Performance Measurement & Performance Based Budgeting in Financial Management Series Number 8: Instructional Version

1. Financial Management SeriesNumber 8(Instructional Version)Performance Measurement & Performance Based Budgeting (PBB) Alan Probst Local Government Specialist Local Government Center UW-Extension

2. Part I Overview

3. Performance Budgeting • Originated in late 1940’s • Congress enacted through National Security Act of 1949 for newly formed Department of Defense • Government Performance and Results Act (GPRA)

4. Performance Budgeting Based on the assumption that presenting performance information alongside budget amounts will improve budget decision-making by focusing funding choices on program results

5. Performance Based Budgeting • Performance based budgeting cannot begin until a system of performance measurement has been instituted • A functional performance based budgeting system cannot be expected to produce the long-term desired results in the first year of its inception • Must build a Performance Based Management System

6. Management Tool Performance budgets focus on missions, goals, and objectives to explain why money is being spent and provide a way to allocate resources to achieve specific results PBB is intended to be a management tool for program improvement, not a “carrot and stick” methodology used to “punish” departments for not meeting goals

7. Why is this Important? • Most Federal grants now require outcome evaluations (performance measurement) in their applications • Bond sales require indicators of financial condition which are well presented by performance data • Local government revenues are becoming insufficient making effective use of resources imperative • Promotes the logical tie between planning and budgeting

8. Why is this Important? • Both the Government Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA) are promoting performance measurement indicating it may soon become a requirement • Provides a way to quantify to the citizens how well their local government is doing compared to previous years and other similar communities; i.e. “how much bang they’re getting for their buck”

9. CAUTION! One of the greatest mistakes in Performance Based Budgeting is to make simplified assumptions based on unrefined results and then apply a system of rewards and punishments based on them Such an approach frequently yields adverse program impacts

10. Unintended Consequences • If PBB used as a reward and punishment system, how do you ensure that reducing a budget by, say 5% for poor performance, doesn’t reap a future 20% decrease in future performance? • How do you ensure you’ve considered all factors that may have affected the decline in performance?

11. Potential Flaws Incorrect assumptions or conclusions • Police: Arrests are up; we gave you more money, what’s wrong? • Police: Arrests are down, we gave you more money, what’s wrong? • Do more arrests mean better police work, more crime, less crime, better crime prevention, or less police work?

12. Example An effective Police Department deters crime, how does one measure “deterred’ crime? “Police arrests are down 5% from last year so, under Performance Based Budgeting, we should reduce the Police budget by 5% until they improve their results” Such a simplistic approach fails to account for the success of crime prevention efforts and community policing, therefore, punishing good performance

13. Interim Solution Until a performance measurement system can be fully implemented, an interim solution may help set the groundwork • Departments heads provide a bullet narrative with annual budget requests including: • what department accomplished last year? • what is different in this year’s budget request? • what goals has the department set for the coming year?

14. Part II Performance Measurement

15. Performance Measurement The regular systematic collection, analysis, and reporting of data that tracks resources used, work produced, and whether specific outcomes were achieved by an organization Note: Measurements are only meaningful to the degree that they are a basis for strategic and operational decision-making

16. Performance Measurement Performance Measurement should: • Be based on program goals and objectives that tie to a statement of program mission or purpose • Measure program outcomes • Provide for resource allocation comparisons over time • Measure efficiency and effectiveness for continuous improvement • Be verifiable, understandable, and timely

17. Performance Measurement • Be consistent throughout the strategic plan, budget, and accounting and reporting systems over time • Be reported internally and externally (Federal grants do and GASB may soon require it) • Be monitored and used in managerial decision-making processes

18. Performance Measurement • Be limited to a number and degree of complexity that can provide an efficient and meaningful way to assess the effectiveness and efficiency of key programs • Motivate staff at all levels to contribute toward organizational improvement

19. Principles

20. Principle I Establish broad goals to guide government decision-making • Basis for the development of policies, programs, and service types and levels to be provided • Developed after an assessment of community conditions and a review of internal operations of the government (GFOA)

21. Principle II Develop approaches to achieve goals • A government should have specific policies, plans, programs, and management strategies to define how it will achieve its long-term goals • It is the policies, plans, and programs that define how the government will go about accomplishing these goals (GFOA)

22. Principle III Develop a budget with approaches to achieve goals • Prepare and adopt a financial plan and budget that moves toward achievement of goals within the constraints of available resources • Provides for the preparation of a financial plan, capital improvement plan, and budget options (GFOA)

23. Principle IV Evaluate performance and make adjustments • Program and financial performance should be continually evaluated, and adjustments made, to encourage progress toward achieving goals • Based on this review, the government may need to make adjustments to the budget, plans, and policies if goals are to be achieved (GFOA)

24. Performance Indicators • Input • Output • Efficiency • Service Quality • Outcome • Explanatory Data

25. Performance Indicators should: • Be quantifiable and measurable • Be relevant, understandable, timely, consistent, comparable, and reliable • Constitute a family of measures - input - output - efficiency - service quality - outcome

26. Types of Performance Indicators • Input Indicators - resources used to produce an output - examples • costs (direct costs plus fringe benefits) • labor hours

27. Types of Performance Indicators • Output Indicators - quantity of units produced - typically under managerial control - examples • Miles of pipe visually inspected • Clients served

28. Types of Performance Indicators • Efficiency Indicators - ratio of inputs used per unit of output (or outputs per input) - examples • Cost per unit: cost per ton of refuse collected, cost per prisoner boarded, cost per transaction, etc. • Productivity: hours per consumer complaint, plans reviewed per reviewer, etc.

