Sonya Huffman, the accountant, is a perfectionist. No one can do the job as well

Question

Sonya Huffman, the accountant, is a perfectionist. No one can do the job as well as she can. Indeed, she has found budget information provided by the various departments to be worthless. She must change everything they give her. She has to admit that her estimates have not always been accurate, but she shudders to think of what would happen if she used the information applied by the marketing and operating departments. No one seems to are about accuracy. Indeed, some of the marketing staff have even become insulting. When Ms. Huffman confronted one of the salesmen with the fact that he was behind in meeting his budgeted sales forecast, he responded by saying, "They're your numbers. Why don't you go out and make the sales? It's a heck of a lot easier to sit there in your office and make up numbers than it is to get out and get the real work done." Ms. Huffman reported the incident, but, of course, nothing was done about it. Write a short report suggesting how the budgeting process could be improved.

Explanation / Answer

this report deals with the nuts and bolts of state budgeting practices--ways to make the process of enacting and managing a budget work more smoothly. It is designed primarily for new legislators, legislators who have not been members of budget committees, and people outside legislatures who are interested in state budgeting processes. The report does not try to explain state budgeting processes from A to Z. It is concerned with some issues in the budget process that are common to all the states and it reports on procedures that states have developed to strengthen the process. Where it seems appropriate, this report recommends specific practices. The practices recommended here cannot be expected in and of themselves to end revenue shortfalls, ensure balanced budgets, or settle differences over policy. They can be helpful in eliminating procedural issues and allowing policymakers to focus on issues that need attention, such as what the state really should be spending the taxpayers' money on. Budget techniques cannot respond to this kind of question. Although the central purpose of every state's budget process is how to allocate fund, there is no single, preferred procedures. As a result, the main principle of sound state budgeting is to maintain flexibility. "The power to tax involves the power to destroy," said Chief Justice John Marshall, and it is equally true that the power to spend is the power to create (note 1). Budgets are documents that express state governments' power to act. They summarize policymakers' evaluations of past programs and public agencies and their forecasts of current and future needs and resources. Budgets set goals, decide among alternative objectives, and create means for controlling and accounting for the expenditures of public money. They can create pressures for tax increases or tax cuts. They can push reform or they can discourage it. Because budgets have so many functions, the process of writing one is often conflict-ridden, unsatisfactory to observers and participants, and flawed in its outcomes. Budgets seem to increase rather than resolve partisan competition; they sometimes are late; they lave problems unresolved; they spend too much or too little; they may fail to include adequate program review, planning for the future, accounting for past expenses, or controls on planned spending (note 2). These complaints have shown up ever since formal, comprehensive budgeting became a feature of state and local government in the early years of the 20th century. The Taft Commission, which examined federal budget processes in 1912, criticized federal budgeting procedures for the same flaws observers note today. Some of the problems--partisanship, indecisiveness, lack of closure--are inherent in the democratic process. Others spring from conflicting expectations of the process. The central function of a budget--the decision of how much to spend for what--will always create disputes, and no budget will ever satisfy everyone. This document highlights some central issues in the state budgeting process, summarizes current thinking on them, and identifies some mechanisms and techniques that can help solve problems in the process. The Challenge to Traditional State Budgeting This report begins with a discussion of alternative ways of thinking about and writing state budgets. Traditional state budgeting is under attack on the grounds that its processes are fundamentally flawed. Critics charges that current budget practices discourage examining program outcomes in favor of automatically continuing existing programs, discourage policy analysis in favor of legislative micromanagement, and are too tolerant of bureaucracy and waste. They allege that budgets fail in their mission of reviewing the past and planning for the future. Chapter 1 looks at these issues: Traditional methods of state budgeting Performance-based budgeting Zero-base budgeting Why traditional budgeting survives Budget processes always benefit from reconsideration because, at the very least, reconsideration improves people's understanding of the difficulty of the process. This chapter contends that changes in budgeting processes will not achieve the desired goals if too much is expected of them. That is not an argument against change. It is a caution against jumping on bandwagons. Traditional methods of state budgeting Participants and observers agree that state budgeting is less satisfactory, in process and in outcome, than in previous years. Hard times always make for hard budgets, but many feel that in recent years, the process itself