Un Pan 000526

Using Performance Information for Budgeting:

Clarifying the Framework and Investigating Recent State Experience

Philip G. Joyce*

Susan Sieg**

*Associate Professor of Public Administration, The George Washington University, 302 Monroe Hall, 2115 G St., NW, Washington, DC 20052.

**Analyst, Congressional Budget Office, Washington, DC, 20515.

Prepared for the 2000 Symposium of the Center for Accountability and Performance of the American Society for Public Administration, held at the George Washington University, Washington, D.C., February 11 and 12, 2000. Data collected for research reported in the paper was supported by a grant from the Pew Charitable Trusts to the Alan K. Campbell Public Affairs Institute at the Maxwell School of Citizenship and Public Affairs, Syracuse University. The paper itself was supported by a grant from PricewaterhouseCoopers. Not to be cited without permission of the authors. The views expressed in this paper are those of the authors and should not be interpreted as those of the Congressional Budget Office. The authors appreciate the helpful comments of Kathryn Newcomer ad Michele Moser on an earlier draft of this paper.

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Using Performance Information for Budgeting: Clarifying the Framework and Investigating Recent State Experience

Philip G. Joyce and Susan Sieg

Abstract

The 1990s witnessed a resurgence of the effort to introduce more performance information into the budget processes of many governments across the world. In the United States, this has manifested itself in moves toward performance-based budgeting in the national government as well as in state and local governments. Despite these efforts and numerous attempts to study these new reforms, a specific and clear framework that integrates performance information into the budget process has been elusive.

In particular, much of the extant literature on performance-based budgeting focuses almost exclusively on the use of performance information by elected officials to make macro-level resource allocation decisions. While this is certainly a relevant focus, it is not a complete one. Such a narrow view of performance measurement and budgeting runs a great risk of oversimplifying a very complex system. This paper argues that the more important (and complete) question concerns the extent to which performance information is available and used at each stage of the budget processbudget preparation, budget approval, budget execution, and audit and evaluation. By framing the question in this way, the researcher may be able to identify a great many more subtle differences from one place (agency, state, local government) to another.

After suggesting this more complete framework for consideration of the availability and use of performance information for budgeting, the paper uses 1998 data on state governments collected by the Government Performance Project (a joint effort of Syracuse University and Governing magazine, funded by the Pew Charitable Trusts) to attempt to determine the extent of availability and use of performance information in the states. The paper finds that strategic planning is widespread, although the incidence of agency-level planning is greater than that of statewide planning. Further, almost half of the states have made significant progress in developing cost accounting systems. While two-thirds of the states have outcome measures, only 10 of them were using these measures to set targets for performance. Finally, the availability and use of performance information in the budget process is greater at the agency level than it is in the central budget offices or (particularly) in the agencies.

The paper argues that scholars should consider studying performance-based budgeting by focusing more attention on analysis of agencies or policy areas, and less attention exclusively on centralized institutions. Changing the research focus in this way would provide a more complete picture of the availability and use of performance information for budgeting. It might prevent scholars and practitioners from reaching erroneous conclusions concerning the effect of these reforms. Through broadening the scope of research we are more likely to discover how much progress has been made, and how much work remains to be done.

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Using Performance Information for Budgeting: Clarifying the Framework and Investigating Recent State Experience

Performance budgeting. Performance funding. Performance-based budgeting. Budgeting for

results. Connecting resources with results. Performance management. Managing for results.

There seem to be as many ways of describing the reforms attempting to connect performance

information with the allocation and management of resources as there are reform efforts

themselves. The level of performance-related activity should, on the one hand, be encouraging

to those who wish to see more systematic use of such information for budgeting. On the other

hand, however, there is a disturbing lack of clarity here. Is there any difference between

budgeting for results and connecting resources with results? Is managing for results about

management, while budgeting for results is about budgeting? Isnt budgeting part of

management (or is it that management is part of budgeting?)? What is the difference (if any)

between performance budgeting, performance-based budgeting, and performance funding?

The risk of all of this activity coupled with the imprecise use of language is that no one

would really know a performance-based budget (or whatever) if he or she saw one.

Researchers are collecting a lot of information, and more is being added all the time, on the

creation and use of performance information in various locations for various purposes. But if

someone wanted to know (as the readers of this paper might) about the status of performance-

based budgeting in the states (or in local governments, or in federal agencies, or in the world)

the problem for the researcher would not be limited to the daunting task of collecting data to

answer the question. It would extend to the problem of defining the question itself. In 1969,

Aaron Wildavsky offered his famous criticism of a past reform, by noting that no one knows

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how to do program budgeting (Wildavsky, 1969). If he were alive today, he might say about

the present reform that no one agrees on how to define performance-based budgeting. We

would submit that the failure to establish a clear, agreed-upon definition is a substantial barrier to

successful research or successful implementation.

What is the point of all this? This paper will argue that we need to embrace a broader, more

precise framework in which to consider performance-based budgeting in order to understand

how it is currently or could be used to change the terms of budgetary debate. After presenting

some background information on past efforts to introduce more performance information into the

budget process and summarizing past research on current efforts, the paper will present this new

framework, which focuses on two dimensionsthe availability and use of performance

informationin all stages of the budget process. Data will then be reported that will attempt to

discern how the states compared to each other based on information collected in 1998. Finally,

we will suggest what we view as the most appropriate way to proceed in future research.

PAST EFFORTS TO CONNECT PERFORMANCE MEASUREMENT AND BUDGETING

It is not necessary here to detail the many past efforts to connect performance measures to

the budget process; the latest wave is a logical follow-on to many previous efforts to insert more

performance information into budget processes, at all levels of government. Because

government resource allocation is an unambiguously important area of inquiry, the budget

process has been the subject of many reform efforts. These include:

early 20th century efforts to introduce greater control to budgeting as a counter to corrupt policies, mainly centered in cities dominated by political machines. The so-called executive budget movement of the 1900s through 1920s is most characteristic of these reform efforts. In fact, by 1920, twenty-three states provided for an executive budget (Burkhead, 1956).

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attempts to introduce greater efficiency into budgeting, by focusing on less costly ways of organizing for work and of delivering outputs. For example, performance budgeting, which came out of the Hoover Commission, called for better techniques of work measurement, thus helping managers to evaluate the efficiency of various methods of delivering outputs (Schick, 1966).

initiatives to make the budget process more focused on the results obtained from the expenditure of money for government activities, rather than on the expenditures or activities themselves. Perhaps the most famous of these was program budgeting (of which the federal effort, the Planning Programming Budgeting System, was a specific example), but zero-based budgeting fits under this heading as well (Schick, 1971; Congressional Budget Office, 1993).

