February 17, 1994
Developing and adopting a budget is perhaps the single most important and time-consuming activity of state government. Ultimately, the budget that is approved by the Legislature and Governor reflects the priorities and preferences that result from a sometimes contentious political process.
Traditionally, budget discussions have focused on the inputs of government, such as the amount of funding and staff. Increasingly, however, decision makers and the general public have demanded better information on the results of public programs and policies. This includes information on government's (1) outputs, or activities, (2) outcomes, or effectiveness, (3) efficiency (cost per output), and (4) cost-effectiveness (cost per outcome).
In this study we asked:
The term "performance budgeting" was first widely used in the federal government 45 years ago. At that time, a commission recommended that the federal government develop a budget that presented program accomplishments in addition to program costs. Since that time, there have been several efforts to reform the federal budget in ways that would establish clearer links between outcomes and funding.
In 1965, the federal government implemented the program planning and budgeting system (PPBS). The executive branch required agencies to critically review both their goals and possible strategies for achieving these goals. Using techniques such as cost-benefit analysis, PPBS represented a massive effort to emphasize rational analysis, rather than political consensus, in the budget process. In the 1970s, the federal executive branch tried to implement other budget reforms. It required agencies to implement management by objectives (MBO), which included the measurement of performance against quantifiable objectives, and zero-base budgeting (ZBB), which identified services that could be provided at alternative levels of funding. But most experts agree that:
While federal budget reforms have helped bring more systematic analysis into the budget process, their emphasis on performance information has had little direct impact on budget allocations.
For the most part, these reforms did not outlive the administrations that proposed them. Their failures demonstrated that, for budget reforms to succeed, there must be a shared commitment to the objectives of budget reform within the executive branch, and between the executive and legislative branches. In addition, these reform efforts showed the difficulty of trying to implement major budget changes in a short period of time. They placed enormous burdens on staff to generate budget analyses, and on decision makers to read and use them. By making goals and budget choices more explicit, these reforms heightened the potential for political conflict.
Today the federal government is in the early stages of a new examination of performance budgeting. A 1993 law requires federal agencies to develop annual performance plans starting in federal fiscal year 1999 and annual performance reports starting in federal fiscal year 2000. Public Law 103-62, the Government Performance and Results Act of 1993. Several agencies will implement performance budgeting pilot projects during the next five years, and in 2001 the federal Office of Management and Budget must provide recommendations on performance budgeting to Congress.
Several states are also experimenting with performance budgeting. For example, the Texas Legislature included performance measures for all state agencies in its 1993 general appropriations bill. Next year, the California Legislature will establish contracts with several agencies for specified levels of performance and funding.
Minnesota's first efforts to develop performance-based budgets occurred at least 25 years ago. At that time, the executive branch started looking at ways to change the focus of state budget formats from "objects of expenditure" (such as personnel, supplies and equipment) to programs and activities. For the 1969-71 biennium, several agencies developed budget proposals "in such a way as to emphasize the purpose (or ends) for which state money is spent." Minnesota State Planning Agency and Department of Administration, Program Budgeting in Minnesota (St. Paul, February 1969), 3. The 1969 Legislature said that future budgets should "be stated in terms of programs and anticipated accomplishment rather than in terms of objects of expenditure." Minn. Laws (1969), Ch. 889, Sec. 1.
Following several years of experimentation, all state agencies prepared "program budgets" for the 1976-77 biennial budget document. The Department of Finance prepared budget instructions that asked agencies to include measures of "outcomes" and "impacts." We found that:
Minnesota, like most states, has published agency performance measures in the budget proposals prepared by the Governor. A 1993 report by the Governor's Commission on Reform and Efficiency concluded that Minnesota's budget system was not sufficiently oriented toward agency missions and program outcomes. Commission on Reform and Efficiency, Budgeting and Financial Management in Minnesota State Government (St. Paul, January 1993). Agency staff we talked with said that, over the years, there has been insufficient training to develop good performance measures. They also said that agencies have viewed performance measurement as an idea that was not relevant to decision makers and would not outlive each existing administration.
The Minnesota Department of Finance instructed agencies in 1992 to include measures of program performance--preferably outcome measures--in their 1994-95 budget proposals. To determine the impact of this most recent emphasis on performance-based budgeting, we reviewed recent executive branch biennial budget proposals and talked with numerous agency staff, Department of Finance staff, legislators, and legislative staff. We found that, for most agencies whose budgets we reviewed, the 1994-95 budget document had more outcome measures than previous budgets. Many agencies reported existing data in new ways to emphasize performance, although agencies usually did not provide outcome-based rationales when making proposals for new spending initiatives.
