Week # 6

1. Week # 6 Budgeting for Improved Performance

2. Chapter Overview • This session discusses the development of performance measurement in local government. • Performance measurement is part of a broader quest for improving government with a particular focus on such financial issues as improved productivity, cost savings, relating service to agency mission, and greater accountability.

3. Historical Overview Over several decades the move to introduce performance measurement emerged at all levels of government: • 1906 - New York Bureau of Municipal Research called for the adoption of budget procedures by the city’s departments. • 1950s - the adoption of Performance-Based Budgeting by federal government supported by Hoover Commission. • 1990s, Al Gore led the National Partnership for Reinventing Government and called for closer monitoring of agency activities to improve performance and increase cost savings through improved productivity.

4. Public Sector Context • In the private sector – the “market” compels producers to offer services that consumers want at a price consumers find acceptable. • This is somewhat true for the public sector where a determination is made about the services that citizens want and the cost they are willing to pay … BUT … As previously noted… this determination is made through the political process which is often imperfect and unreliable.

5. Public Sector Context • Performance measurement introduces another mechanism that managers and their councils can use to help make their budget priorities better reflect citizen preferences. • The effort to introduce performance measurement has largely involved an attempt to introduce management tools and practices that would increase efficiency in production, financing and delivery of public goods and services.

6. Public Sector Context The effort to introduce “market-like” forces into the public arena has been led by such organizations as: • ICMA - International City/County Managers Association • GASB - Governmental Accounting Standards Board • GFOA - Government Finance Officers Association

7. Measuring Performance • There are three commonly used types of performance measures: inputs, outputs and outcomes. • Figure 6-2 on page 128 of the text summarizes these basic types of performance measurement. • Table 6-1 on page 130 illustrates performance measures for the city of Rockville, Maryland.

8. INPUT MEASURES • An input measures involves the quantity of resources used to produce goods or services. • These are the easiest to measure in that the “input” may simply involve assessing the costs associated with producing a good or service - both personnel costs and non-personnel costs). • An input measure might also involve other common units of measure such as the number of hours (labor) required to provide a service.

9. OUTPUT MEASURES • Output measures involve the amount of goods or services produced (e.g., miles of city streets cleaned by street sweepers). • A common unit of measure is typically used for reporting purposes such as the example cited above. • Output data is commonly collected and used for the budget to demonstrate workload.

10. OUTCOME MEASURES • Outcome measures assess the impact of inputs in relation to a performance goal. • For example, the overall reduction in DUI related accidents after instituting a DUI enforcement program. • Outcomes measures are also known as “results measures” and “impact measures” because they attempt to assess overall effectiveness.

11. EXAMPLE Using the installation of a video camera for traffic enforcement as an example, the next few slides will illustrate each type of performance measure.

12. INPUT MEASURES • The cost of the camera and the cost to install and maintain the camera. • The cost to record, store and process video recordings to substantiate each violation. • The labor costs (or number of staff hours) required to identify violators, send notices of violation and collect fines.

13. OUTPUT MEASURES • The number of traffic signals installed and made operational during a particular year. • The number of traffic violations recorded and processed at one intersection. • The number of violators identified, notified and fines collected.

14. OUTCOMES MEASURES • The reduction in traffic accidents occurring at an intersection using video camera. • The overall reduction in traffic accidents. • The reduction in motorists or pedestrians injured in traffic accidents.

15. Cost Efficiency & Cost Effectiveness • Inputs – Outputs – Outcomes can be combined to compute additional indicators of performance by calculating a simple ratio. • Cost efficiency is a ratio comparing the cost (inputs) to the production of a specific good or service. For example, what does it cost per mile for snowplowing. • Cost effectiveness is a ratio that relates costs (inputs) to the change that occurs. For example, a budget plan that includes a program objective of crime reduction would compare the costs to actual reduction in the crime rate that results.)

16. Performance Expectations and Perceptions A report published in 2005 by New York City’s Center on Municipal Government Performance found that people… “…judge government performance in ways that often differ markedly from the standard measures that governments use to evaluate themselves”.

17. Performance Expectations and Perceptions • Department heads most often view performance and measure those things that are needed to manage the organization – they are concerned with performance and production by various organizational units. • In contrast, the public takes a holistic and more intuitive view of performance. The public is concerned with the extent to which the job is getting done and typically little interest is paid to the performance of individual units of government.

18. Actual versus Perceived Performance • Turn to page 132 and review Figure 6-3 which illustrates sources of performance expectations and performance gaps. • The public’s expectations and their perception of actual performance – may not align with true performance which can beinfluenced by many factors, including the availability of funding, proper management, etc. • A performance deficit occurs when the government fails to meet the public’s expectations (e.g., New Orleans citizens’ view of emergency services following Hurricane Katrina). • A performance surplus occurs when the government meets or exceeds the public’s expectations (e.g., New York City citizens’ view of fire and police services following 911).

