Performance Budgeting 2.0: Budgeting in the New Normal Environment

1. Performance Budgeting 2.0: Budgeting in the New Normal Environment Dr. Alfred Ho School of Public Affairs & Administration University of Kansas

2. Defining Public Budgeting • Budgeting is not just about numbers … • It is a mechanism for setting social, economic, and political goals and objectives, and for managing organizations, programs and activities to achieve these goals. • Budgetary decisions on revenues, spending, and debt reflect many underlying values, ideologies, and policy priorities.

3. The Budgeting Context Budgetary decisions do not happen in an institutional & value vaccum!

4. The “New Normal” for State & Local Governments • The “new normal” fiscal environment for the US • Serious federal deficit and foreseeable worsening of the problems • State and local fiscal challenges • Structural change in the U.S. economy and upcoming economic challenges due to globalization and the changing geo-political and global economic environment • Changing demographic structure of the US • Increasingly diverse and fragmented society with increasingly ineffective mechanisms of social and value aggregation  All these will make public budgeting harder and harder!

5. U.S. Government Spending Trends Source: OMB

6. U.S. Government Spending Trends • Federal revenues: FY2008: $2.5 trillion FY2009: $2.1 trillion FY2010: $2.2 trillion FY2011: $2.3 trillion FY2012: $2.5 trillion (est.) • Federal spending: FY2008: $3 trillion FY2009: $3.5 trillion FY2010: $3.5 trillion FY2011: $3.6 trillion FY2012: $3.8 trillion (est.) So the deficit of FY2009 was about $1.4 trillion. FY2010, FY2011, FY2012 -- about $1.3 trillion, respectively.

7. U.S. federal deficit as a percentage of GDP

8. What are driving the spending increases? U.S. Government Spending as a Percentage of GDP, by Major Spending Categories

9. Comparing Healthcare and Social Security Spending Changes with Revenue Changes Dr. Alfred Ho, Public Admin. Univ. of Kansas

10. The “New Normal” -- Structural Deficit Problems of the Fed. Govt. • Even if the federal government has collected all the income tax and social security payroll tax revenues it is supposed to collect, it still cannot keep up with the rapid growth in healthcare and social security spending. • And not all baby boomers have retired yet. The worst challenges are yet to come! • This is a “structural problem” that can only be fixed by policy changes. • A better economy won’t solve this problem • It requires hard choices by politicians and the public Dr. Alfred Ho, Public Admin. Univ. of Kansas

11. Economic Challenges in the New Normal Environment • Globalization and technological revolution have led to structural changes in the U.S. economy • Decline of manufacturing, rise of the service economy, outsourcing …  personal income is not likely to grow rapidly, and we can’t afford consuming in the same way as before. • Foreseeable baby boomer retirement and the rapid rise of healthcare costs will force the government spend more on social security and healthcare • Potential “crowding-out” effects on other spending, including defense, community development, environmental protection and energy, R&D, education, corrections … • Some of these burdens will be shifted to state and local governments Dr. Alfred Ho, Public Admin. Univ. of Kansas

12. The “New Normal” Challenges & the State & Local Fiscal Gap • State and local governments faced tremendous fiscal challenges for the few years during the Great Recession in 2008-2010. • http://www.cbpp.org/files/9-8-08sfp.pdf (McNichol, et al. 2012) • Many states still have budget shortfalls despite the recent economic recovery (see Table 2, p. 6)

13. State & Local Responses to the “New Normal” Challenges • Cut higher education spending  allow tuition to increase (privatization of state universities) • Cut local fiscal assistance (California, Connecticut, Maine, New York, N. Carolina, Illinois …) • Cut capital and infrastructure spending (the stimulus package in recent years reversed the trend slightly) • Withheld money for pension contribution • Drained the rainy day fund • Lay-offs, furloughs, cut new positions, stop hiring new people • Renegotiate with the unions on post-retirement benefit policies • Innovative ways to reduce health care costs

14. Demographic Changes in the New Normal Environment Wolf & Amirkhanyan (2010): • Aging population  Implications for the future workforce, the consumption power, and the economic growth rate • Who will stay and who will leave? Will new immigrants come to your community?  Nationally, we will have a more diverse and heterogeneous population, but • Significant between-state and intra-state differences in population growth • Different implications for education and community development programs and spending

15. Culture, Values, and IT • To resolve the above economic, social, and demographic challenges require social dialogues about: • What are important to society? • How should resources be distributed among different social groups? • Who should have access to the decision-making process? Does everyone have equal access to power? • Is it possible to build any social consensus on some of these tough policy issues?

