Objective-Based Budgets GPA 2012

Objective-Based Objective-Based BudgetsBudgets

Lisa Glickstein, PhDLisa Glickstein, PhD

Andover Public SchoolsAndover Public Schools

Googlisms!Googlisms!

Budgeting is…Budgeting is…

…”…”a vehicle for making a vehicle for making performance management performance management operational in the public sector.”operational in the public sector.”

…”…”a framework that streamlines a framework that streamlines resource allocation decisions.”resource allocation decisions.”

……connecting evaluation, connecting evaluation, management and costs.management and costs.

Presentation OverviewPresentation Overview

BackgroundBackground Definitions & ModelsDefinitions & Models BenefitsBenefits

Creating an Objective-Based Creating an Objective-Based BudgetBudget ProcessProcess Accounting Accounting

Best PracticesBest Practices

BackgroundBackground

……say what now?!say what now?!

A Brief History…A Brief History…

International Monetary Fund: International Monetary Fund: Program Budgeting (1980’s)Program Budgeting (1980’s)

Government Performance & Results Government Performance & Results Act (1993): Federal agencies must Act (1993): Federal agencies must report on performance (GPRA) report on performance (GPRA) measures annuallymeasures annually

Federal Performance Progress Federal Performance Progress Report (SF-PPR) adopted in 2008Report (SF-PPR) adopted in 2008

General Budget BenefitsGeneral Budget Benefits

Help to eliminate debt & adjust Help to eliminate debt & adjust expenses to needs & circumstancesexpenses to needs & circumstances

Keep you informed as you compare Keep you informed as you compare plans with performance & allocate plans with performance & allocate funds to close gapsfunds to close gaps

Improve financial communication Improve financial communication among stakeholdersamong stakeholders

Allow you to take advantage of Allow you to take advantage of opportunitiesopportunities

Help to achieve definite objectivesHelp to achieve definite objectives

Measures of successMeasures of success

Effectiveness: Effectiveness: extent to which extent to which programs programs achieve achieve intended & intended & other outcomesother outcomes

Efficiency: Efficiency: delivery of delivery of services at the services at the lowest possible lowest possible cost, without cost, without sacrificing sacrificing qualityquality

Definitions:Definitions:

Program – initiative designed to Program – initiative designed to change a condition or situationchange a condition or situation

Indicator – a change in characteristic Indicator – a change in characteristic of an individual, social structure or of an individual, social structure or environment as a result of the environment as a result of the program, eliminating external factorsprogram, eliminating external factors

Performance measure – instrument Performance measure – instrument or assessment tool used to measure or assessment tool used to measure an indicatoran indicator

Impact – amount of progress Impact – amount of progress towards meeting objectives as a towards meeting objectives as a result of the programresult of the program

Definitions part 2:Definitions part 2: Objective – a measurable desired Objective – a measurable desired

change change Activity – discrete action item in your Activity – discrete action item in your

program planprogram plan Output – a group of activities that Output – a group of activities that

together are capable of producing a together are capable of producing a desired outcomedesired outcome

Inputs – the people & things (with Inputs – the people & things (with costs) needed to do activities & costs) needed to do activities & produce outputsproduce outputs

Outcome – a qualitative or Outcome – a qualitative or quantitative result of an output quantitative result of an output (measured during evaluation)(measured during evaluation)

Logic Model FrameworkLogic Model Framework

Begin with Objectives (Goals)Begin with Objectives (Goals) Develop Performance Measures & Develop Performance Measures &

IndicatorsIndicators Link Inputs, Activities & Outputs (if-Link Inputs, Activities & Outputs (if-

then relationships)then relationships) Collect data on PM&ICollect data on PM&I EvaluationEvaluation Connect Performance (Outputs & Connect Performance (Outputs &

Outcomes) back to Objectives Outcomes) back to Objectives (Impact)(Impact)

Evaluation: Indicators in the context of Evaluation: Indicators in the context of design & implementation, program design & implementation, program relevance, efficiency, effectiveness, relevance, efficiency, effectiveness, impact & sustainabilityimpact & sustainability

Purpose in budgeting:Purpose in budgeting: Identify programs or activities that are Identify programs or activities that are

not cost-effective & cannot be made so not cost-effective & cannot be made so & should be cut& should be cut

Identify savings that can improve Identify savings that can improve efficiencyefficiency

