Presentation on theme: "Financial Management Series Number 8 (Instructional Version) Performance Measurement & Performance Based Budgeting (PBB) Alan Probst Local Government."— Presentation transcript:
1Financial Management Series Number 8 (Instructional Version) Performance Measurement & Performance Based Budgeting (PBB)Alan ProbstLocal Government SpecialistLocal Government CenterUW-Extension
3Performance Budgeting Originated in late 1940’sCongress enacted through National Security Act of 1949 for newly formed Department of DefenseGovernment Performance and Results Act (GPRA)
4Performance Budgeting Based on the assumption that presenting performance information alongside budget amounts will improve budget decision-making by focusing funding choices on program results
5Performance Based Budgeting Performance based budgeting cannot begin until a system of performance measurement has been institutedA functional performance based budgeting system cannot be expected to produce the long-term desired results in the first year of its inceptionMust build a Performance Based Management System
6Management ToolPerformance budgets focus on missions, goals, and objectives to explain why money is being spent and provide a way to allocate resources to achieve specific resultsPBB is intended to be a management tool for program improvement, not a “carrot and stick” methodology used to “punish” departments for not meeting goals
7Why is this Important?Most Federal grants now require outcome evaluations (performance measurement) in their applicationsBond sales require indicators of financial condition which are well presented by performance dataLocal government revenues are becoming insufficient making effective use of resources imperativePromotes the logical tie between planning and budgeting
8Why is this Important?Both the Government Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA) are promoting performance measurement indicating it may soon become a requirementProvides a way to quantify to the citizens how well their local government is doing compared to previous years and other similar communities; i.e. “how much bang they’re getting for their buck”
9CAUTION!One of the greatest mistakes in Performance Based Budgeting is to make simplified assumptions based on unrefined results and then apply a system of rewards and punishments based on themSuch an approach frequently yields adverse program impacts
10Unintended Consequences If PBB used as a reward and punishment system, how do you ensure that reducing a budget by, say 5% for poor performance, doesn’t reap a future 20% decrease in future performance?How do you ensure you’ve considered all factors that may have affected the decline in performance?
11Potential Flaws Incorrect assumptions or conclusions Police: Arrests are up; we gave you more money, what’s wrong?Police: Arrests are down, we gave you more money, what’s wrong?Do more arrests mean better police work, more crime, less crime, better crime prevention, or less police work?
12ExampleAn effective Police Department deters crime, how does one measure “deterred’ crime?“Police arrests are down 5% from last year so, under Performance Based Budgeting, we should reduce the Police budget by 5% until they improve their results”Such a simplistic approach fails to account for the success of crime prevention efforts and community policing, therefore, punishing good performance
13Interim SolutionUntil a performance measurement system can be fully implemented, an interim solution may help set the groundworkDepartments heads provide a bullet narrative with annual budget requests including:what department accomplished last year?what is different in this year’s budget request?what goals has the department set for the coming year?
14Performance Measurement Part IIPerformance Measurement
15Performance Measurement The regular systematic collection, analysis, and reporting of data that tracks resources used, work produced, and whether specific outcomes were achieved by an organizationNote: Measurements are only meaningful to the degree that they are a basis for strategic and operational decision-making
16Performance Measurement Performance Measurement should:Be based on program goals and objectives that tie to a statement of program mission or purposeMeasure program outcomesProvide for resource allocation comparisons over timeMeasure efficiency and effectiveness for continuous improvementBe verifiable, understandable, and timely
17Performance Measurement Be consistent throughout the strategic plan, budget, and accounting and reporting systems over timeBe reported internally and externally (Federal grants do and GASB may soon require it)Be monitored and used in managerial decision-making processes
18Performance Measurement Be limited to a number and degree of complexity that can provide an efficient and meaningful way to assess the effectiveness and efficiency of key programsMotivate staff at all levels to contribute toward organizational improvement
20Principle I Establish broad goals to guide government decision-making Basis for the development of policies, programs, and service types and levels to be providedDeveloped after an assessment of community conditions and a review of internal operations of the government(GFOA)
21Develop approaches to achieve goals Principle IIDevelop approaches to achieve goalsA government should have specific policies, plans, programs, and management strategies to define how it will achieve its long-term goalsIt is the policies, plans, and programs that define how the government will go about accomplishing these goals(GFOA)
22Develop a budget with approaches to achieve goals Principle IIIDevelop a budget with approaches to achieve goalsPrepare and adopt a financial plan and budget that moves toward achievement of goals within the constraints of available resourcesProvides for the preparation of a financial plan, capital improvement plan, and budget options(GFOA)
23Evaluate performance and make adjustments Principle IVEvaluate performance and make adjustmentsProgram and financial performance should be continually evaluated, and adjustments made, to encourage progress toward achieving goalsBased on this review, the government may need to make adjustments to the budget, plans, and policies if goals are to be achieved(GFOA)
24Performance Indicators InputOutputEfficiencyService QualityOutcomeExplanatory Data
25Performance Indicators should: Be quantifiable and measurableBe relevant, understandable, timely, consistent, comparable, and reliableConstitute a family of measures- input- output- efficiency- service quality- outcome
26Types of Performance Indicators Input Indicators- resources used to produce an output- examplescosts (direct costs plus fringe benefits)labor hours
27Types of Performance Indicators Output Indicators- quantity of units produced- typically under managerial control- examplesMiles of pipe visually inspectedClients served
28Types of Performance Indicators Efficiency Indicators- ratio of inputs used per unit of output (or outputs per input)- examplesCost per unit: cost per ton of refuse collected, cost per prisoner boarded, cost per transaction, etc.Productivity: hours per consumer complaint, plans reviewed per reviewer, etc.
