Financial Management Series Number 8

(Instructional Version)

Performance Measurement & Performance Based Budgeting (PBB)

Alan Probst Local Government Specialist Local Government Center UW-Extension

Part I

Overview

Performance Budgeting

Originated in late 1940s

Congress enacted through National Security Act of 1949 for newly formed Department of Defense

Government Performance and Results Act (GPRA)

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

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

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

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

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 theyre getting for their buck

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

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, doesnt reap a future 20% decrease in future performance?
How do you ensure youve considered all factors that may have affected the decline in performance?

Potential Flaws
Incorrect assumptions or conclusions

Police: Arrests are up; we gave you more money, whats wrong? Police: Arrests are down, we gave you more money, whats wrong? Do more arrests mean better police work, more crime, less crime, better crime prevention, or less police work?

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

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 years budget request? what goals has the department set for the coming year?

Part II

Performance Measurement

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

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

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

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

Principles

Principle I
Establish broad goals to guide government decisionmaking

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)

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)

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)

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)

Performance Indicators

Input Output Efficiency Service Quality Outcome Explanatory Data

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

Types of Performance Indicators

Input Indicators
- resources used to produce an output - examples

costs (direct costs plus fringe benefits) labor hours

Types of Performance Indicators

Output Indicators
- quantity of units produced - typically under managerial control - examples

Miles of pipe visually inspected Clients served

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.

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

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

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

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)

Step 1
Cost 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

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

Step 2
Identifying a Service Area

Identify your major activities Do not identify every activity; only major activities
- critical to success of agencys 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

Step 3
Service 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)

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.

Step 4 Indicator Definitions & Examples

Category
Input

Definition

Example
Cost (direct costs plus fringe benefits) Staff hours

Resources used to produce

an output

Output

Quantity or number of units produced. Activity-oriented, measurable and usually managerial control.

Res. properties assessed within Clients served Calls responded to

Step 4 Indicator Definitions & Examples

Category
Efficiency

Definition
Inputs per unit of output or outputs per input

Example
Cost per appraisal Appraisal per appraiser Errors per data entry operator Response time Percentage of customers satisfied

Service Quality

Timeliness, accuracy and/or customer satisfaction of the service provided

Step 4 Indicator Definitions & Examples

Category Outcome Definition Qualitative consequences associated with a program/service. Focuses on the ultimate why of providing a service Example Job trainees who hold a job for more than 6 months

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

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

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?

Examples
Service Area
Fire suppression Human Resources Library

Indicator
Incidents responded to Vacancies filled New materials circulated

Efficiency Indicators
Inputs used per unit of output

Cost per unit where the input is money/dollars Productivity where the input is staff hours Cost per senior lunch served Cost per client Investigations conducted per detective Hours per fire inspection

Examples:

Efficiency Indicators
Service Area
Fire Suppression

Indicator
Cost per incident

Senior-based Services
Human Resources Custodial Services

Cost per client

Cost per vacancy filled Cost per square foot cleaned

Service Quality Indicators

Measures customer satisfaction, timeliness, and/or accuracy of a service Examples:
Customer surveys Response logs Error rates

Service Quality Indicators

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

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?

Outcome Indicators
Service Area
Fire Suppression

Indicator
Fire deaths per 10,000 population Fire injuries per 10,000 population Percent of clients who remain in the community after one year of service or information. Average recruitment time Percentile comparisons of cost per square foot to IFMA standards

Senior-based Services

Human Resources Custodial Services

The Logic Model

Begin with the end in mind
Start by asking: What results are we seeking? What are we hoping to accomplish? How will we accomplish it?

What is the Logic Model?

