Week 7 Performance Budgeting

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Performance budgeting in the U.S. federal government: history, statusand future implications

Jones, L.R., and Jerry L. McCaffery. "Performance budgeting in the U.S. federal government: history, status and futureimplications." 10.3 (2010): 482+. Web. 15 May 2014.Public Finance and ManagementDocument Type: Report

Performance budgets emphasize activities performed and their costs, and include variousperformance measures in the budget to document what is gained from what is spent. Thesemeasures usually include unit cost comparisons over time or between jurisdictions. Performancebudgeting tends to emphasize measures of efficiency and effectiveness. Broader measures(outcome) are often difficult to define and measure, particularly in human service areas.Nonetheless, performance budget concepts have proven persistent. For the federal government, akey measure that has stimulated increased interest in the topic was passage by Congress of theGovernment Performance and Results Act in 1993 (GPRA) and subsequently the GovernmentManagement and Results Act (GMRA) in 1995. This article notes the long period of experimentationwith performance budgeting in the U.S. and identifies some of the lessons learned from thisinitiative. It also addresses reforms including the Office of Management and Budget (OMB) ProgramAssessment Rating Tool (PART) as they relate to incentives for budgeting based on performance.Conclusions also touch upon the difficulties faced in attempting budget reform in the midst of aperiod of fiscal and monetary stress. We conclude that while the expressed interest of the Obamaadministration in assessing the performance of federal government agencies is evident, there is noevidence to suggest that the administration will attempt to implement performance budgeting per seas a means to accomplish this end. Rather, performance is now reviewed by OMB only as an inputto budget decision making, which is perhaps the best that advocates of performance budgeting canhope for in the medium term. What it would take to interest federal government decision makers,particularly members of Congress, to accept performance budgeting is impossible to determinegiven the present focus of the government on health care reform, job creation, the state of theeconomy and armed conflicts abroad. Administrative reform, except in the areas of regulation offinancial institutions, national security and transportation safety, has not been high on the agenda ofthe Obama administration or Congress in the period 2008-2010. However, this could change withnew initiatives recently announced by the administration and Congress.

1. INTRODUCTION

Performance measurement and performance budgeting are topics that have long been a part of thepublic administration agenda in the United States (Eghtedari and Sherwood, 1960a; 1960b; Schick,1971). Interest in performance budgeting developed in response to perceived abuses at the localgovernment level as early as the 1870s in the U.S. (e.g., in New York City), at the beginning of the20th century (e.g., in the budget research of the New York City Bureau of Municipal Research,which eventually became the Brookings Institution), from a response to growth of government at all


levels and particularly of the federal government during the presidency of Franklin D. Rooseveltduring the Depression of the 1930s, through the mid-1940s and in the post-World War II era,especially during the Eisenhower presidency (McCaffery and Jones, 2001: 43-67). The first wave ofwhat we would identify as pure performance budgeting occurred during the 1950s under theguidance of the President's Bureau of the Budget (BOB). In the view of the leadership of the BOB inthe 1950s, performance budgeting and performance measures were intended to emphasizeefficiency and effectiveness. Then, as now, broader measures (outcomes) were desired but oftenwere difficult to define and measure, particularly in human services programs. Nonetheless,performance budgeting in concept has proven persistent over time in the U.S. federal government,as well as in state and local government. Evidence of this trend is found in the huge expansion ofthe literature in this area in the past decade. It is interesting to note that until the 1990s, in the U.S.and internationally, performance data were intended for internal government use, primarily bybudget and management control offices and line agency managers, and after 1993 by members ofoversight committees of Congress. The external use of performance measures arose in some partin response to the customer orientation of reform initiatives intended to make government moreaccessible and to improve service quality to citizens. Such initiatives include the NationalPerformance Review in the U.S., Total Quality Management, and a range of initiatives that havebeen lumped together, described and analyzed as the New Public Management (see for exampleBorins, 1997; Schedler, 1997; Thompson, 1997; Lynn, 1997).

More recently for the U. S. federal government, the key measures that stimulated increased interestin performance and budgeting was approval by Congress into statute in 1993 of the GovernmentPerformance and Results Act (GPRA), and in 1994 of the Government Management and ResultsAct (GMRA). The 1994 GMRA extended the provisions of the 1993 Act across the entire federalgovernment. Pursuit of the National Performance Review under the Clinton administration(1992-2000) also stimulated interest in this topic (National Performance Review, 1993). Our studydoes not ignore this long history of interest in performance as part of the modern era of effortdevoted to instilling "good government" and governance practices. Rather, informed by this history,it focuses on implementation of GPRA/GMRA and identifies some of the lessons learned from thisinitiative, its application and use, misuse and non-use. It also addresses selected impediments toreform as they relate to incentives for budgeting based on performance.

Before delving into the specifics of performance budgeting, let us note the tremendous increase ininterest in performance measurement and management that characterizes the field presently andhas done so for much of the past decade. Measurement of performance and efficiency in the publicsector has become a sub-field unto itself (Ingraham, Joyce and Donahue, 2003; Robinson, 2007).Scholars are interested and attempting to use various types of measurement, including toolsincluding CompStat/CitiStat (Behn, 2008a: 206-235) and techniques including Laspeyres andPaasche index numbers, principal-components methods, use of canonical analysis and eigenvaluesin weighting relevant variables, dynamic factor modeling, instrumental variables, and what aretermed hedonic approaches using regression coefficients in the weighting of a range of types ofvariables, balanced scorecards and their linkage to organizational strategy (Kaplan and Norton,


1996; Kaplan and Norton, 2001; Simons, Davila and Kaplan, 1999), and other approaches (see forexample Smith and Street, 2005: 401-417; Stone, 2002: 405-434; Rouse and Putterill, 2003:791-805; Reichmann and Sommersguter-Reichmann, 2007). While our study focuses on use ofperformance measures in budgeting, the question of how best to measure performance, or whetherit can be measured well at all, remains an issue of considerable academic and practitioner interest.