has been to blame, particularly because of its traditional focus on line-item control and incremental budgeting. Traditionally, state budgets have focused on controlling expenditures. Control is expressed in written budgets through "line items"--statements allocating so much money for a specific expense: computers for the tax collectors, acquisitions for the state library, salaries for prison guards. Where written budgets focus on line items, legislators tend to do so as well. Line-item budgeting tends to be incremental--previous appropriations are increased or decreased by small increments over time. This approach is likely to take previous policies and programs for granted, and discourages rigorous or fundamental review of priorities, program effectiveness, or service outcomes. These practices are under attack because they are said to foster a business-as-usual approach to government at a time when the public is challenging how state governments operate, questioning their efficiency and effectiveness, and expressing distrust of representative government itself. Line items focus on what money buys (an input) rather than on the service that is provided (an outcome). An input could be tones of asphalt for state highways or new computers for property tax assessors. Outcomes are less likely to be considered: Have traffic conditions improved enough to justify the asphalt? Are property tax assessments more timely and equitable? Nothing in a line-item budget prevents such questions from being asked, but the format does not encourage questions because the written form of budgets tends to drive the way people think about them. With growing concern about how well government functions, many people contend that the traditional focus on line-item budget and incremental change neglects outcomes so much that the budgeting process itself is an impediment to effectively delivering programs. Critics contend that line-item budgeting does not do enough to take program results into account. Two questions arise: Are these criticisms justified? Can adopting of a different technique improve budget outcomes? This chapter first looks at two proposals for reforming budget processes--performance-based budgeting and zero-base budgeting. Then it returns to the evaluation of traditional incremental budgeting. Performance-based budgeting Governors and legislators throughout the states are revising budget procedures to emphasize performance and results. This activity goes under many names: outcome-based budgeting, performance budgeting, and sometimes program budgeting. The terms are confusing because in current use they overlap but do not mean exactly the same things. In general, though, the present trend is to reshape budget processes to reward efficient, effective programs and to encourage remodeling programs that cannot meet specific goals. In this report, this kind of budgeting is called performance-based budgeting. Performance-based budgeting calls for a revolution in how states are governed. It focuses on setting goals, designing the strategies needed to meet the goals, and measuring how well they are met. Future funding decisions should focus on program effectiveness, not on the preservation of existing programs and levels of spending. This approach requires that budgeting be directed at program rather than at specific line items, that the goals of those programs be laid out in measurable terms, and that performance review becomes central to budget decisions (note 3). None of this is easy: It is hard to identify and reach agreement on quantifiable goals for most state programs. For example, in the ambitious performance-based budgeting that Governor William F. Weld of Massachusetts developed for fiscal year 1994, the agency and program mission statements explain what the agencies do rather than set goals. Any reasonable definition of state programs has to recognize that many of them cross existing agency lines, so that full implementation of a program-oriented performance budget might require extensive reorganization. The Legislative Analyst in California has in fact suggested that effective program management will require restructuring the division of responsibilities between state and local government, which would require constitutional changes. Advocates contend that the difficulty of implementing a performance-based budget is evidence of how thoroughly state government needs to be reformed. They say that the difficulty of agreeing on goals for programs is evidence that the issue has been neglected, and the process of trying to reach agreement will produce valuable analysis and debate. If existing agency structures impede a focus on programs and service delivery, the framework needs rebuilding. The difficulty of measuring performance has to be faced squarely. How else can anyone know whether government is providing needed services? How else can public confidence in government be rebuilt? Massachusetts Governor Weld submitted his budget proposals for fiscal year in the form of a performance-based budget, in many ways providing a working model of the general purposes of such reform. His budget proposals and the appropriations bill he submitted to the legislature are organized by agency programs, without line items below the program level. All programs--service delivery groups in Governor Weld's idiom--developed performance measures including such categories as the amount of service provided, productivity, degree of public satisfaction, equity of service, delivery, and the extent to which a program met its immediate purpose. The budget followed up this logic by proposing greater authority for agency managers to transfer funds from one program