Performance-Based Budgeting - Essay Example

? Why has true performance-based budgeting proven so difficult? PERFORMANCE BASED BUDGETIN Introduction This paperfocuses on defining performance based budgeting while trying to explain why true performance-based budgeting has proven difficult over the years. The paper further looks into what can be learned from the initiatives in performance based budgeting; taken in the recent years and whether the agendas can be advanced. In addition, if the schemas are advanced, what will be required to affect the process? Performance-based budgeting is used by countries that wish to minimise the complexities and costs. Countries with limited resources and capacities such as low income countries also use the approach. The structure of the paper begins with the introduction, followed by definition and lastly the scope. After the definition of the terms, the paper focuses on one practical example of a situation that performance budgeting presents. Afterwards, the difficulties of budgeting will be discussed. The last part of the paper analyses the concepts obtained from the design, and whether they can be advanced: and if yes, what are the basics for that. Definition and scope Performance-based budgeting is the process of developing budgets based on programme funding levels. It looks into the anticipated results from the programme with a sole aim of minimizing the costs while administering effective budgeting outlines (Caiden, 1994). In terms of decisions, the budget centres on output of resources more than the inputs. Over the years, development of different models of performance based budgeting using different mechanisms have led to better fund linking and utilization (Caiden, 1994). These models are of two types, the very sophisticated ones and those that use the basics only to advance their functions (Drucker, 1974). One may confuse the definition by thinking that performance budget depends broadly on performance. The light of the matter is it depends on many aspects. A budget develops to projected result through clear process. The key elements considered when developing a performance-based budget are understanding products objectives, what the budget should contain, and how it should appear. The distinction line in this case depends on the goals attached to the budget. It reflects on both the given levels of funding and the expected results (Berry & Flowers, 1999). One result obtained from a true performance based budget is an indication of how the dollars budgeted turns into results. The result should be evidence based, reflecting general chain of events and results and not scientific assumptions (Grizzle & Pettijohn, 2002). Under this, the most effective governmental performance based budgets outlays how money is spent on the day to day activities. The link between funding of the projects and how they are going to yield towards expected results has to be emphasized. The effects that the results will pose on the intended purpose have to be highlighted (Grizzle & Pettijohn, 2002). In order to distinguish a line item budget from a program-based budget, the best way is to consider the fundamentals (Easterling, 1999). The line budget shows items in usage, for example, how each dollar is spent. On the other hand, the performance budget reflects what each dollar budgeted will accomplish by a way of evidence in achieved results, for example, reduction in accidents, an improvement in health facilities, and an increase in customer satisfaction (Romzek & Dubnick, 1987). The other objective achieved via a performance-based budget is a reflection of activity performed, for example, process a grant application, inspect a worksite, and review a compliance activity (Wildavsky, 1992). This budgeting was introduced to many systems because of the value of accountability and transparency it holds. Many countries, organizations, and companies are using it in different sectors as a part of the new reforms that the world is experiencing. Most governments are aiming for management for results in public sectors (Wildavsky, 1992). Examples of reforms include the civil service reforms projected to generate motivation and incentives to public employees, restructuring of organizations in order to create an environment projected towards service delivery and improved coordination of factor inputs, for example, the creation of agencies and reduction of ministries). Finally, the development of the institution and oversight changes geared towards strengthening public accountability for performance. All the above frontiers are important in ensuring that the performance based budget works for better results (Heinrich, 2002). The model has several Advantages Some of the advantages of the performance-based model of budgeting are firstly, the statement of clear objectives. This model is deemed better than the other models since it works from the basis of clear objectives. In real life practice, an organization must set and identify clear objectives and core goals. As far as the assumption that every business wants to make a profit, the model tries to capitalize on gains and minimize on costs (Grizzle & Pettijohn, 2002). The level of accountability within the performance based budgeting is enhanced to a high extent. Alterations for