tools to apply performance budgeting techniques to their own organizations.

Understand the evolution of performance budgeting and its inherent advantages
Examine the performance budgets and results for eleven federal agencies
Benchmark against the best agency submissions, and avoid the pitfalls of poor budgets and accountability reports
Identify the attributes of good performance measures and learn how to develop them
Bonus! Includes a CD-ROM with the latest performance and accountability reports for all 24 CFO agencies.

• Language: English
• Publisher: Berrett-Koehler Publishers, Inc.
• Release date: Jul 1, 2008
• ISBN: 9781523096084

William G. Arnold CDFM-A, CCA

William G. Arnold, CDFM-A, CCA, worked with the Department of Defense for 34 years, over 25 of which he spent in financial management. He has held positions as Budget Officer, Director of Resource Management, Director of Disbursing, and Entitlements Director with the Air Force and the Defense Finance and Accounting Service. Mr. Arnold is also the author of Performance Budgeting: What Works, What Doesn’t and The Antideficiency Act Answer Book .

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Acronyms

1 Performance Budgeting: An Idea Whose Time Has Come

There are serious weaknesses in the internal operations of the Federal Government in the fiscal field. These weaknesses penetrate into the heart of every governmental transaction. (T)he Government’s accounting system, outmoded and cumbersome, does not indicate what was accomplished with the money spent in the year past.

Only by making the head of each activity financially responsible for all the costs of his program, can he be held to account. Only by modernizing the Federal system of budgeting and accounting will it be possible to tell exactly how much any single program or project is costing. The Federal Government must be able to assess results intelligently.

One could easily assume these quotes are from a recent Government Accountability Office (GAO) report or from Congressional testimony. In truth, these rather astounding statements are from the Hoover Commission report of 1949.¹ What’s more astounding is that they still ring true today.

The History of Performance Budgeting

The Commission on Organization of the Executive Branch of the Government was created in 1947 when Congress passed Public Law 80-162. President Truman appointed former President Herbert Hoover to chair the effort, hence the group’s popular title: The Hoover Commission. The report contains wide-ranging recommendations for improving the way the government works. In its discussion of government budgeting, the report makes the following statements:

The budgetary processes of the Government need improvement, in order to express the objectives of the Government in terms of the work to be done rather than in mere classifications of expenditures.²

We recommend that the whole budgetary concept of the Federal Government should be refashioned by the adoption of a budget based upon functions, activities, and projects; this we designate as a ‘performance budget.’³

Thus, the term performance budget was coined in 1949. The following excerpts explain what the creators of this concept had in mind:

Such an approach would focus attention upon the general character and relative importance of the work to be done, or upon the service to be rendered, rather than upon the things to be acquired, such as personal services, supplies, equipment, and so on. These latter objectives are, after all, only the means to an end. The all-important thing in budgeting is the work or the service to be accomplished, and what that work or service will cost. . . .

Under performance budgeting, attention is centered on the function or activity—on the accomplishment of the purpose—instead of on lists of employees or authorizations of purchases. In reality, this method of budgeting concentrates Congressional action and executive direction on the scope and magnitude of the different Federal activities. It places both accomplishment and cost in a clear light before the Congress and the public.⁴

Performance budgeting was seen as a shift from the traditional method of budgeting for inputs, to a system of budgeting for what is to be produced—outputs—and for the results of those outputs—outcomes. Performance budgeting was also meant to increase government transparency for major stakeholders—Congress and the public.

Unfortunately, Congress didn’t immediately buy into the idea. It passed the Budget and Accounting Act of 1950, which attempted to shift the focus from input budgeting to output budgeting. But the real crux of performance budgeting, tying requested dollars to anticipated results, had to wait another 43 years for Congressional action.

In 1993 Congress attempted to make the government more accountable for producing results meaningful to the public by passing the Government Performance and Results Act (GPRA). (See Appendix I for the full text of GPRA.) In doing so, Congress, perhaps unwittingly, reinitiated the efforts that began with the Hoover Commission report in 1949 and started us down the path toward performance budgeting.

GPRA required each federal agency to satisfy three basic requirements: (1) publish a strategic plan with long-range objectives, (2) create annual performance plans that show how the agency will make progress in the coming year toward achieving the objectives outlined in its strategic plan, and (3) report on how well the agency met its annual performance plan in the form of an annual performance report.

Implementation of GPRA was slow and sporadic. Agencies by and large went through the motions, producing their plans and reports to satisfy the legislative mandate, but without a real sense of purpose. Agencies didn’t believe the plans and reports had value, and there were no benefits or consequences for meeting, or failing to meet, the annual performance goals.