It will likely take time for agencies to develop a consensus on appropriate measures of performance and collect reliable supporting data. We found that the quality of performance information in the 1994-95 budget was uneven, partly because agencies only had about two months in 1992 to develop performance-based budgets. Although the Department of Finance provided some helpful training for agencies, officials in several agencies told us this was insufficient. In addition, some agencies had difficulty developing performance measures because their missions had not been adequately defined by state law or by their own internal planning.
While there was some increase in the amount of performance information that was presented in the Governor's budget, we also found that:
Department of Finance officials told us that they have viewed performance budgeting as a multi-year effort, and that they did not intend to use performance information to make decisions on the 1994-95 budget. However, the department's budget instructions to agencies stated that Minnesota Milestones, agency objectives, and agency performance indicators would "provide the basis for budget decisions" and that the ability of agencies to retain 95 percent of their base-level funding would depend on the adequacy of this information. We found that there were very limited discussions of performance in executive branch budget meetings convened by the Department of Finance, and there were no instances in which the department reduced agency base funding on the basis of performance information. We concluded that the department's budget instructions were overly ambitious.
Legislators and their staff told us that the performance-based budgeting approach had little impact on public discussion of the proposed budget or on legislative decisions. To some extent, this reflected factors that were unique to the 1993 legislative session, such as the overriding attention given by legislators to the projected shortfall in state revenues. However, it also reflected several more fundamental issues, including: (1) distrust between the legislative and executive branches, (2) the lack of explicit agreement between the legislative and executive branches on agency missions and goals, (3) the disregard of the Governor's budget document during legislative budget hearings by many agency officials and legislators, and (4) the Legislature's lack of confidence in the quality of many agencies' performance measures and supporting data.
Although decision making for the 1994-95 budget was not significantly different from past budgets, we found that:
For example, some agencies are starting to assess program effectiveness using measures of customer satisfaction, and others are using performance measures to set goals for individual work units and assess their performance. Efforts such as these have been encouraged by the Department of Finance's recent emphasis on performance budgeting, but they also have been fostered by recent management literature and a law passed by the 1993 Legislature that requires 20 state agencies to report performance information on an annual basis. Minn. Laws (1993), Ch. 192, Secs. 35, 39-41. The first annual report is due in September 1994, and the law requires the Office of the Legislative Auditor to conduct regular reviews of the measures and supporting data. To the extent that the Department of Finance's efforts had an impact on executive branch decisions in the 1994-95 budget process, it was probably on internal agency allocations made to address budget cuts mandated by the Governor. Some observers of the budget process told us that the department's efforts caused agencies to think more about performance and outcomes than they had in the past, especially as they made budget cuts. We found that the budget proposals of several agencies tried to explain the impact of proposed budget cuts in terms of outcomes, although we were unable to quantify whether performance budgeting caused agencies to make different budget choices than they otherwise would have made.
Finally, we examined the budget impacts of Minnesota Milestones, a long-range plan developed by the executive branch following an extensive series of community meetings. Minnesota Planning, Minnesota Milestones: A Report Card for the Future (St. Paul, December 1992). With its 20 state goals and 79 performance indicators, Minnesota Milestones is a serious effort to provide greater focus on the state's well-being and the performance of state government. As noted earlier, the Department of Finance's 1994-95 budget instructions stated that Minnesota Milestones would play an important role in budget decisions. Although agencies usually discussed Minnesota Milestones in their budget narratives, most people we spoke with did not believe that it caused agencies to re-evaluate their fundamental missions, priorities, or activities as they prepared budgets in 1992. Minnesota Milestones had a limited impact on the 1994-95 budget partly because the executive branch proposed using it for budgeting purposes before the document was finalized, before strategies and costs had been considered, and before sufficient outcome data were available. Also, we found that:
Decision makers in the executive and legislative branches had difficulty using Minnesota Milestones to make budget choices on specific programs and activities.
Whether Minnesota Milestones will play a stronger role in future budget discussions depends largely on the executive branch's ability to (1) develop specific strategies (with cost implications) that could improve various aspects of state government's performance, (2) develop a greater sense of "ownership" for Milestones among legislators and state agencies, (3) distinguish Minnesota Milestones from the agency performance measures mandated by the 1993 Legislature, and (4) ensure that the measures are appropriate and based on meaningful, useful data.