Current efforts to manage for results are a logical successor to these past reforms. Perhaps

most closely identified in this country with the entrepreneurial management movement

popularized in the book Reinventing Government (Osborne and Gaebler, 1992), this movement

argues for a movement toward outcome-based budgets and away from a self-conscious focus

on inputs. Reformers specifically decry the tendency of budget processes to focus on the

allocation of resources to serve the narrow interest of legislative constituencies rather than the

broader public interest. The concern over pork which is behind the move to give Governors,

and then the President, a form of line-item veto authority, results from a concern that legislators,

left to their own devices, do not budget in a manner that reflects the broader public interest

(Abney and Lauth, 1985; Joyce and Reischauer, 1997).

Several summary observations can be made about the history of budget reform:

Generally, the ambitions of budget reforms have often outstripped the analytic and information management capacity of government agencies.

Lack of leadership support in both the executive and legislative branches, as well as unclear or conflicting expectations, has allowed reform efforts to falter.

Rational, planning-based systems have not replaced, nor can they be expected to replace, the political process which makes resource allocation decisions in a complex environment of competing interests (Office of Program Policy Analysis and Government Accountability, 1997).

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CURRENT RESEARCH IN PERFORMANCE-BASED BUDGETING The 1990s have seen a renaissance of performance-based reforms in the United States. These

are not only the logical successors of past reforms in this country, but are part of an international

trend that is consistent with the new public management movement. Australia, New Zealand,

and Great Britain are most often cited as exemplars of this reform movement (Premchand, 1999).

In state and local governments in the United States, the general movement toward more

performance measurement has often been coupled with benchmarking efforts or with efforts to

report on service efforts and accomplishments. In the federal government, the movement is

most closely associated with the Government Performance and Results Act. (Joyce, 1999).

A number of efforts have been made in the 1990s to review the current state of performance-

based budgeting in the states. A 1993 study of performance measures in the federal government

included case studies of two states, and noted that state and local government use of performance

measures concentrated heavily on activities rather than results, and that there were only tenuous

links between performance information and resource allocation decisions. The author stated that

performance measures are used much more extensively in carrying out the budget than in

preparing it (Joyce, 1993). Similarly, case studies of five performance-based government efforts

by Broom and McGuire found that agency managers, legislators, stakeholders and citizens were

using the products of performance based systems. Unable to draw a clear link between

performance information and resource allocation decisions, the authors were optimistic that

performance information would gain wider use in budget and policy decision-making mainly

because performance-based efforts are being sustained, nurtured and refined (Broom and

McGuire, 1995). Researchers have also reported on efforts in individual states, such as

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California (Office of the Legislative Analyst, 1993), Florida (Office of Program Policy Analysis

and Government Accountability, 1997), and Oregon (Oregon Progress Board, 1994).

Other studies have focused on comparing various performance measurement practices across

all 50 states. The most long-established of these is Lees evaluation of state budgeting practices,

which has been ongoing since 1970. Lee, surveying state budget offices, focuses on the use of

program analysis in state budgeting, focusing in particular on central budget office and

legislative practices in use of such techniques as effectiveness analysis and productivity

analysis. Lee finds that productivity and effectiveness measures (which show increasing

prominence in budget documents) will be revised when funding levels change, indicating that

states recognize that expected results must be kept in balance with available funding. Yet Lees

most current survey results (from 1995) indicate that executives are relying less on productivity

analysis in making resource allocation decisions. Further, Lee notes that states have not

developed accounting systems that track the costs of providing services or performing work,

noting that states have identified few incentives to devise such systems (Lee, 1997).

In addition, the Florida Office of Program Policy Analysis and Government Accountability

(OPPAGA) identified three uses for performance information: a management tool to improve

program effectiveness through long-range planning and goal setting; a policy/budget influence

tool; and a budget tool to be used as a basis for budget decisions. In its in-depth study of five

states and survey of these and the remaining 45 states, OPPAGA notes that there are benefits to

be found in any implementation of performance-based efforts. State agencies reported a greater

focus on results, opportunities for re-engineering and a heightened sense of mission. (OPPAGA,

1997)

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More recently, a survey was conducted of state legislative and executive budget officers

concerning performance-based legislative requirements in the states. The authors of the article

define performance-based budgeting as a budget system requiring strategic planning for agency

mission, goals and objectives, and a process that requests quantifiable data that provides

meaningful information about program outcomes. (Note, significantly, that this definition says

nothing about use of measures for management or budgeting.) This study determines the legal or

administrative requirements for the states to conduct performance-based budgeting as defined

above. The survey finds that 31 states (62%) have legislation that requires performance-based

budgeting. Approximately 16 states (32%) have some form of performance-based budgeting

instituted by administrative requirements such as budgeting instructions or guidelines. Only

three states have no mandate whatsoever to conduct performance-based budgeting. The authors

find that while states are requiring performance information in budget submissions, the

effectiveness and contribution of performance measures to the budget process in the states

remains unclear. Most states recognize the incremental nature of development and

implementation of performance measurement systems as well as their integration into the

budgetary decision-making process. (Melkers & Willoughby, 1998)

Finally, a recent survey of performance budgeting and performance funding in all 50

states (Jordan and Hackbart, 1998) looked at performance measurement both during the budget

preparation process (performance budgeting) and during the budget approval process

(performance funding). The authors find that 34 states use some form of performance budgeting

(29 of these say that performance measures affect the Governors recommendations in some

way), while only 13 use some form of performance funding. Only 10 states indicated that they

both used performance budgeting and performance funding.

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Most current research into the status of performance information in the states, then, has been

based on case studies of the most well-known state initiatives, or on surveys of state budget

offices. No matter the source, the overwhelming conclusion is that performance measurement is

gaining in popularity, but its usefulness is still in question. Most scholars suggest that

performance information may be best suited for support of managerial decision-making.

(Melkers & Willoughby, 1998; Joyce, 1997). These studies underscore the rather preliminary

nature of state performance-based budgeting efforts. They point to the increased use of

legislative requirements in providing the basis for performance-based budgeting. Further, they

tend to support the notion that there is still a great deal of variation among the states in the

presence of performance information and the use of this information for budgeting.

