B. Explaining the Governor's Influence
IV. STATE EXPERIENCES WITH PROGRAM AND PERFORMANCE BUDGETING
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gram budgets sometimes are used in conjunction with the line-item format, with cost information in line-item format and program information presented in narra- tive form. Far less frequently are standalone performance budgets used, although elements of performance budgeting are found in a number of state budgets.
The National Association of State Budget Officers (NASBO) periodic sur- vey of Budget Processes in the States (1997) contains information regarding ' 'budget approach'' used by the states. States self-report their ' 'budget approach'' as incremental, program, zero-based, or performance budgeting. While line-item budgets and incremental decision making are not the same thing, they often are linked as elements of traditional budgeting. The "incremental" category in the NASBO survey may be considered a proxy for the line-item budget format. In the NASBO survey, five states identified their approach as incremental, eight identified their approach as program, one identified its approach as zero-based, and none identified the approach as performance budgeting. Most of the other 36 states identified their "approach" as various combinations of incremental, program, zero-based, and performance budgeting. Three identified their budget procedures as using all four approaches, 12 identified their procedures as using three approaches, and 21 identified their procedures as using two approaches.
The modal category was program/incremental (n = 16). Clearly, "budget ap- proaches" in the states are hybrids, not pure types.
IV. STATE EXPERIENCES WITH PROGRAM AND
162 Lauth and Steinbauer requires federal agencies to develop and to measure customer service standards (Lee, 1997a).
Several projects are under way to develop performance standards for man- aging government entities. The National Advisory Council on State and Local Budgeting (NACSLB) was formed by several budget and governmental associa- tions to determine what constitutes "best practices" in state and local budgeting.
"The council has agreed on 59 practice statements on what it considers to be components of a commendable budget process" (NACSBL, 1997). The recom- mendations incorporate many of the goals of strategic planning such as using a long-term perspective, establishing linkages to broad organizational goals, focus- ing budget decisions on outcomes and results, involving and promoting commu- nication with stakeholders, and providing incentives to government management and employees.
The Government Performance Project, coordinated by the Alan K. Camp- bell Public Affairs Institute at Syracuse University, designed a method for assess- ing and rating management. Performance measures have been specified in six management areas: financial management, managing for results, capital manage- ment, human resource management, information technology and executive ca- pacity.
A recent project report, ' 'Grading the States: A Management Report Card'' (Governing, 1999), notes that "more and more states are deciding to hold them- selves accountable for the results produced by the dollars they spend every year.
Strategic planning, performance measurement, bench-marking, and performance- based budgeting are all in use in a growing number of places, though the way the terms are defined varies widely." State grades range from A— in two states where "managing for results" is an integral part of government, to F in one state which seems to have ignored performance-based management completely. Most states are graded somewhere in between, with a 50-state average of C+ in the managing for results category.
Looking primarily for achievements in performance-based budgeting, a pe- rusal of the study's report on each state leads to three generalizations. First, the quality of the performance data varies from a few states where ' 'excellent exam- ples of outcome measures are easy to find," to several states where "outcome measures are still being used in budgeting decisions in only a limited way," to many states where ' 'the quality of the data and many of the measurements could use improvement." Output measures apparently are much more prevalent than outcome measures. Second, many states have initiated performance-based bud- geting by using a small number of pilot agencies before expanding to a larger number of agencies, and pockets of success with measuring outcomes is more common than state-wide success. Third, legislatures tend to be disinterested in performance-based budgeting. Some appear to be wary of performance-based
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budgeting because they fear such data might be used to strengthen agency claims for increases in spending, or to shift the balance of power between the executive and legislative branches to the disadvantage of the executive. However, some legislatures have realized that good performance data is information to help them carry out their legislative functions more effectively.
Robert D. Lee over the past 25 years has surveyed state budget offices at 5-year intervals regarding their budget preparation procedures, use of program analysis, accounting procedures, and personnel qualifications. Lee's surveys dem- onstrate that these offices are dynamic, continuing to search for methods of im- proving budgeting practices and fiscal control. Higher levels of education among analysts and computerization have permitted states to thoroughly analyze and develop data on agencies and funding requests.
Jon Yunker identified several issues as important for managing a state bud- get office. Yunker (1990) believes four matters must be addressed: defining the role of the budget office in relation to the governor's office and the legislature;
defining the organizational structure that best supports that role; finding and de- veloping the right personnel; and adopting a management style and strategy to maximize the effectiveness of personnel. According to Yunker, an effectively managed office is a necessary precondition for a successful budget process be- cause management and staff energy can only then be devoted to resource alloca- tion and policy guidance.
