Policy commentary prepared at the request of the Governor's
Office
by members of the Commission's Advisory Oversight Council
MAKING ARKANSAS' STATE GOVERNMENT PERFORMANCE DRIVEN AND ACCOUNTABLE
Four reforms state government can implement now to save taxpayers millions
1. Restructure Arkansas' state budgeting process to require
performance-based budgeting in all agencies rather, than the
traditional incremental budgeting still in use in most states.
2. Define and implement a system of performance-based pay for all state
employees.
3. Incorporate Activities Based Costing (ABC) into the state's accounting
system with expenditures tied not only to costs but to measurable,
performance outputs.
4, Provide for .a fully independent audit of state government overseen by a
bipartisan audit committee comprising a preponderance of members outside of
state government's management and legislative sphere. And, in connection with
the audit function, implement the recommendations contained in, the management
letters issued by the accounting firm of Deloitte & Touche over the course
of three successive state government audits--1995; 1996, and 1997.
Table of Contents
Foreword and Summary of Recommendations
Performance-Based Budgeting
Merit Pay for State Employees and Teachers
Activity Based Cost Accounting
Creating an Independent Audit Function
Members of the Murphy Commission's
Oversight Advisory Council
Chairman, Mike Haigh
Madison Murphy
Dorsey Jackson
Ray Gash
Bob Hogan
George Breazeal
Rep. Ted Thomas
Michael Watson
Steve Stephens
Bob Ratchford
Foreword and Summary of Recommendations
by Madison Murphy
Chairman, Murphy Commission
The Murphy Commission's primary focus, when it began its review of state
government months ago, centered on discovering ways to save money in state
agencies and across the breadth of Arkansas.' state system. As it nears the
end of its work, the Commission's stated mission remains the same:
"discovering ways to make state government smaller, leaner, more
efficient, and more accountable." And now -- even snore so than at the
beginning of the effort --members realize this mission is achievable and can
be accomplished without jeopardizing he ability of the state to deliver those
essential and traditional services the people of Arkansas expect.
"Arkansas -- according to a just released report by the National
Association of State Budget Officers (NASBO) --remains one of only twelve
states that currently has no performance measures developed for major
governmental functions ...it is one of only nine states that does not publish
any performance results for its citizens apprising them if their tax dollars
are producing the intended results established when those dollars were
allocated to a state function."
Still„ in the course of its work; the Commission has realized its
one-time effort to identify cost savings in state agencies will never be
sufficient to re-center government on its core functions, to incentivize
government managers to provide the best services for the lowest costs, and to
infuse government with a "customer first" attitude.
Achieving these objectives requires seeking out those best
practices in management and finance and implementing them in a manner designed
to assure government always performs with the greatest possible efficiency,
with an ingrained sense of stewardship over taxpayers funds, and with a
here-to-fore unheard of level of accountability and openness. The Murphy
Commission sees identifying such practices, recommending them to the slap V,
and working to implement them in the years ;ahead as its singular most
important goal. To that end, there is good news. Out among the states there is
already an accountability, performance, and cost ;containment explosion
already well-underway.
Citizens, weary of rising government expenses and constantly higher taxes
coupled with declining quality of services, have demanded change. And, as a
result, tough, business-minded governors, such as George Allen of Virginia
and Zell Miller of Georgia, have responded with conviction to install
innovative managerial and financial reforms based on higher performance at
less cost. The benefits of such reforms are already apparent in states
such as Virginia, Texas, Michigan, Georgia, Florida, Arizona and others.
Government expenses are falling, citizens' taxes are decreasing, state
economies are booming, public services are improving, and massive inefficient
government bureaucracies are giving way to lean customer-oriented operations
bent on "bang for buck" delivery of services tied wholly to
measurable performance objectives.
By contrast, Arkansas -- according to a just released report by the National
Association of State Budget Officers (NASBO) -- remains one of only
twelve states that currently has no performance measures developed for major
governmental functions. As such, it is one of only nine states that does not
publish any performance results for its citizens apprising them if their tax
dollars are producing the intended results established when those dollars were
allocated to state function.
Arkansas needs to join the performance, cost, and accountability movement
occurring now in other states. The following four primary recommendations are
among several direction.
Major Recommendations
1. Restructure Arkansas' state budgeting process to require the use of
performance-based budgeting in all agencies rather than the traditional
incremental budgeting still in use in some states.
2. Define and implement a system of performance-based pay for all
state employees.