29Efficiency vs. Effectiveness Efficiency is related to cost effectiveness, i.e. lowest costs for a given output levelEffectiveness is related to if the service level meets the demands of the citizens
30Types of Performance Indicators Service Quality Indicators- how satisfied customers are- how accurately a service is provided- how timely a service is providedPercentage of respondents satisfied with serviceFrequency of repeat repairsAverage wait time
31Types of Performance Indicators Outcome Indicators- are qualitative consequences associated with a program/service- focus on the ultimate “why” of providing the service- examples include:Reduction in fire deaths/injuriesIncrease in job trainees who hold a job for more than six monthsDecrease in low birth-weight babies
32Four-Step Methodology* Step 1: Review and evaluate existing department mission and cost center goalsStep 2: Identify service areasStep 3: Define service area objectivesStep 4: Identify indicators that measure progress toward objectives*(Fairfax County, VA Performance Measurement System)
33Step 1 Cost Center Goal Statement States what is to be accomplished (outcome)States what is to be provided/produced (output)States why cost center existsIdentifies customersTranscends several yearsBegins with “To and a verb”
34Cost Center Goal Template & Example To provide/produce (fill in service or product) to (fill in customer) in order to (statement what you intend to accomplish).Maternal and Child Health ServicesTo provide maternity, infant and child health care and/or case management to at-risk women, infants and children in order to achieve optimum health and well-being
35Step 2 Identifying a Service Area Identify your major activitiesDo not identify every activity; only major activities- critical to success of agency’s mission- consume significant portion of cost center (department) budget- politically sensitive or frequently in spotlight- significant customer service focusGroup activities that have common objectives and/or customers
36Step 3 Service Area Objectives Support cost center goalReflect planned benefits to customersAllow measurement of progressQuantify portion of the cost center goal that will be accomplished within the fiscal yearDescribe quantifiable future target (optional)
37Step 3 Objective Statement Template & Example To improve/reduce/maintain (accomplishment) by (a number or percentage), (from X to Y) toward a target of (a number).Maternal and Child Health ServicesTo improve the immunization completion rate of children served by the Health Department by 3 percentage points, from 77 percent to 80 percent, toward a target of 90 percent, which is the Healthy people year 2010 goal.
38Step 4 Indicator Definitions & Examples Category Definition ExampleInput Resources used to produce Cost (direct costs an output plus fringe benefits)Staff hoursOutput Quantity or number of units produced Res. propertiesActivity-oriented, measurable and assessed within usually managerial control Clients servedCalls responded to
39Step 4 Indicator Definitions & Examples Category Definition ExampleEfficiency Inputs per unit of output or outputs Cost per appraisalper input Appraisal per appraiserService Timeliness, accuracy and/or customer Errors per data entryQuality satisfaction of the service provided operatorResponse timePercentage ofcustomers satisfied
40Step 4 Indicator Definitions & Examples Category Definition ExampleOutcome Qualitative consequences Job trainees associated with a program/service. who hold aFocuses on the ultimate “why” of job for moreproviding a service than 6months
41Input Indicators Resources used to produce an output Cost (budgeted or actual)Staff-year equivalents (SYE)Full-time equivalents (FTE)Direct labor hours (DLH)
42Costs as an Input Indicator Direct costs plus fringe benefitsDirect costs are those devoted to a particular service and include:Personnel servicesOperating expensesRecovered costsCapital equipment
43Output Indicators What was produced/provided Usually end in “ed” Questions to askWhat services were delivered?What volume was provided?How many units of service?