In our view, the current cross-sectional studies, while they have contributed greatly to our

understanding of the rather embryonic efforts toward increasing the use of performance

information in budget processes, tend to have at least two limitations. First, they rely on a

narrow definition of performance-based budgeting that is limited to a discussion of legislative

requirements (Melkers and Willoughby, 1998) executive branch review (Lee, 1997; Jordan and

Hackbart, 1998) or the outcome of legislative resource allocation (Jordan and Hackbart, 1998;

and to some extent Lee, 1997), and do not give as much emphasis to other stages of the budget

process, in particular agency budget preparation and (particularly) execution. Second, because

they tend to rely on individual (or sometimes two) survey responses, they can yield unreliable

results that are heavily influenced by the biases and interpretations of a limited number of

survey respondents.

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A MORE DETAILED LOOK AT PERFORMANCE INFORMATION IN THE BUDGET PROCESS

As noted above, the basic underlying problem with the existing evaluation of performance-

based budgeting involves the lack of clarity. It seems that while everyone wants to do

performance-based budgeting, and many people study it, there is not general agreement on what

it is. Our first challenge, therefore, is to try to introduce some greater clarity into the debate by

providing a more detailed framework for consideration of performance-based budgeting. After

establishing this new framework, we will test for the extent to which performance-based

budgeting is being practiced by looking at results of surveys and other data collected from the 50

states in the latter half of 1998.

Why a new framework? In our view, more clarity and nuance is in order precisely because

the old definition(s) have degenerated to the point where they have become all things to all

people. As noted above, there are a number of different terms that are used to describe the

connection of performance information, on the one hand, and government resources, on the

other. We will attempt to clarify this situation somewhat by adopting a scheme that will permit a

more comprehensive view of the relationship of performance information to the budget process.

There are, in our view, two dimensions to this new typology. First, it must account for multiple

activities, including strategic planning, performance measurement and cost accounting. These

activities, in our view, comprise the successful building blocks for the use of performance

information in the budget process. Second, it must account for activities that occur at different

stages of the budget process, and focus on both availability and use of performance measures, as

opposed to focusing on availability in agencies and use only during executive review and budget

approval.

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For our purposes, performance-based budgeting, rather than representing a black and

white concept, is a continuum that involves the availability and use of performance information

at each of the various stages of the budget processbudget preparation, budget approval, budget

execution, and audit and evaluation. Even within some of these stages, there can be numerous

manifestations of performance-based budgeting. During budget preparation, for example, it is

necessary to focus both on agency-level budgeting and central office review and

recommendation. In budget approval, it is essential to investigate both legislative activity and

gubernatorial decisions on spending bills (whether to sign or veto, the use of line-item vetoes,

etc.). In a given government, performance-based budgeting may manifest itself at some stages of

the budget process, but not others. This is why, in our view, it is essential to capture the full

range of possible uses when evaluating the progress that a given entity has made in

performance-based budgeting. Evaluating some stages but not others risks reaching

incomplete or misleading conclusions, which may overstate accomplishments in some settings

while underestimating reform efforts in others.

BUILDING BLOCKS FOR USING PERFORMANCE INFORMATION FOR BUDGETING

The successful use of performance information for budgeting takes a long time to take hold

and has many obstacles to overcome in the public sector. There are at least four prerequisites to

successful use of performance information at any stage of the budget process: (Joyce, 1999)

1. Public entities need to know what they are supposed to accomplish. This is often quite

difficult for public agencies, because they exist in an environment where a great many

legitimate actors are attempting to influence their activities. Thus, the effort to engage in

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strategic planning (preferably government-wide), to the extent that it enables decisions to

be made that establish the strategic direction for the government, is crucial.

2. Valid measures of performance need to exist. This is also quite difficult for public sector

entities, since, it is hard to measure outcomes, and easier it to measure outputs. Further,

the more one starts to move toward measuring outcomes, the more public entities may

legitimately question whether they may be held accountable for achieving results that are

partly (or even mostly) outside of their control.

3. Accurate measures of cost need to be developed. Connecting resources with results

implies knowing how much it costs to deliver a given level of outcome. Most public

agencies cannot even tell you how much it costs to deliver an output, in particular

because of the problems with allocating indirect costs. Agencies or governments that are

heavily involved with user fees may be better able to identify costs, because they have

greater incentives and external pressures to do so.

4. Finally, cost and performance information need to be brought together for budgeting

decisions. The problem here is that there is no simple decision rule, at least at a macro

level. It is perhaps intuitively appealing to argue for taking money from those who do

badly (that is, those who fail to meet performance targets) and giving more money to

those who do well. While this may sound good in theory, however, it doesnt specify the

causal link between the money and the result. In fact, sorting out the contribution of

funding versus other factors would require a full-blown program evaluation. Further, the

use of performance information for budgeting implies that budgetary actors have the

incentives to use information, which is by no means clear in many cases. In fact, the

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incentive question is probably the most important one to focus on in determining the

possibility that performance information will actually be used as an input into decisions.

Understanding performance-based budgeting requires that we determine the extent to which

the preceding building blocks may be present in a particular government (or government agency)

at a particular time. They are building blocks in the sense that the failure to identify a strategic

direction imperils the development of appropriate performance measures, and the lack of

appropriate measures of performance and cost undermines the appropriate use of information for

budgeting purposes.

DEVELOPING A TYPOLOGYAVAILABILITY AND USE OF MEASURES AT DIFFERENT STAGES OF THE BUDGET CYCLE

Most past research into performance-based budgeting has focused not on the budget

process as a whole, but on selected parts of the budget process. The primary question that has

tended to occupy researchers concerns the extent to which performance information is used by

elected officials to make budget decisions, both in the executive and in the legislative process.

But this is a limited scope of inquiry, focusing on only part of the budget process. Performance

information may be used in important ways at other stages of the processagency budget

preparation, budget execution, and audit and evaluationas well.

Further, the ultimate question about how much the budget process is performance-based

involves two subquestions. The first is about the availability of information. Therefore, the

focus on the extent to which governments and government agencies produce valid and reliable

information on both performance and cost is an appropriate part of the answer to the budgeting

question. In addition, since this information is arguably being provided in some context, the

availability question also must address the extent to which this performance information is

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consistent with the strategic goals of the agency or government. Having information does not

guarantee its use, but it is a necessary prerequisite. A second crucial link between performance

and the budget, then, involves the obvious focus on the extent to which performance information

actually enters into decisions involving the allocation and management of resources use of

performance information.