2. HISTORICAL EVOLUTION OF PERFORMANCE BUDGETING

General acceptance of the concepts of performance budgeting may be dated from therecommendations of the Commission on Organization of the Executive Branch of the Government(commonly called the Hoover Commission) in 1949. Performance budgeting was initially mandatedby amendments to the National Security Act in 1949. These amendments required the Departmentof Defense to install performance budgeting in the three military departments (63 Stat 412, 1949).

The federal government as a whole entered into performance budgeting as a consequence of theBudget and Accounting Procedures Act of 1950. This act required the heads of each agency tosupport "... budget justifications by information on performance and program cost by organizationalunit" 64 Stat 946, 1950). The first wave of experimentation with performance budgeting in the U.S.federal government occurred during the 1950s when the President's Bureau of the Budgetrecommended and Congress accepted and adopted a number of proxies for performance inbudgets, primarily as a means for simplifying the task of budgeting (McCaffery and Jones, 2001;see also Hilton and Joyce, 2007). For purposes of definition at this time, performance budgets wereintended generally to identify and emphasize activities performed and their costs, and to includevarious performance measures in the budget to document what was gained from what was spent.These measures typically included unit cost comparisons over time, or between jurisdictions whenused at state and local government levels.

While the federal government was developing performance measures and moving towardperformance budgeting, some state and local governments quickly adopted the concept. Earlyattempts included Detroit, MI, Kissimmee, FL, San Diego, CA, and various states includingOklahoma, California, and Maryland (Seckler-Hudson, 1953, 5-9). The City of Los Angeles providesanother case study of this era from 1952 to 1958. In 1951, Los Angeles created the position of CityAdministrative Officer (CAO) and filled it with Samuel Leask, Jr. Just one year after his appointment,Leask had instituted a performance budget system throughout the city. The heart of the LosAngeles system was a performance contract. This contract was based on goals and targetsdeveloped in the budget process. The parties to this contract were the mayor, city council and theCAO, on the one hand, and department administrators on the other. These performance contractswere monitored by the CAO during budget execution to ensure goals were achieved (Eghtedari andSherwood, 1960b: 83). Performance contracts were based upon work programs that became thestarting point from which questions about timing, size, and nature of expenditures could be framed.Departmental appropriations were based on work programs, and a government-wide reporting


system was used to compare units of work performed to man-hours expended in the budgetexecution process. This was the final check on actual versus proposed performance (Eghtedari andSherwood, 1960b, 83).

A study of this system, conducted primarily in the Building, Safety, and Library Departments, foundthat the performance approach resulted in a strengthening of the executive budget, programplanning, and central control of decisions going into the executive budget. Measurement of work ina governmental jurisdiction was found to be practical and feasible, with positive benefits gainedfrom such measurements (Eghtedari and Sherwood, 1960b: 82-88). In this case, perhaps the majorfinding of the study was in the value of creating and staffing the Office of City Administrative Officer(CAO). The study found that the CAO had "... improved the quality of program planning, hadbrought about a higher degree of coordination among the essentially independent departments thanever before existed, and has made some contribution to the overall efficiency of municipaloperations" Eghtedari and Sherwood, 1960b). Additionally, the new budget process assisted inincreased control for the city administrator by creating the performance contracts. Perhaps the mostimportant result of the Los Angeles experiment was the proof that a performance-style budget in agovernmental agency was feasible and beneficial.

Since the 1950s and particularly beginning in the 1990s, the United States federal government wasnot alone in its recognition of the potential of performance budgeting. Various U.S. state and localgovernments continued to experiment with versions of performance budgeting, and continue to doso to the present (Sanger, 2008). More than fifty countries have implemented various aspects ofperformance budgets in the period from the late 1960s through 2000. Among the leaders in thisendeavor were New Zealand, Australia, the United Kingdom, Sweden, Canada, and France. Mostearly attempts in foreign nations merely supplemented the traditional budget and were usuallyissued as separate documents (Axelrod, 1988, pp. 272-273). Meanwhile, the performance budgetexperiment in the U. S. federal government was integrated first into Program Budgeting in the1950s and then the Planning, Programming, Budgeting System (PPBS) during the 1960s. And whilethe government-wide PPBS experiment was terminated by President Richard Nixon in 1969, PPBScontinues to be used by the Department of Defense to the present, although in the early 2000s itwas renamed the Planning, Programming, Budgeting and Execution System (PPBES), indicatingthe importance of the entire budget cycle and not just the front end of budget preparation,negotiation and decision (Jones and McCaffery, 2008).

3. PERFORMANCE BUDGETING METHODOLOGY

Performance budgeting (PB) requires administrators to separate programs into the basic activitiesin which their agency engages, decide what performance measures best fit each activity anddevelop budgets based on costs for each measure. In this respect, PB has much in common withperformance management (for more on this topic, see Behn, 2008a; 2008b). The typicalperformance budget has narrative describing what the unit does, performance measures thatindicate activities and trends, and a breakdown by typical budget category. A "pure" performancebudget would consist of activity classifications, workload data, other measures of performance, unit


costing data, and program goals. Other data typically found in budgets that are modeled afterperformance budgets consist of narratives discussing the activity or program, several years of datafor comparisons, mission statements, and desired outcomes. It should be noted, most budgets thatare called performance budgets are not of the pure format.

Once programs have been separated into activities, measurements for performance must begenerated for program evaluation. There are five generic performance measures used withperformance budgeting. These include input, workload, efficiency ("doing the thing right"),effectiveness ("doing the right thing"), and impact or outcome measures. Input measures describethe resources, time, and personnel used for a program. They typically appear in the budget asdollars for salary and supporting expenses. They also might be presented as staff training hoursand number of person years expended on an activity.