19. Actual versus Perceived Performance A reasonable goal of performance measurement is to minimize the gaps between expectations and actual performance. This can be done by: > Fairly assessing and articulating local government’s true performance capabilities > Providing citizens and elected leaders with a candid assessment of performance strengths, weaknesses, and vulnerabilities – given current budget levels and organizational capacity.

20. Setting Performance Standards • Externally Collecting comparative data of the performance of other similarly sized jurisdictions in the region can be used to set thresholds for local performance measures. • Internally Benchmarking can be used by local government examining historical performance records to set thresholds for performance. Strategic Planning can be used to take into consideration the government’s unique circumstances and to establish goals, performance objectives and corresponding performance measures.

21. Strategic Planning On page 134 the author asserts… Performance measurement begins with a strategic plan. > There are many scholars of local government finance who would agree with the author. > For this reason, expanded coverage will be provided of this highly important concept.

22. Strategic Plan defined… (The following definition appears on Page 189 of the text) A type of plan that provides for goals, objectives, and strategies for a local government or one of its units. The plan includes undertaking an analysis of the organization’s strengths and weaknesses, opportunities and threats (SWOT); development of a mission statement; and possibly the development of a separate statement of vision. The strategic plan also provides overall direction for the major initiatives that an organization plans to pursue and the connection of those initiatives to the organization’s mission and purpose.

23. Strategic Plan • A strategic plan includes a mission statement for the unit of government (and for each department and even each program). The mission statement articulates the reason for that entity’s existence. A mission statement should consider the interests of both internal and external stakeholders.

24. Strategic Planning is a process • Strategic planning is a recurring activity that brings together internal and external stakeholders to review and update the mission of the organization. • The process usually includes SWOT analysis to assess… • internal strengths and weaknesses and • external opportunities and threats

25. Developing a Strategic Plan Following a review of the mission and SWOT analysis, the final step involves developing the actual strategic plan by identifying… >Goals > Objectives > Strategies

26. GOALS • A goal is a one-sentence statement of a desired result or state of affairs that guides much of the work of the unit during the planning period, usually 3 – 5 years. • A goal is usually a broad, value-laden statement that the unit will attempt to realize during the planning period.

27. OBJECTIVES • Each goal usually has several objectives, which provide more specific and measurable targets that guide the unit’s efforts to achieve the goal. • While goals are very broad statements – objectives are very specific and time-oriented. • Objectives can be staggered so that when one is completed, the next may be undertaken. • All objectives relate back to the goal and therefore successfully achieving the stated objectives leads to goal achievement.

28. Strategies • Each objective, in turn, has specific strategies for achieving the goal and its objectives. • Strategies define the activities that will be undertaken. • Strategies indicate the “who, what, when, where and how” of a plan. • Turn to Page 134 and review the inset at the bottom of the page for an illustration of a Goal – Objective – Strategies for a local government

29. Budgets & Performance Measures • Strategic plans provide a foundation for the budget - using the simple logic that once a detailed plan is developed it is relatively simple to identify the resources that will be needed to implement the plan. • Furthermore, strategic plans provide so much detail regarding organizational activities that managers find it easy to translate the objectives into performance measures.

30. Limitations to Performance Measurement • It can be readily discerned how developing performance measures can improve budgeting and to improved management. • Although achieving certain outcomes remains an important factor in decision making, the extent to which performance measurements may have actually influenced budgeting processes and decisions is subject to debate.

31. Limitations to Performance Measurement • There are several roadblocks to the integration of performance measurement into local budget and management systems. • The roadblocks have limited the progress toward bringing more accountability and efficiency to local governments. • These roadblocks can be grouped into three types of obstacle: (1) Information Obstacles (2) Organizational Obstacles (3) Managerial Obstacles

32. Information Obstacles Three types of information are needed to strengthen the link between performance measurement and budgeting: (1) Information about what citizens want from government • Information about the impact of funding levels on performance • Information about the cost of government

33. What do citizens want? • Most government managers develop measures that serve their needs but mean little to citizens. • Measures should be developed that measure community conditions. • On-line surveys, on-line discussion groups and focus groups are being used by some progressive governments to identify high priority concerns and determine effective ways to measure the well-being of the community.

34. What impact does funding have on performance? • Another obstacle is the lack of credible information about the actual impact of funding on outputs or outcomes. • While increased funding is often cited as “all that is needed”, the real issue is the effectiveness of government policies and programs to resolve the underlying causes giving rise to many of the complex issues and ills of contemporary society. • There is also adequate evidence to demonstrate the “unintended consequences” of some government programs such as the failure of many federal housing projects over the last fifty years).