A picture of a program A way to show the relationship between what we put in (inputs), what we do (outputs) and what results occur (outcomes) Sequence of if/then relationships Core of program planning and evaluation

Logic Model
Inputs Outputs
What we invest Staff Dollars Volunteers Materials Equipment Technology Workshops Outreach Inspections Awareness Behavior Knowledge Decisions Attitudes Policies Skills Conditions Environment Social Economic Civic What we do

Outcomes
Short-Term Medium-Term Long-Term

Logic Model Fire Suppression

Inputs Outputs
What we invest What we do

Outcomes
Short-Term Medium-Term Long-Term

Staff Dollars Volunteers Materials Technology

Training Inspections Emergency response

Inspections Suppression responses Public education

Response Protection time of lives & Fire property containment (fire deaths Prevalence injuries, of smoke detectors

Example Service Area Objective

Teen Pregnancy Prevention
Acceptable
Reduce the teen pregnancy rate by 2 pregnancies per 1,000 population from 42 to 40 in localities with comprehensive teen services

Unacceptable
Increase the number of localities with comprehensive teen services from 20 to 27

Performance Management Model

Goals

General Goals of program:

Provide quality services to all customers Maintain or improve performance Provide economical services

Inputs

Resources:
Money Facilities Equipment Supplies Contracted services

Performance Management Model (cont.)

Activities

Work processes:
Salting roads Making arrests Processing bills Performing inspections

Outputs

Goods & Services produced:

Statistical measurements Miles of roads repaired Tons hauled or recycled Positions filled

Performance Management Model (cont.)

Outcomes

Results and Impacts

100% of customers will report being satisfied 95% will be error free 90% of services will be within +/- 2% of comparable service within the private sector

Performance

Measurement

Administration of customer satisfaction surveys Tracking number of jobs, error rates, average per job Cost comparison to private sector services Quarterly and annual reports summarizing services provided, ouputs ad outcome achievement

Remember

Quantify objectives Associate objectives with an outcome Word outcomes the same as objectives Provide a complete Family of Measures Avoid confusing indicators (e.g. efficiency and service quality) Reference the correct baseline to target year for objective Define service areas by program objective/customers rather than process function

Part III

Benchmarking

Definition
Formal benchmarking is the continuous, systematic process of measuring and assessing products, services and practices of recognized leaders in the field to determine the extent to which they might be adapted to achieve superior performance.
Benchmarking & Best Practices, Treasury Board of Canada

Another Definition
Benchmarking is the practice of being humble enough to admit that someone else is better at something and wise enough to try and learn how to match and even surpass them at it.

Types of Benchmarking

Internal commonly one year compared to a previous years performance External your performance compared to another similar organization Operational your recent annual or periodic performance Strategic long term performance

Internal Operational

Probably the most common measure at the local government level Measures current performance versus an established benchmark from prior performance Example: Police Dept. criminal cases closed this year versus the average over the past ten years

External Operational

Measurements against other organizations performance Example:

Total Structure Fires Incidents Per 10,000 Population
Whitewater

Platteville Series2 Series1

Janesville

Eau Claire

Beloit 0 20 40 60 80

Fa irf a x C ou
9 8 7 6 5 4 3 2 1 0

POLICE Violent Crimes Reported Per 1,000 Population

,V J D A an os e, e C C ou A nt y A ,W u S an sti I A n, T nt on X M ia i m P h o, T i-D o en X at ix e C ,A ou Z nt y, FL

an

nt y

Series3

Series1 Series2

Benchmarks

Internal Benchmarks Overall spending Growth in tax base Growth in income New home starts Miles within service area

External Benchmarks Private sector wages Neighboring cities Similar sized counties Statewide groupings Statewide averages

Benchmark Standards
Program dollars spent per capita Spending per $1,000 property assessment Percentage growth over time Adjustments for inflation Other specific service standards

Setting Targets

Benchmarking National standards Mandates Board direction Past Performance Internal goals Citizen demands

Part IV

Performance Based Budgeting (PBB)

Performance Based Budgeting (PBB)

Performance-based budgeting relies on: Strategic planning Operational planning Performance accountability A realistic performance measurement system

1. 2. 3. 4.

to build budgets.

Performance-based Budgeting (PBB)

Performance-based budgets focus on return on investmentthat is, what do we get for our investment of resources?