16. A Video on the Great Recession Impact • http://www.pbs.org/wnet/need-to-know/video/need-to-know-december-16-2011-mayor-under-siege/12637/ • Big-city mayors across the United States are under growing pressure to balance their budgets while still providing necessary services. Need to Know chronicles three days spent with Milwaukee mayor Tom Barrett, illuminating how one mayor spends his time trying to drum up business, even while facing withering attacks from some of his hard-pressed constituents. • What is even more interesting are the comments by Dr. Tricia Rose, professor of African-American cultural politics at Brown University, on the impact of government cutback on inner-city minority residents.

17. Culture, Values, & the Media • As shown above, factors that have a significant role in our future policies: • The political culture of society – are we willing to listen to diverse views, compromise, and sacrifice some of our self interests, given the growingly diverse and heterogeneous population? • What values and ideologies are driving our decisions? Are these values helpful to solving these policy problems, or make the problems worse? • The Mass Media and IT • What are their roles in facilitating the social discourse and fostering social consensus? • Do you think they are helping or hurting? Why?

18. Culture, Values, the Mass Media, and IT • Research has shown that the mass media and the new social media have allowed more user-differentiation and market segmentation • Decline of the traditional mass media (e.g., TV channels, local newspaper) • More customer-tailored media (e.g., cable TV ) • More self-selective clustering of users • Implications for democracy and social consensus building? • Implications for the budgetary process?

19. The Budgeting Context

20. Performance Budgeting • A tool that has been proposed since the turn of the 20th century • Use quantitative performance indicators to help budgetary decisions • Types of performance measures: • Outcome measures (e.g., crime rates, % of users achieving the desirable social/economic outcomes …) • Output measures (e.g., unit of products / services produced, # of clients served) • Efficiency measures (e.g., cost per user, time used per case) • Effectiveness measures (e.g., jobs created per $1 investment)

21. Traditional Performance Budgeting • Use performance, especially outcomes, to drive budgetary decisions • Cut ineffective or unproductive programs • Strive to get better value for money • Gained popularity in the late 1980s & the 1990s • Response to the anti-government movement that labeled government as wasteful and ineffective • The movement of “reinventing the government” • Outcome-driven management • A tool of accountability by managers Does not work!

22. Failures of Traditional Performance Budgeting • Too managerially driven; Ignore the concerns and priorities of politicians. • Too much emphasis on “scientific objectivity” and quantifiable measurability, and not enough focus on perceptions. (To policymakers, “perception” is reality!) • Mostly done by the management; seldom involve the line workers, policymakers, service users, and citizens • “What outcomes matter, and outcomes for whom?” • The report tends to be too long and technical, and is not user-friendly to the general public and policymakers  Result: Policymakers ignore performance measurement results in budgetary decision-making

23. Failures of Traditional Performance Budgeting • This is not to say that the traditional performance measurement exercise is completely useless. • We need to differentiate two types of resource allocation activities, and different types of performance measurement and reporting: driven mostly by values, priorities, ideologies, and political tactics “Boundary” allocation decision “program- /activity- level” allocation decision Can be more open to economic, effectiveness, and efficiency analysis

24. Failures of Traditional Performance Budgeting We should not mix up the “boundary” decisions with “program decisions. • Accountability of “boundary decisions” • need to address the fundamental values and priorities (e.g., equity and distribution questions, accessibility to services, societal outcomes) • The public and their elected officials should play an important role in the process • Accountability of program or activity-level decisions • Focus more on the technical issues of effectiveness and efficiency • Managers should drive the decisions, given the priorities set by citizens and their representatives • However, citizen participation may be critical in some cases

25. Time forPerformance Budgeting 2.0! 1. Think about the “value” of public services, not just the “performance” • The “Value” Formula: Managers recognize that input includes not only governmental budgetary investment, but also investment by other sectors through Partnership and leveraging Driven by political decisions and priorities, values, and ideologies Defined not just by managers, but also by the public and their representatives