35. What are the costs to government? • Unlike the private sector, public organizations operate with little concern for monitoring costs and making serious efforts to achieve optimum performance and minimize costs. • Government is mostly concerned with meeting the demand for high priority service requests (and clients) – and resources are allocated accordingly. • A greater emphasis should be placed on identifying reliable cost data with an overall goal of funding effective programs and achieving optimal efficiency

36. Organizational Obstacles • The issues that government must face often transcend the well-defined organizational boundaries of most governmental agencies. • For example, drug abuse cannot be fully resolved by law enforcement alone - there is an obvious need to address this complex problem through various programs. • Most government agencies do not recognize ( or choose not to deal with) this problem and performance measures are established that relate only to the services they are charged with providing (e.g., law enforcement – not drug treatment.)

37. Organizational Obstacles • Agency executives do little to develop or promote interdepartmental initiatives to address common problems. • There is a desperate need for increased coordination among government agencies to develop strategies to jointly identify and resolve many community problems.

38. Managerial Obstacles • Managers require information in order to make decisions. • However, creating and reporting performance measures does not change the quantity of work performed – managers do! • The text cites three limitations relating to the use of performance measures by managers

39. Managerial Obstacles #1 While performance measures provide a means to evaluate organizational performance – other factors can also influence performance and they should be considered. - Managers should review and analyze performance data and link those measures to other factors that might influence performance. - A comprehensive analysis will allow managers to effectively guide and direct the efforts of the workforce and lead to improvement in performance. - In a similar manner – a comprehensive analysis can facilitate the decisions regarding budgeting and resource allocation.

40. Managerial Obstacles #2 Managers should do more than review and act on performance measures – they should also remain constantly mindful of the relative importance of high priority outcomes. - Managers must provide leadership by clarifying the government’s priorities. - Managers must avoid the tendency of emphasizing the measures that reflect most favorably on their departments while simultaneously deemphasizing those that do not. - Using a strategic planning process can compel managers to identify the highest priorities, allocate resources to those priorities and create/report performance measures related those priorities.

41. Managerial Obstacles # 3Research has indicated that local government budget decisions show “limited consideration of performance measures” (Melkers and Wllioughby, 2005) - Managers should integrate performance measures into the budget process. - Managers should take steps to ensure performance measures focus not only on the “ends” but also the means” – in other words – what should government produce and how much should be allocated for that purpose. - Managers should find ways to ensure citizens and various other stakeholders become involved in this process.

42. Rethinking how performance is measured and reported • The text presented evidence that the information needs of citizens are shaped by factors largely ignored by most performance measures used internally by managers. • This is a fundamental weakness that managers should correct.

43. IDEALLY – performance measures should... • Convey information useful not only to internal government users but also to citizens who assess local government’s performance in a more holistic manner. • Help managers link inputs to outputs and the effects of those outputs to desired outcomes. • Facilitate an understanding of the interconnectedness of local government programs and services. • And budget participants in allocating resources so that perceived and true performance deficits are reduced.

44. An Illustration Bellevue, Washington • In 2004 the leaders of Bellevue, Washington launched a dialogue with citizens and then compiled a list of sixteen metameasures that would convey a mix of citizen attitudes and statistical measures of the city’s overall condition. • Turn to Page 140 and review the sixteen metameasures developed by the City of Bellevue.

45. Production Function of Government • Like the private sector – public sector managers combine labor and capital (inputs) to create outputs that serve the needs of the community. • The production function (or outputs) in local government falls into one of four categories: > Prevention > Response > Maintenance > Administration and Planning

46. Prevention Prevention: Resources devoted to reducing or deferring the need for a public service or to preventing injury or the loss of life or property. Example: Fire prevention Gang intervention programs Drug resistance programs Safety and health inspections

47. Response Response: Resources used to respond to either routine or emergency requests for services. Example: Activities performed as a reaction to a request or an event such as… Emergency service response (police, fire, etc) Power Outage Water pipe break Street repair

48. Maintenance Maintenance: Resources devoted to the ongoing production of goods or services not otherwise classified in another category. Example: Spending for recurring services & products produced by government such as… Libraries Parks and recreation Street cleaning Utiliity production

49. Administration and Planning Administration & Planning: resources for various support services needed for general administration. Example: Budgeting Planning Human Resources Tax Administration

50. Production Function of Government • Every local government is a unique combination of the four factors of production described in the previous slides. • Economically, the budget process requires decision makers to combine inputs in order to maximize community welfare given a certain level of available revenues. • Local government production can therefore be illustrated as follows: CI = (Prevention + Response + Maintenance + Administration)