What is the difference between the framework offered here and the current emphasis on

performance measurement and budgeting? Put simply, current studies tend to look at availability

at one stage of the process (budget preparationdo agencies or budget offices have performance

measures?) and use at another stage (budget approvaldo legislatures use them in the

appropriations process?). They almost completely ignore, at least as part of budgeting, questions

of budget execution or audit/evaluation. They also tend to de-emphasize actual use in budget

preparation (particularly at the agency level) or (perhaps most surprisingly) availability for

budget approval. The question that preoccupies researchers ishow much are the Governor

and/or the legislature using performance information to make budget decisions, as opposed to

making decisions based on (gasp!) narrow parochial concerns? If the answer is (as it usually

is)not much, then the performance-based reform is declared to be the second coming of PPBS:

Another failureNext!

But, in our view, such a narrow view of performance measurement and budgeting runs a

great risk of oversimplifying a very complex system. The real questionmuch messieris: To

what extent is performance information available and used at each stage of the budget process

budget preparation, budget approval, budget execution, and audit and evaluation? By framing

the question in this way, the researcher may be able to identify a great many more subtle

difference from one place (agency, state, local government) to another.

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How would performance information be manifested at different stages of the process? Table

1 presents a typology dividing performance information into its two componentsavailability

and useat each of the four stages of the budget process. Note that at the first stagebudget

preparationperformance information could be available or used either in the process of an

agency building its budget to present to the budget office, or within the budget office while

analyzing the budget. In the budget approval stage, it could involve the relevant committees, the

entire legislature, or the chief executive. In budget execution, it could involve the agency

carrying out the budget, using the discretion provided for it in appropriation acts. For audit and

evaluation, the question ishow does performance information enter into either internal or

external evaluations of an agency or governments programs?

There are two important things to note about this typology. The first is that there are clearly

a great many possible decision points in the budget process. The second is that, at each one of

these decision points, the twin questions of availability and use are both equally relevant. It

would be quite possible for a given state (or agency) to have or make use of performance

information in one stage of the process, quite independent of what might happen at other stages

of the process. For example, agencies might make substantial use of performance information in

building the budget, while other actors (central budget offices, legislatures) make little or no use

of that information in subsequent stages. Conversely, the absence of performance concerns in

preparation and approval would not prevent a given agency from using its discretion to execute

its budget by considering the effects of different execution strategies on its goals and objectives.

The point is that often performance-based budgeting suffers from an overly narrow

definition. If we ask only the questiondoes the legislature or the chief executive actually

allocate resources based on considerations of performance, we run the risk of missing other

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applications altogether. This focus would fail to recognize that important decisions that affect

resource allocation occur at all stages of the classic budget process. Performance-based

budgeting is not just (as sometimes seems to be suggested) about whether the chief executive or

legislature stops engaging in pork barreling behavior, instead allocating resources in a more

rational manner. It is also about (to name two) whether agencies use performance information

in managing their budgets, and whether auditors ask performance questions in evaluating

programs. If we do not embrace this broader set of questions, we run the risk of prematurely

stifling progress, if (as some of the previous studies have suggested) the most important evidence

of increasing use of performance measures in the budget process is found at the budget execution

and evaluation stage.

If these are the important questions to ask, and we are to focus on them at different stages of

the budget process, it is reasonable to ask what we know about current practice that can answer

the questionto what extent are governments currently providing and using performance

information in the budget process? Below, we attempt to make some progress in answering that

question by using recent information from the 50 state governments.

USING PERFORMANCE INFORMATION FOR BUDGETING IN THE STATESAN INITIAL INQUIRY

The states have been at the center of the movement to connect budgeting and performance

for more than 30 years. As noted above, there is no shortage of studies on the current

manifestations of these performance-based efforts. Recently, the Maxwell School of Citizenship

and Public Affairs at Syracuse University, in conjunction with Governing magazine, collected

extensive data on the availability and use of performance information in the 50 states

(Governing, 1999). These data were collected as part of an effort, funded by the Pew Charitable

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Trusts, to gauge the extent to which the states were actively engaged in efforts to manage for

results, which was one of five management areas on which the states were surveyed. Data were

collected from exhaustive surveys filled out by 49 of the 50 states, in addition to a number of

follow-up interviews that were conducted by Governing journalists in each state. (See Box 1 for

a discussion of the methodology underlying the results reported in Tables 2 through 5 of this

paper.)

For our purposes, this data collection effort allows us at least a partial answer to the

questionhow much progress have states made at having information available for budgeting,

and then actually using that information in the budget process? In this analysis, we will focus

on four sub-questions:

What is the status of strategic planning in the states?

To what extent does the state track the cost of service provision?

To what extent does the state measure performance?

If the state measures cost and performance, how is this information used?

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Box 1Data

The data reported in this paper were collected by the Maxwell School of Citizenship and

Public Affairs at Syracuse University and Governing magazine as a part of the Government

Performance Project (GPP). The GPP is a collaborative academic/journalistic effort funded by

the Pew Charitable Trusts, designed to evaluate management in state governments, local

governments, and federal agencies. In 1998, the first year of this research focused, in part on the

50 state governments. This effort involved a number of different data collection techniques.

First, surveys were sent to the state budget office of each state in the Spring of 1998 requesting

responses to a number of questions in five management areasfinancial management, human

resource management, capital management, information technology management, and managing

for results. Second, various public documents, such as strategic plans and audits, were requested

from each state. In addition, follow-up telephone interviews of executive and legislative officials

(including budget officials, agency personnel, and legislators) were conducted in an effort to

augment the data collected from other sources. The data that are presented here represent the

categorization of the authors based on data collected as part of the survey (in particular, the

managing for results and financial management portions), published documents, and transcripts

of telephone interviews that were conducted as a part of the study.

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What is the relationship between these building blocks and the two important questions

availability of measures and use of measuresthat we noted earlier? Referring back to Table 1,

it is important to note that the first three of these questions (about strategic planning,

performance measurement, and cost accounting) are largely questions about the availability of

performance information, while the fourth, which would assume the availability of these

performance data, asks how the information actually influences decisions about the allocation

and management of resources. To the extent that we can evaluate the states on each of these four

dimensions, we can gain a more thorough understanding of the extent to which performance

information is both available and used at the different stages of the budget process. In other

words, we can use data collected on actual availability and use to attempt to fill in the cells of

Table 1 for each states, in order to determine the extent of performance-based budgeting in a

given location.