3. Incorporate Activities Based Costing (ABC) into the state's accounting
system with expenditures tied not only to costs but to measurable performance
outputs.
4. Provide for a fully independent audit of state government, overseen by a
bipartisan audit committee comprising a preponderance of members outside of
state government's management and legislative sphere.
And, as a prelude to the formation of an, edit committee, implement tae
recommendations contained in the management letters issued by the accounting
firm of Deloitte & Touche over the course of three successive state
government audits -- 1995, 1996, and 1997.
Follow-on and Miscellaneous Recommendations
What the Governor Should Do
Governor Huckabee asked the Commission and its Oversight Advisory Council
to look into these four reform issues in more detail and then offer some
advice and guidance. In responding, the Oversight group's original intent was
to define "how" the state should craft these reforms as well as how
and when they should be implemented. But in the course of surveying some 27
states it became obvious that it would be inappropriate for a single group of
citizens to strictly define how four such important reforms should be done in
Arkansas.
The more important role for the Commission was to survey other states and
collect information, assess the literature and the policy debate to provide
supportive arguments, and to offer a starting point with a
"foundation" of information and a clear perspective as to why these
reforms should be done. This report then can serve as a "primer"
for citizens, candidates, elected officials and others interested in
introducing performance management to state Government in Arkansas.
When the Murphy Commission conferred with other states that successfully
implemented such changes, it became apparent that adopting them does not
happen because a single interest group defines them and says they must be
done. Instead, the group saw a consistent pattern wherein a partnership of
government and the private sector teamed up to 1) carefully craft the
reforms (which differed in each state due to unique needs), 2) thoughtfully
assure stakeholder input (but not domination), and 3) put the reforms in place
in a workable, uniform, and integrated manner with broad-based public support.
In each state, however, there were elements common to these efforts that
contributed to their success:
1. As a matter of political leadership, the Governor, as the state's
chief executive officer, became their staunchest advocate. Change is
always difficult to affect and therefore significant change needs a
champion. In states where the Governor threw the full weight of his office
and legislative initiatives behind these reform, they happened. This was
especially true where legislative champions also emerged. George Allen of
Virginia and George Bush of Texas are examples.
2. The Governor gave substance to the means by which performance
measures came into being. This usually took the form of special
commissions and offices. Forming such groups had the added advantage of
surrounding the Governor with like-minded people and experts and gave
"arms and legs" to his initiative. It was these special task
forces or commissions that did the work -- keeping the Governor informed
and involved -- and handed him a completed package with all details.
3. The working commissions, task forces and special offices in each
state showed great sensitivity -- on the one hand -- by assuring input and
representation by stakeholder groups such as state employees groups and
agency personnel. They valued and respected their views and their points
were all weighed and carefully evaluated. But on the other hand, they were
not allowed -- because of obvious self interest -- to dominate the
process. For the sake of objectivity and balance the groups drew more
heavily on private sector expertise, policy groups, and experts from
around the nation.
The Murphy Commission believes this report, as a "performance
primer", will he useful to the Governor, the Legislature, and others. But
getting the job of actual reform done will require an approach similar to that
of other states as outlined above. The following recommendations outline
the Commission's suggestions on one possible approach to implementation
that may have merit and which we encourage the Governor to consider:
In order to facilitate the implementation of performance reforms, the
Governor should additionally take the following steps:
Follow -on recommendation 1
The Governor creates a new Commission (i.e. the Arkansas Government
Accountability Council or some similar title) and empowers it to work with,
guide, and assist him and his staff in achieving these four recommended
measures in the most timely manner possible. He further names a chairman from
the private sector to head the Accountability Commission and who regularly
joins the Governor in reporting its progress to the media and to the public at
large. The Commission is peopled with enough members that four smaller
groups (each enhanced with advisory members from stakeholder groups) can work
on the four main reforms.
Such councils are not new. Florida, for example, has its Florida
Commission on Government Accountability and Iowa has formed a 13 member
bi-partisan Iowa Council on Human Investment charged with defining and
implementing measures that keep that state "performance" and
"results" oriented and continually focused on public accountability.
