Performance Based Budgeting

January 9, 2015

Performance-Based Budgeting in State Agencies

 

Traditionally, state budgeting focused on incremental changes in detailed categories of expenditures. Performance-based budgeting (PBB) is a more recent approach which diverges from older budgeting techniques by concentrating on results as opposed to merely requests by agencies.1 In essence, a complete PBB system links the amount of appropriations received by state agencies to their success in achieving pre-determined goals. This process requires the state legislature and related agencies to identify specific, quantifiable goals or objectives to be achieved. Budget dollars are then allocated to agencies based upon the required resources to attain such goals, in what is formulated as a strategic plan.

PBB promotes legislators to rethink policies of the past and provides agencies the flexibility to make challenging decisions that are not easily reached under traditional budgeting systems. Benefits of this system include unification of government direction, increased information to public officials and constituents of agency performance, and a more effective budget decision process.2 Over time, studies show that successful use of PBB can positively impact long-term fiscal health of states.2 Problems with the use of PBB consist of subjectivity in what goals are important, the vagueness in developing goals, what measures are to be used in evaluation, lack of direction as to dealing with ineffective agencies, and the costs of tracking and overseeing performance data of agencies.2 3

Arkansas’ budgeting process focuses primarily on requests made by state agencies and does not currently follow a result-oriented PBB system.4 Although budgets are reviewed by the legislature, budgeting decisions do not require strategic plans from the agencies, nor do they involve assessments of how well agencies achieved defined performance measures.4

While it is difficult to ascertain which states precisely follow comprehensive PBB systems, sources affirm that most states apply the system in some capacity. According to the Murphy Commission report, 14 states incorporated PBB into operations, and over 20 other states were considering using the system.4 In contrast, a study done around the same time by researchers at Georgia State University found that 47 states have some form of PBB methods in effect.5 Of this number, 31 states passed legislation requiring PBB use, and 16 states use PBB through non-legislative initiatives in place.5 Provided below is a chart organized by these researchers showing which of the states have implemented some form of performance-based budgeting, through which bills, and in what year. Arkansas is one of the three states that does not have any form of centralized performance-based budgeting initiatives, according to their study.5

A more recent study conducted in 2012 revealed that 40 states have performance budgeting legislation passed into law.2 Furthermore, the researchers recommended implementation to the states which do not use PBB (including Arkansas) because of the positive impact this system has on state liquidity, expenditures per capita, and long-term financial liability ratios.2

The success of these states prompted the federal government to adopt similar measures into the budgeting process for federal agencies. The Government Performance and Results Act (GPRA) of 1993 requires federal agencies to create a 5-year strategic plan of performance goals.4 These plans specify exactly how the agencies are to achieve measurable performance goals. Agencies then must report quantifiable results to the Office of Management and Budget, along with explanations if goals are not met.4 The OMB office is in charge of developing and conveying an overall federal performance report to Congress.4

Texas is recognized as one of the leading users of PBB, enacting the system after bills passed in 1991 and 1993 provided for tying agency budgets to performance goals.7 8 Agencies are required to create performance goals and a strategy for achieving the goals. A Legislative Budget Board is in charge of monitoring the performance of state agencies in achieving strategic goals and conveying metrics of performance to the legislature.6 The legislature uses the reports on agency performance when deciding upon the next year’s budget.3 6

Requisite to the success of PBB is an accurate, transparent accounting system that will provide legislators and budget oversight committees with information to assess the proper costs associated with state agency activities. For this reason, as discussed elsewhere, CFC recommends the implementation of activity-based accounting systems across all state agencies to accurately report the true expenditures of government activity.

 

Sources:

1. “Performance Based Budgeting: Fact Sheet.” Performance Based Budgeting Fact Sheet. National Conference of State Legislators, n.d.

2. Lu, Yi and Katherine Willoughby. “Performance Budgeting in the States: An Assessment” IBM Center for. IBM Center for The Business of Government (2012): 71-75. <http://faculty.cbpp.uaa.alaska.edu/afgjp/PADM628%20Spring%202013/Performance%20Budgeting%20in%20the%20States%20–%20An%20Assessment.pdf>

3. National Conference of State Legislators. “Legislative Performance Budgeting.” NCSL.org. 6 Oct. 2008. <http://www.ncsl.org/research/fiscal-policy>.

4. Murphy Commission. 1996-1999. “Making Arkansas’ State Government Performance Driven and Accountable.” <http://www.arkansaspolicyfoundation.org/policy/performance_driven.html>

5. Melkers, Julia, and Katherine Willoughby. “The State of the States: Performance-Based Budgeting Requirements in 47 out of 50.” Public Administration Review 58.1 (1998): 66-73.

6. Legislative Budget Board, n.d. <http://www.lbb.state.tx.us/>.

7. H.R. 2009, 72nd Reg. Sess. (Tex. 1991)

<http://www.lrl.state.tx.us/legis/BillSearch/text.cfm?legSession=72-0&billtypeDetail=HB&billNumberDetail=2009&billSuffixDetail=&startRow=1&IDlist=&unClicklist=&number=100>

8. S. 1332, 73rd Reg. Sess. (Tex. 1993).

<http://www.lrl.state.tx.us/legis/BillSearch/text.cfm?legSession=73-0&billtypeDetail=SB&billNumberDetail=1332&billSuffixDetail=&startRow=1&IDlist=&unClicklist=&number=100>