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Financial Management Series Number 8 (Instructional Version) Performance Measurement & Performance Based Budgeting (PBB) Alan Probst Local Government.

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Presentation on theme: "Financial Management Series Number 8 (Instructional Version) Performance Measurement & Performance Based Budgeting (PBB) Alan Probst Local Government."— Presentation transcript:

1 Financial Management Series Number 8 (Instructional Version) Performance Measurement & Performance Based Budgeting (PBB) Alan Probst Local Government Specialist Local Government Center UW-Extension

2 Part I Overview

3 Performance Budgeting
Originated in late 1940’s Congress enacted through National Security Act of 1949 for newly formed Department of Defense Government Performance and Results Act (GPRA)

4 Performance Budgeting
Based on the assumption that presenting performance information alongside budget amounts will improve budget decision-making by focusing funding choices on program results

5 Performance Based Budgeting
Performance based budgeting cannot begin until a system of performance measurement has been instituted A functional performance based budgeting system cannot be expected to produce the long-term desired results in the first year of its inception Must build a Performance Based Management System

6 Management Tool Performance budgets focus on missions, goals, and objectives to explain why money is being spent and provide a way to allocate resources to achieve specific results PBB is intended to be a management tool for program improvement, not a “carrot and stick” methodology used to “punish” departments for not meeting goals

7 Why is this Important? Most Federal grants now require outcome evaluations (performance measurement) in their applications Bond sales require indicators of financial condition which are well presented by performance data Local government revenues are becoming insufficient making effective use of resources imperative Promotes the logical tie between planning and budgeting

8 Why 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 requirement Provides 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”

9 CAUTION! 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 them Such an approach frequently yields adverse program impacts

10 Unintended 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?

11 Potential 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?

12 Example An 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

13 Interim Solution Until a performance measurement system can be fully implemented, an interim solution may help set the groundwork Departments 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?

14 Performance Measurement
Part II Performance Measurement

15 Performance Measurement
The regular systematic collection, analysis, and reporting of data that tracks resources used, work produced, and whether specific outcomes were achieved by an organization Note: Measurements are only meaningful to the degree that they are a basis for strategic and operational decision-making

16 Performance Measurement
Performance Measurement should: Be based on program goals and objectives that tie to a statement of program mission or purpose Measure program outcomes Provide for resource allocation comparisons over time Measure efficiency and effectiveness for continuous improvement Be verifiable, understandable, and timely

17 Performance Measurement
Be consistent throughout the strategic plan, budget, and accounting and reporting systems over time Be reported internally and externally (Federal grants do and GASB may soon require it) Be monitored and used in managerial decision-making processes

18 Performance 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 programs Motivate staff at all levels to contribute toward organizational improvement

19 Principles

20 Principle I Establish broad goals to guide government decision-making
Basis for the development of policies, programs, and service types and levels to be provided Developed after an assessment of community conditions and a review of internal operations of the government (GFOA)

21 Develop approaches to achieve goals
Principle II Develop approaches to achieve goals A government should have specific policies, plans, programs, and management strategies to define how it will achieve its long-term goals It is the policies, plans, and programs that define how the government will go about accomplishing these goals (GFOA)

22 Develop a budget with approaches to achieve goals
Principle III Develop a budget with approaches to achieve goals Prepare and adopt a financial plan and budget that moves toward achievement of goals within the constraints of available resources Provides for the preparation of a financial plan, capital improvement plan, and budget options (GFOA)

23 Evaluate performance and make adjustments
Principle IV Evaluate performance and make adjustments Program and financial performance should be continually evaluated, and adjustments made, to encourage progress toward achieving goals Based on this review, the government may need to make adjustments to the budget, plans, and policies if goals are to be achieved (GFOA)

24 Performance Indicators
Input Output Efficiency Service Quality Outcome Explanatory Data

25 Performance Indicators should:
Be quantifiable and measurable Be relevant, understandable, timely, consistent, comparable, and reliable Constitute a family of measures - input - output - efficiency - service quality - outcome

26 Types of Performance Indicators
Input Indicators - resources used to produce an output - examples costs (direct costs plus fringe benefits) labor hours

27 Types of Performance Indicators
Output Indicators - quantity of units produced - typically under managerial control - examples Miles of pipe visually inspected Clients served

28 Types of Performance Indicators
Efficiency Indicators - ratio of inputs used per unit of output (or outputs per input) - examples Cost 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.

29 Efficiency vs. Effectiveness
Efficiency is related to cost effectiveness, i.e. lowest costs for a given output level Effectiveness is related to if the service level meets the demands of the citizens

30 Types of Performance Indicators
Service Quality Indicators - how satisfied customers are - how accurately a service is provided - how timely a service is provided Percentage of respondents satisfied with service Frequency of repeat repairs Average wait time

31 Types 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/injuries Increase in job trainees who hold a job for more than six months Decrease in low birth-weight babies

32 Four-Step Methodology*
Step 1: Review and evaluate existing department mission and cost center goals Step 2: Identify service areas Step 3: Define service area objectives Step 4: Identify indicators that measure progress toward objectives *(Fairfax County, VA Performance Measurement System)

33 Step 1 Cost Center Goal Statement
States what is to be accomplished (outcome) States what is to be provided/produced (output) States why cost center exists Identifies customers Transcends several years Begins with “To and a verb”

34 Cost 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 Services To 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

35 Step 2 Identifying a Service Area
Identify your major activities Do 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 focus Group activities that have common objectives and/or customers

36 Step 3 Service Area Objectives
Support cost center goal Reflect planned benefits to customers Allow measurement of progress Quantify portion of the cost center goal that will be accomplished within the fiscal year Describe quantifiable future target (optional)

37 Step 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 Services To 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.