self-gain or heinous motives have no room in this model. It also makes the low performing departments pull up their performance because they are gauged through their performances. The knowledge of a business employing performance tied to budgeting is a tool that improves the outcomes of the organization. The reasons being employees are well aware that their performance is under watch and will be measured on the output levels (Shafritz, 1992). The model has an advantage of linking agency funding to performance in achieving expected results; in a manner that can include rewards and penalties. Hence, it advocates for accountability and performance. Many organizations are on the verge for better results and outcomes. Hence, the model advocates for both. It is also advantageous to the policy makers due to offering them an opportunity to specify their outcomes and quality levels. The model improves vast knowledge of agency operations and enhances citizens’ participation in reviewing government operations (Romzek & Dubnick, 1987). Florida shifting to performance based budgeting Several reasons attributed to the introduction of the model in Florida in the early 1990s. During this time, the economy of Florida was very weak. Hence, many leaders saw it appropriate to change the models of leadership starting with implementation of true performance budgeting (Berry & Flowers, 1999). During this time too, the federal government had minimized its transfers, a thing that pushed for the implementation of the budget model. The second reason was the protests from citizens advocating for accountability and a transparent way of formulating budgets and disseminating resources. The final reason was necessitated by the many reforms that took place during that time (Romzek & Dubnick, 1987). The adoption of the new reforms such as; strategic planning, reengineering and total quantity management took shape from the private sectors to the public sectors (Hendric, 2000). Even so, this model was not new phenomena in Florida, but the enactment of the performance and accountability act in 1994 made a serious impact on the use of performance based budgeting. The main purpose was to enhance accountability, clear definition of goals and objectives, and performance evaluation (Heinrich, 2002). The act stipulated that each agency within the government must include baseline data, outcomes, performance measures, and standard for current programs and their justification in the budget models. The first agencies to carry the pilot were the General tax administration and property tax administration that fall under the department of revenue and the second agency was the facilities management program that is within the department of management and services (Florida Tax Wtch, 1999). After observation and tabling of results at the end of the piloting period, the agencies were given incentives or disincentives depending on the performance. The two are intrinsic to the concept of performance budgeting, but the main guideline towards its effectiveness is the objective measures. The government established an agency (OPPAGA) that dealt with evaluation of the programs. The agencies also help in legislative contribution to implementing the budget (Florida Tax Wtch, 1999). Recent evaluations show that the agency has since helped the state to attain several government objectives under the performance budgeting. The plan was to implement the program within four to seven agencies in a year until the year 2002. Eventually, the program has evolved from development of the program, objectives and goals to induction of better measures that go hand in hand with the current evolution in technology (Wildavsky, 1992). All the problems identified within the administration of the program help in devising measures to curb them in future (Shafritz, 1992). However, the government encountered numerous problems especially in putting across a proper definition of agencies’ programmes. Another problem involves developing long-term plans. The plans should be relevant to the project and must bring appropriate standards for specified programm. Shafritz (1992) stipulates that a closer examination of the fundamental difficulties faced in Florida in relation to performance measures showed that the main cause was strong technical aspect of the performance measure regardless of the strong political aspect of budgeting (Wildavsky, 1992). Challenges of implementing performance based budgeting The first challenge that the model faces which may make it difficult for proper outcome realization is the fact that the frontier works with limits and targets. In the light of the issue, there exists some advantages out of it; however, the model fails for being over ambitious in its goals (Shafritz, 1992). In an example, responsible parties planning the model may stipulate that the budgeted goal is to make sure that every school in a state receives a hundred computers within a set period (Wildavsky, 1992). The reason why such a target may fail is that it does not focus on what will be the cost for putting into effect the plan. At the end of the day, one will realize that the goal is so ambitious, and there may not be enough resources to push for its success. The other reason why such a model will fail is that it does not dig