to another under their control. Massachusetts legislators were unwilling to adopt much of Weld's restructuring of the budget, in part because it would have increased executive authorship at the expense of the legislature. Texas legislators have adopted a performance-based budget, and in Texas's case, the Legislature so thoroughly dominates the budget process that there is little likelihood of any increase in executive control. The budget for the current biennium required six-year strategic plans from state agencies and provided funding according to the agencies' goals and objectives. There is widespread enthusiasm for performance budgeting in the states, and some states have implemented some elements, especially the goal-setting and the greater attention to performance measurement. Questions remain: What will a state legislature do if a program does not reach its target goals? How can rewards for performance be established without creating incentives to reshape programs to reap rewards rather than improve programs? How willing are legislators to trade certain control over budget detail for promises of improved service delivery that require greater executive discretionary power? Zero-base budgeting The popularity of zero-base budgeting (ZBB) is partly due to its name. It appeals to many people who are concerned with public budgeting because, according to one standard definition, it requires "the review of all budget requests from point zero, without assuming that any existing program should continue" (note 4). Although the original goals of ZBB have proved elusive, in a modified form it has become a widely used budgeting tool. In its original sense, ZBB meant that no past decisions are taken for granted. Every previous budget decision is up for review. Existing and proposed programs are on an equal footing, and the traditional state practice of altering almost all existing budget lines by small amounts every year or two would be swept away. No state government has ever found this feasible. Even Georgia, where Governor Jimmy Carter introduced ZBB to state budgeting in 1971, employed a much modified form. State programs are not, in practice, amenable to such a radical annual re-examination. Statutes, obligations to local governments, requirements of the federal government, and other past decisions have many times created state funding commitments that are almost impossible to change very much in the short run. Education funding levels are determined in many states partly by state and federal judicial decisions and state constitutional provisions, as well as by statutes. Federal mandates require that state Medicaid funding meet a specific minimum level if Medicaid is to exist at all in a state. Federal law affects environmental program spending, and both state and federal courts help determine state spending on prisons. Much state spending, therefore, cannot usefully be subjected to the kind of fundamental re-examination that ZBB in its original form envisions. As practiced in state government, ZBB has been used to consider reducing activities in a program, not just to look at its continuation or expansion. It does so by requiring that agencies' formal budget requests include the consequences of different funding levels, and that activities be prioritized according to the possibility of increased and decreased funding for each of them. ZBB appeared in the 1970s when rapid growth in federal programs, grants-in-aid to states, and state tax sources seemed to be bringing inexorable and unexamined growth to state budgets. Hence it focused on potential restraint and possible cuts, rather than on the quality of service delivery. The first two states to adopt ZBB enthusiastically were Georgia and Texas, both of which were at the time experiencing economic booms and above-average expenditure growth rates. In the states where it continues to exist in some form, ZBB is hard to separate from the widespread practice of expecting agencies to evaluate the impact of changes in funding on operations. This is a useful technique. It provides valuable information both when state resources are expanding and when cuts are needed, and assists policymakers to break with the tradition of incrementalism. Even more important in the budget climate of recent years, the process makes it possible to avoid across-the-board cuts by emphasizing the effects of different cuts on services. To the extent that ZBB has encouraged governors and legislators to take a hard look at the impact of incremental changes in state spending, it produced a significant improvement in state budgeting. But in its classic form--begin all budget evaluations from zero--ZBB is as unworkable as it ever was (note 5). Why traditional budgeting survives Why is it so hard to change traditional budgeting methods? Why does budget reform seem to excite more interest than activity? Critics of proposed reforms suggest two reasons: Traditional budgeting meets more expectations about the process better than any proposed reform, and Reforms will not solve the problems that reformers have identified. Proposals for reform focus on particular unsatisfactory results from the existing process and recommend ways to improve those results. But they may fail to consider how many conflicting expectations the budget process has to meet. Aaron Wildavsky, an expect on government budgeting methods, puts it like this: Budgeting is supposed to contribute to continuity (for planning), to change (for policy evaluation), to flexibility (for the economy), to rigidity (for limiting spending) and to openness (for accountability) (note 6). Wildavsky goes on to suggest that a budget process that is expected to do so many