1. “Cut to the Bone” Budget Cutting and Reallocation Andrew Graham School of Policy Studies Queen’s University SPS 827 2016

2. Structure of this Session Reallocation in the budget process Strategic Reviews around the world Cutting Tools: How to Cut Risks, consequences, sustainability Practical Considerations for Budget Managers

3. The New Reality Swing into deficit era – all Canadian governments affected Budgets always under pressure – internal and external pressures Resources are always scarce, moving around, evolving Reallocation is always on the books in financial management, at both macro and micro levels Being able to cut spending is an inherent managerial skill required – knowing when, how and where is the challenge.

4. Feeling the pinch What are the current challenges you face as a public sector manager? Survey in UK of public sector managers by the Institute on Leadership and Management, 2010

5. Clichés Abound Cutting the deficit Leaner and meaner Doing more with less Cutting the fat out of the system Smart government

6. Reallocation Policy Change Fiscal Change Control Adjustment Performance Adjustment Cost Adjustment Variable and External Policy and Politics Constant and Internal Managemen t

7. Strategic Reviews: Federal Government of Canada

8. Canada Not Alone Australia since 2007: focused on horizontal program areas UK has been in and out for some time: Comprehensive Spending Review under coalition government – only actually made 38% of projected savings Netherlands has been consistent until recent crisis Ontario Government’s Program Review, Renewal and Transformation (PRRT) is a budget reallocation process.

9. All direct program spending reviewed - 25% each year Treasury Board and its Secretariat set terms of reference: Comprehensiveness – assessment of mandate, departmental objectives, program effectiveness, efficiency and alignment to government priorities Reallocation proposals – options for program reductions or eliminations to reallocate to government priorities and support overall spending control Reinvestment proposals – options to better support government priorities Departments review the relevance and performance of their spending, identify lowest performing/priority 5% of programs, seek outside expert advice and report to the Treasury Board Privy Council Office identifies review departments every year and assesses, with Treasury Board and the Department of Finance, the departmental proposals Strategic Review Process – Centrally Driven 9

10. Strategic Reviews – Scope and Key Elements Departmental Strategic Reviews to answer specific questions in key areas: Government Priority, Federal Role, Relevance (i.e. continued program need) Performance (effectiveness, efficiency, value for money) Management Performance Departmental Strategic Reviews to be conducted using the following key elements Analytical Framework: The department’s Program Activity Architecture Information Sources: Evaluations, Audits, Management Accountability Framework assessments, Auditor General Reports, and other reports Reporting Requirements: Outlined in the Terms of Reference Steering Committee: A departmental steering committee to be established with ex officio membership from TBS External Advice: Expert outside advice to be involved on each Review to ensure neutrality and credibility

11. Strategic Reviews –Conditions for Success Sufficient time for deliberative process Ministerial engagement throughout the Review process Clear and strategic alignment of programs and results (value of a strong Program Activity Architecture) Comprehensive assessment of all programs (100%)-not focussing only on 5% Early involvement of senior management team – policy, communications, and corporate services Multiple lines of evidence – evaluations, audits, benchmarking, international comparisons Overview portion of the Strategic Review should tell a compelling departmental story Arm’s length expert advice as effective challenge to proposals and alternatives

12. In 2009, the third year of the Strategic Review Process, 20 federal organizations (including departments, agencies and Crown corporations) undertook strategic reviews of 100 percent of their direct program spending. In total, almost $26 billion, or approximately 23 percent, of all government program spending was examined. Savings of $287 million were redirected to Budget 2010 priorities Savings were redirected to fund new initiatives, both within departments and to broader spending priorities in Budget 2009 Moving from ¼ of all departments to whole of government Now, savings will be directed to deficit reduction Targetting total of $11 billion by 2016 The first reviews generated savings but also demonstrated a need to improve the quality of results information … 12 Overtaken by Deficit Review Process

13. Reallocation in the Budgeting Context Emerging as a greater priority More preached than practiced around the world Greater trend to crisis budgeting which is not reallocation as used here: Greece, Spain, Italy(??) Best examples: Netherlands, UK and Canada Types and forms in Canada: Program Review and Expenditure Review, Strategic Reviews Currently: Strategic Review in Canada – two phases Occurs at macro and micro level 13

14. Reallocation in the Budget Context: Types of Reallocation Fiscal Stress Revenue shortfall Fundamental repriorization of government spending Overspending due to increased use of all services Overspending due to increased costs across the board Fiscal Abundance Revenue windfall Repriorisation freeing up revenue Underspending due to decreased use of all services Underspending due to decreased costs 14

15. Reallocation in the Budget Context: Types of Reallocation Programme overspending Overspending due to increase demand for specific programme Overspending due to increase cost of specific programme Lowered political priority of other programme Underspending due to decreased cost of other programme Underspending due to decreased use of other entitlement service New political priority Rise in priority of a specific programme Lowered political priority of other programme Underspending due to decreased cost of other programme Underspending due to decreased use of other entitlement service 15

16. Reallocation in the Budget Context: Types of Reallocation Substitution of inputs Change in production technology Change in input prices Change in cost efficiency of production 16

17. Managers must approach budget cutting with care, so as not to harm the organization's capacity to achieve its purposes. The toughest question they face is how to reduce the budget without compromising the organization's mission.