26. Example: Best Cars 2012

27. Time forPerformance Budgeting 2.0! 2. Engage the public and major stakeholders • What “outcomes” are important to the public / service users? • Tools: citizen surveys (stated importance + derived importance analysis), focus groups, citizen committees, neighborhood meetings, service user feedback, data analysis of citizen service requests • Example – the Iowa Citizen-Initiated Performance Assessment project. Lessons learned: • Need a portfolio of engagement strategies • Mindful of the costs and time of engagement on the staff and citizens

28. Time forPerformance Budgeting 2.0! 3. Focus on “outcomes” that matter! • Don’t try to measure and report everything • Outcome-driven logic model and strategic planning Outcomes Intermediate Outcomes Output Activities Input & Resource Allocation

29. Time forPerformance Budgeting 2.0! 4. Think about “Governance”, not “Government” • At each level, think about how to partner with other sectors and leverage their resources and capacity Outcomes What are the roles of the government and other sectors? Should the government provide, produce, lead, coordinate, and/or foster? Intermediate Outcomes Output Activities Input & Resource Allocation

30. Time forPerformance Budgeting 2.0! 5. Effectiveness and cost-efficiency still matter  Need to build a culture and system of business process improvement • Example: INDYSTAT in the City of Indianapolis http://www.indy.gov/eGov/City/OAP/IndyStat/Pages/Home.aspx How to allocate resources more cost-effectively among activities/programs to achieve the desired outcomes?

31. Time forPerformance Budgeting 2.0! 6. Capacity Building for Data-Driven Decision-Making • Governments today do not lack data on program activities • Service requests, program outputs, police and fire statistics, GIS-based data, housing and property data, survey data …. • A “smart” government knows how to leverage and harness the “intelligence” of the data to make better decisions and deliver services more cost-effectively • Needs capacity building on: • IT infrastructure, GIS, data interoperablity and integration efforts, data analysis

32. Time forPerformance Budgeting 2.0! 6. Capacity Building for Data-Driven Decision-Making (con’t) • Example – an ongoing project by Alfred Ho

33. Time forPerformance Budgeting 2.0! 7. Communicate, Communicate, Communicate! • IF: • citizens are thinking about the “value” of public services, not just performance; and • value is partly derived from “values” and perceived importance of services; and • perception is fluid and moldable, and not a static phenomenon • Then: • The government should proactively communicate with citizens about its values and underlying rationales of policy decision-making • It should also proactively counter the growingly fragmented political culture

34. Time forPerformance Budgeting 2.0! 7. Communicate … (con’t) • There should be a portfolio of communication strategies to target different citizen types and preferences • Different media should be used not as “mutually exclusive” strategies, but as mutually reinforcing mechanisms

35. Citizen Engagement – Communication Channel Preferences in 2009 (Aug-Nov)

36. Citizen Engagement – Communication Channel Preferences in 2010

37. Citizen Engagement – Communication Channel Preferences in 2011 – Pew Source: Rainie, L., et al. (2011). How the Public Perceives Community Information Systems. Washington, D.C.: Pew Research Center’s Internet & American Life Project.

38. Time forPerformance Budgeting 2.0! Get the e-newsletters Come to Mayor’s Night outs Are they effectively linked? Visit the City’s website Get the mail newsletter Facebook targeting the younger generation

39. Conclusion • Strategies matter, but policymakers and managers should be mindful of the political environment • Strategies suggested above should be adapted to the political environment • Roles and strategies of the union matter • System and capacity building matter • You may engage the citizens and get their input very effectively, but if you don’t have the capacity and good management system to deliver, you have a bigger problem because expectations have been raised. • Leadership matters • Visioning, bringing people together, and communicating

40. Conclusion • Budgeting under the New Normal will be about: • Doing more with less • Doing less with less for some departments and programs • Doing more with more for some programs, if those programs are of high priorities and value to the public • How to cut spending and raise more revenues depends heavily on: • How the social discourse of values and priorities are conducted • The values and ideologies of the leadership & the community • The managerial capacity of the government to deliver • “Performance” matters, but the old way of measuring and reporting performance may not.

41. Questions? • Please feel free to email me if you have any questions. Alfred Tat-Kei Ho Associate Professor School of Public Affairs & Administration Wescoe Hall, room 4076 University of Kansas Lawrence, KS 66045 Email: alfredho@ku.edu