Workload measures are volumetric measures of what an agency does. Such items as number ofaudits done, returns filed, checks issued, number of arrests made, or miles of highway constructedare typical workload measures. Workload measures are the lowest form of performancemeasurement. The trouble with workload measures is that there are a lot of them and they do nottell anyone very much without further analysis. While workload measures do describe the activitiesof a program, they do not define how well the program is accomplishing its mission (Jones &Thompson, 1999; 2007). To do this, workload measures must be converted into measures ofefficiency, effectiveness, and outcome.

Efficiency measures take workload data and merge it with cost data to develop unit cost measures.Then efficiency can be gauged on such items as the cost per arrest made, the cost of issuing acheck, or the cost of flying an aircraft per hour. Efficiency is a much better indicator of performancethan simple workload data since it gives outputs a direct cost relationship. These costs per unit canthen be compared over time or against other similar activities to gauge competitiveness orimprovement. This is important since it allows administrators a simple way to keep track of complexprograms. At higher levels, the legislature can track efficiency measures to keep costs down, andthe public can be assured its taxes are being spent efficiently. Efficiency, however, does notnecessarily indicate effectiveness.

Effectiveness measures are used to mark output conformance to specified characteristics. Suchitems as quality, timeliness, and customer satisfaction fall into this category. These measuresrequire the manager to determine goals for the particular program activity and to identify who theircustomers are and what type of characteristics customers would want within the products orservices delivered to them. Then effectiveness measures indicate how well the agency is satisfyingthese needs. Effectiveness measures are better than efficiency measures in that the primary focusof effectiveness is on the customers, whereas the primary focus of efficiency is the organization. Ifefficiency focuses on cost per unit, effectiveness measures tend to focus on rates ofaccomplishment, like percent of satisfied clients or ratio of clients helped as opposed to ratio ofclients seen. Effectiveness is associated with the quality of service and includes such things asresponsiveness, timeliness, accessibility, availability, participation, safety, and client satisfaction. If


efficiency measures are largely internal, effectiveness measures connect the operator to hisclientele, the citizen to his government.

Outcome measures are the most difficult level of measure used in a performance budget system.These are measures of outcome, impact, or result. They attempt to capture performance based onachieving what the program wanted to do as a whole. Simply put, they ask if the program achievedthe mission it set out to do from the start. Has the city become cleaner, the streets safer, studentsmore knowledgeable, and customers more satisfied? In the 1970s, several cities took photographsof their city streets and used a standardized photograph rating scale to judge whether their streetswere actually getting cleaner as a result of sanitation efforts. This information could then becompared against historical data or against a rating for a different neighborhood. After all, it ispossible to collect many more tons of trash and to have the unit cost drop, but have the city streetsgetting dirtier. The photo scale technique was meant to provide an outcome measure. As a practicalmatter, outcome measures have proved to be very difficult to develop and maintain. They tend to beparticularly difficult in human service areas, such as education or public safety, where globalstatements are easy, but precise measurement difficult. Additionally, in the budget process, evenwhere measurement is easy, sometimes it is difficult for policymakers to decide how many dollars itwill take to move up an increment or two on a rating scale and if it is worth it. This further assumesmore clarity in cause-and-effect relationships than may be possible in the real world. Constructingand evaluating measures adds technical difficulty to the budget process, which many participantsview as complicated enough in terms of determination of cost and political preference.

Early versions of performance budgeting focused on measures of workload and efficiency. Theindicators focused primarily on the agency itself and were primarily internal measures of what theagency did and what it cost. These were input and workload measures, like salary cost and tons oftrash collected, with efficiency ratios developed to measure the change in cost of collecting a ton oftrash from one year to the next. More recent attempts at performance budgeting have includedmeasures of effectiveness and outcomes or results, and have a focus on the clients and customersof the agency, with some measures constructed to evaluate client or customer satisfaction orresponse time to customer demand. Whatever measures are used, they are compared betweensimilar agencies or over several years to measure competitiveness or improvement.

This type of budget aims to assist managers in wisely spending such that maximum output isachieved with as little input as possible, with the focus shifting from objects of expenditure toprogram activities as the basis for budgeting. Therefore, instead of budgeting for salaries, utilities,and travel expenses, the manager would base the budget upon the activities his unit performs, andpolicymakers would judge which activities should be increased or decreased.

4. ADVANTAGES AND DISADVANTAGES OF PERFORMANCE BUDGETING

As with any budget type, performance budgets have advantages and disadvantages associatedwith them. The basic premise of PB is that it will instill incentives to improve the performance andproductivity of agencies and their employees. Some additional potential advantages include


improved planning, more effective administrative control, increased decentralization of decisionmaking, improved public relations as a consequence of greater transparency of program andspending information, improved focus on the activities of the organization, and provision of moreprecise quantitative measures, which if pertinent and feasible, are better than vague generalities forevaluating the organization according to a set of established standards (Wildavsky and Jones,1994).

Some potential disadvantages also may be noted. The first is that there is no empirical evidence inthe literature of any case where PB actually has had significant influence on agency budgets orproductivity (Gilmour and Lewis, 2006; Robinson and Brumby, 2005). However, there are caseswhere disincentives built into PB agency reviews have retarded performance, e.g., when budgetshave been reduced. Thus, one disadvantage is that when PB review is performed and the resultsare positive, leading to increased funding, no productivity increases are evident. But, when theopposite occurs, performance can decrease. Secondly, performance budgeting is not equallyapplicable to all organizations or agencies. Many agencies do not do work or exhibit performancethat is easily quantifiable (Schick, 2001). Thirdly, efficiency is not guaranteed by identifying andusing unit cost data for comparison to performance measures. Legislators and administrators mayuse a performance budget to identify problem areas or wasteful agencies, but this by itself does notincrease efficiency. Fourthly, in a political context, it may be difficult to define an appropriate set ofmeasurements for workload or performance. In practice, many indicators have proven to beinappropriate, and agencies may have to go through several iterations before a satisfactory set ofmeasures is found. Fifthly, the end product of many agencies may not be measurable by any knownmeans. Measures of effectiveness and outcome or impact are extremely difficult to develop in someareas, e.g., social services and education. Lastly, this type of budgeting may not be practicable forrelatively small agencies. The staffing time and costs associated with monitoring indicatorsyear-round may inhibit or prevent smaller agencies from using performance budgets effectively.