Make judgments about the likely impact Make judgments about the likely impact of external factors on PMIof external factors on PMI

Enable useful judgments about Enable useful judgments about effectiveness when outcome measures effectiveness when outcome measures are lackingare lacking

Old Line-Item BudgetOld Line-Item Budget

PersonnelPersonnel ContractualContractual TravelTravel EquipmentEquipment SuppliesSupplies OtherOther

Line-Item Budgets: Line-Item Budgets: WeaknessesWeaknesses

Lack information for resource Lack information for resource allocation decisionsallocation decisions ““[a] short-term perspective encourages [a] short-term perspective encourages

incremental decisions, where the next incremental decisions, where the next budget is built on the previous one with budget is built on the previous one with only incremental adjustments”only incremental adjustments”

Requires top-down management to Requires top-down management to approve spending changes approve spending changes

Weak accountability for results Weak accountability for results (focus on line items)(focus on line items)

Lack transparencyLack transparency

Alternate Budget ClassificationsAlternate Budget Classifications

TypeType LevelsLevels ExamplesExamples

FunctionalFunctional FunctionFunction

Main programMain program

Agriculture, forestry, fishing Agriculture, forestry, fishing & hunting& hunting

AgricultureAgriculture

OrganizationalOrganizational Department/agencyDepartment/agency

OfficeOffice

Department of AgricultureDepartment of Agriculture

Office of Extension ServicesOffice of Extension Services

Objective or Objective or Program-basedProgram-based

ProgramProgram

ActivityActivity

Capital projectCapital project

Cooperative ExtensionCooperative Extension

Farm management Farm management educationeducation

Construction of storesConstruction of stores

Input/accountingInput/accounting

(line item)(line item)

CategoryCategory

ItemItem

Sub-ItemSub-Item

Goods & ServicesGoods & Services

UtilitiesUtilities

ElectricityElectricity

Objective-Based BudgetsObjective-Based Budgets

Connect costs to outputs & Connect costs to outputs & outcomesoutcomes

How much did it cost to achieve How much did it cost to achieve outcomes (& objectives)?outcomes (& objectives)? How much per unit of change?How much per unit of change? How much per unit of service?How much per unit of service?

Compare relative cost (including all Compare relative cost (including all activities) of competing activities activities) of competing activities based on impactbased on impact

Linked to funding formulas, Linked to funding formulas, incentives or penalties in some incentives or penalties in some modelsmodels

Objective-Based Budgeting: Objective-Based Budgeting: BenefitsBenefits

Improved prioritization of Improved prioritization of expendituresexpenditures

Improved service effectiveness Improved service effectiveness &/or efficiency&/or efficiency

Greater freedom in allocating Greater freedom in allocating resources…resources…

……in exchange for greater in exchange for greater accountability for resultsaccountability for results

Objective-Based ModelsObjective-Based ModelsTypeType DescriptionDescription PrioritizationPrioritization Effectiveness Effectiveness

& Efficiency& Efficiency

ProgramProgram Simple Simple Expenditure by Expenditure by objectivesobjectives

Primary benefitPrimary benefit Indirect onlyIndirect only

Zero-BasedZero-Based Cost/impactCost/impact

Ranking system Ranking system for cuts/growthfor cuts/growth

Primary benefitPrimary benefit SecondarySecondary

Performance-Performance-LinkedLinked

Penalties for Penalties for failure to meet failure to meet performance performance targetstargets

SecondarySecondary Primary; risk of Primary; risk of performance performance distortion & distortion & cheatingcheating

Formula-Formula-FundingFunding

Sector-specificSector-specific

Failure to meet Failure to meet cost objectives is cost objectives is penalizedpenalized

SecondarySecondary Primary; risk of Primary; risk of chronic chronic underfundingunderfunding

Performance Performance IncentivesIncentives

Growth targeted Growth targeted to areas meeting to areas meeting performance performance targetstargets

SecondarySecondary Primary; risk of Primary; risk of overfundingoverfunding

Creating an Objective-Creating an Objective-Based BudgetBased Budget

Critical QuestionsCritical Questions

Program-Budget ProcessProgram-Budget Process

Forecast revenue, expenditures, Forecast revenue, expenditures, deficit or surplus, & debtdeficit or surplus, & debt

Adopt strategic plan policies & Adopt strategic plan policies & prioritiespriorities