29. Efficiency vs. Effectiveness Efficiency is related to cost effectiveness, i.e. lowest costs for a given output level Effectiveness is related to if the service level meets the demands of the citizens

30. Types of Performance Indicators • Service Quality Indicators - how satisfied customers are - how accurately a service is provided - how timely a service is provided • Percentage of respondents satisfied with service • Frequency of repeat repairs • Average wait time

31. Types of Performance Indicators • Outcome Indicators - are qualitative consequences associated with a program/service - focus on the ultimate “why” of providing the service - examples include: • Reduction in fire deaths/injuries • Increase in job trainees who hold a job for more than six months • Decrease in low birth-weight babies

32. Four-Step Methodology* • Step 1: Review and evaluate existing department mission and cost center goals • Step 2: Identify service areas • Step 3: Define service area objectives • Step 4: Identify indicators that measure progress toward objectives *(Fairfax County, VA Performance Measurement System)

33. Step 1Cost Center Goal Statement • States what is to be accomplished (outcome) • States what is to be provided/produced (output) • States why cost center exists • Identifies customers • Transcends several years • Begins with “To and a verb”

34. Cost Center Goal Template & Example To provide/produce (fill in service or product) to (fill in customer) in order to (statement what you intend to accomplish). Maternal and Child Health Services To provide maternity, infant and child health care and/or case management to at-risk women, infants and children in order to achieve optimum health and well-being

35. Step 2Identifying a Service Area • Identify your major activities • Do not identify every activity; only major activities - critical to success of agency’s mission - consume significant portion of cost center (department) budget - politically sensitive or frequently in spotlight - significant customer service focus • Group activities that have common objectives and/or customers

36. Step 3Service Area Objectives • Support cost center goal • Reflect planned benefits to customers • Allow measurement of progress • Quantify portion of the cost center goal that will be accomplished within the fiscal year • Describe quantifiable future target (optional)

37. Step 3 Objective Statement Template & Example To improve/reduce/maintain (accomplishment) by (a number or percentage), (from X to Y) toward a target of (a number). Maternal and Child Health Services To improve the immunization completion rate of children served by the Health Department by 3 percentage points, from 77 percent to 80 percent, toward a target of 90 percent, which is the Healthy people year 2010 goal.

38. Step 4Indicator Definitions & Examples Category Definition Example InputResources used to produce Cost (direct costs an output plus fringe benefits) Staff hours OutputQuantity or number of units produced. Res. properties Activity-oriented, measurable and assessed within usually managerial control. Clients served Calls responded to

39. Step 4Indicator Definitions & Examples Category Definition Example Efficiency Inputs per unit of output or outputs Cost per appraisal per input Appraisal per appraiser Service Timeliness, accuracy and/or customer Errors per data entry Quality satisfaction of the service provided operator Response time Percentage of customers satisfied

40. Step 4Indicator Definitions & Examples Category Definition Example OutcomeQualitative consequences Job trainees associated with a program/service. who hold a Focuses on the ultimate “why” of job for more providing a service than 6 months

41. Input Indicators Resources used to produce an output • Cost (budgeted or actual) • Staff-year equivalents (SYE) • Full-time equivalents (FTE) • Direct labor hours (DLH)

42. Costs as an Input Indicator Direct costs plus fringe benefits Direct costs are those devoted to a particular service and include: • Personnel services • Operating expenses • Recovered costs • Capital equipment

43. Output Indicators What was produced/provided Usually end in “ed” Questions to ask • What services were delivered? • What volume was provided? • How many units of service?

44. Examples Service Area Indicator Fire suppression Incidents responded to Human Resources Vacancies filled Library New materials circulated

45. Efficiency Indicators Inputs used per unit of output • Cost per unit where the input is money/dollars • Productivity where the input is staff hours Examples: • Cost per senior lunch served • Cost per client • Investigations conducted per detective • Hours per fire inspection

46. Efficiency Indicators Service Area Indicator Fire Suppression Cost per incident Senior-based Services Cost per client Human Resources Cost per vacancy filled Custodial Services Cost per square foot cleaned

47. Service Quality Indicators Measures customer satisfaction, timeliness, and/or accuracy of a service Examples: • Customer surveys • Response logs • Error rates

48. Service Quality Indicators Service Area Indicator Fire Suppression Average suppression response time Senior-based Services Percent of clients satisfied with services provided Human Resources Satisfaction rate with vacancy processing Custodial Services Percent of customers satisfied with custodial services

49. Outcome Indicators • Describe the benefit of the service to the customer • Describe what was changed or accomplished as a result of the service • Questions to ask: • How has the customer benefited? • Why is the customer better off? • What is the impact of the service?

50. Outcome Indicators Service Area Indicator Fire Suppression Fire deaths per 10,000 population Fire injuries per 10,000 population Senior-based Services Percent of clients who remain in the community after one year of service or information. Human Resources Average recruitment time Custodial Services Percentile comparisons of cost per square foot to IFMA standards