Overall, the executive branch's recent focus on performance budgeting has helped to encourage agencies to develop better performance measures and information. This is a useful start, even though the measures and data need considerable improvement. We think that development of a more performance-based budget should be considered a multi-year process. Although performance information had a limited impact on decisions in the 1994-95 budget process, we observed that agency officials are developing more uses for this information in daily management.
There is general agreement among observers of various levels of government that the public sector should do a better job of measuring its performance for purposes of improving policy making, agency management, and public accountability. This consensus is reflected in recent laws enacted by the federal government and several states requiring regular reporting on agency performance. It is also reflected in resolutions by national public administration and accounting bodies, and in management trends such as "total quality management."
However, there is considerable debate about whether and how to link performance information to budgeting decisions. On the one hand, some observers believe that performance information will be irrelevant if it does not play a key role in the budget process. The budget process is the primary means by which the executive and legislative branches oversee agency activities and decide how resources should be allocated. But many people have expressed a reluctance to automatically adjust an agency's funding level based on a measurement of its performance. This is because (1) it is unclear whether the appropriate budgetary response to a poorly performing program is to reduce its funding or increase it, (2) program performance may depend on factors that are outside of an agency's control or that are not easily measured, (3) tying funding to performance could create incentives for misreporting, and (4) budgeting is a political process of making choices and tradeoffs, not merely a mechanical process for allocating funds based on data or formulas.
The 1993 Legislature required the Department of Finance to prepare "performance-based" budgets in the future, in addition to requiring annual performance reporting by selected state agencies. We think that performance information can play a useful role in the budget process, but it is only one of many factors that should be considered. Furthermore, national experts and observers of Minnesota's budget process told us that several changes would have to occur before performance information could have a significant impact on budgeting. Agencies would need to recognize performance measurement as a central part of management, not merely a passing fad, and they would have to improve the quality of their performance measures and supporting data. This would enable legislative discussions with executive branch agencies to focus more on policy issues and ways to improve performance and less on questions of fact. In addition, successful implementation of performance budgeting would require greater agreement between the legislative and executive branches on agency and program missions. And, because legislative budget hearings do not always provide enough time to review and discuss agency performance in detail, the Legislature might need to consider other forums for accomplishing this.
Performance information can help the Legislature in virtually all aspects of governing, not just budget decisions. It can help the Legislature to develop state policies and goals, monitor policy implementation, communicate with the public, and make budget choices. Likewise, agency officials can use performance information in many aspects of daily management, not just to allocate funds or justify budgets. They can use this information to select goals, priorities, and strategies, to monitor their operations, and to evaluate individual or organizational performance.
Minnesota's 1993 performance reporting act was an important demonstration of the Legislature's commitment to performance measurement. For the first time, performance reporting is required in law, not just in executive branch budget instructions. Furthermore, there are provisions for our office to review the appropriateness, validity, and reliability of agency performance measures and data. Nevertheless, it remains to be seen whether the executive and legislative branches will use this information to help make decisions.
Many legislators and staff told us that the early part of the budget session could be more useful if legislative committees would conduct agency "performance reviews," using agency performance reports as a focal point for discussions. We think this idea has merit, particularly if agency performance reports can be improved and made responsive to legislative priorities and concerns. We think it would be preferable for this discussion to occur in legislative policy committees, if possible, because these committees consider both policy and budget issues. By conducting these reviews early in the budget session (or even in the months before the session begins), legislators would be better able to consider performance issues when setting budget and policy priorities. The reviews could also provide a better means for legislators and agencies to discuss program goals and objectives, and perhaps arrive at an agreement on reasonable performance expectations.
Many legislators and their staff suggested to us that the Legislature should try to set clearer performance expectations for agencies and programs by adopting statements of mission and priorities into law, where necessary, and by putting performance targets into appropriations bills on a selected basis. We do not recommend having large components of agency budgets or state aid allocations adjusted automatically, in response to the levels of outcomes produced. Rather, performance goals in appropriations bills would provide agencies with clearer statements of legislative expectations, and would provide a benchmark for reviewing subsequent performance.
We also think there are steps that the executive branch should take to improve its use of performance information. We recommend that the Department of Finance:
Performance information is not a panacea for addressing the state's issues. It is a tool that can help decision makers, but it will not make the difficult decisions for them. Knowing how the state is faring on key measures of performance is important, but decision makers will still need to consider reasons for current performance levels, many of which are beyond the control of agencies. It will take time to develop a consensus on what should be measured and to develop credible information.