AVAILABILITY STRATEGIC PLANNING Strategic planning is the process of deciding on objectives of the organization, changes in

these objectives, the resources used to attain these objectives, and the policies that are to govern

the acquisition, use and disposition of these resources (Anthony, 1965). As such, strategic

planning involves several components:

A statement of mission and/or vision,

Goals that are derived from the mission,

Objectives that operationalize the goals,

Measurements of performance to determine progress toward goals and objectives.

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The data from the surveys reported in Table 2 indicates that strategic planning is occurring at

either the agency level or statewide in every state.

Statewide

Strategic planning at the statewide level comes in two flavors. The first form, a consensus-

based plan, involves a mix of public input as well as executive and legislative agreement.

According to the survey results, as many as 14 states use this type of statewide strategic planning

model. In the second form, found in 11 states, the Executive simply presents a statement of

policy goals, which may include strategic or performance components.

Consensus-Based Plans

The most familiar of the 14 states using this model include Oregon (Oregon Benchmarks,)

Minnesota (Minnesota Milestones,) Utah (Utah Tomorrow), Florida, and North Carolina. One

would assume that plans such as this may have more permanence than simple policy statements

from the Executive, but this is not the case. In each of the high-profile states mentioned above,

there have been setbacks:

The original Oregon Benchmarks project suffered from a lack of correlation between performance in the agencies and the statewide benchmarks. Many of the original benchmarks have been eliminated; the current Oregon Shines II document has been scaled back to include 92 benchmarks that are outcome based.

The Minnesota Milestones project, started in 1991, includes 20 state goals with 70 indicators. The project fell on hard times after a critical legislative audit led state leaders to run away from it rather than correct it. The goal-setting exercise that was part of the original project has been discontinued. Agencies were required to tie budgets to Milestones in the 94-95 biennium, that requirement was subsequently eliminated.

Utah Tomorrow originated in the legislature, and was originally designed to encourage the legislature to think in broader, long-range terms. The project is still having trouble deciding whether it should be a statewide plan or a summation of

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agency strategic plans. In 1997, Utah Tomorrows goals failed to pass in the legislature, so in 1998, Utah Tomorrow didnt even come up for a vote.

In Florida, the Commission on Government Accountability to the People (the GAP Commission), which was charged with setting statewide benchmarks for performance, lost its funding from the state legislature during 1998.

North Carolinas statewide plan has a cross-agency perspective in 10 policy areas; the state has 10,000 measures of performance. A philosophical shift in the legislature (Democrat to Republican) has slowed down progress in improving the quality of the state plan. Several attempts at an Oregon-style Progress Board have failed due to a lack of institutionalization no one knows whether it is an arm of the Executive, the legislature, or an outside agency. Most telling, however, in a recent $150 million budget reduction, the Governor suggested across-the-board cuts rather than reductions based on the states strategic plan and agency performance information.

Executive Policy Statement

The second statewide strategic planning model consists of an Executive statement often

coming as part of the annual budget address. It is questionable, in many cases, whether these

statements constitute a strategic plan. Often agency leaders are left with broad statements such

as run government like a business or smaller smarter government rather than a specific set of

goals and objectives under which to plan operations. Virginia, a leader in strategic planning and

performance measurement, seems to be thriving under this arrangement. The governor issues a

statewide executive plan; the state notes that term limitations on the governor (who can only

serve one term) do not allow enough time to build broad public support for a statewide plan.

Agency Level

Without exception, strategic planning is occurring in at least some agencies in each state.

Many states follow a traditional strategic planning model, creating mission statements, goals and

objectives, and designing performance measures. Other states use different names annual

performance plans, business plans, vision and values statements. The essence, however, is the

22

same: managers are being asked to thoughtfully analyze their reason for being, and to plan

operations to effectively meet the needs of their customers/clients/stakeholders in the context of

the overall agency mission.

While strategic planning at the agency level is widespread across the states, i.e., almost

everyone is doing it somewhere, within the states the story is not quite as positive. A number of

states, including Connecticut, North Dakota and Arkansas are piloting strategic planning in

selected agencies. Other states, including Colorado, Illinois, Massachusetts and Pennsylvania,

ask, rather than require agencies to engage in the process. The quality of the agency plans in

these instances varies greatly depending often on the commitment of agency leaders. In these

states, strategic planning is hardly widespread, and depending on the political climate, expanding

in some states and contracting (or at least stagnating) in others.

AVAILABILITY COST ACCOUNTING For managing for results programs to achieve their highest usefulness, performance

information must be combined with cost information to determine the tradeoff between marginal

dollars spent and marginal results achieved. Evaluating the trade-off between the outcomes of

one program against another must be done with the understanding of the unit costs of the

services related to each outcome measure. Table 3 reports that about half of the states have

made some attempt at developing a statewide cost accounting system (or at least some

approximation).

Types of Cost Allocation

Theoretically, any state receiving federal funding is required to have an indirect cost

allocation program in place. Generally, this means that states calculate an overhead rate that

23

includes fringe benefits and other direct overhead costs. This rate is then applied to the direct

costs incurred on federally funded programs. While this procedure meets federal standards, it is

incomplete for the purposes of determining the true cost of services.

A number of states noted that cost allocation is occurring as required by OMB Circular A-87.

Thirteen states made specific mention of indirect cost allocation, numerous others noted that cost

allocation may be occurring within the agencies, but no specific details were included. A

number of states are also beginning to develop activity-based costing programs. This is a more

sophisticated mechanism that attempts to measure the full cost of resources consumed in the

delivery of a particular service, including allocations for fringe benefits and overhead costs as

well as allocations for other indirect costs.

Five states responded that activity-based costing is being piloted in a subset of state agencies.

Texas noted that it is trying now to determine marginal costs of activities, and expects to present

this information with its outcome measures. New Jersey has a well-developed program for

analyzing cost per unit, and has used this information in privatization decisions, and for

benchmarking selected services with other states. Six states made note of other costing

programs: Colorado has started a fee evaluation program to determine whether fees charged are

based on the full cost of activities, Hawaii will present full-cost prototype budgets for three

departments in FY 2001, Missouri is beginning a program review process to perform cost-benefit

analyses on state programs, Montana and Minnesota reported use of project accounting, and

Pennsylvania uses a Planning Programming Budgeting System that categorizes expenditures by

cost function.

