Effective use of performance budgeting.

• Author: Mucha, Michael J.
• Position: PM2 CONNECTIONS: PERFORMANCE MEASUREMENT & MANAGEMENT

In recent years, governments have experienced unprecedented fiscal stress and community pressure to reduce costs, so sizable budget cuts have been a reality for most governments. Many jurisdictions have also realized that their traditional budget process does not help managers make the types of decisions necessary to reduce costs to the required levels. A traditional budget process is suitable for small, incremental changes that are applied equally (or nearly so) across the entire organization, year after year, as revenues increase or decrease. This kind of budgeting relies on maintaining the status quo; next year, departments will be able to spend what they had this year (plus or minus the small adjustment). Because this approach does not usually re-distribute funding among departments, it contributes to departmental silos that form something like separate mini-organizations. Funding goes to a department and is used to provide programs and services, but the specific decisions related to exactly what is to be funded are often determined within the department, leaving them out of the budget process. Funding decisions are also not usually connected to public priorities and community expectations. What the department then does or accomplishes is also not very apparent, but it is consistent from year to year. Even when small cuts occur, departments are able to absorb them and still deliver the same services as in prior years.

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As cuts become more severe, many governments are forced to explore performance management. Often, under pressure from the public, governments start using performance measures as a way to justify expenditures and demonstrate results. The traditional budget process is still in place, but rather than simply distributing funding as always, the budget process also sets operational targets. As the government obtains more information on what gets accomplished, it also provides a level of accountability to the public. This also provides a greater focus on outcomes. However, this style of budgeting (referred to in Exhibit 1 as outcome/output reporting) follows the same process as traditional line item budgeting. It does provide some level of accountability, along with communicating the organization's accomplishments and progress toward goals, but simply listing performance measures in the budget is not performance budgeting. Unfortunately, with many governments, the only link between performance and budgeting...