An Arkansas Accountability Council ideally should comprise business
leaders, public policy experts, and accounting experts, most all of whom are
outside the sphere of government, its agencies, the legislature, and state
employee associations. Legislative, executive branch, and state employee
membership would be allowed, but limited. It should also require a bi-partisan
balance and the Governor should involve work closely with legislative leaders
from both sides of the aisle. In its initial stages it should be tasked with
assuring the completion of the following steps:
- accumulate the best practices from all states relative to the four
accountability reform measures outlined above. (i.e. Texas is among those
states now fully implementing performance-based budgeting, throughout its
government, Iowa makes effective use of Activity Based Cost accounting and
Georgia has one of the leading merit pay systems in the nation as does
Colorado.)
- consult with and accumulate the latest literature from accounting firms,
public policy groups, and support organizations such as the National
Association of State Budget Officers (NASBO) and the Government Finance
Officers Association. Invite briefings and testimony from these and many
other groups. The Government Finance Officers Association, for example has
recommended as part of its best practices package for all states, the
formation of a state government audit committee.
- review all initial findings from the discovery phase outlined in the two
steps above and make initial determinations about the form and substance
of the four reform measures as they could be applied to Arkansas.
- determine a working time schedule and the tactics needed to transition
from current practices to the four reform measures. (taking into account
costs, phased-in approaches, pilot programs, etc.)
- facilitate ample input from all stakeholder groups.
- implement the new reforms allowing for the inevitable bugs and
transitional problems, strive to correct them through evaluation,
adjustment, and follow-up.
- remain in place to further evaluate existing programs and accountability
measures, new ideas, practices and innovations Arkansas should consider in
the years ahead and recommend their implementation.
Follow-on recommendation 2
Appoint a Special Assistant to the Governor, attached to the Governor's
office (not DF&A or any other state agency or Commission), and charge that
person with two major functions:
- representing the Governor, this individual would drive-full-time-the
process of implementing the recommendations in the Deloitte & Touche
management letters covering the last three audits (see section four of
this report)
- while representing the governor in day - to - day follow through on all
accountability and performance reforms such as audit recommendations, this
person – and leis or her staff - would also resource Arkansas'
Accountability Commission providing input and resources - as arms, legs,
eyes and ears, for this group.
* In order to be effective in carrying out these two tasks, the
Governor's special assistant for accountability would likely need staff
assistance, expenses, and other support. An adequate budget would be
required. The Commission also recognizes that such a position would require
special expertise both managerially and with respect to orchestrating these
measures. It would require an ability to work in agencies, get along with
people, drive the process, and pull in resources from around the state and
nation. Accounting expertise would be needed, but the special assistant
would not necessarily need to be an accountant, but more of a driver.
Business or policy experience would be a plus -- along with public relations
skills and a writing ability.
It is worth noting here, again, that this concept also is not new. Arizona
has its Office for Excellence in Government and Florida created its Office of
Program Analysis and Government Accountability - both of which support the
Governor's accountability and performance initiatives. They also work very
closely in tandem with their legislatures.
Miscellaneous recommendations made in connection with this report's
findings on performance measures also address
higher education. As stated m the first section of this report (following)
it reads:
Miscellaneous recommendation 1
The Murphy Commission recommends fully re-establishing Arkansas' higher
education performance and productivity system along with its corresponding
cost accounting system iii the Department of Higher Education.
(More information about this recommendation is provided in the
Performance-based budgeting section of this report.)
Miscellaneous recommendation 2
The Murphy Commission recommends enacting, in Arkansas, a law similar to
the Federal Government Performance and Results Act of 1993.
This act mandates government agencies engage in comprehensive strategic
planning and submit those strategic plans for both public and legislative
review. It also requires defining results in terms of measurable outputs
rather than process inputs and reporting progress toward those results
regularly. Agencies must also report the interim or ongoing cost of all
activity and report final results when they are achieved (or when they fail).
Federal law also spells out the details of how and when agencies; do these
things including time schedules and reportable benchmarks. Such a law in
Arkansas would surely serve to spear the use of performance and accountability
measures as a matter of routine in state government.
The Arkansas Accountability Council, as described above, should be charged
with crafting such a law and the Governor, in turn, should make it a part of
his agenda and take the leadership in advocating its passage.
The Commission commends these recommendations and the following supportive
briefing notes that accompany them to the Governor, his staff, key state
agency heads, and other governmental personnel, all legislators, and other
constitutional officers. In the years ahead, the Commission intends to
aggressively work for the incorporation of these timely reforms into state
operating policy and will endeavor to build a ground swell of public support
to help make them a reality.
A word on how best to use this report...
Each section on the four proposed reforms begins with a brief summary of
that reform, how it works and why it is important. For readers seeking a quick
read, skip to the beginning of each section and read the first few paragraphs.