24

Most importantly, no state has implemented activity-based costing (or anything like it)

statewide. The states that are most accomplished are still in the pilot stages. Texas notes that

one pilot agency, after completion of the pilot phase, is implementing activity-based costing

agency-wide. Another notes that ABC is a good management tool which can be used to achieve

higher efficiencies.

AVAILABILITY PERFORMANCE MEASURES Performance measures have come a long way since the performance budgeting days of the

1950s. While measures of output and efficiency continue to show up in reports, states are

striving to add measurements of outcome. While Table 4 reports virtually all states (Alabama

and Arkansas are the exceptions) have input and output measures, only, about two-thirds (32

states) indicate that outcome measures are available. It should be noted, however, that the states

citing that outcome measures were available needed to meet a fairly minimal standard in order to

appear in this category. That is, they needed to report that they had at least one measure of an

outcome. Only 2 statesAlabama and Arkansasreported minimal or no use of

performance measures. The meaningfulness of the measures needs to be questioned as well.

Only ten of the states with measuresFlorida, Iowa, Maryland, Minnesota, Mississippi,

Missouri, Ohio, Oregon, Virginia, and Washingtonreport that they set targets for performance

using those measures.

Table 5 presents, in part, information on availability of measure at different stages of the

budget process. Almost all states reported that measures were available during some stage of

the budget process. In 43 states, survey respondents reported that either some or many

measures were available in state agencies. Most of these states reported some use in agencies;

only 13 reported that many measures were available. In almost all states, outcome measures

25

for at least some agencies were available in the central budget office for budget review.

Somewhat fewer states (38) reported the availability of measures during the process of

legislative approval. In these latter two cases (budget office review and legislative approval) the

data are substantially limited by the lack of good information on the extent of availability.

Location and Type

Every state that uses measures does so at the agency level; two states (Maryland and

Oklahoma) reported that they would be adding them to the planning process for FY 99. Some

states with a statewide planning document include measures of progress at the statewide level as

well; these include Florida, Georgia, Kentucky, Minnesota, Missouri, Nebraska, North Carolina,

Oregon, Texas, Utah, and Virginia. Three statesConnecticut, North Dakota, and Ohioreport

that they are piloting the use of performance measures in order to learn from the experiences of

the pilot agencies. Louisiana, on the other hand, chose to implement strategic planning and

performance measurement for all executive agencies in the space of one year.

Many respondents noted that the success of measuring performance lies in leadership from

the top. If the Executive and leaders in the Legislature recognize the value of measuring

performance, agencies are much more focused in their measurement efforts. If one branch or the

other is uninterested, the movement tends to collapse. In Louisiana, for example, performance

standards and appropriations are enacted into legislation; there is agreement in the leadership of

both houses, the appropriation committee and the governor that planning and performance

measures are important for making allocation decisions.

On the other hand, several states have passed legislation requiring strategic planning and

performance measurement, but have not followed through in any formal way. Rhode Island

26

passed legislation requiring performance measures. In response, the state Budget Office includes

measures in the budget for informational purposes, but has no idea how the legislature intends to

use the information. In Mississippi, twenty-one agencies are required to submit performance

targets with appropriation requests; agencies created their own measures at the outset, but neither

branch is pushing lethargic agencies to improve the quality of their measures.

USE OF PERFORMANCE INFORMATION IN THE BUDGET PROCESS States do not in general report many effects of performance information on macro-budget

decision making. As Table 5 indicates, most states report that performance information is used

at the agency level; we do not have any good information, however, on the extent to which this

use affects resource allocation in the agencies. Turning to use of measures by the central budget

office, in only four statesMissouri, Texas, Louisiana, and Virginiais the use of performance

measures by the budget office extensive; 19 other states report some use. As might be

expected, there is even less use of performance information in state legislatures. Only in

Louisiana does there appear to be extensive legislative use of performance information. In 10

other states, measures are used by the legislature for some decisions. However, many

respondents noted that the presence of performance information is changing the tone of the

debate rather than questioning the nature of the expenditure, lawmakers are asking for outcome

expectations if an expenditure is approved.

What is the reason for this relative paucity of use in the legislative process? Reportedly,

most state legislatures look skeptically at performance information coming from Executive

agencies. Many in state legislatures believe that the process of measuring performance is still

too new to be relied on for resource allocation. Still other state legislators are unwilling to forgo

27

parochial interests to make allocation decisions on performance alone. Performance information

is of interest often when legislators need to report accomplishments to their constituents at home.

One of the major problems most frequently cited has to do with quality of data. While states

report that they include outcome/output measures in the budget document, in some (many) cases,

there is no data available with which to report actual performance. In states that had data to back

up their measures, one theme ran through many of the interviews: the legislature fails to use

performance measures in many budgetary decisions because of its suspicion about the quality of

the data being presented. Some states are addressing the problem by expanding the program

evaluation responsibilities of the legislative audit bureaus to include auditing of performance

information. Others rely on the agencies to police the data themselves.

In still other cases, legislatures were reported to be skeptical of measures because they had

no input in the process that created the measures in the first place. States where the legislature

and the executive branch worked together to determine measures seem to be farther ahead in

using those measures for both managerial and budgetary decision-making. Louisiana and

Maryland, relative neophytes in the managing for results movement, have benefited from support

from both the legislature and Executive from the very beginning of the program. These states

expect that the legislature will be highly receptive to the performance information submitted with

budget requests.

Another concern apparent in many states involves the question of rewards and punishment.

Neither the executive branch nor the legislature seems sure how to react if agencies meet or fail

to meet their targets. Louisiana has adopted a 5% rule if agencies come in over or under by 5%

or more of performance targets a legislative review is triggered. The state, however, has not

28

determined what actions might be taken as a result of the review. Do agencies get to keep any

savings for other uses if they exceed their performance targets? Or do they come under greater

scrutiny because the targets they set were too low? Do agencies that fail to meet targets get

additional funding to do better, or do they get funding reduced as punishment? Virginia is

piloting an incentive program where good performance is rewarded with the ability to carry

over funds.