This all changed when the President’s Management Agenda (PMA) was published in 2001. The PMA, consisting of five overarching strategic objectives, was designed to make the government work better. The President’s Office of Management and Budget (OMB) began quarterly ratings of the five objectives for every major federal agency. The fifth strategic objective, Budget and Performance Integration, helped us focus on performance budgeting as a desired end-state, using the GPRA structure as the means to get there. The continuous pressure of quarterly ratings moved the entire federal structure down the performance budgeting path.

After a trial run with select agencies in FY2004, all federal agencies began performance budgeting with their FY2005 budget submissions. OMB directed that the GPRA requirement for an annual performance plan would be incorporated into the budget submission—in other words, agencies were to submit a performance budget. In addition to the traditional input-style budget broken down into appropriations and object classes, agencies were now expected to show the dollars associated with their major programs or activities, what accomplishments those programs would achieve during the year, and the results, or outcomes, of those accomplishments. In other words, agencies were directed to create annual performance plans that tied results to dollars. This is the essence of performance budgeting.

The federal agencies have had varying success in implementing performance budgeting. Some have embraced the idea, creating budgets that are clear and compelling. Others are lagging behind, perhaps because the value of performance budgeting isn’t apparent or perhaps because they believe this movement is temporary and will be replaced by another initiative as administrations and politics change.

The Value of Performance Budgeting Today

So, does performance budgeting have value? And equally important, is it here to stay? The answers to these questions are interrelated.

As the Hoover Commission report demonstrated, the concept of performance budgeting isn’t new. But why is the idea coming the forefront now? What’s different today that gives performance budgeting both value and staying power that didn’t exist in the past?

We are at a historic turning point in the realm of federal budgeting for two principal reasons. First, entitlement programs are mushrooming, consuming ever larger portions of federal spending. Legislators are squeezing discretionary budgets like never before. Second, information technology has increased the visibility of government activities. The explosion in the number of media news outlets means more and more eyes are serving as watchdogs over government spending.

Dwindling Discretionary Funds

Consider the makeup of federal spending in 1966, depicted in Figure 1-1.⁵ Interest on the national debt amounted to seven percent of total spending. Other mandatory expenses, including Social Security (15 percent), Medicare/Medicaid (one percent), and miscellaneous other categories such as government retirements amounted to 26 percent. Thus, all entitlement programs plus interest represented just one-third of federal spending. That left the other two-thirds for discretionary programs, that is, funding for the federal agencies to run the government. Defense used 43 percent of all federal dollars, while the rest of the government consumed the remaining 24 percent.⁶

Figure 1-1 Federal Spending Breakdown in 1966

Now compare the fiscal spending breakdown in 1966 with that in 2006 (Figure 1-2).⁷ In 2006 interest accounted for nine percent of spending, Social Security was up to 21 percent, and Medicare/Medicaid was a staggering 19 percent. Total mandatory spending had reached 62 percent of all spending, leaving just 38 percent to run the government. In 2006, defense spending consumed 20 percent, while all non-defense agencies were left with just 18 percent. The defense piece of the pie has shrunk by more than half since 1966 and the non-defense piece has been cut by one-third.

Figure 1-2 Federal Spending Breakdown in 2006

This trend is continuing. Entitlement programs, especially Social Security and Medicare/Medicaid, continue to grow faster than the rate of revenue growth. Changing demographics, reflecting the impact of aging Baby Boomers, promises an explosion in entitlement spending.

Projections by GAO indicate that without a change in either the entitlements legislation or the tax code, entitlement spending will consume 100 percent of all tax revenues by 2030, and by 2040 will consume 30 percent of the gross domestic product (GDP).⁸ This leaves nothing to operate the government—except deficit spending. The magnitude of deficit spending needed to fund government operations would be untenable, both politically and economically.

What does all this mean? In short, agency budgets are under enormous pressure, and that pressure will continue to grow. Discretionary budget dollars are becoming increasingly scarce. This leads to more competition for these dollars and more scrutiny over how we spend them.

Decision makers (e.g., agency heads, OMB, the President, Congress) will be forced to make tougher and tougher decisions on which programs to fund with these scarce discretionary dollars. Performance budgets give the decision makers the information necessary to make rational, informed allocations. Agencies that conduct performance budgeting well have a decided edge over those that don’t. Good managers would gain an advantage by embracing performance budgeting.

Media Scrutiny

Performance budgeting also makes agencies accountable for achieving the results promised in the budget. This heightened accountability places a lot of pressure on agencies to succeed. Agencies that document meaningful and realistic objectives in their performance budgets and