18. Internal ReallocationInvesting for Efficiency In-Year Cash Management Budget Cuts Reasons to Reallocate

19. Drivers of Cutbacks Cutbacks in budgets, allocations Changes in service levels Reduced revenue Price shifting Policy shift reducing entitlements, eligibility, access New technologies shifting service centre Unusual cost shifting, e.g. energy costs

20. Cutting to Improve Aiming at efficiencies Reducing tax burden May need to invest to cut Example: amalgamating support services, New technology to reduce staff costs.

21. Determining the Size of the Cuts Often mandated Sometimes unclear Cuts what also affects the size Cut now or cut later? The bottom 5% - common approach but what does it mean?

22. General Approaches to Reallocation Cheese Slicing Efficiency Gains Central Priority Setting

23. Equality, delegated, local knowledge, less political Gradual degradation of service, political surprise, budget padding as defence Cheese Slicing Sounds good, doing more with less, avoids pain, can create system change, cut waste Assumes innovations work, may cost money, savings in future not now, takes commitment Efficiency Gains More strategic, politicians in direct control, targeted Death of a thousand cuts, individual constituencies aroused Centralized Priority Setting Pros and Cons: Risks and Opportunities

24. Budget Cutting Tools Reduce staff Reduce travel, related services Reduce training Close offices

25. Budget Cutting Tools Reduce levels of services Alternate means of delivery Downloading costs Increasing fees, charges

26. Across the Board Cuts Often the easiest Often mandated and left to manager to plan the execution strategy (sorry) Gives managers flexibility Can use slack if any exists Have to know what you can and cannot cut: discretionary spending versus entitlements, collective agreements

27. Critique of Across the Board Cuts Have "surface" fairness, but they are indiscriminate Do not account for differences in units' ability to absorb cuts Ignore starting level of budget flexibility in a unit. "Making across-the-board cuts is like going to the bank and asking for five inches of money.” – Tom Peters

28. In an organization with low trust levels, complex programming and relatively poor information, the best approach may be across-the-board cuts. But that does not make it good management.

29. Targeted Cuts Forces priority setting Have to know where flexibility lies Have to understand the risks

30. Targeted Cuts Example: Strategic Review process of federal government Can take programmatic approach: cut or change the whole thing Can engage staff and management team in priority exercise but comes down to leadership Requires in-depth knowledge of the programs, resources and financial performance of the organizations

31. Strategic Cost Reductions Technology: short term costs for long term savings? Capital investments Business re-engineering Sharing services

32. Strategic Sourcing Shared Services Consolidation Asset Liquidation Travel Cost Management Facilities Optimization Process Improvement Service Modernization Revenue Optimization Some Big Ticket Items

33. Government-level Reallocation Targets departments Sets criteria – high levels Looks at the allocative efficiency of programs for the government and the citizen/consume Looks at the consequences of alternative funding levels. The first function requires the answering of questions such as: is this program motivated by a valid motive for government intervention or should it be left to the market or the private non-profit sector?

34. Government-level Reallocation Should this program be organized at the level of national government or should it be left, for instance, to the municipalities Does this program use the appropriate instrument or should it, for instance, use regulation or a tax instead of a subsidy? Is this program designed appropriately from the point of view of allocative efficiency for the government/consumer, for in stance the right subsidy base, regulatory object, criteria of eligibility, etc.?

35. Government-level Reallocation The second function requires the answering of questions such as: what would be the consequences for the quality of services, the level of provision, the private funding contribution and the demand for substitute services, if public funding were reduced by, for instance: 5%, 10% or 20%. These two functions are typically not fulfilled by policy evaluation under the supervision of spending departments.

36. The Cost Reduction Process Will be organizationally based Have to know what you have and what you don’t have – good knowledge of budgets and also of cash management history Have to have a grip on costs and how costs vary with volume Knowing scope for decision-making: Is this fully externally mandated? Are there level targets?

37. The Cost Reduction Process Are there area targets, e.g. staff levels? Who is involved? Need to engage external groups? Existing budget rules: do managers have budget flexibility that can be honoured or does that have to change? Time flexibility to achieve targets – flexibility within the reduction period – back-end loading Known risk tolerance Is this an extraordinary process or integrated in informal decision making?

38. Gearing Up for Process Changes that Reduce Costs Making sure you have the financial information about the operation before leaping into anything Finding new ways of doing business Understanding main cost drivers in current work processes: Policies, Processes, People Seeking innovative but cost reliable means of change: example, lean production and health care None of this is short-term or reactive.