Two attributes appear to distinguish current performance measurement and budgeting initiativesfrom the efforts of the 1950s. The reincarnation of performance measurement beginning in the1990s in the U.S. federal government focused considerably on external relations, with customersatisfaction measures viewed as a major strength of new performance measurement systems.Additionally, when implementing performance measurement, a shared sense of vision from the topto the bottom of the organization was thought to be critical by advocates. However, despite thatagencies now prepare and submit annual and long-term program plans to OMB and Congress inconformance with the requirements of law, as explained in the next section of this study, most ofthese plans still did not link directly with their budgets (Joyce, (1993). Thus, neither OMB norCongress could analyze budgets linked to performance even if they wanted to because they havenot had the data to enable such an effort (Moynihan, 2006; see also Gilmour and Lewis, 2005).

5. ENACTMENT OF GPRA AND GMRA: IMPLICATIONS FOR PERFORMANCE BUDGETING

As noted in our introduction, on August 3, 1993, Congress passed P.L. 103-62, the GovernmentPerformance and Results Act of 1993--GPRA (P.L. 103-62, 1993). Approximately a year later, it


passed the Government Management Reform Act (GMRA) that implemented the provisions ofGPRA across all of the federal government. The purpose of the acts was to shift the focus ofgovernment management from inputs to outputs and outcomes, from process to results, fromcompliance to performance, and from management control to managerial initiative.

The significance of GRPA was made evident in 1994 when the Office of Management and Budget(OMB) issued its Circular No. A-11 Revision (Preparation and Submission of Budget Estimates forFY 1996). Under the guidelines of this directive, justification of programs and program fundinghenceforth would require the use of performance indicators and goals as set forth by the GPRA. Inissuing Circular A-11 in 1994 to instruct and control the preparation of the FY 1996 budget, OMBindicated that without performance indicators, performance goals, or some other type ofperformance data, agency requests for significant funding to continue or increase an ongoingprogram would be difficult to justify (OMB, 1994, 122). For the FY 1996 President's Budgetsubmission and subsequently through 2000, OMB asked agencies to use output and outcomebased performance measures in the budget decision-making process and budget justificationstatements. These guidelines conformed to the general provisions of the GPRA.

The long-term goal of GPRA was and continues to be implementing performance measurement intofederal government management and to some extent experimentally into budgeting as a means ofimproving resource planning, decision making, allocation and execution for federal agencies(McCaffery and Jones, 2001; McNab and Melese, 2003). Performance budget pilot projects wereconducted for FY 1998 and FY 1999 under the auspices of GPRA. Regrettably, the results fromthese pilot projects were never provided externally and consequently only agencies and OMBlearned from these experiments. Then in 2002, under the administration of George W. Bush, OMBdeveloped and integrated performance measurement but not performance budgeting per se into allprogrammatic and budget submissions and reviews under the Performance Assessment RatingTool (PART) system.

6. THE PROGRAM ASSESSMENT RATING TOOL AND LINKAGE TO PERFORMANCEBUDGETING

A budget reform initiative was announced by President Bush in the FY 2003 President's Budgetdelivered to Congress in February 2002 (Jones, 2002a). The budget introduced"performance-based budget review" to link funding to performance measures and accomplishmentsfor federal departments and agencies. As a result of a Presidential initiative in August 2001, theOffice of Management and Budget already had targeted review to improve performance in fiveareas of management: human resources management productivity, competitive sourcing (i.e.,contracting out), financial management, e-government, and integration of performancemeasurement and budgets. However, the change in 2002 went beyond these objectives inestablishing a Program Assessment Rating Tool (PART) to be used in budget review. What isprovided here is not a comprehensive evaluation of the success of performance-based budgetreview under the Bush administration, but merely a critique.


There is some evidence available to assess the efforts and degree of success of OMB with thisapproach, given that by 2003 more than 20% of federal programs and virtually all departments andagencies were complying with OMB budget submission requirements. For FY 2004, 231 programswere graded by OMB using the Program Assessment Rating Tool system (OMB, 2003). However,whether and to what extent the PART review improved department efficiency and effectiveness isuncertain (Gilmour and Lewis, 2006). What can be said is that OMB used PART to attempt toreduce budgets in some instances. This is hardly surprising given the role of OMB is, in part, to cutbudgets and this is standard practice as an element of most management and performance reviewtechniques employed by executive budget control agencies (Jones and Euske, 1991; McCafferyand Jones, 2001: 203-224, 281-320; Jones, 2001a; Jensen, 2001; Wanna et al., 2003; Guthrie etal., 2004). Performance assessment using PART continued in preparation of the FY 2003 throughFY 2009 President's Budgets under the Bush.

Performance review under the Bush administration may be viewed as a continuation of a trendbegun in the 1990s under OMB and at the direction of Congress (Rodriquez, 1996; GAO, 1997a;1997b; 1998; 1999; 2000a; 2000b; GPRA, 1993; GMRA, 1994). As explained earlier in this study,budgets have long been reported to and analyzed by OMB using performance-based criteria to linkfunding to performance measures and accomplishments for federal programs within departmentsand agencies. The Program Assessment Rating Tool was used by OMB in analysis of 67 programsincluded in the FY 2003 President's Budget. PART was employed to score performance in 231programs (about 20% of total on-budget federal programs) for the President's FY 2004 Budget. Anadditional 20% were reviewed annually by OMB in preparation of the FY 2005 through FY 2009President's Budgets (OMB, 2008).