much in details as to what the needs of the schools are (Drucker, 1974). In addition, if the computers fall within their needs, what types of computers are best for these schools? Placing limits such as in a straight-line budget helps answer such questions hence; a budget that concentrates only on the targets can be too nebulous creating room for inaccurate forecasts and over-expenditures (Drucker, 1974). The other difficulty associated with the model is that it uses measures. In many cases, defining completion of a process is always problematic even in instances where cohesive budgets are developed, and the project is pushed all trough top the final stages. Looking at some of the performance based goals; a reflection of vague goals pushes its way top mast of them. The performance based budgeting is deemed very vague in such a way that it does not present a clear cost framework for organizations to follow. In light of this issue, the inconveniences caused in many organizations out way the legitimacy of the model (Easterling, 1999). Many organizations are forced to develop other committees that will focus on analytical parts of the frontier and cost allocation analysis. The big problem is that the model will focus so much on targets and assume the need critical on analysis of ways in which to reach the target (Hendrick, 2000). However, many are the times the model performs separate cost analysis to come up with individual prices within every step involved. This becomes an extra cost analysis which in actual sense, drains the available funds and create confusion to the budget (Florida Tax Watch, 1999). The other difficulty faced by the model is that organization deemed to implement it are required to begin at a baseline and come up with a budget request for all its departments (Florida Tax Watch, 1999). Within the budgets, all the departments must set priorities and targets. With a consideration of departments such as law-making bodies and executive bodies, this is deemed as a disadvantage especially for programs that are faced with low political power if they require additional funding to meet their objectives (Romzek & Dubnick, 1987). There have been many cases where such departments have been denied funding. The reason being that extra funding gets channelled to departments whose managers have outstanding political influence (Wildavsky, 1992). With reference to Florida, political interference is one of the sited problems that end up frustrating the functioning of performance budgeting. Most politicians choose to implement the line budgets overlooking the performance budgets. This demoralizes the budget officials since creating budgets is a very tedious activity. The flexibilities of the budgets have gone down in departments that have adopted the model in Florida due to the demand of accountability that is excessively high (Romzek & Dubnick, 1987). The fact that the legislature insists on reduction of the sizes of the program undermines its functions due to the broad nature it assumes. Secondly the model has failed in several agencies in Florida is due to difficulty in developing appropriate measures to evaluate the performance of the agencies due to diverse characteristics. The measure for results is a technical process. It faces influence from stakeholders hence creating many drifts on what measures to be taken. Ways on how to implement the measures have to be taken into account (Grizzle & Pettijohn, 2002). Wildavsky (1992) states that many agencies fail to improvise measures that can deal with the key functions of their programs hence having difficulties in evaluating their program results causing a misconception by citizens (Florida Tax Watch, 1999). The problems originate from the difficulties of lacking proper data on program results, ambiguous standards, incomplete performance standards and measures, and a regular habit of avoiding output measures for functions with limited control and low outcome. It is observed that the legislatures of the state of Florida fail to pull up consensus on their workers and what constitute reasonable performance measures. This has been a significant hindrance for the state to achieve the benefits of performance based budgeting. The factors also contribute to the development of many measures by the agencies hence causing a high workload for the agency and a lot of data for the legislature to consider (Grizzle & Pettijohn, 2002). Considering the costs effect of the model, it becomes difficult to measure outcome. Other difficulties encountered include the unreliability of some performance data hence decision-making becomes derailed. It is caused by the lack of appropriation data, unit cost data, and relevant cost accounting systems. Agencies face a shortage in unit cost data considered a key element in decision making of state governments. Most agencies face problems when making decisions due to such reasons. Heinrich (2002) states that the incentives and disincentives were not properly implemented due to lack of clear procedures. The last reason is the lack of leadership qualities in leaders both in the executive and the legislature. Any group of leaders has taken responsibility for advocating the implementation of the model and monitoring its performance. Future possibilities After close