Performance-based budgeting procedures
Performance-based Budgeting (PBB) is a decision making tool for legislators to explicitly link funding decisions to performance measures and outcomes, rather than baseline outlays from prior periods. PBB requires a detailed development of the activities, outputs and intended outcomes of the program or agency along with metrics accurately capturing these. The most important component of the PBB procedure is to integrate this performance information into the budgeting process and create clear connections between outcomes and funding decisions to incentivize agencies. Many US state and local governments have adopted PBB procedures but at varying levels and extents. It is commonly used by US state governments to fund higher education institutions.
- Goal: Increase the flexibility of budgetary allocations
- Goal: Increase the cost-effectiveness of budgetary allocations
- Goal: Decrease budgeted funding for ineffective or unnecessary expenditures
- Goal: Increase the cost-effectiveness of public spending
- Goal: Increase the transparency of government spending
- Goal: Increase understanding of government funded programs' results and efficiency
- Goal: Increase program effectiveness by incentivizing agencies
Legislators in a particular state government come to consensus and adopt the performance-based budgeting approach, usually by adopting appropriate legislation. It is rare that they will adopt this approach for all agencies and funding decisions. They, more likely, will select specific agencies and programs that are best suited for this budgeting procedure. This agency will need to develop and present the activities they undertake, and the intended outcomes of the program. The legislators, the agency head and other stakeholders will then collectively decide upon appropriate performance metrics that capture the intended outcomes and these will be linked to funding. This allows the legislators to learn about the program and their results and allows for more informed decision making. At the start of the year, the agency will collect baseline data and will continue to gather and process data pertaining to performance metrics. On the basis of the agency’s performance on the metrics, funding levels will be decided.
Tradeoffs of implementing this policy may include:
- Overload of information for legislators to consider
- Increased burden of data collection for agencies
- Potential negative impact on agency performance due to perverse incentives stemming from inappropriate performance metrics
- Unreliable and insufficient data negatively affecting budgeting decisions
- Disconnect and discontent between legislators and agency staff due to their difference in opinions on the goals and functions of the agency
If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:
- Is sufficient information available about the intended goals and results of government expenditures?
- Do relevant agencies have sufficient resources to collect and manage performance data?
- Does the existing budget process have the potential to incorporate this performance information in a way that would enhance decision making?
- Can a system be established to verify the validity of the data and metrics provided?
- Does a sufficient number of legislators value evidence-based budgeting as a decision-making tool over the traditional political process?
- Do conditions exist for a productive collaboration between budgetary decision makers (e.g., executives, legislators, etc.) and agencies that will ensure the selection and use of meaningful and appropriate performance metrics?
- Are the Tradeoffs listed above unlikely to be an issue in the jurisdiction in context?
The following questions should be considered when determining how to implement this policy:
- Which agencies and programs should be a part of performance-based budgeting procedures?
- How many performance indicators should be selected per agency/program?
- Should the indicators be selected by agency staff, legislators or in collaboration between the two?
- How integrated should the performance information be in the budgeting process?
- How, if at all, should performance data be monitored and verified to ensure accuracy?
- How often shall data be collected to measure the extent of success on the selected metrics?
- What shall the approach be towards programs/agencies that are performing poorly as per the indicators, but serve an important function in the opinions of the legislators?
- Has adoption of: Common.  A large majority of US state governments have adopted performance based budgeting procedures. However, the extent to which resources are allocated purely on performance indicators is limited.
- Notable entities who have implemented or adopted this policy include:
- Electeds - Local Legislators. Rationale: The PBB procedure allows for more meaningful funding decisions based on evidence. Allows legislators to justify changes in funding to constituents.
- Electeds - State and Provincial Legislators. Rationale: The PBB procedure allows for more meaningful funding decisions based on evidence. Allows legislators to justify changes in funding to constituents.
- Government Agencies - Independent Budget Offices. Rationale: The PBB procedure is believed to be a more sophisticated, transparent and accountable policy approach to budgeting.
- Constituents- All taxpayers. Rationale: The PBB procedure increases transparency and accountability in the government budgeting process.
- Government Agencies - Departments of Budgets. Rationale: PBB may increase the burden of budget preparation and presentation, making it a lot more tedious.
- Government Agencies - All Departments of Direct Public Service Provision. Rationale: The PBB process affects this group of government agencies the most and may result in budget cuts. It also leads to considerably heavier work load for performance data collection and management.
- Performance-Based Program Budgeting in Context: History and Comparison Gary, VanLandingham. "Performance-Based Program Budgeting in Context: History and Comparison." Office of Program Policy Analysis and Government Accountability (1997). Provides a historical background on PBB in Florida and makes comparisons with some other states.
- A Basic Model of Performance-Based Budgeting Robinson, Marc, and Mr Duncan Last. A Basic Model of Performance-Based Budgeting. International Monetary Fund, 2009. Provides a basic outline of the PBB model and considerations that need to be made.
- Performance-based budgeting: beyond rhetoric Moynihan, Donald P. "Performance-based budgeting: beyond rhetoric." (2003). This policy brief from the World Bank touches upon the experience of the US with PBB and lessons that can be learned.
- Commentary on PBB in American Local Governments: It’s More than a Management Tool Ho, Alfred Tat‐Kei. "PBB in american local governments: it's more than a management tool." Public Administration Review 71.3 (2011): 391-401. This paper covers the various ways in which PBB can be leveraged to achieve better results.
- Performance Based Budgeting: Opportunities and Considerations SEIU 1000 Research Department. "Performance Based Budgeting: Opportunities and Considerations." (2010). Besides providing a general overview of the PBB procedures, this paper analyzes the efforts California has made towards adopting PBB.
- Performance Based Budgeting: Fact Sheet. The National Conference of State Legislatures (NCSL) has provided a very resourceful and succint summary of PBB.
- Legislative Performance Budgeting Another NCSL resource that highlights which states have adopted PBB.
- The Performance Management and Budget System of the City of Sunnyvale, California Sunnyvale has successfully integrated PBB into their decision making systems and this paper highlights the course and trajectory of that success.