PART scored programs using a multi-variate set of criteria consisting of approximately 30 variablesthat initially (for FY 2003-2008) culminated in what was characterized as a "stop light" system: redfor failing performance, yellow for marginal performance, and green for good performance. For FY2004 the system expanded the range of grading options to five categories: effective, moderatelyeffective, adequate, results not demonstrated, and ineffective. For FY 2004 14 programs were ratedas effective, 54 moderately effective, 34 adequate, 11 ineffective and 118 results not demonstrated.The large number in this last category indicated that many programs have not attempted or havebeen unable to develop useful measures of performance. Reporting of the results was provided in aseparate volume of the President's budget (OMB, 2003). Programs were rated in four areas ofperformance: program purpose and design, strategic planning, program management, and programresults.

7. PART GOALS AND PERFORMANCE IMPROVEMENT

The overall objectives of PART were (a) to measure and diagnose program performance, (b) toevaluate programs in a systematic, consistent, and transparent manner, (c) to inform agency andOMB decisions for management, legislative or regulatory improvements and budget decisions, and(d) to focus on program improvements and measure progress against prior year ratings. OMBextended the application of PART to all programs in the budget in budget review. Doing so proved


to be a time-consuming effort for the reviewers who were mostly line budget examiners. Budgetanalysts were tasked to review specific programs, i.e., they assumed some degree of ownership ofthe budgets they examined (McCaffery and Jones, 2001: 203-224; Wildavsky, 1964: 38, 40, 160).Consequently, there was a problem of consistency in application of evaluative criteria with OMBreview of budgets and performance.

Given this problem, the executives and budget staff of programs and agencies under review werewise in taking Wildavsky's advice (Wildavsky, 1964, pp. 2031) to be sensitive to the signals aboutpriorities provided to it by budget analysts. Typically, after one or two budget reviews by the sameanalyst, agency budget officials became attuned to the preferences of the analyst andadministration served. To fail to read such feedback was to lose competitive advantage in thebudget game. The advantage of the PART system over previous methods of budget review wasthat it provides more feedback, i.e., more signals on how to achieve a higher rating. Indeed, by2003, PART had become sufficiently institutionalized so that consulting firms inside the Washington,D.C. beltway were offering courses to teach program staff how to improve their scores. With thismuch feedback and assistance, it is surprising how many programs were rated for the FY 2004Budget as ineffective or results not demonstrated categories (129, or roughly 56% of the 231programs reviewed). However, from FY 2004 to FY 2006, many agency performance ratingsimproved.

For FY 2003 through FY 2008, many programs received failing PART scores--but improvements insome programs continued to be reported (OMB, 2008). Departments and agencies invested stafftime and energy to achieving improved ratings in attempt to be rewarded in the President's Budget.The key incentive supporting the PART system was the intent of OMB directors and staff tointegrate performance scoring with OMB budget review. Presumably, programs that improved theirratings were rewarded in the budget. Thus, the advantages of the PART approach appear to betwofold. First, the scoring was relatively easy to understand because it was simple--there were onlyfive categories. Second, PART scores were scaled relative to a set of variables that represented thestrategic and annual planning, management and execution performance by programs and agenciesaccording to data developed and reported to OMB by these agencies. OMB did not provide the datafor PART reviews. Still, the opportunity was ever present for programs to score better if they wantedto, in part based on whether they were able to measure and quantify results.

It may be observed that at least two biases are built into any performance rating system in additionto the inevitable issues concerning inter-rater reliability noted above. First, some programperformance results (or outputs) are easier to measure and report than others. The second isuncertainty about the relationship between achievement on measures and budget decisions. Forexample, if programs solve some problems faced by their clientele groups (Wildavsky's term) butfailed others, should their budget be increased or reduced? On one hand, the argument is to rewardimprovement, but if clientele needs have been satisfied, does this indicate a decrease in demandfor program services and therefore a budget cut?

Review of the PART system by departments and agencies that were rated by OMB initially


indicated several recurrent criticisms (Jones, 2002a; 2002b; 2003). The PART questionnaireinstrument required yes or no answers to a number of questions about performance. It was beensuggested that a better system would have departments and agencies rate their answers on ascale, e.g., 1 (lowest) to 5 (highest). Scaled data are more amenable to analysis than yes/noresponses. A second criticism concerned the way OMB defined the units of analysis - as programsinstead of departmental or agency administrative entities. Some programs defined by OMB werenot administered as such by departments and agencies (many programs cross agencyjurisdictions), thus making performance reporting more difficult. In this regard, there seemed to besome incompatibility between PART and the Government Performance and Results Act. PARTevaluated programs while GPRA assesses agencies--and these entities are defined in differentways. This was confusing to those under evaluation. A third criticism was that while OMB providedsome feedback on their assessment of questionnaire responses and desired improvements inprogram performance, more information of this type was needed. Further, some program officialsindicated they wished to collect more data but were prevented from doing so by various rules,including the requirements of the Paperwork Reduction Act, and OMB insistence that they cut downthe number of different data elements to be measured and reported. Finally, program staff reportedthe appearance of an inverse relationship between effectiveness ratings and budget decisions, i.e.,better was not necessarily richer.

8. SUPPORT FOR PERFORMANCE-BASED REVIEW

Testimony to Congress by David Walker (Walker, 2001; 2002), the Controller General of the U.S.government, and comments by representatives of the General Accounting Office, the Offices of theInspectors General and members of Congress indicate that important institutional observers,including the key oversight committees of Congress, have reviewed OMB assessment of executiveprograms and management practices for the FY 2003 and 2004 budgets. Until 2006, numerousentities including the U. S. Comptroller General were cautiously supportive of Bush administrationefforts.

The Government Accountability Office (GAO), the auditor for Congress, was very specific in statingthat it had reviewed favorably the criteria supporting PART and OMB evaluation of department andagency performance. As noted, in 2002, Christopher Mihm of GAO stated that in his view theapproach and its execution were methodologically sound (Mihm, 2002) GAO reviews ofperformance management from the late 1990s through 2002 were supportive. (GAO, 1996a; 1997a;1997b; 1998; 1999; 2000 a & b, Mihm, 2002a & b; Posner, 2002).