Basic service level (or continuation of basic services)? Increased services (more services to same recipients or expansion of same services to more recipients)? Better (higher quality) services? More efficient services (cost savings in service delivery)?

Mitigation or resolution of a problem?

Performance-based Budgeting (PBB)

PBB is budgeting for results - with an eye on the price tag

PBB emphasizes program effectiveness and bases decision making (whether for continuation or enhancement of a program) on outcomes. However, the costs of achieving those outcomes must be scrutinized to ensure efficient service delivery and maximize allocation of scarce resources.

Goal Setting
A SMART goal is defined as such:

Specific Is the goal clear and to the point? Measurable Can you tell if it is accomplished? Attainable Is it a realistic goal? Relevant Is it a priority of the organization? Trackable Results are compared over time?

SMART Examples

Yes: To respond to all fire calls within the city within 7 minutes of dispatch No: To protect all property within the city to a high level of safety
Yes: To process all building permit requests within 48 hours of application No: To process all building permit requests in the shortest time possible

Rudimentary PBB
A rudimentary form of PBB to be implemented until a formal system can be produced could include the following in each departments budget request:

An explanation of the departments overall goals An explanation of what the department has accomplished in the past year An explanation of what the department intends to accomplish in the coming year An explanation as to what is different from last year in the proposed budget and why A GASB compliant budget showing past year budget expenditures

Performance-based Budgeting (PBB)

Program Structure Strategic plans, operational plans, and performance based budgets are geared to program structures Funds are appropriated to departments/programs A program is a grouping of activities directed toward the accomplishment of a clearly defined objective or set of objectives Program structure is an orderly, logical array of programs and activities that indicates the relationship between each

TOP TEN REASONS WHY PERFORMANCE-BASED BUDGETING WONT WORK IN MY DEPARTMENT

It doesnt matter what we do because we have federal/state funding.

10.

9. We just reorganized and we dont know what were doing yet. 8. Everything is just fine as it is; weve always done it this way. 7. Were too busy getting REAL work done to bother with this. 6. We need more staff, more money, more time, more ( fill in the blank ) to do this. 5. We cant target outcomes; theyre too specific. 4. We cant measure what we do. 3. Youll misinterpret any information we give you.

2. We cant be accountable because we have no control over anything.

1. Were different. This shouldnt apply to us. We need an exemption.

OFTEN FOLLOWED BY:

All right, just give me a form and tell me what you want me to say.
If I give them something, then theyll go away. (Maybe this whole thing will just go away.)

NOTE: This genie wont go back into the lamp.

INSTITUTIONALIZING PERFORMANCE MEASUREMENT:

Make performance an integral part of your management processes.

Use metrics to understand and measure how a process works and the results it generates. Develop an internal performance accountability process. Integrate performance into policy and budget decision making and everyday program management.

INSTITUTIONALIZING PERFORMANCE MEASUREMENT:

POINTER: When you break down a policy, program, or process into its component parts, you use "systems logic" to develop a model of how it should work

INPUT

PROCESS

OUTPUT & OUTCOME QUALITY

EFFICIENCY
Managers should use metrics to gauge and assess program and processes, diagnose problems, and formulate solutions.

Example
Service Quality

Service Area

Objective

Input

Output

Efficiency

Outcome

Fire Suppression

To maintain fire loss at 0.02% or less of Total Property Valuation

$249,000

77

$3,234

7.3 minutes

0.027% fire loss

incidents responded to

cost per response

Average response time

average fire loss percent

Example 2
Service Area Objective Input Output Efficiency Service Quality Outcome

Street Reconstruction

5%

$1,374,500

4.7%
Engineering design costs as a percent of total project cost

75%

7%

Capital Facilities

Maintain construction cost growth to no more than 5 percent

Budget/actual costs Staff

Projects completed

Percent of projects complete d on time

Contract cost growth (%)

INSTITUTIONALIZING PERFORMANCE MEASUREMENT:

Metrics (performance indicators) measure process and product.