The primary focus of the central budget office is budget preparation and fiscal guidance for agencies. According to Al Kilman (1990), a successful budget process is defined by five criteria: the budget is produced; it is "on time"; it reflects the priorities of the top decision maker; the document is accurate; and it has sufficient backup detail for defense. Furthermore, Kilman contends these elements are fundamental, extending beyond where the budget is produced or the process used for budget development (e.g., PPBS or MBO). These elements are necessary whether the process is defined through policy or political outcomes.
Lee describes six forms of budget guidance (1992). These include imposing budget ceilings for agency requests, maintaining minimum or current levels of service, mandating which types of policies will receive favorable reaction by the governor, inclusion of necessary or mandatory program improvements or expan- sions (e.g., court orders or federal requirements), and requiring agencies to rank requests. These kinds of ceilings or guidance on agency requests have grown in popularity over the past 20 years and reflect the need to ' 'weed out'' lower prior- ity spending in order to accommodate critical programs such as Medicaid and public safety. For example, in 1970, 59% of the states reported not using any form of budget ceilings to constrain agency requests. By 1990 only 11% reported not using any form of budget ceiling. However, in 1995 the trend was reversed, with 28% of state budget offices reporting that they did not impose budget ceil-
764 Lauth and Steinbauer ings for agency requests (Lee, 1997a). This may a sign that states have rebounded from the recessionary pressures of the early 1990s and are permitting agencies to expand programs after several years of constrained spending.
In 1995, nearly half the states reported using specific dollar-level ceiling techniques for agency budget preparation compared to no states imposing specific dollar-level ceilings in 1970. The use of written policy guidance has increased over the past 25 years from 2% to 39% in 1995. Interestingly, the practice of ranking priorities among programs decreased from 1990 to 1995 but it is still utilized by more than three-fourths of the states (Lee, 1997a).
In 1995, Francis Stokes Berry and Barton Wechsler surveyed state agencies on several aspects of strategic planning including, the kinds of processes em- ployed, and the objectives and outcomes of the process (Berry and Wechsler, 1995). The authors defined strategic planning as "a systematic process for man- aging the organization and its future direction in relation to its environment and the demands of external stakeholders, including strategy formulation, analysis of agency strengths and weaknesses, identification of agency stakeholders, imple- mentation of strategic actions, and issue management." The study found approxi- mately 60% of agencies responding used some type of strategic planning. Al- though this is a significant portion, the results should be viewed with caution because states have only recently begun implementing the process.
Reasons considered important for using strategic planning from highest to lowest response (96% to 60%) included setting program and policy direction, a desire to emulate good business practices, government budget and fiscal pres- sures, and a need to resolve competing agency resource allocation priorities.
Agencies have begun connecting strategic planning to the budget process. In fact, three-quarters of the respondents link the strategic planning process and the agency's budget process. One important way to tie the two processes together is through workload measures that quantitatively reflect the achievement of objec- tives. Of course, one problem with the linkage is the inherent conflict between the long-term plan and the single year budget cycle of most governments. The authors are optimistic about the future of strategic planning by state agencies, expecting its importance to expand in the future.
Lee outlines the changes in the usage of program analysis and effectiveness and productivity measures overtime. States report significant declines in conduct- ing program analysis by central budget offices. There were 18 and 16 percentage- point decreases in effectiveness and productivity analyses from 1990 to 1995, respectively (Lee, 1997b). Other central offices appear to be doing this work instead (Lee, 1997a). However, states that conduct productivity analysis do use the information for decision making (Lee, 1997b). How this will effect budget practices and decisions is unknown at this point.
Detailed performance measures have also appeared to reach their maximum use in 1990, when 95% of all states included program effectiveness measures in
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budget requests for new or revised programs (Lee, 1997a). In 1995, states were not using this kind information as much (72%), but it is still much higher than 1970 levels (24%). These measures are substantially employed for revising fund- ing levels though. Effectiveness and productivity measures were used by 57%
and 60% of the states respectively in 1995, up from 49% and 51% in 1990. One reason for the overall decline may be the difficulty in establishing useful measures and in gathering the data, particularly for effectiveness measures. Of course, as state executive and legislative budget offices become more sophisticated in using indicators, these difficulties will wane, enabling the most efficient use of the information. Lee concludes that the executive branch has probably "balanced out" in using these forms of analysis (Lee, 1997a).
In another survey of state budget offices, Julia Melkers and Katherine Wil- loughby found that 47 of the states have some form of performance-based bud- geting requirements (Melkers and Willoughby, 1998). The authors define perfor- mance-based budgeting as requiring strategic planning regarding agency mission, goals and objectives, and a process that requests quantifiable data about program outcomes. The requirements are statutory for 31 states or administrative in 16 states. Only Arkansas, Massachusetts, and New York do not have either type of mandate.