GAO has favored performance measurement to the extent that it recommended in 2002 thatCongress adopt a "Performance Resolution" process to measure and report annually on executiveagency progress. This approach would function in a manner similar to the Budget Resolutionprocess (Posner, 2002). Such support for performance budget review (as distinct from broad-scaleperformance budgeting) may change, but it is clear that virtually everyone in the nation's capitoltook serious notice of and responded to the Bush administration OMB initiatives with performancemeasurement and results reporting linked to budgets. And, it may be anticipated that Congress and


the Executive branch will continue to be concerned with implementation of the GovernmentPerformance and Results Act. However, positive reviews of PART began to change when it becameevident after 2006 that OMB was using PART merely to cut budgets. Eventually this became theBush budget legacy: a perversion of the purposes of performance budgeting and growth of largeannual and cumulative budget deficits.

9. U.S. FEDERAL BUDGET REFORM: IS THERE A ROLE FOR PERFORMANCE BUDGETING?

To put the initiatives of the Bush and Obama administration into the larger context of the status offederal budgeting in 2010-2011, observers of the congressional budget process have expressed theview that performance assessment is not the most significant problem. Rather, without caps onspending, and without the other restraints from the Budget Enforcement Act of 1993 that expired in2000, including Pay-Go (finance before providing the benefit) for entitlement programs to controlincreases in the huge non-discretionary accounts (approximately 70% of total federal spendingannually) including Social Security and Medicare, the federal budget process was deemed to be"broken" and in need of reform (Joyce, 2002; Meyers, 2002). Further evidence abounds that federalgovernment budgeting is in trouble, both procedurally and substantively. After four years of annualsurpluses, from 1998 to 2001, the federal budget moved back into deficit of $160 billion in FY 2002and approximately $480 billion in FY 2003. Adding to future deficits, Congress passed additional taxcuts requested by President Bush and adding $475 billion in spending to Medicare in 2003.Congress also approved additional funding of $79 billion in the spring of 2003 for the war onterrorism, and in September 2003, President Bush requested another $87 billion in the next budget(FY 2004) for pacification and rebuilding Iraq and Afghanistan. Large supplemental budgets havebeen approved routinely by Congress and the President for national defense and security from theperiod following the 9/11 terrorist attack on the U.S., continuing into 2010 under the Obamaadministration.

Given is that the annual federal budgets for fiscal years 2010 and 2011 are projected to be in deficitby more than $1 trillion, that total federal debt is approximately $13 trillion and is projected toincrease through at least 2018 (Congressional Budget Office, 2010). Additionally, with the focus ofthe government now on health care reform implementation, job creation, the state of the economy,and armed conflicts abroad, the result is that administrative reform, except in the areas of regulationof financial institutions, national security and transportation safety, has not been not high on theagenda of the Obama administration or Congress. What the Democratic Congress and PresidentObama will do with respect to controlling spending and reducing deficits over the longer term isuncertain, although Obama has repeatedly promised to make such reductions. Whether Congresswill invest more energy into performance review of the budget also is impossible to forecast. Recentevidence suggests that Congress will attempt to reduce spending and the deficit through its BudgetResolution process (Congressional Quarterly, 2010, p. 1). The Budget Resolution is, in essence,the annual congressional spending plan. However, the spending and other targets established inthe Budget Resolution are not binding on appropriations committees, and Congress in fact is notrequired to pass a Resolution (McCaffery and Jones, 2001, pp. 109-112). As of May 2010,Congress was unable to negotiate a Budget Resolution for FY 2011.


While the expressed interest of the Obama administration in assessing the performance of federalgovernment agencies is evident, PART as employed by the Bush administration has beenabandoned and there is no evidence to suggest that the administration will attempt to implementperformance budgeting per se as a means to accomplish this end. Rather, performance is nowreviewed by OMB less formally than under PART, as one set of inputs to budget decision making,which is perhaps the best that advocates of performance budgeting can hope for in the mediumterm. What it would take to interest federal government decision makers, particularly members ofCongress, to accept performance budgeting is unknowable. Congress demonstrated such interestin the 1980s in passing the Gramm-Rudman-Hollings budget deficit legislation and in the 1990s inapproving GPRA and GMRA. However, in the 2000s regardless of what party has been in themajority, spending control has not been a priority. And for a variety of reasons this also has beenthe case for both the Bush and Obama administrations in this period.

Implementation of performance budgeting seems unlikely in the short term because Congresscannot even manage the process it is supposed to follow to control spending, even when one partycontrols both Houses of Congress. Despite the GAO recommendation that Congress use aperformance resolution (Posner, 2002), it seems unlikely that Congress has the institutionalcapacity or the inclination to apply performance measurement in budgeting. Appropriationscommittees, which hold the most budget power in Congress, shun this approach because theybelieve it will reduce their discretion over spending. Few members of Congress want "budgeting byformula," as performance budgeting often is perceived.

10. THE FUTURE OF PERFORMANCE-BASED BUDGETING IN THE U.S. FEDERALGOVERNMENT

Whether Congress will ever take action to further implement performance measurement andmanagement, strategic planning and budgeting, in conformance with the Government Performanceand Results Act of 1993 and the Government Management and Results Act of 1995, is uncertain.Given the likelihood of little or no action by Congress to place greater emphasis on performance inbudget analysis and decision making in the near-term future, we may ask how much difference itmakes whether Congress uses or ignores performance budgeting and performance review? Tosome extent, Congress has routinely used performance measures to review and enact budgetssince the 1950s and before. A vast number of performance proxy measures are built into federalbudgets for Executive branch programs in virtually all departments, ranging from the National ForestService and Bureau of Land Management to the Department of Defense. By using formulas thatequal dollars, performance budgeting may reduce complexity in congressional budgeting - andreducing complexity is a necessity in federal budgeting, as Wildavsky explained years ago(Wildavsky, 1964, pp. 11-14-15; pp., 147-152; Wildavsky, 1988, pp. 79-80, p. 412). Can Congressbe expected to do more?