consideration of many areas that have used the model, yes it is possible to use the model and achieve its objectives. The lessons from the model suggest that the inherent limitations faced during the implementation of the model can be minimized to attain maximum value of the model. The first step towards lesson learned is that a proper and strong cooperation and agreement between the administration and the legislature will facilitate the development towards better implementation of the model (Florida Tax Watch, 1999). By so doing, the capacity of agencies’ participation and attention of employees is enhanced. For instance, the governor’s office of planning and budgeting and the office of program policy analysis and government accountability play a major and important role in implementing the program. On the other hand, all relevant stakeholders should put a hand in enabling a smooth transition and implementation. The implementation of the cooperation strategies will enlarge active participation for all stakeholders (Hendrick, 2000). The next best way to increase the use and output of the model is to focus on departmental mission, goals, and outcomes, not inputs and processes. It is effective to measure output of the agency's performance via outcome rather than input and output measures. A lesson from observation of the Florida case shows that: the success of performance budgeting depends on how well it can be used in, policy and budgeting, decisions thorough measuring outcome. For example, the citizens’ satisfaction and not output like numbers of received services (Berry & Flowers, 1999). The third lesson favourable to the development and success of the model is focusing on performance measures that are relevant and provide accurate verifiable results. If comprehensive measurements systems can be developed, they will facilitate the legislature and the public to be in a better position in measuring the output of the program. The performance measurements should be able to evaluate all of the agency major functions. Under this, even though difficult to achieve total cover of all functions of the state, it is desirable to consider the option (Romzek & Dubnick, 1987). It will be important for the agencies to develop and promote the establishment and use of full cost accounting methods. These costs are important in decision making hence developing a reliable cost requires a total organizational approach. The full accounting systems are relevant to develop reliable and effective data. Most of the Florida departments have suggested the adoption of the full accounting system citing it as the base for improved data that will be reliable. Adequate modification of state’s accounting and budget system will efficiently track the cost of a program a thing that other models do not have. These changes are gradual changes that take the money and time to develop (Hendrick, 2000). It is important to strengthen current audit for validation of performance data. The credibility of the audit checking systems is a vital tool for validation of data. It will also be important to establish the standards to be followed. This ensures that the processes and objectives for granting incentives and sanctions can be efficiently achieved. The legislature should be responsible for development of ideologies that are more comprehensive and steps detailing standards and values (Shafritz, 1992). References Berry, F. S., & Flowers, G. (1999). Public entrepreneurs in the policy process: Performancebased budgeting reform in Florida. Journal of Public Budgeting, Accounting and Financial Management, 11(4), 578-617. Caiden, G. E. (1994). Administrative reform—American style. Public Administration Review, 54(2), 123-128. Drucker, P. F. (1974). Management: Tasks, responsibility, practices. New York, NY: Harper and Row, Publishers, Inc. Easterling, C. N. (1999). Performance budgeting in Florida: To muddle or not to muddle, that is the question. Journal of Public Budgeting, Accounting and Financial Management, 11(4), 559-577. Florida TaxWatch. (1999). PB2—Diamond in the rough or just a Zirconium bauble. Retrieved December 5, 2013, from http://WWW.floridataxwatch.org/archive/pb22.html. Flowers, G. E. (1999). An evaluation of the effect of agency conditions on the Implementation of Florida’s performance-based program budgeting. Ph. D., diss., Florida State University. Grizzle G. A., & Pettijohn C. D. (2002). Implementing performance-based program budgeting: A system-dynamics perspective. Public Administration Review, 62(1), 51-62. Heinrich, C. J. (2002). Outcomes-based performance management in the public sector: Implications for government accountability and effectiveness. Public Administration Review, 62(6), 712-725. Hendrick, R. (2000). Comprehensive management and budgeting reform in local government: The case of Milwaukee. Public Productivity & Management Review, 23(3), 312-337. Romzek, B., & Dubnick, M. J. (1987). Accountability in the public sector: Lessons from the Challenger tragedy. Public Administration Review, 47(3), 227-238. Shafritz, J. M. (1992). The HarperCollins dictionary of American government and politics. New York, NY: HarperCollins. Wildavsky, A. (1992). Political implications of budget reform: A retrospective. Public Administration Review, 52, 594-599. Read More