44Examples Service Area Indicator Fire suppression Incidents responded toHuman Resources Vacancies filledLibrary New materials circulated
45Efficiency Indicators Inputs used per unit of outputCost per unit where the input is money/dollarsProductivity where the input is staff hoursExamples:Cost per senior lunch servedCost per clientInvestigations conducted per detectiveHours per fire inspection
46Efficiency Indicators Service Area IndicatorFire Suppression Cost per incidentSenior-based Services Cost per clientHuman Resources Cost per vacancy filledCustodial Services Cost per square foot cleaned
47Service Quality Indicators Measures customer satisfaction, timeliness, and/or accuracy of a serviceExamples:Customer surveysResponse logsError rates
48Service Quality Indicators Service Area IndicatorFire Suppression Average suppression response timeSenior-based Services Percent of clients satisfied with services providedHuman Resources Satisfaction rate with vacancy processingCustodial Services Percent of customers satisfied with custodial services
49Outcome Indicators Describe the benefit of the service to the customer Describe what was changed or accomplished as a result of the serviceQuestions to ask:How has the customer benefited?Why is the customer better off?What is the impact of the service?
50Outcome Indicators Service Area Indicator Fire Suppression Fire deaths per 10, populationFire injuries per 10, populationSenior-based Services Percent of clients who remain in the community after one year of service or information.Human Resources Average recruitment timeCustodial Services Percentile comparisons of cost per square foot to IFMA standards
51The Logic Model “Begin with the end in mind” Start by asking: What results are we seeking?What are we hoping to accomplish?How will we accomplish it?
52What is the Logic Model? A picture of a program A way to show the relationship between what we put in (inputs), what we do (outputs) and what results occur (outcomes)Sequence of if/then relationshipsCore of program planning and evaluation
53Logic Model Inputs Outputs Outcomes What we What we do Short-Term Medium-Term Long-TerminvestStaff Workshops Awareness Behavior ConditionsDollars Outreach Knowledge Decisions EnvironmentVolunteers Inspections Attitudes Policies SocialMaterials Skills EconomicEquipment CivicTechnology
54Logic Model – Fire Suppression Inputs Outputs OutcomesWhat we What we do Short-Term Medium-Term Long-TerminvestStaff Training Inspections Response ProtectionDollars Inspections Suppression time of lives &Volunteers Emergency responses Fire propertyMaterials response Public containment (fire deathsTechnology education Prevalence injuries,of smoke detectors
55Example Service Area Objective Teen Pregnancy PreventionAcceptable UnacceptableReduce the teen pregnancy rate by 2 Increase the number of pregnancies per 1,000 population localities with comprehensive from 42 to 40 in localities with teen services from 20 to 27comprehensive teen services
56Performance Management Model Goals General Goals of program:Provide quality services to all customersMaintain or improve performanceProvide economical servicesInputs Resources:MoneyFacilitiesEquipmentSuppliesContracted services
57Performance Management Model (cont.) Activities Work processes:Salting roadsMaking arrestsProcessing billsPerforming inspectionsOutputs Goods & Services produced:Statistical measurementsMiles of roads repairedTons hauled or recycledPositions filled
58Performance Management Model (cont.) Outcomes Results and Impacts100% of customers will report being satisfied95% will be error free90% of services will be within +/- 2% of comparable service within the private sectorPerformance MeasurementAdministration of customer satisfaction surveysTracking number of jobs, error rates, average per jobCost comparison to private sector servicesQuarterly and annual reports summarizing services provided, ouputs ad outcome achievement
59Remember Quantify objectives Associate objectives with an outcome Word outcomes the same as objectivesProvide a complete Family of MeasuresAvoid confusing indicators (e.g. efficiency and service quality)Reference the correct baseline to target year for objectiveDefine service areas by program objective/customers rather than process function
61Definition“Formal benchmarking is the continuous, systematic process of measuring and assessing products, services and practices of recognized leaders in the field to determine the extent to which they might be adapted to achieve superior performance.”Benchmarking & Best Practices, Treasury Board of Canada
62Another Definition“Benchmarking is the practice of being humble enough to admit that someone else is better at something and wise enough to try and learn how to match and even surpass them at it.”