With respect to executive branch budget reform, it probably does not matter much how Congressbudgets. The executive branch can institute the types of reform it deems fit and useful. Again, this is


nothing new. Most of the major budget reforms in the post-WW II period have been developed andimplemented in the executive branch, e.g., program budgeting in the 1950s, PPBS in the 1960s,management by objectives--and budgeting by objectives--and zero-based budgeting in the 1970s,top-down budgeting in the early 1980s, fixed-ceiling budgeting in the mid-1980s and 1990s afterpassage of the Gramm-Rudman-Hollings Acts, the Budget Enforcement Acts of 1990 and 1993 andother similar measures, and the performance/results orientation post-2000 (McCaffery and Jones,2001). While it may be argued that GPRA was a congressional initiative, enforcement andimplementation have been managed by the President's Office of Management and Budget. Thusthe conclusion may be drawn that if performance budgeting is to be implemented at some time inthe future in the U.S. federal government, it probably must come at the initiative of the Presidentand the Office of Management and Budget.

President Barack Obama has articulated the importance of performance evaluation in publicpronouncements. However, as of 2010, OMB does not appear to be moving any further towardsimplementing a performance budgeting system--but it definitely continues to emphasize use ofperformance information in the budget process as explained below. While most federal agencieshave embraced GPRA and the idea of performance measurement, some still are treating it as ashort-term phenomenon and waiting for it go away, as did other budget reforms including ZeroBased Budgeting (ZBB) and Management by Objectives (MBO), so as to allow them get on withwhat they perceive as the "real" work of their agencies. Performance measurement andperformance budgeting consume a significant amount of staff time and energy. Unless decisionmakers are willing to use the information produced from performance measurement, staff and otherobservers of the process wonder whether the cost is worth the effort and benefit. In particular, ifCongress is no longer interested in the GPRA approach to performance measurement, they thenwonder why OMB continues to push it. This perception was magnified when performancemeasurement and evaluation were viewed as exclusively of interest to the Executive branch for usein cutting budgets, as occurred during the period 2006 to 2008 (and for fiscal year 2009 budgetpreparation under Bush).

If Congress appears to be ignoring to a great extent the results of the GPRA and GMRA laws itpassed, then it remains to be seen whether the Obama administration and the Executive branch willpress forward on the emphasis on performance measurement in budgeting and management in2010 and beyond. It may be observed that some members of Congress remain interested inperformance review. On May 13, 2010, Congressional Representative Henry Cuellar (D-TX)presented a draft bill to the House Oversight and Government Reform subcommittee onGovernment Management, Organization and Procurement intended to put performance "at theheart of how federal government does business". Cuellar introduced similar legislation in 2009intended to make PART law but Congress did not take action on this legislative proposal. Theemphasis of the new legislation is revised so that PART has been dropped, with the new legislationfocused on performance goals and more modern, crosscutting thinking about performancemeasurement and management. However, this legislation does not call for performance budgeting.(Kohli, 2010)


The Obama administration is interested in assessing the performance of federal governmentagencies. In spring 2010, OMB announced that the President's fiscal year 2011 budget included anew approach to ensure that executive branch departments and agencies focus on performance.The Budget established 128 High Priority Performance Goals (HPPGs) across federal departmentsand agencies that define its priorities (OMB 2010). According to OMB sources (who decline to becited) the Obama administration wants agencies to integrate performance planning into theiroperational plans more systematically with "less bureaucratic reporting and review" by OMB, as wasthe practice using PART under the Bush administration. We have noted that much of this has beenalready accomplished by a number of agencies in implementation of GPRA. Further, it is unclearhow HPPG performance review by OMB will be integrated into budget decision making, or whetherit is intended to be integrated at all. A reasonable expectation is that high priority areas will receiveincreased funding in Presidential budgets. If this is so, it is unclear what performance results willneed to be demonstrated, and to whom, for agencies to justify continuation of funding increases.

Despite this interest in careful assessment of the performance of federal agencies, there is noevidence to suggest that the Obama administration will attempt to implement performancebudgeting. Thus, the longer-term issue for the Obama administration, and administrations to follow,is to determine whether performance assessment of the type they desire can and should be doneusing performance budgets.

11. CONCLUSIONS AND RECOMMENDATIONS

Based on our review of performance budgeting and performance-oriented budgeting initiatives atthe federal government level in the U.S., what advice may be given to practitioners involved indeveloping performance measurement tied to budgeting, regardless of what level of government atwhich they work? In our view, practitioners should consider the recommendations provided below.Finally, after enumerating and articulating our recommendations, we provide an overall conclusionwith respect to U.S. federal government application of performance budgeting.

1. Agencies should first identify the primary mission they perform and the most important servicesthey provide. It is critical to define and use performance indicators that measure and report (a) themost important work elements the agency is responsible for performing, and (b) evidence of valueadded and changes in productivity. Definition of agency mission, strategy and prioritization ofservices needs to be integrated and linked to performance plans and budgets. This in turn helps inidentifying the measures of performance to be used in gauging these service activities. Decidingwhich services are the primary activities of the agency will clarify which measures to develop tomeasure performance (Jones and Thompson, 2007; Grizzle and Pettijohn, 2002).

2. Agencies should keep performance budgeting plans a simple as possible. Simplicity has seemedto be the best way to approach GPRA performance planning. Large convoluted measures that aredifficult for outside administrators or legislators to understand are not likely to be beneficial ingauging performance. Moreover, verbose explanations of future implementation plans or of itemsnot directly related to the measures themselves add little value to plans. The plans should state the


mission and vision of the organizations. Specific measures, their targets, baseline data if available,and long-term goals should be identified. Clear definitions of the measures used should bedeveloped and examined closely for clarity before they are reported outside the agency. Finally, ameans for validating the measures as well as their relationship to the budget is highly desirable andrequired by law in the GPRA.