Top-down budget for department & Top-down budget for department & program allocations using the program allocations using the forecast & plansforecast & plans

Assess prior year & projected Assess prior year & projected outcomes for activities & outputsoutcomes for activities & outputs

Create a bottom-up program budget Create a bottom-up program budget within the allocationwithin the allocation

Simplified Process Simplified Process (grant or single program)(grant or single program)

Forecast total amount of grant & Forecast total amount of grant & institutional resources (match)institutional resources (match)

Adopt objectives (logic model or Adopt objectives (logic model or strategic plan)strategic plan)

Allocate funds per objectiveAllocate funds per objective Assess prior & projected outputs & Assess prior & projected outputs &

outcomesoutcomes Create the budget for each objective Create the budget for each objective

based on activities & outputsbased on activities & outputs

Creating a Zero-Based BudgetCreating a Zero-Based Budget

Identify activities for each Identify activities for each objective (include alternatives)objective (include alternatives)

Calculate costs of inputs for Calculate costs of inputs for each activityeach activity

Predict outputs, cost per unit Predict outputs, cost per unit output, & expected outcomesoutput, & expected outcomes

Select activities & outputs by Select activities & outputs by relating impact to cost, budgetrelating impact to cost, budget

New Objective-Based BudgetNew Objective-Based Budget

Admin CostsAdmin Costs Objective 1Objective 1

Output 11Output 11 Activity 111Activity 111

Output 12Output 12 Activity 121Activity 121 Activity 122Activity 122

Objective 2Objective 2 Output 21Output 21

Activity 211Activity 211 Output 22Output 22

Activity 221Activity 221

Objective 3Objective 3 Output 31Output 31

Activity 311Activity 311 Activity 312Activity 312

Indirect CostsIndirect Costs

Barriers to changeBarriers to change

Accounting softwareAccounting software Supporting administrative or indirect Supporting administrative or indirect

costs (not linked to an outcome)costs (not linked to an outcome) Apportioning a single direct cost Apportioning a single direct cost

across objectives (or sub-programs)across objectives (or sub-programs) Conforming programs to Conforming programs to

organizational boundariesorganizational boundaries Performance distortion (failure in Performance distortion (failure in

non-measured areas) & cheating, if non-measured areas) & cheating, if linked to incentives or penaltieslinked to incentives or penalties

Accounting SoftwareAccounting Software

Assign PO a tag by activity or output Assign PO a tag by activity or output and record separately (Excel)and record separately (Excel)

Add extensions to current accounting Add extensions to current accounting cost center for activities, outputs & cost center for activities, outputs & outcomesoutcomes

Create programs as a group of cost Create programs as a group of cost centers (alternative approaches or centers (alternative approaches or linked activities) that are functionally linked activities) that are functionally linked to outputs & outcomeslinked to outputs & outcomes

Organizational boundariesOrganizational boundaries

Split interdepartmental programs into Split interdepartmental programs into sub-programs managed by each sub-programs managed by each departmentdepartment

Give ownership to one program Give ownership to one program partner (fiscal agent model)partner (fiscal agent model)

Ownership includes responsibility for Ownership includes responsibility for fiscal record-keeping, data collection, fiscal record-keeping, data collection, personnel management, spending personnel management, spending decisions & resultsdecisions & results

Handling Direct & Indirect Handling Direct & Indirect CostsCosts

Direct costs can Direct costs can be entirely be entirely allocated to a allocated to a single program single program or sub-program, or sub-program, objective, or objective, or even a single even a single output or activity output or activity with some effortwith some effort

ALLOCATEALLOCATE

Indirect costs Indirect costs are shared are shared across an entire across an entire program or program or even multiple even multiple programs and programs and are impossible are impossible to allocate fairly to allocate fairly & accurately& accurately

SEPARATESEPARATE

Tracking ToolsTracking Tools

Activity LogsActivity Logs Track POTrack PO

Grant Activity Log – Project Director

Date Hours Activity Performance Measure

3/3/09 2 Volunteer Training Build Capacity for Client Support

Expense Activity Log

Date InvoiceAmount

Activity & Vendor Performance Measure

3/3/09 $ 800 Volunteer Training (YMCA)

Build Capacity for Client Support

Time & Effort (Direct Cost)Time & Effort (Direct Cost)

TE ToolsTE Tools TaskCoachTaskCoach ToDoListToDoList ProjectTimerProjectTimer TimeToolTimeTool TimeGTTimeGT Xpenser (app)Xpenser (app) TimeRecording (app)TimeRecording (app)

Best PracticesBest Practices

““Make it work!”Make it work!”