For readers wanting more detail and examples, read the full narratives of each
section and the appendices. They are full of details, facts and figures.
Good reading.
PERFORMANCE-BASED BUDGETING
Recommendation
Restructure. Arkansas' state budgeting process to require
the use of performance-based budgeting in all agencies rather than the
traditional incremental budgeting still in use in most states.
The premise of performance budgeting is simple. It would require state
government to define what constitutes good performance for all of its
functions and then allocate budget dollars to those functions on the basis of
how effectively the intended performance outputs are being achieved. As is the
case with a number of stags, Arkansas still uses an incremental approach to
budgeting rather than a performance-based approach.
The state's current budgeting process generally allocates funds to agencies
and their program and operating budgets based primarily on their requests
made prior to each legislative session. These requests, more often than not,
are based on an almost routine expectation of some kind of increase. And while
there is considerable executive and legislative review of proposed budgets,
the agencies are not required to submit any form of strategic plan for review,
any detailed assessment of measurable program outputs versus costs, or any
quantifiable performance output measures for proposed new programs.
Arkansas bases its budgeting much more on input -- how much money, hose
many people, what new equipment is needed -- and not nearly enough on output.
Output is defined as measurable and quantifiable results that should be stated
acrd cost projected at the time of budget allocations ...and assessed for
progress regularly.
In contrast, 14 states are incorporating performance-based budgeting into
their operations and at least 20 others are seriously considering it.
Moreover, Virginia -- according to The National Association of State Budget
Officers (NASBO) -- periodically zeros out its state budget forcing
agencies to fully evaluate and re justify their programs. The Murphy
Commission budgeting recommendation in Arkansas also reflects a need to
periodically zero out programs. The best way to accomplish this is to
establish a statutorily prescribed number of years after which each agency
would automatically zero base its budgets. The budgeting schedule could be
arranged so only a select number of agencies would zero out in a given year --
thereby avoiding a zero-budget for all of state government in a given cycle.
The Federal Government Performance and Results Act of 1993 (GPRA):
A Model For The States
How Six Innovative States Helped. Shape This Major National
Reform
sponsored by Rep. John Conyers (D - Mich) and Sen. John
Glenn (D - Ohio).
The federal government is implementing performance measurement and
budgeting through the Government Performance and Results Act of 1993 (GPRA),
Sen. John Glen and Representative John Conyers, sponsors.
GPRA requires federal agencies to develop, no later than the end on' fiscal
year 1997, 5-year strategic plans that include the agency's mission statement,
identify the agency's goals, and describe: how tire agency intends to achieve
those goals through its activities and through its human, capital,
information, and other resources. Under GPRA, agency strategic plans are the
starting point for agencies to set goals for programs and measure the
performance of the programs in achieving those goals.
In addition, GPRA requires agencies to submit, beginning in fiscal year
1999, annual program performance plans to the
Exhibit I
The Results-based Management Reforms in Six States That
Shaped New Federal
Government Performance Reform Through The Government
Performance and Results Act
State |
Strategic Planning |
Performance Measurement |
Selected Systems Alignment |
Florida |
State developed statewide strategic plan
Agencies required to develop strategic plans |
Agencies required to develop results-oriented performance |
Selected agencies piloted personnel and budget flexibility |
Minnesota |
State developed statewide strategic plan |
Agencies required to develop results-oriented performance measures |
State proposed alignment of human resource management systems to
achieve desired
results |
North Carolina |
Agencies, required to develop strategic plans |
Agencies in selected program areas required to develop
results-oriented performance measures and link to budget |
Statewide effort aligned human resource management systems to achieve
desired results |
Oregon |
State developed statewide strategic plan in collaboration with
stakeholders |
Agencies required to develop results-oriented performance measures |
Statewide effort aligned human resource management and budget systems
to achieve desired results
Selected agencies aligned performance information with budget and
accounting systems |
Texas |
State developed statewide strategic plan
Agencies required to develop strategic plans |
Agencies required to develop results-oriented performance measures
and link to budget |
Statewide budget and accounting systems aligned with agency strategic
plans |
Virginia |
State implementation underway for statewide strategic plan
Select agencies developed strategic plans on own initiative |
Pilot agencies required to develop results-oriented
Requirement planned for other agencies to develop results -oriented
performance measures
performance measures |
Not identified |
Office of Management and Budget (OMB) and program performance reports to
the President and Congress. Program performance plans are to describe how
agencies are to meet their program goals through daily operations and
establish target levels of performance for program activities. In these plans,
agencies arc to define target levels in objective, measurable terms so that
actual achievement can be compared against the targets. Agencies' individual
performance plans are to provide information to OMB for m overall federal
government performance plan that OMB is to develop and submit annually to
Congress with the president's budget. In their program performance reports,
agencies are to show (1) program achievements compared to the targets
specified in the performance plans: and (2) when a target has not been met, an
explanation of why the target was not met and what actions would be needed :o
achieve the unmet goals.