39. 7-Steps of Effective Costing Costing purpose: how will information be used? Cost Object: what is being targeted – activity, service, output, outcome? Cost base: relevant costs, all in. Cost Classification: direct and indirect. Cost assignment methodologies: reasonable. Calculate, validate and confirm Get Sign-off: everyone has to agree on baseline. From Treasury Board of Canada Guide on Costing http://www.tbs- sct.gc.ca/pol/doc-eng.aspx?section=text&id=12251http://www.tbs- sct.gc.ca/pol/doc-eng.aspx?section=text&id=12251

40. Scoping and Understanding Consequences of Cuts Risk of actions: political, clients, interest groups, staff Potential to lead to organizational goal shifting, restructuring, etc Can be a great opportunity to change, adjust, fix Policy and procedural changes

41. Scoping and Understanding Consequences of Cuts Impact on organizational plans Changes in authorities and delegations Impact of variable cuts within an organization Need for a challenge function within the process.

42. Risk Framework Strategy Risk: Does the overall strategic approach appear to be sound? Is it consistent with best practices in the private and public sectors? Human Resource Risk: Does the proponent of the savings initiative possess the capabilities to successfully implement the initiative? How does the proponent’s human resource capability compare with that found in comparable projects or initiatives in the public and private sector?

43. Risk Framework Process Risk: Does the proposal require the re- engineering of existing business processes? What is the magnitude of the proposed changes and how easily can they be implemented? What is the effect on stakeholders? Infrastructure Risk: Is the existing infrastructure (e.g. information technology, capital assets, and governance and underlying legislation) adequate to execute the proposal, or is new infrastructure required (or new legislation/governance model). Are there risks inherent in the use/purchase of new infrastructure?

44. Risk Framework Reversal Risk arises when decisions to reduce or eliminate certain programs are reversed. Execution Risk is commonly associated with the implementation of an operational efficiency measure. The implementation of an efficiency measure often requires new skills, business processes, and infrastructure

45. Challenges in Reallocation at Both Macro and Micro Level Significant organizational investment Executive and management time Commitment to process and tough decision-making Financial and business intelligence has to be sound Triaging large volumes of complex information Asking tough questions Maintaining perspective –Strategic Review as an opportunity to renew organization, not simply a budget reduction exercise

46. Issues and Questions Strategic reviews are vertical: need horizontal reviews as well, e.g. review of central HR functions Cut whole programs or bits and pieces Cost of efficiencies – transitional To what extent do you invest to save?

47. Some Practical Considerations for Budget Managers

48. Reducing Staff Costs Slow down hires, keep positions vacant Outright lay-off The use of attrition Shifting to non-permanent staff, contracting Altering work arrangements

49. Transitional CostsRedundancySeverance CostsSalary Period CostsRetraining Costs Substitution/Replacement Costs TransferReallocation

50. Communicating Cuts Cuts will inevitably raise issues of legitimacy and trust Rumours of cuts can potentially do more harm than their reality – morale, concern for clients, friends

51. Keep in mind the following points in developing communications….. Assume that everyone is looking for the answer to one question—will I lose my job? Keep the messages clear. Be careful what you promise. Don't expect to make everyone happy – but don’t appear to happy making cuts either. Do not say, this will not hurt. Be clear on consequences.

52. Practical Considerations for Budget Managers Have your own process of identifying possible reductions and efficiencies. Be ready. Get there first. Ask yourself and your organization some tough questions, such as: Is the activity designed to operate as efficiently as possible? Have necessary materials being purchased at the lowest price while maintaining quality? Are we locked into contractual arrangements beyond our control?

53. Practical Considerations for Budget Managers Can the process be mechanized or computerized to minimize staff costs? Can this be delivered through a third party more cheaply? Can processes be standardized within and across units to reduce costs? Can you amalgamate units? Can IT be better sourced? Careful here.

54. Practical Considerations for Budget Managers Can you look at fleet reductions or better management? Can you increase revenue? Know your costs and how they interact: does reducing training costs affect performance in a measurable way? Compare and contrast. Find cost comparitors. Find places where other solutions have been tried and worked. Beware the bounce.

55. Practical Considerations for Budget Managers Know your history – what has already been done. Is all the low handing fruit be plucked? Link reductions to program results Do due diligence on risks: be clear, avoid chick little responses. Link reductions to resource issues beyond your control but in your area of need – look at IT, HR, other functional areas. Look for internal partners to reduce costs – share, double up, eliminate overlaps.

56. Practical Considerations for Budget Managers Be aware of your redundancies – people, obligations, systems, programs Ensure your program is understood – be ready with your story Focus on sustainability not just response. Make sure you know what you will need to get in return for the cuts: Greater flexibilities in other areas, Future draft trades, Transitional assistance and money, Additional support for problem cost areas. Move as quickly as you can, be focused and do not keep people in suspense too long: great way to shut down any productivity.