disparate things will work worse as more specific formulas and expectations are loaded onto it. Budgeting, he argues, should not be made responsible for all of the aims of government. Traditional budgeting has responded fairly well to the conflicting demands made upon it because it builds upon previous agreements and commitments. It does not reopen every question and it does not try to do too much. Planning, evaluating, and accounting are activities that can proceed effectively without being central to the budget. For budget processes not to be overloaded, they should continue to focus on narrow, not broad, purposes. Hal Hovey, editor of State Policy Reports and a close observer of state reform, concurs, writing recently in The Fiscal Letter: Many of the values of reforms can be lost by expecting too much from them. They won't ever solve the real problem, which is that we voters want to spend more than we want to pay in taxes, and insist on elected officials who agree with us. We are all in for trouble if state officials do what the Congress has made a practice of doing--substituting a new round of budget reforms for dealing with the budget (note 7). Both Wildavsky and Hovey are suggesting that traditional budgeting survives because of its lack of rigorous method. The traditional systems allows but does not require legislators and governors to use many techniques and kinds of information now available and similar to those which reformers urge them to adopt. Program and financial auditing, performance evaluation teams, and short- and long-term forecasting already are institutional fixtures of many state governments. Sunset review processes also exist in many states. There is no lack of review. What is lacking, according to legislators and the staff who provide the audits and reviews, is the use of the information in budgeting. Much good information goes unused because legislators sometimes find program reviews and audits focused on the wrong question, too detailed, or untimely. Some issues can be addressed with better communication between legislators and evaluators. A more significant reason is time itself: Legislators lack the time to make use of all the information that is available to them. The lack of rigorous method in traditional budget processes allows legislators to focus on their priorities to the exclusion of others, work on what is most important at the time, and rely on the continuation of past decisions in other areas. This flexibility is the greatest strength of traditional budgeting methods. Encouraging Innovations and Cost Savings More and more states have considered new budget practices, using a special fund to encourage and reward administrators who institute practices that save money or improve service quality. There are real advantages to sharing financial benefits of innovation with those who propose it. In doing so, lawmakers encourage creative thinking and risk-taking by program managers. The following examples show some of the different ways to structure an incentive program. Florida's innovation funds will lend agencies money to front expenses associated with a new practice or technology. Agencies are then expected to use their savings to repay the interest-free loan. Other states do not use a dedicated account but simply allow agencies to retain a percent of what is saved through innovation. This technique was proposed for California in 1993 but has yet to be implemented. Georgia lawmakers also agreed in 1993 to apply this budget practice. Georgia's program is unique in that it rewards innovation that yields ongoing savings for the state. If cost savings will accumulate over a number of years, agencies may keep up to half of what is saved each year for the first three years. But where savings are one-time in nature, agencies only get to keep part of the savings that accrue in the first year. Agencies can choose how to spend their portion so long as expenditures do not create future obligations. All projects must be prefiled with the state's budget director to qualify for incentive money. Mississippi lawmakers have asked their state finance director to identify each year those programs who innovative actions merit reward. This finance director will recommend to the Legislature an award amount and how the agency be allowed to apply the reward. Texas plans to publicly commend or financially reward agencies that meet or exceed specific performance expectations. Financial rewards may take the form of increased transfer authority, contract authority, appropriations, or may involve a bonus for key staff. Massachusetts and Oklahoma have both, at one time or another, allowed agencies to carry forward funds saved through efficiency into the next fiscal year. Constraints on State Government At the same that that management theorists are recommending bottom-up management accompanied by maximum flexibility at the top, many state governments face new constraints on their flexibility. Tax and expenditure limits have become widespread, and a growing number of states require voter approval of tax increases. Policy decisions are increasingly subject to voter and judicial review. Federal officials continue to enact more mandates, and taxpayers are unwilling to pay for more government. Budget processes cannot control or even limit voters' distrust of elected officials, federal policies toward states, or the outcome of lawsuits challenging state corrections, education, or health policies. Budget processes have proved unable to control rapid growth in expenditures for corrections, education, and Medicaid. In many states, major political issues are decided outsid

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