(Demand) (Need) (Size of Problem) (Resources)

Inputs

Process

Outputs & Outcomes

(Products) (Services) (Results)

Efficiency:

Outputs Inputs

(Expenditures compared to productivity; caseload per staff member.) (Cost per item produced, service provided, or client served; cost per result achieved.)

Outputs or Outcomes Cost Outputs or Outcomes Time Quality:

(Production or turnaround time; timeliness of results.)

Effectiveness in meeting the expectations of customers, other stakeholders; and expectation groups.

INSTITUTIONALIZING PERFORMANCE MEASUREMENT:

The volume of performance information that must be managed can be staggering.

Watch out for the shotgun or kitchen sink approach-reporting just about every type of measurement or statistic that is already gathered or can be counted easily. This leads to a heavy emphasis on transactional data--inputs and outputs--rather than results.

INSTITUTIONALIZING PERFORMANCE MEASUREMENT:

Concentrate on the development of balanced sets of performance indicators in order to provide a clear picture of performance without overwhelming users with needless detail

Five types of performance indicators:

Input Output Outcome Efficiency Quality

A balanced set may include more than one of any indicator indicator type and none at all of some but must have at least one measure of outcome, efficiency, or quality

INSTITUTIONALIZING PERFORMANCE MEASUREMENT:

Present performance information at different levels in order to surface key data while maintaining the availability of support and explanatory material.

Key Performance Indicators Supporting Performance Indicators General Performance Information Explanatory Notes

Get consensus among data users on indicator types and levels before indicators are reported.

INSTITUTIONALIZING PERFORMANCE MEASUREMENT:

A key performance indicator is a performance indicator that is included in the Budget Supporting Documents

Factors in determining key level include:

Most direct measure of outcome? Critical success factor? Big ticket item? Hot button item? History and who values?

INSTITUTIONALIZING PERFORMANCE MEASUREMENT:

General performance information (GPI) may be included in the budget. However, values for general performance indicators are reported for prior year actual only. GPI may include:

Multi-year histories or trends

External comparisons (national or regional)

MANAGING ACCURACY:
Beware of:
High balls and low balls (unrealistically high or low performance targets) Instant replays (reporting the same performance level over and over, regardless of circumstances) Greased pigs (indicators for which name, definition, or method of calculation change so often that you cant get a handle on them)

Beware of: (cont.)

Orphans (indicators for which no one claims responsibility)

Statistical illiteracy (calculations that dont add up)

Limp excuses (meaningless explanations of performance variances)

MANAGING ACCURACY:
Get the right start by developing meaningful, valid, accurate, and reliable performance indicators

Provide documentation for each performance indicator identified in the strategic plan. Strategic planning guidelines include performance indicators

INTEGRATING PERFORMANCE INTO BUDGET DECISION MAKING:

Establish the link between resources and results early and maintain that link through budget development, appropriation, and budget control processes.
Set performance standards linked to appropriation levels
Performance standards are the expected levels of performance associated with a performance indicator for a particular period and funding level. They link dollars and results Performance standards are one way to demonstrate RETURN ON INVESTMENT--what we can expect to receive for our money (easier to explain to stakeholders)

Integrating Performance into budget decision-making

Establish the link between resources and results early and maintain that link through budget development, appropriation, and budget control processes.

During budget development, performance indicator values associated with the funding level recommended in budget discussions are proposed performance standards
During the budget process, performance indicator values become performance standards linked to the funding amounts actually appropriated in the budget Performance standards may be modified only through approved processes Performance standards are monitored and tracked

References
Performance Based Budgeting Putting The Pieces Together, Carolyn S. Lane, Deputy Director, Office of Planning and Budget, Division of Administration, State of Louisiana, September 2006
Performance Management: Using Performance Measurement for Decision Making Recommended Practice (2002 & 2007) Government Finance Officers Association (GFOA) Fairfax Countys Performance Measurement System Performance Measurement Team, Dept. of Management & Budget, Fairfax County, Virginia, June 2006 Performance Management Handbook Eau Claire County, WI, January 2007 Moving From Line Item to Performance Based Budgeting: Craig Maher, UW Oshkosh