The nature of the debate is changing, though slowly. In many appropriations committees,

rather than questioning the details of an expenditure, legislators are asking what performance

improvements can be expected with the additional expenditure. This is often the exception

rather than the rule within states, but the majority of states report that legislators are using

performance information to enrich the mix of information considered when making budget

allocation decisions. Concerns remain, though, in both legislative and executive branches that

correct outcome measures can be determined. For this reason, legislators are loath to give up the

close control of the line-item budget.

Almost unanimously, states that have performance measures in place cite their highest and

best use (currently) as a support for management decision-making in the agencies. Almost every

state can tell a story of programmatic changes that have been made as a result of performance

information. This information, however, is very anecdotal; the fact that states can tell stories

about particular incidents of performance-based management does not tell us anything about

how widespread this practice is. This finding, however, is of significance because it occurs in

the budget execution process, and seems to be quite independent of legislative and central budget

office macro-level decisions. It thus serves as a crucial point at which to judge the use of

performance information in the budget process. To the extent that agencies are using

29

performance information to manage, this can be an important indication of progress; one that

would be missed, for example, if one focused only on the legislature.

It is important to note that the data collected as part of the Maxwell School/Governing study

necessarily (because of resource constraints) relied on survey responses and interviews that

focused on centralized budget institutions (the central budget office, legislative committees, etc.)

rather than state agencies. This accounts for the paucity of data on agency budget preparation,

on budget execution, and on audit and evaluation. As noted earlier, a thorough understanding of

performance budgeting would necessitate more information on availability and use of measures

during these parts of the process as well. For this reason, it is difficult to draw complete

conclusions that would enable us to test the full dimension of availability and use discussed in

the framework presented in Table 1.

CONCLUSIONWHAT IS THE APPROPRIATE DIRECTION FOR FUTURE RESEARCH?

Where do we go from here? As we noted above, while the data that we have presented

enable us to shed some light on state practices, there are important limitations to the data which

limit their usefulness in evaluating the use of performance information at all stages of the budget

process. There is a particular dearth of good data on agency-level use of performance

information to allocate resources, and on use of performance measures for audit and evaluation.

One of the basic problems with extant research is that it may focus on the wrong unit of analysis.

Focusing on the state, for example, almost necessarily leads to a focus on centralized

institutions (the central budget office, the legislature) within the state. This, as we have noted,

provides an incomplete picture of both the availability and the use of performance measures in

the budget process.

30

While there is a possibility that this centralized approach may lead to a false positive (a

conclusion that there is more performance information finding its way into the budget process

than is in fact the case), the greater probability is that it leads to a false negative. That is, if the

conclusion is that the central budget office does not use performance information in putting the

Governors budget together, and the legislature does not use it in the appropriations process, the

ultimate conclusion is that there is no performance-based budgeting in the state. What if,

however, a given state agency was using its discretion to allocate its resources among agency

subunits on the basis of which type of allocation would best fit with the strategic needs of the

agency? What if the state auditor routinely asked questions about program outcomes, instead of

questions about financial compliance? And what if performance and cost information were

found to be available at different stages of the process, but simply not used? We would argue

that each of these latter cases should be acknowledged as evidence of performance-based

budgeting, which has the goal of having more performance information available and used in the

budget process. If we view performance-based budgeting as a continuous, rather than a

dichotomous, variable, it should convince us that it needs to be investigated in all of its rich

detail in order to understand its true implications.

In his 1997 book, The Tides of Reform, Paul Light argues that the problem with public sector

reforms is not that there are too few of them, but too many (Light, 1997). Reforms are not

permitted to germinate and bear fruit before they are prematurely declared to be failures. Seen in

this context, we would argue that it is crucial to view performance-based budgeting reforms

through a wide, rather than a narrow lens. If we focus only on centralized institutionssuch as

the central budget office and legislative bodiesas our barometers of success, we may miss a lot

of potentially encouraging developments. We may also be looking in the wrong placewhy

31

would we expect a legislative body to use performance information for budgeting unless this

information actually exists?

We would encourage scholars who are studying the relationships between performance

information and budgeting to eschew the kind of narrow, cross-sectional results that are often

presented (indeed, some of which have been presented in this paper), in deference to a research

model that puts the agency or the policy area within a government at the center. The question

will then becometo what extent is performance information available and used in budgeting

for (agency X or policy Y) at each stage of the budget process? In our view, it is through

broadening the scope of our research that we will discover how much progress has been made,

and how much work remains to be done.

32

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Burkhead, J. (1956). Government Budgeting. New York, NY: John Wiley & Sons.

Governing. Grading the States (March 1999). Joyce, P. (1993). Using Performance Measures in the Federal Budget Process . Washington,

DC: Congressional Budget Office.

Joyce, P. G. (1997) Using Performance Measures for Budgeting: A New Beat, or Is It the Same Old Tune? in Kathryn Newcomer, ed., Using Performance Measures for Public and Nonprofit Programs (San Francisco: Jossey-Bass), pp. 45-61.

Joyce, P.G., and R.D. Reischauer (1997), The Federal Line-Item Veto: What is it and What Will It Do?, Public Administration Review 57: pp. 95-104.

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Key, V. O. Jr,. (1940). The Lack of a Budgetary Theory. American Political Science Review(December), 1137-1144.

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Light, Paul (1997). The Tides of Reform: Making Government Work (New Haven: Yale University Press).

Melkers, J., & Willoughby, K. (1998). The State of the States: Performance-Based Budgeting Requirements in 47 out of 50. Public Administration Review, 58(1), 66-73.

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Rubin, I. (1991). Budgeting for Our Times: Target Base Budgeting. Public Budgeting and Finance(Fall), 5-14.