Create a Solid ProgramCreate a Solid Program Each program or sub-program has Each program or sub-program has

one owner who reports on outputs one owner who reports on outputs &/or outcomes & is not accountable &/or outcomes & is not accountable solely for spending according to solely for spending according to budgetbudget

Expenditures that serve the same Expenditures that serve the same purpose should be placed in the purpose should be placed in the same program, even if operated by same program, even if operated by different departments or partners different departments or partners (create sub-programs if needed)(create sub-programs if needed)

Check that activities match program Check that activities match program outputs (don’t just match similar outputs (don’t just match similar activities)activities)

Select Strong IndicatorsSelect Strong Indicators

Relevant to users (comprehensive Relevant to users (comprehensive summary measures)summary measures)

Representative (less likely to be Representative (less likely to be influenced by external factors)influenced by external factors)

Cost effectiveCost effective Comparable within sectorComparable within sector Minimize perverse effectsMinimize perverse effects May be quantitative, qualitative or May be quantitative, qualitative or

efficiency (cost per unit)efficiency (cost per unit)

Take Care with OutputsTake Care with Outputs Standardized outputs can be linked tightly Standardized outputs can be linked tightly

& predictably with funding for formulas, & predictably with funding for formulas, targets & incentivestargets & incentives

Heterogeneous outputs are of limited utility Heterogeneous outputs are of limited utility in funding decisions because of variabilityin funding decisions because of variability

Quality-based outputs only lend Quality-based outputs only lend themselves to incentive funding but can themselves to incentive funding but can help reduce perverse effectshelp reduce perverse effects

Outcomes are unpredictable due to Outcomes are unpredictable due to external factors which makes them less external factors which makes them less useful for incentives or targetsuseful for incentives or targets

Assign outcomes (impact) to higher level Assign outcomes (impact) to higher level organizational structures or entities and organizational structures or entities and outputs to lowest levelsoutputs to lowest levels

PresentationPresentation

Leave out inputs (useful for Leave out inputs (useful for managers, not for anyone else)managers, not for anyone else)

Present a small number of the Present a small number of the best & most relevant indicatorsbest & most relevant indicators

Use summary measures Use summary measures (combine PMI)(combine PMI)

Perform cost-benefit analysis, Perform cost-benefit analysis, especially among alternative especially among alternative approachesapproaches

Measure Twice…Measure Twice…

Data collection system – robust Data collection system – robust instruments & processinstruments & process

Data processing & analysis is Data processing & analysis is timely & accuratetimely & accurate

Validate indicators for errors, Validate indicators for errors, manipulation, & methodological manipulation, & methodological deficienciesdeficiencies

……Cut Once!Cut Once! Evaluation must be timely & include Evaluation must be timely & include

periodic spending review - linking does periodic spending review - linking does nothing by itself to improve effectiveness or nothing by itself to improve effectiveness or efficiencyefficiency

Allocate direct costs as accurately as is Allocate direct costs as accurately as is cost-effectivecost-effective

IF you can estimate a cost per unit service IF you can estimate a cost per unit service you can plan future budgets based on you can plan future budgets based on cost/unit and number of projected units of cost/unit and number of projected units of service (formula funding)…service (formula funding)…

……OR recalculate inputs (with cost OR recalculate inputs (with cost changes) for desired outputs & account for changes) for desired outputs & account for changes in planned activities annuallychanges in planned activities annually

Track line items for post-hoc analysis of Track line items for post-hoc analysis of high or low-performing activity/outputs or high or low-performing activity/outputs or programsprograms

Further Reading & ResourcesFurther Reading & Resources

From Line-Item to Program From Line-Item to Program Budgeting: Global Lessons and Budgeting: Global Lessons and the Korean Case (John Kim, Ed)the Korean Case (John Kim, Ed)

Performance Budgeting (Marc Performance Budgeting (Marc Robinson)Robinson)

A Basic Model of Performance-A Basic Model of Performance-Based Budgeting (Marc Based Budgeting (Marc Robinson and Duncan Last)Robinson and Duncan Last)