63Types of BenchmarkingInternal – commonly one year compared to a previous year’s performanceExternal – your performance compared to another similar organizationOperational – your recent annual or periodic performanceStrategic – long term performance
64Internal OperationalProbably the most common measure at the local government levelMeasures current performance versus an established benchmark from prior performanceExample: Police Dept. criminal cases closed this year versus the average over the past ten years
65Total Structure Fires Incidents Per 10,000 Population External OperationalMeasurements against other organization’s performanceExample:Total Structure Fires Incidents Per 10,000 Population
66POLICE Violent Crimes Reported Per 1,000 Population
67Benchmarks Internal Benchmarks - Overall spending - Growth in tax base - Growth in income- New home starts- Miles within service areaExternal Benchmarks- Private sector wages- Neighboring cities- Similar sized counties- Statewide groupings- Statewide averages
68Benchmark Standards Program dollars spent per capita Spending per $1,000 property assessmentPercentage growth over timeAdjustments for inflationOther specific service standards
72Performance-based Budgeting (PBB) Performance-based budgets focus on “return on investment”—that is, what do we get for our investment of resources?Basic service level (or continuation of basic services)?Increased services (more services to same recipients or expansion of same services to more recipients)?Better (higher quality) services?More efficient services (cost savings in service delivery)?Mitigation or resolution of a problem?
73Performance-based Budgeting (PBB) “PBB is budgeting for results - with an eye on the price tag”PBB emphasizes program effectiveness and bases decision making (whether for continuation or enhancement of a program) on outcomes.However, the costs of achieving those outcomes must be scrutinized to ensure efficient service delivery and maximize allocation of scarce resources.
74Goal Setting A SMART goal is defined as such: Specific – Is the goal clear and to the point?Measurable – Can you tell if it is accomplished?Attainable – Is it a realistic goal?Relevant – Is it a priority of the organization?Trackable – Results are compared over time?
75SMART ExamplesYes: To respond to all fire calls within the city within 7 minutes of dispatchNo: To protect all property within the city to a high level of safetyYes: To process all building permit requests within 48 hours of applicationNo: To process all building permit requests in the shortest time possible
76Rudimentary PBBA rudimentary form of PBB to be implemented until a formal system can be produced could include the following in each department’s budget request:An explanation of the department’s overall goalsAn explanation of what the department has accomplished in the past yearAn explanation of what the department intends to accomplish in the coming yearAn explanation as to what is different from last year in the proposed budget and whyA GASB compliant budget showing past year budget expenditures
77Performance-based Budgeting (PBB) Program StructureStrategic plans, operational plans, and performance based budgets are geared to program structuresFunds are appropriated to departments/programsA program is a grouping of activities directed toward the accomplishment of a clearly defined objective or set of objectivesProgram structure is an orderly, logical array of programs and activities that indicates the relationship between each
78TOP TEN REASONS WHY PERFORMANCE-BASED BUDGETING WON’T WORK IN MY DEPARTMENT It doesn’t matter what we do because we have federal/state funding.9. We just reorganized and we don’t know what we’re doing yet.8. Everything is just fine as it is; we’ve always done it this way.7. We’re too busy getting REAL work done to bother with this.6. We need more staff, more money, more time, more ( fill in the blank ) to do this.5. We can’t target outcomes; they’re too specific.4. We can’t measure what we do.3. You’ll misinterpret any information we give you.2. We can’t be accountable because we have no control over anything.1. We’re different. This shouldn’t apply to us. We need an exemption.
79All right, just give me a form and tell me what you want me to say. OFTEN FOLLOWED BY:All right, just give me a form and tell me what you want me to say.If I give them something, then they’ll go away. (Maybe this whole thing will just go away.)NOTE: This genie won’t go back into the lamp.
80INSTITUTIONALIZING PERFORMANCE MEASUREMENT: Make performance an integral part of your management processes.Use metrics to understand and measure how a process works and the results it generates.Develop an internal performance accountability process.Integrate performance into policy and budget decision making and everyday program management.
81INSTITUTIONALIZING PERFORMANCE MEASUREMENT: POINTER: When you break down a policy, program, or process into its component parts, you use "systems logic" to develop a model of how it should workINPUT OUTPUT & OUTCOMEPROCESSQUALITYEFFICIENCYManagers should use metrics to gauge and assess program and processes, diagnose problems, and formulate solutions.