3. Agencies should expect evolution of measures. Several aspects of performance planning willtake considerable time to work out. Dialogue about the satisfactoriness of measures needs to takeplace within the agency, and between agencies and budget reviewers and others who monitorperformance externally, e.g., congressional oversight committees. Such dialogue is needed toimprove measures, measurement and linkage to budgets. Subsequent performance plans may notlook anything like the initial ones developed by an agency. Federal agencies changed many of theirperformance measures after realizing the initial measures were not appropriate. Additionally, thesize of initial plans often is significantly reduced over the first several years of implementation(General Accounting Office, 2001; see also General Accounting Office, 1996; 1997a & b; 1998;1999; 2000 a & b). Moreover, outcomes may not be measurable on an annual basis. Someoutcomes take years to achieve (e.g., in the area of social services or education), depending on theservice mission, orientation and goals of the agency.

4. Agencies should concentrate on measures of efficiency, effectiveness and cost reduction.Outcome or output measures should be included if possible in performance budgets. However, itmay be more feasible for agencies to focus on efficiency and effectiveness measures that are morerealistically attainable. Even simple measures of output and performance are likely to be perceivedas more useful by both agency officials and external budget examiners if accompanied byefficiency, effectiveness and cost reduction initiatives. In the current environment of budget deficitsand reductions, performance measurement and reporting that includes means for improving agencyoperations while cutting costs are more likely to be noticed and supported.

5. Agencies should realize their measures may not be interpreted as expected. Outcomes are by farthe most difficult to capture. Few agencies can include true outcome measures in their GPRA plans.An outcome measure at one level could be an input measure at another level. Input measures arenot required by GPRA and usually are not of interest to outside stakeholders, but they are oftenused by control agencies in budget examination and reduction. Experience at the state governmentlevel in the U.S. has demonstrated that some of the consequences of use of performancemeasurement and budgeting may have a broader range of effects than initially anticipated (Melkersand Willoughby, 2005; see also Willoughby, 2004).

6. Good accounting and performance measurement systems are required to implementperformance budgeting in an effective manner. Agencies with good service and cost informationsystems in place have a significant advantage in developing performance measurement andbudgeting systems. Few agencies had good information systems when GPRA was passed, but asof 2010, most federal agencies have such systems, given varying degrees of sophistication andaccuracy.


7. Agencies should link together reform initiatives where synergism is possible. GPRA fit ratherneatly into other reform initiatives in the 1990s, including Total Quality Management and theNational Performance Review. Most of the pilot projects used GPRA as a means to enhanceinitiatives already in progress in their organization. Many of the tools of TQM appeared to havebenefited managers as they attempted to create performance indicators and plans. In addition,GPRA requirements matched reasonably well with the Performance Assessment Rating Tool(PART).

8. Agencies should determine how performance plans can be linked to resource allocation. Perhapsthe most difficult task to complete in all of performance budgeting and in GPRA implementation is todefine whether and how various measures on hand may be tied to costs and resource allocation. Asnoted above, defining measures and relating them to costs requires accurate and reliabledatabases and information systems. Most federal agencies have improved their accounting systemsin efforts to comply with the requirements of the Chief Financial Officers Act of 1990. However,better accounting for expenses and costs is only part of what is needed for performance budgeting.Measures of service performance must be developed and matched to expenses and costs.

Over the past decade, some federal agencies have achieved significant progress relatingperformance measures to costs, while others have not made any real progress, according to OMB(OMB, 2010). Initially, a few agencies began the performance measurement process byestablishing performance contracts between its field activity managers and the corporate office(General Accounting Office. 2001, pp. 8-9). However, by the early 2000s, most U.S. federalagencies, and many of the other national governments that have used extensive performancecontracting in the past, had abandoned them, e.g., New Zealand. A primary stumbling block with theperformance contract approach is the object of expenditure and appropriation base used in the U.S.federal budget process, which has no performance orientation. For other nations, performancecontracts have been eliminated because they were not found to produce the results desired,especially given the significant effort consumed in preparation and reporting. Still, performancemeasures are used to allocate budgets to some extent as of 2010 in the UK, Switzerland, Australia,New Zealand and in other developed nations, and in the U.S. federal government, as notedpreviously in this study. Some developing nations are deeply involved in similar efforts (Wescott etal, 2009). Still, such use typically does not qualify as pure performance budgeting. Rather, it isresource-allocation decision making, informed by some performance indicators and trends. Only indeveloping nations does it appear that pressure is applied presently to implement full-scaleperformance budgets. While this pressure is applied within national governments by their treasurydepartments and central budget control agencies, often it is directed more rigorously to localgovernments and is driven most directly by international development assistance institutionsincluding the World Bank and Asian Development Bank (Srithongrung, 2009; Punyaratabandhu andUnger, 2009; Kim, 2009; Netra and Craig, 2009; Taliercio, 2009, p. 196; Wescott, 2009).

In summary, the extent to which longer-term U.S. federal government experimentation withperformance-based budget reform will continue remains in doubt. This is particularly the case as a


result of the extensive role of the federal government in assuming a large amount of additional debtin its efforts to stabilize the economy, beginning in the last quarter of 2008. Rescuing the economyhas dominated the U.S. federal government monetary and fiscal policy agenda to the extent thatperformance budgeting or performance-oriented budgeting, even as employed during the period2001-2008, has been pushed off the political landscape. Still, given that it has been around for morethan fifty years, we can expect that performance budgeting, at some point, is likely to rise again onthe budget reform agenda of the U.S. federal government.

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Willoughby, K. (2004) "Performance Budgeting and Budget Balancing: State GovernmentPerspective", Public Budgeting and Finance, 24(2), pp. 21-39.

L. R. Jones

Wagner Professor of Public Management

Graduate School of Business and Public Policy, Naval

Postgraduate School

Monterey, California, USA

Jerry L. McCaffery

Professor of Public Budgeting

Graduate School of Business and Public Policy, Naval


Postgraduate School

Monterey, California, USA

Jones, L.R.^McCaffery, Jerry L.

Documents

Week 7 Performance Budgeting