GPRA also allows agencies to propose in their annual performance plans that
OMB waive certain administrative requirements. These administrative waivers
would provide federal managers with more flexibility to structure agency
systems to better support program goals. Under GPRA, the administrative
requirements eligible for waiver would be nonstatutory and involve only
budgeting and spending within agencies. In return, agencies would be held
accountable for "achieving higher performance."
And lastly, CPRA requires a 20-year test of performance budgeting in not
less than five agencies, at least three of which have had experience
developing performance plans. Under the test, performance budgets are to
provide Congress with information on the direct relationship between proposed
program spending and expected program results and the anticipated effects of
varying spending levels on results.
In fiscal year 1994, OMB selected 53 agencies or programs to pilot
strategic planning, performance planning, performance measurement, and
performance reporting and will select additional pilot agencies in fiscal
years 1995 and 1996. OMB also will be selecting agencies from among the
initial 53 to pilot managerial flexibility and test performance budgeting in
fiscal years 1995 and 1998, respectively. Although GPRA does not call for
government-wide implementation of strategic planning and performance planning
until fiscal years 1998 and 1999, respectively, OMB and the administration's
National Performance Review have strongly endorsed these reforms and have
encouraged all agencies to develop their strategic and performance plans as
soon as possible.
Florida, Minnesota, North Carolina, Oregon, 'Texas, and
Virginia
The Success of Their Performance Measures Attracted Federal
Attention
When GPRA was first proposed, a Federal objective was to first identify
some of the experiences state governments had in implementing management
reforms that were reported as successful and thus could guide federal agencies
in implementing GPRA. States that had sought to increase their focus on
program results through strategic planning, performance measurement and
reporting, and performance budgeting were identified. The winners in this
federal search were Florida, Minnesota, North Carolina, Oregon, Texas, and
Virginia because they were implementing some or all of these reforms.
When the U.S. General Accounting Office (GAO) issued a report on findings
in these six states -- Managing for Results, 1994 (GAO/GGD-95-22) -- it
said their unique brand of results-oriented management reforms could indeed
help a federal agency focus more on program outputs than resource inputs which
could in turn lead to improved program effectiveness. It went on to say that
collectively the experiences determined "that strategic planning and
performance measurement could be an important means for stakeholders to obtain
agreement on common goals and measure progress toward achieving those
goals" It added that each state "used strategic planning to improve
working relationships within and across agencies and across levels of
government aimed at achieving outcomes." The report concluded by saying,
"The state's experiences suggest that, if successful, GPRA could serve as
a powerful tool for developing and communicating agreement across the federal
system on program's goals and for measuring progress in achieving those
goals."
According to the GAO report there was one downside: Some state officials
said that despite progress in getting agencies' staff to develop and use
results-oriented measures to manage and gauge progress, legislators made
limited use of agencies' performance information during the budget process, in
part because consensus between the executive and
ILLUSTRATION
Principles of PBB
Strategic Planning
- What are the mission, goals, objectives of programs
Outcome Measurement
- What arc programs producing?
Benchmarks
- What standards should programs meet?
The Purpose of PPB
Provide agencies flexibility in using resources within programs
Hold them accountable for performance
Encourage management innovation and focus on performance
PBB responds to many concerns
Requires systematic review of agency organization and purpose
Helps identify performing and non-performing parts of government
Encourages long-term planning
Makes everyone consider purposes of government, not just day – to -
day business
PBB is widespread
34 states have legislation calling for the use of performance-based
budgeting
14 other states Lave initiatives not involving legislation
Only Arkansas and New York have not acted
States that make most use of PBB in budgeting
North Carolina
Complete performance-budget submitted in 1997
Florida
Phasing in PBB through fiscal year 2002
Texas
Now using performance measures for all state agencies
Transition to PBB is not simple
Budgets have to be restructured
Agency structure may have to change
Legislator's expectations of agencies may have to change
legislator's have to learn a new way of thinking about budgets
Budgets have to be restructured
The focus is on activities and outcomes - what purpose is
achieved-rather than line item expenditures
An activity like health may be the responsibility of several agencies
Budgets must focus on activities, not agencies
Agency structure may have to change
In the long run, performance budgeting could mean restructuring
agencies to put responsibility for a given activity in one agency
Agencies and budgets may have to change
Focus budgeting on goals or activities, not on specific expenditures
Allow agencies greater flexibility in shifting money to meet program
goals
Accountability for program outcomes, not specific expenditures
North Carolina
Governor submitted both performance based and traditional budgets for
1997-1999 biennium
North Carolina has focused on structure, with performance standards
added.