38 Step 4 Indicator Definitions & Examples
Category Definition Example Input Resources used to produce Cost (direct costs an output plus fringe benefits) Staff hours Output Quantity or number of units produced Res. properties Activity-oriented, measurable and assessed within usually managerial control Clients served Calls responded to

39 Step 4 Indicator Definitions & Examples
Category Definition Example Efficiency Inputs per unit of output or outputs Cost per appraisal per input Appraisal per appraiser Service Timeliness, accuracy and/or customer Errors per data entry Quality satisfaction of the service provided operator Response time Percentage of customers satisfied

40 Step 4 Indicator Definitions & Examples
Category Definition Example Outcome Qualitative consequences Job trainees associated with a program/service. who hold a Focuses on the ultimate “why” of job for more providing a service than 6 months

41 Input Indicators Resources used to produce an output
Cost (budgeted or actual) Staff-year equivalents (SYE) Full-time equivalents (FTE) Direct labor hours (DLH)

42 Costs as an Input Indicator
Direct costs plus fringe benefits Direct costs are those devoted to a particular service and include: Personnel services Operating expenses Recovered costs Capital equipment

43 Output Indicators What was produced/provided Usually end in “ed”
Questions to ask What services were delivered? What volume was provided? How many units of service?

44 Examples Service Area Indicator
Fire suppression Incidents responded to Human Resources Vacancies filled Library New materials circulated

45 Efficiency Indicators
Inputs used per unit of output Cost per unit where the input is money/dollars Productivity where the input is staff hours Examples: Cost per senior lunch served Cost per client Investigations conducted per detective Hours per fire inspection

46 Efficiency Indicators
Service Area Indicator Fire Suppression Cost per incident Senior-based Services Cost per client Human Resources Cost per vacancy filled Custodial Services Cost per square foot cleaned

47 Service Quality Indicators
Measures customer satisfaction, timeliness, and/or accuracy of a service Examples: Customer surveys Response logs Error rates

48 Service Quality Indicators
Service Area Indicator Fire Suppression Average suppression response time Senior-based Services Percent of clients satisfied with services provided Human Resources Satisfaction rate with vacancy processing Custodial Services Percent of customers satisfied with custodial services

49 Outcome Indicators Describe the benefit of the service to the customer
Describe what was changed or accomplished as a result of the service Questions to ask: How has the customer benefited? Why is the customer better off? What is the impact of the service?

50 Outcome Indicators Service Area Indicator
Fire Suppression Fire deaths per 10, population Fire injuries per 10, population Senior-based Services Percent of clients who remain in the community after one year of service or information. Human Resources Average recruitment time Custodial Services Percentile comparisons of cost per square foot to IFMA standards

51 The 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?

52 What 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 relationships Core of program planning and evaluation

53 Logic Model Inputs Outputs Outcomes
What we What we do Short-Term Medium-Term Long-Term invest Staff Workshops Awareness Behavior Conditions Dollars Outreach Knowledge Decisions Environment Volunteers Inspections Attitudes Policies Social Materials Skills Economic Equipment Civic Technology

54 Logic Model – Fire Suppression
Inputs Outputs Outcomes What we What we do Short-Term Medium-Term Long-Term invest Staff Training Inspections Response Protection Dollars Inspections Suppression time of lives & Volunteers Emergency responses Fire property Materials response Public containment (fire deaths Technology education Prevalence injuries, of smoke detectors

55 Example Service Area Objective
Teen Pregnancy Prevention Acceptable Unacceptable Reduce 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 27 comprehensive teen services

56 Performance Management Model
Goals General Goals of program: Provide quality services to all customers Maintain or improve performance Provide economical services Inputs Resources: Money Facilities Equipment Supplies Contracted services

57 Performance Management Model (cont.)
Activities Work processes: Salting roads Making arrests Processing bills Performing inspections Outputs Goods & Services produced: Statistical measurements Miles of roads repaired Tons hauled or recycled Positions filled

58 Performance Management Model (cont.)
Outcomes Results and Impacts 100% of customers will report being satisfied 95% will be error free 90% of services will be within +/- 2% of comparable service within the private sector Performance Measurement Administration of customer satisfaction surveys Tracking number of jobs, error rates, average per job Cost comparison to private sector services Quarterly and annual reports summarizing services provided, ouputs ad outcome achievement

59 Remember Quantify objectives Associate objectives with an outcome
Word outcomes the same as objectives Provide a complete Family of Measures Avoid confusing indicators (e.g. efficiency and service quality) Reference the correct baseline to target year for objective Define service areas by program objective/customers rather than process function