Confirming other research, the study found that the budgeting requirements were recent, with the exception of Hawaii and Illinois. Sixteen of the states with statutory requirements tie performance measures to strategic planning in the law.
In most cases, responsibility for developing measures lies with the line agencies, which is sensible since these are the agencies with programmatic knowledge.
Melkers and Willoughby (1998) include a cautionary note in reporting their find- ings, stating that "the effectiveness and contribution of performance measures to the budgeting process in the states remains unclear." Constraints on time, resources, and data limit the full utilization of measurements.
NASBO's 1997 survey results confirm much of the information of the pre- viously cited surveys and offer interesting additional information. In 32 states, budget offices monitor performance measures, and in 29 states the results are published. States use these measures for a variety of reasons including public accountability (24 states), goal or priority building (21 states) and budgeting deci- sions (24 states).
Based on his research on state budgetary reforms, Lauth (1992) concludes that several conditions must exist for the efforts to be successful. The existing system must be perceived as unsatisfactory. The governor's commitment is neces- sary. The program should not be oversold with grand promises. Managers and budgeters implementing the effort must be thoroughly trained and their support obtained. The program should be selectively installed, i.e., pilot agencies. Requi- site data bases and accounting processes must be compatible and support the new information requirements. The reformers must consider the political ramifica-
766 Lauth and Steinbauer tions. The effort ought to have a good implementation strategy consisting of a clear statement of goals and an understanding of how existing organizational units and procedures contribute to those goals. The reform is an ongoing effort, probably requiring adjustments. Finally, it its important not to overemphasize the rational/technical features of budget innovation at the expense of political/
democratic values.
The federal government has been following the states' lead on budget re- form, as can be seen from the previously mentioned National Performance Re- view (NPR) and the mandatory development of performance standards. Philip G. Joyce cautions the leaders and the public about being overly optimistic for the future of these reforms in his essay, "The Reiterative Nature of Budget Re- form: Is There Anything New in Federal Budgeting?" (Joyce, 1993a). Joyce links the current reform efforts to past ones such as PPBS and ZBB to demonstrate how the federal government has tried to implement performance budgeting sev- eral times previously. He asserts that the system failed for two reasons: first, the reforms were not consistent with the political process and second, the paperwork requirements were too burdensome. These problems are also possible for the latest reform efforts so those implementing the NPR need to (1) appreciate that the reforms may be resisted by those who have a stake in the traditional incremen- tal budgeting process, (2) ensure the information provided is necessary and used, and (3) analyze how the reforms will be implemented and the information used before instituting universal requirements (Joyce, 1993b). Furthermore, the stake- holders must realize that reform will occur at the margin rather than through a wholesale effort (Joyce, 1993a).
For the new generation of reforms to take root, policy makers must expect a relationship between money spent and performance. Before this can happen, though, the Executive, Congress, and stakeholders must first agree on the agen- cies' most important goals. In other words, agencies have competing functions, and for there to be an accurate assessment of success, everyone must agree on what success means; only then can objectives be quantified (Joyce, 1993b). De- veloping outcome measures for some departments and functions may be very difficult where outcomes are vague or implementation is dependent on outside actors such as the Defense Department and intergovernmental programs. Over time, performance measures may be able to provide information that legislators and the President can use making fiscal decisions, but as mentioned previously, this will be in context to other political and policy decisions. In the end, the greatest use of performance indicators may be as a management tool to track spending and efficiency.
Beyond budget processes and performance, central budget offices use sev- eral techniques to control agency spending and ensure expenditures do not exceed revenues. One is reviewing interim expenditures through reports. Thirty-nine states use this method, and most do so on a monthly basis. Budget offices can
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also limit the amount of revenue allotments to agencies; however, most choose not to do so. In fact, the states vary widely in allotment request using quarterly, annual, or "as requested" time frames. Only Utah has allotment requests on a monthly basis (NASBO, 1997). The ability to transfer funds between programs or departments is another widely used form of control over agencies. In per- forming this function, budget offices must achieve a balance between adhering to legislative intent as expressed in the appropriations act, and permitting agencies to accommodate changed circumstances or respond to unforeseen events. Only 11 states permit the agency to transfer appropriations between programs or units in a department, and no agency is allowed to transfer funds between departments without approval of some other entity such as the legislature, budget office, or controlling board. In nearly half the states (21), these kinds of transfers are not even permitted (NASBO, 1997).