82Example Service Area Objective Input Efficiency Service Quality ObjectiveInputOutputEfficiencyService QualityOutcomeFire SuppressionTo maintain fire loss at 0.02% or less of Total Property Valuation$249,00077$3,2347.3 minutes0.027%fire lossincidents responded tocost per responseAverage response timeaverage fire loss percent
83Example 2 5% $1,374,500 4 4.7% 75% 7% Street Reconstruction Service AreaObjectiveInputOutputEfficiencyService QualityOutcomeStreet Reconstruction5%$1,374,50044.7%75%7%Capital FacilitiesMaintain construction cost growth to no more than 5 percentBudget/actual costsStaffProjects completedEngineering design costs as a percent of total project costPercent of projects completed on timeContract cost growth (%)
84INSTITUTIONALIZING PERFORMANCE MEASUREMENT: Metrics (performance indicators) measure process and product.Inputs Outputs & OutcomesProcess(Demand)(Products)(Results)(Need)(Services)(Size of Problem)(Resources)Outputs(Expenditures compared to productivity;caseload per staff member.)InputsEfficiency:Outputs or Outcomes(Cost per item produced, serviceprovided, or client served; cost perresult achieved.)CostOutputs or Outcomes(Production or turnaround time; timeliness of results.)TimeQuality:Effectiveness in meeting the expectations of customers, other stakeholders; and expectation groups.
85INSTITUTIONALIZING PERFORMANCE MEASUREMENT: The volume of performance information that must be managed can be staggering.Watch out for the “shotgun” or “kitchen sink” approach--reporting just about every type of measurement or statistic that is already gathered or can be counted easily. This leads to a heavy emphasis on transactional data--inputs and outputs--rather than results.
86INSTITUTIONALIZING PERFORMANCE MEASUREMENT: Concentrate on the development of balanced sets of performance indicators in order to provide a clear picture of performance without overwhelming users with needless detailFive types of performance indicators:InputOutputOutcomeEfficiencyQualityA balanced set may include more than one of any indicator indicator type and none at all of some but must have at least one measure of outcome, efficiency, or quality
87INSTITUTIONALIZING PERFORMANCE MEASUREMENT: Present performance information at different levels in order to surface key data while maintaining the availability of support and explanatory material.Key Performance IndicatorsSupporting Performance IndicatorsGeneral Performance InformationExplanatory NotesGet consensus among data users on indicator types and levels before indicators are reported.
88INSTITUTIONALIZING PERFORMANCE MEASUREMENT: A key performance indicator is a performance indicator that is included in the Budget Supporting DocumentsFactors in determining key level include:Most direct measure of outcome?Critical success factor?Big ticket item?Hot button item?History and who values?
89INSTITUTIONALIZING PERFORMANCE MEASUREMENT: General performance information (GPI) may be included in the budget. However, values for general performance indicators are reported for prior year actual only.GPI may include:Multi-year histories or trendsExternal comparisons (national or regional)
90MANAGING ACCURACY: Beware of: High balls and low balls (unrealistically high or low performance targets)Instant replays (reporting the same performance level over and over, regardless of circumstances)Greased pigs (indicators for which name, definition, or method of calculation change so often that you can’t get a handle on them)
91Beware of: (cont.)Orphans (indicators for which no one claims responsibility)Statistical illiteracy (calculations that don‘t add up)Limp excuses (meaningless explanations of performance variances)
92MANAGING ACCURACY:Get the right start by developing meaningful, valid, accurate, and reliable performance indicatorsProvide documentation for each performance indicator identified in the strategic plan.Strategic planning guidelines include performance indicators
93INTEGRATING PERFORMANCE INTO BUDGET DECISION MAKING: Establish the link between resources and results early and maintain that link through budget development, appropriation, and budget control processes.Set performance standards linked to appropriation levelsPerformance standards are the expected levels of performance associated with a performance indicator for a particular period and funding level. They link dollars and resultsPerformance standards are one way to demonstrate RETURN ON INVESTMENT--what we can expect to receive for our money (easier to explain to stakeholders)
94Integrating Performance into budget decision-making Establish the link between resources and results early and maintain that link through budget development, appropriation, and budget control processes.During budget development, performance indicator values associated with the funding level recommended in budget discussions are proposed performance standardsDuring the budget process, performance indicator values become performance standards linked to the funding amounts actually appropriated in the budgetPerformance standards may be modified only through approved processesPerformance standards are monitored and tracked
95References“Performance Based Budgeting – Putting The Pieces Together,” Carolyn S. Lane, Deputy Director, Office of Planning and Budget, Division of Administration, State of Louisiana, September 2006“Performance Management: Using Performance Measurement for Decision Making” Recommended Practice (2002 & 2007) Government Finance Officers Association (GFOA)“Fairfax County’s Performance Measurement System” Performance Measurement Team, Dept. of Management & Budget, Fairfax County, Virginia, June 2006“Performance Management Handbook” Eau Claire County, WI, January 2007“Moving From Line Item to Performance Based Budgeting: Craig Maher, UW Oshkosh