60 Part III Benchmarking

61 Definition “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

62 Another 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.”

63 Types of Benchmarking Internal – commonly one year compared to a previous year’s performance External – your performance compared to another similar organization Operational – your recent annual or periodic performance Strategic – long term performance

64 Internal Operational Probably the most common measure at the local government level Measures current performance versus an established benchmark from prior performance Example: Police Dept. criminal cases closed this year versus the average over the past ten years

65 Total Structure Fires Incidents Per 10,000 Population
External Operational Measurements against other organization’s performance Example: Total Structure Fires Incidents Per 10,000 Population

66 POLICE Violent Crimes Reported Per 1,000 Population

67 Benchmarks Internal Benchmarks - Overall spending - Growth in tax base
- Growth in income - New home starts - Miles within service area External Benchmarks - Private sector wages - Neighboring cities - Similar sized counties - Statewide groupings - Statewide averages

68 Benchmark Standards Program dollars spent per capita
Spending per $1,000 property assessment Percentage growth over time Adjustments for inflation Other specific service standards

69 Setting Targets Benchmarking National standards Mandates
Board direction Past Performance Internal goals Citizen demands

70 Performance Based Budgeting (PBB)
Part IV Performance Based Budgeting (PBB)

71 Performance Based Budgeting (PBB)
Performance-based budgeting relies on: Strategic planning Operational planning Performance accountability A realistic performance measurement system to build budgets.

72 Performance-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?

73 Performance-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.

74 Goal 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?

75 SMART Examples Yes: To respond to all fire calls within the city within 7 minutes of dispatch No: To protect all property within the city to a high level of safety Yes: To process all building permit requests within 48 hours of application No: To process all building permit requests in the shortest time possible

76 Rudimentary PBB A 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 goals An explanation of what the department has accomplished in the past year An explanation of what the department intends to accomplish in the coming year An explanation as to what is different from last year in the proposed budget and why A GASB compliant budget showing past year budget expenditures

77 Performance-based Budgeting (PBB)
Program Structure Strategic plans, operational plans, and performance based budgets are geared to program structures Funds are appropriated to departments/programs A program is a grouping of activities directed toward the accomplishment of a clearly defined objective or set of objectives Program structure is an orderly, logical array of programs and activities that indicates the relationship between each

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.

79 All 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.

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.

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 work INPUT OUTPUT & OUTCOME PROCESS QUALITY EFFICIENCY Managers should use metrics to gauge and assess program and processes, diagnose problems, and formulate solutions.

82 Example Service Area Objective Input Efficiency Service Quality
Objective Input Output Efficiency Service Quality Outcome Fire Suppression To maintain fire loss at 0.02% or less of Total Property Valuation $249,000 77 $3,234 7.3 minutes 0.027% fire loss incidents responded to cost per response Average response time average fire loss percent

83 Example 2 5% $1,374,500 4 4.7% 75% 7% Street Reconstruction
Service Area Objective Input Output Efficiency Service Quality Outcome Street Reconstruction 5% $1,374,500 4 4.7% 75% 7% Capital Facilities Maintain construction cost growth to no more than 5 percent Budget/actual costs Staff Projects completed Engineering design costs as a percent of total project cost Percent of projects completed on time Contract cost growth (%)

Metrics (performance indicators) measure process and product. Inputs Outputs & Outcomes Process (Demand) (Products) (Results) (Need) (Services) (Size of Problem) (Resources) Outputs (Expenditures compared to productivity; caseload per staff member.) Inputs Efficiency: Outputs or Outcomes (Cost per item produced, service provided, or client served; cost per result achieved.) Cost Outputs or Outcomes (Production or turnaround time; timeliness of results.) Time Quality: Effectiveness in meeting the expectations of customers, other stakeholders; and expectation groups.

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.

Concentrate on the development of balanced sets of performance indicators in order to provide a clear picture of performance without overwhelming users with needless detail Five types of performance indicators: Input Output Outcome Efficiency Quality A 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

Present performance information at different levels in order to surface key data while maintaining the availability of support and explanatory material. Key Performance Indicators Supporting Performance Indicators General Performance Information Explanatory Notes Get consensus among data users on indicator types and levels before indicators are reported.

A key performance indicator is a performance indicator that is included in the Budget Supporting Documents Factors in determining key level include: Most direct measure of outcome? Critical success factor? Big ticket item? Hot button item? History and who values?

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 trends External comparisons (national or regional)

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)

91 Beware 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)

92 MANAGING ACCURACY: Get the right start by developing meaningful, valid, accurate, and reliable performance indicators Provide documentation for each performance indicator identified in the strategic plan. Strategic planning guidelines include performance indicators

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 levels Performance standards are the expected levels of performance associated with a performance indicator for a particular period and funding level. They link dollars and results Performance standards are one way to demonstrate RETURN ON INVESTMENT--what we can expect to receive for our money (easier to explain to stakeholders)

94 Integrating 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 standards During the budget process, performance indicator values become performance standards linked to the funding amounts actually appropriated in the budget Performance standards may be modified only through approved processes Performance standards are monitored and tracked

95 References “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

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