North Carolina performance budget
Sets 10 abroad areas of government activity, independent of agency
structure:
Health, Human Services, Corrections, Public Safety, Environment,
Economic and Community Development, Education, Cultural Resources,
Transportation, and General Government.
Sets a mission statement for each area. For Health:
"The Health Program Area protects North Carolinians against illness
and injury in the day-to-day environment in which they live and work, and
provides treatment and access when health problems occur"
North Carolina performance budget
The budget breaks down Program Area's activities into
- Goals, Programs, Subprograms
And for each subprogram it sets
- Objectives
- Outcome measures
- Performance measures.
North Carolina performance budget
Budget shows proposed funding for each goal, program and subprogram
For state health programs, for example,
- 3 goals
- 7 programs
- 13 subprograms
North Carolina performance budget
*The budget also shows how the funding is divided among 8 different
agencies that are responsible for parts of the goals of the overall Health
Program Area:
- Agriculture, Commerce, Environment and Natural Resources, Human
Resources, Insurance, Labor, University Hospitals, and Administration
Florida performance budget -- intentions
Phasing in performance budgeting over 7 years (5 or so agencies a year)
Agencies group their activities into programs and recommend
performance measures and standards
Agencies designate programs
Provide measurement standards and reports
Florida performance budget - practice
Agencies create large programs -- grouping several former budget
entities into one program
Agencies gain budget flexibility
Revenue Department for example, has two programs
General tax administration
Property tax administration
Florida performance budget- benefits
Increased management flexibility
Focuses attention on agency purposes
Identifies weaknesses in information
Produces a sense of teamwork among agency staff
Florida performance budget - concerns
Size of Programs
Budget flexibility (unlimited transfer authority within programs
but not between programs)
May lack specific purpose
Hard to set performance standards
Agency lack of historic data to provide baseline standards
Lack of expertise in measurement
Texas performance budgets - intentions
Benchmarks are assigned to broad areas of state government
All agencies have created strategic plans
Goals, (objectives, strategies and measures
Strategies" are the budget unit
"Key" outcome measures go into the budget bill
Texas performance budgets - practice
Legislative Budget Board evaluates and reports on nature of measures
and performance reports
State Auditor evaluates performance reports
Agencies have developed around 11,000 measures of performance
Issues - creation of performance measures
Difficult for agencies to shift from activity measures to performance
measures
Lack of historic data to provide a basis of competition
Lack of expertise in measurement
Must involve Legislature and Executive Agencies both
External review of performance measures
Florida - legislative program audit agency
Texas - Legislative Budget Board and State Auditor
Minnesota - Legislative Auditor
Issues - what do performance measures mean?
A health program goal in North Carolina is to reduce infant mortality.
If infant mortality is o educed, how do you whether that the program's
activities deserve credit, or whet her external factors caused the change?
Issues - structure of the budget
Structure of a performance based budget is at odds with traditional
budgeting
- Not a line-item format
- Can be at odds with budget committee/ subcommittee structure
Program budgets may appear in difference agency budgets
Issues - PBB cannot decide appropriations
Focus is on the long term, not the next year or biennium
No one has figured out how to tie budget allocations to measures and
performance
Issues - incentives and sanctions
Incentives (similar in Florida and Texas):
Additional flexibility in budget management
Flexibility in salary and position management
Retention of unencumbered balances at end of fiscal year
additional funding
Issues -incentives and sanctions
Sanctions
Quarterly reports to governor and legislature
Quarterly appearances of staff to report
Restructuring or elimination of a program
Reductions in staff or budget
Reduction of managerial salaries
Some conclusions about PPB
Can improve agency management
Systematic review of agency organization and purpose
Helps identify performing and non - performing parts of government
Encourages long-term planning
Makes everyone consider purposes of government
PBB does not simplify the budget process
It will neat tell legislators whether to increase or cut funding for a
poorly performing (or an highly satisfactory) agency
It will not tell you what to do about a poorly performing but essential
agency
It will not tell you how to allocate money between roads and schools
Issues- what does PBB do for legislators?