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34

Table 1

Dimensions of Performance Measurement in the Budget Process

Stage of Budget Process Measures Available: Use of Measures to: Budget Preparation: Agency Level

= Agency strategic planning and performance planning

= Cost accounting = Performance (outcome)

measures

= Make tradeoffs between agency subunits to allocate funds strategically

= Build budget justification for submission to central budget office

= Determine overlapping services within agency

Budget Preparation: Central Budget Office

= Governmentwide strategic planning and performance planning

= Cost accounting = Performance (outcome)

measures

= Make tradeoffs between agencies to allocate funds strategically

= Build budget justification for submission to legislative body

= Determine overlapping services between agencies

Budget Approval: Legislative

= Performance measures, accurate cost estimates, and strategic/performance plans included with budget justifications

= Compare costs to marginal effects on performance during legislative funding process

= Make performance expectations clear as part of budget allocation

Budget Approval Chief Executive

= Implications of legislatively-approved budget for achieving government strategic objectives

= Make decisions on signature, veto, or line item veto/reduction informed by performance implications

Budget Execution = Agency and governmentwide

strategic plans = Performance (outcome)

measures = Cost accounting

= Use spending discretion and flexibility to allocate funds in line with strategic priorities and consistent with achievement of agency performance goals

Audit and Evaluation = Agency strategic goals

= Actual performance data = Cost accounting information

= Shift focus of audits/evaluations to include performance questions, rather than only financial compliance

35

Table 2:

Strategic Planning in the States

----------Statewide ----------- Consensus-based Governor's Policy Agency Neither

AL X AK X6 AZ X AR X -- pilot CA X CO X6- spotty CT X6 - 9 pilots DE X1 X FL X X GA X X HI X X ID X IL X6 IN X2 X7 IA X KS X6 KY X X LA X10 X ME X11 X MD X MA X3 MI X MN X X6 - spotty MS X MO X X MT X NE X X NV X NH X NJ X X NM X NY X NC X X ND X - pilot 1994 14 agys OH X X OK X - 5/70 agys OR X X PA X4 X6 - few RI X6 - few SC X7 SD X TN X X

36

Table 2 Continued ----------Statewide ----------- Consensus-

based Governor's

Policy Agency Neither

TX X X UT X X VT X VA X5 X WA X WV X X8 WI X9 WY X X

1 Governor issues annual policy memo 2 Executive vision statement guides agencies 3 Governor sets goals for upcoming year 4 Governor sets out mission and goals in Executive Budget 5 Governor sets out Executive Plan 6 Agency strategic plans not required, but prepared anyway 7 Agencies prepare annual performance plan that outlines goals and objectives 8 Agencies prepare goals and a plan for accomplishing the goals 9 Agencies prepare business plans that focus on efficiency rather than results of service 10 Statewide strategic plan limited to two policy areas 11 Statewide vision and values statement

37

Table 3:

Use of Cost Information in the States

Indirect Cost

Activity Based

No Central IT Support for

Allocation Costing Other System Cost AccountingAL X X AK X AZ X X AR X X1

CA X CO X2 CT X DE X FL X GA X HI X3 ID X X IL X X IN X IA X4 KS X KY X LA X ME X MD X X1

MA X X MI X MN X6 X1

MS X MO X5 X MT X6 NE X NV X NH X NJ X X NM X X1

NY X NC X ND X OH X OK X X1

OR X X PA X7 X RI X SC X1

SD X TN X8 X

38

Table 3 Continued

Indirect

Cost Activity Based No Central IT Support for

Allocation Costing Other System Cost AccountingTX X4 UT X VT X VA X4 WA X X WV X X1

WI X4 WY X

1 Cost accounting performed in some agencies 2 Fee evaluation program will determine if fees are based on full cost of activities 3 Full-cost prototype budgets for three departments due FY 2001 4 Activity based costing in pilot stage 5 Program review process will perform cost/benefit analyses on state programs 6 Project Accounting 7 Modified PPBS system 8 Implementing in 50% of state departments

39

Table 4:

Location and Quality of Measures

---Location of Measures--- -------------------Type of Measures------------------- Agency Statewide Outcome Input/Output Minimal/None Set targets?

AL X X AK X X AZ X X X AR X CA X CO X X CT X1 X X DE X X X FL X X X X X GA X X X X HI X X X ID X X X IL X X X IN X X X IA X X X X KS X X X KY X X X X LA X X X ME X X X MD X3 X X X MA X X X MI X X X MN X X X X X MS X X X MO X X X X X MT X X NE X X X X NV X X NH X X NJ X X NM X X NY X X NC X X X X ND X1 X X OH X1 X X X OK X3 X X OR X X X X X PA X X RI X X X SC X X SD X X TN X X

40

Table 4 Continued

---Location of Measures--- -------------------Type of Measures------------------- Agency Statewide Outcome Input/Output Minimal/None Set targets?

TX X X X X UT X X X X VT X X X VA X X X X X WA X X X X WV X X4 WI X X X WY X X

1 Pilot program to develop performance measures 2 Legislature is considering performance information as additional source of information 3 Beginning in FY 99 4 Measures are of client impact rather than broader outcomes

41

Table 5:

Availability and Use of Performance Information in the States

--------Agency --------- --Central Budget Office-- -------Legislature------ Budget Prep/Execution Budget Approval Budget Approval ---------Audit--------- Available Used Available Used Available Used Available Used

AL few no yes low yes low no AK some yes yes low yes low no AZ some yes yes some yes low AR none no no CA CO some yes yes low yes low CT some yes yes low yes low DE some yes yes some yes some FL some yes yes low yes low GA some yes yes some no HI some yes yes low 1 no ID some yes yes low yes low no IL some yes yes low yes low IN some yes yes low 1 IA many yes yes some yes low no KS some yes yes some yes low KY some yes yes some 2 yes LA many yes yes high yes high yes ME many yes yes some yes some no MD many yes yes some yes some no MA few yes yes low yes low MI some yes yes some yes some yes MN some yes yes low yes low yes MS some yes yes low yes some MO many yes yes high yes some MT few yes yes low yes low NE some yes yes low 2 NV some yes yes some yes some yes NH few no yes low 2 NJ some yes yes some 2 NM some yes yes low yes low no NY some no no no NC many yes yes low yes low ND some yes yes low yes low OH some yes yes low yes low OK few yes yes some yes low no OR many yes yes some yes some PA many yes yes low yes low yes RI some yes yes some yes low

42

Table 5 Continued --------Agency --------- --Central Budget Office-- -------Legislature------ Budget Prep/Execution Budget Approval Budget Approval ---------Audit--------- Available Used Available Used Available Used Available Used

SC some yes yes some 2 SD some no yes low yes low TN some yes yes low no no TX many yes yes high yes some yes UT some yes yes some yes low VT many yes yes some yes low VA many yes yes high yes some yes WA many yes yes some yes low WV many yes yes some yes low WI some yes yes low yes low yes WY few no yes low yes low

1: No indication that the legislature gets the information 2: No information about availability or use in the legislature