The Short Answer

1. Performance measurement is not a magic answer. Budgeting is about choices. And choices are about power and politics. Improving budgeting does not necessarily mean improving decisions. But budgets can be made better by presenting better choices (that are likely to result in improvements) and then presenting these ideas more clearly.

2. “Performance-based budgeting” can present better choices by requiring each budget unit (internal and contract) to answer the basic questions in performance accountability:

• Who are your customers?
• How do you measure if your customers are better off?
• How do you measure if you’re delivering service well?
• How are you doing on the most important of these measures?
• Who are the partners who have a role to play in doing better?
• What works to do better (including no-cost and low-cost actions)?
• What do you propose to do?

These questions should be answered on a regular basis, throughout the year, and used once a year to drive the budget.

3. The budget process should formally assess answers to these questions for each budget unit, starting from the smallest budget unit to the agency as a whole.

4. Paper usage should be minimized by strictly limiting the number of performance measures at each level to no more than 3 to 5. (Here’s some info on how to select performance measures). The budget narrative and the printed budget document should be kept to strict minimums, which can be separately supplemented in the internal and external budget process.

Full Answer

(1) There is no “formula” way to do budgeting. Budgeting will always be a complex process of politics and choices. And performance measurement or any other thing will not change that. What effective performance measurement can do is provide information to make better choices and better decisions. If it is approached in this way, it can make a difference.

(2) What kind of information in what form? There are a couple of things to know about budgeting processes. They process huge volumes of information quickly. They produce changes mostly at the margins. There is usually a maintenance portion and a discretionary add/change portion. Change happens mostly at the margins. Most budgeting in state, county or city government is “initiative-based budgeting.”

(3) What budget people want to know is: Is this program worth the money? Is it producing what it should? Can it perform better? Can it be done less expensively? Not much time is actually spent on these questions. Most budget time is spent on the technical construction of the budget (including cost of living adjustments, salary, and position changes etc.) Much of budget analyst time is spent making sure the details are right, like ensuring that the equipment and travel request is reasonable. Strategic thinking about any given program or agency usually takes place, if it takes place at all, in a review session on the Executive side and a hearing on the legislative side. The time for any one program is very limited. So the question is: what is the most important information to provide in this setting?

(4) The most important information we should include in these sessions is:

• What is the historical and current status of the data, and what are our projections if nothing is done differently? Provide a baseline that includes the data trend line and forecast. (Learn how to create baselines here).
• What is the story behind the baseline? What are our accomplishments so far? What are the contributing and limiting factors affecting the data?
• What works to do better? What are our researched best practices and untested ideas on how to improve the data?
• What do we propose to do? What is our action plan?

All of this information should be included in addition to the usual object, sub-object and funding details.

(5) Performance measurement is not a magic answer. Budgeting is about choices. And choices are about power and politics. Improving budgeting does not necessarily mean improving decisions. But budgets can be made better by presenting better choices and presenting them more clearly.

(6) Performance budgeting can present better choices by requiring each budget unit (internal and contract) to answer the basic questions in performance accountability:

• Who are your customers?
• How do you measure if your customers are better off?
• How do you measure if you’re delivering services well?
• How are you doing on the most important of these measures?
• Who are the partners who have a role to play in doing better?
• What works to do better (including no-cost and low-cost actions)?
• What do you propose to do?

These questions should be answered on a regular basis throughout the year, and used once a year to drive the budget.

(7)  The budget process should formally assess answers to these questions for each budget unit, starting from the smallest budget unit to the agency as a whole. Not all of this needs to be printed in the budget document.

(8)  Paper usage should be minimized by strictly limiting the number of performance measures at each level to no more that 3 to 5. Budget narrative and the printed budget document should be kept to strict minimums which can be separately supplemented in the internal and external budget process.

(9) Use performance measures to assist in making wise decisions about where to cut budgets. Most budget people will tell you this is the least pleasant part of the job. Performance measures can be used to help guide these difficult decisions. This is not, and never should be, formulaic work. But budget cuts can be approached using the same criteria that helped select elements of an action plan in the first place: specificity, leverage, values and reach. These can be used in reverse to rank order actions (programs, activities etc.) in relation to their power to effect change. And cuts can then be made by starting at the bottom of the list and working up. Other criteria can be added as appropriate. See the discussion of these criteria and the budget decision process in 2.13.