New kinds of information, possibly better information
Facilitates debate and discussion in the budget process
Encourages long-term perspective
Focus on agency accountability for outcomes
Value - for legislators
A powerful tool to improve government management ' • Helps meet
legislators' and voters' needs for
Accountability
Orientation to service
Quality measurement
Focuses attention on outcomes
legislative branches had not been reached on what would be measured and how
the measures would be used.
Exhibit I offers a summary over view of the six states studied and
their programs.
The Murphy Commission recommends enacting, in Arkansas, a law similar to
the federal Government Performance and Results Act of 1993. Such action would
surely serve to spur the use of performance measures as a matter of routine in
state government.
The following discussion on the performance management movement and
performance budgeting is based on two previously published commentaries
produced by Michael Campbell, Ph.D. with the Alliance for Redesigning
Government and Joni L. Leith with the Government Finance Officers Association
(GFOA). The authors' original work has been condensed and merged to
comprise the following overview. Full copies of Campbell's and Leith's papers
are available on request. The Murphy Commission acknowledges their work in ii,
is area and the contribution it makes to this report.
The Performance Measure Movement in Government
"Government must be accountable for results." This statement,
voiced repeatedly by politicians and citizens, by the media, and by other
watchdogs of government is deceptive in its simplicity. It raises, but does
not resolve, several fundamental questions: What are the desired
"results" of government? How do we know whether government has
achieved some intended result? What does it really mean to be accountable?
Until recently, government accountability was largely a matter of
accounting. When public funds were appropriated, the key accountability
questions focused on how the money was spent ante on what. Were funds spent on
particular programs as intended? What portion of the money was spent on
personnel, equipment, buildings, overhead, etc.? Were proper rules and
procedures followed for spending public moneys, awarding contracts, and
tracking expenditures? Fiscal audit and budget reports, which answer these
types of questions, have been used for years to demonstrate accountability and
responsibility in government, but seldom very effectively or in a manner where
citizens has easy access to understandable information about the use of their
tax dollars and the results they generate.
Since the beginning of this decade, however, the concept of governmental
accountability has taken on a new meaning. In this view, government
demonstrates accountability when it shows its citizens: (1) what they are
getting from the use of public funds in terms of products and services, (2)
how these expenditures benefit their lives or the lives of those they care
about, and (3) how efficiently and effectively the funds are used. This type
of accountability holds government responsible not only for its actions, but
also for the results of its actions.
In order to demonstrate accountability in this way, state and local
governments and federal agencies have begun developing new measurement and
reporting systems. These are generally called "performance measurement
systems" or sometimes "performance accountability systems."
Research into performance measurement has been an ongoing process by state
and local governments as well as organizations such as the Urban Institute.
In the mid-1980s, the Governmental Accounting Standards Board (GASB) began
a research project into performance measurement that resulted in a series of
reports published under the title Service Efforts and Accomplishments
Reporting: Its Time has Come (1989-1993). The GASB reports explore the
state of the literature and the state of practice for twelve of the
most costly state and local services.
From its research, GASB concludes that performance measurement and
reporting is rapidly developing and is of value to elected officials,
citizens, and management. GASB recognized, however, that there is a need for
further work on developing valid and generally accepted indicators, gathering
data, and developing methods to verify and present the information. While
GAS13 is not expected to issue standards requiring the inclusion of
performance measurement in the comprehensive annual financial report in the
near future, its research and interest in the topic has provided yet another
spur for experimentation by state and local governments.
Echoing GASB's push for performance measurement is the 1990's explosion of
management reform initiatives that rely on performance measurement data.
Management reforms such as activity-based management, total quality
management, re-engineering, rightsizing, reinventing government, visioning,
and strategic planning movements need access to valid performance data in
order to improve the provision of government programs and services. In fact,
many reformers now say these processes are essentially meaningless unless tied
to performance and output measurement. They are right.
On another front, a survey conducted by GFOA in May 1994 found that of the
508 state, provincial, anti local government responses to the question of
where performance measurement data are reported, 69 percent report performance
measures in the budget document, 57 percent report them in an internal
management report, 39 percent report them in other public reports to elected
officials or citizens, and 23 percent report them in annual financial reports.
The movement has grown considerably over the last four years. Presented in
the Appendix to the section is a state by state outline, developed by
NASBO, showing which states have instituted performance measures in their
programs and which states have implemented performance - based budgeting.
These exhibits are the source for the data showing Arkansas among those
states that do not use performance-based budgeting and one of only twelve
states not making use of performance measures in agencies. It is worth noting
here that until the last legislative session in 1997, Arkansas did have one
major functional area - higher education - under a performance-based
allocation system. Rather than address some obvious flaws in that system
however, it was, instead, deliberately eliminated in- the last legislative
session by a powerful state senator with an ax to grind over college funding.
Arkansas' higher education performance model had been singled out by other
states as one of the best in the nation - written up in national publications.
The Murphy Commission recommends fully re-establishing
Arkansas' higher education performance and productivity system along with its
corresponding cost accounting system in the Department of Higher Education.
The Commission feels so strongly about this recommendation that it will
remain a primary focus throughout the life of the Commission and a matter of
continued advocacy until Arkansas' higher education productivity systems are
fully restored and functioning. The Murphy Commission, at the request of
Arkansas' State Higher Education Board Chairman Curt Bradbury prepared a
confidential briefing for the Governor's consideration at the time of the
legislative initiative to do away with Arkansas' productivity system. For the
reader seeking more background, it is available on request.
Overview of Performance Measurement
Performance measurement is a process for determining how a program is
accomplishing its mission through the delivery of products, services, or
processes. Performance measurement systems attempt to measure performance
through ongoing data collection efforts, as opposed to program evaluations,
operational audits, and other special studies that generally are more
extensive and less frequently performed. In other words, performance
measurement is a periodic rather than episodic form of evaluation. The process
of measuring and reporting performance is similar to financial reporting
systems, which routinely collect financial data and report financial
performance. Performance measurement reporting adds another dimension of
accountability to taxpayers.
The four key steps of performance measurement are:
Identification and definition of indicators;
Collection of the appropriate data;
Analysis, or comparing performance to previous results or relevant norms;
and
Reporting the results
Performance measurement encompasses indicators that measure performance
along several dimensions. Although there are many different terms and
combinations of indicators, most attempt to measure performance along one of
three dimensions; quantity, effectiveness, of efficiency. Ideally, a set of
performance measures answers four key questions: How many? How efficiently? Of
what quality? To what effect?
Types of Performance Measures
There are several different terms used to describe performance measures.
One of the most frequently used set of terms divides performance measures into
four basic types:
Input
Output
Effectiveness/outcome
Efficiency.
Input Measures: Input indicators measure the volume of resources, both
monetary and non-monetary, that are used in delivering a program or service.
Total expenditures arising from the provision of a program or service is a
frequently used monetary input measure. When using cost data, it is important
to define the specific items of cost included and the year in which the costs
occur so that fair and accurate comparisons can be made between different time
periods or programs. It may be necessary to use constant dollars in order to
remove the distortion of inflation.
Items of overhead, such as payroll, computer services, administrative
support, and building use, may be included with the input measure if a
jurisdiction allocates these costs to programs. Jurisdictions also differ as
to their definition and treatment of capital costs. Certain equipment costs
should be amortized over their useful lives and allocated over the
appropriated periods rather than in the year the actual expenditure is made.
On the other hand, it is not necessary to include in the input indicator a
cost item that is not relevant to the problem being addressed. For example,
when examining the performance of a work crew that does not have control over
its administrative costs, these costs should not be included in the input
measure.
Not all inputs are measured in dollars. The most frequently measured
non-monetary resource is labor, expressed as full-time equivalents or labor
hours. Another non-monetary input indicator used is equipment hours. Care
should be taken in comparing non-monetary inputs among governments, as some
jurisdictions contract out services that others do not.
Output Measures: Output indicators report the quantity or volume of
products and services provided by the program. Output indicators are commonly
referred to as workload indicators. Some jurisdictions obtain much detail
about workload, counting not only the number of outputs of product or service
by the program but also the amount of workload coming into the program (e.g.,
applications for assistance) and the amount currently being processed and thus
not yet completed as a unit of output. Some also use indicators that measure
of demand for the good or service compared to the amount of service currently
being provided.
Units of output are not always easy to define. A valid unit of output
should be...
mutually exclusive,
definable and countable,
uniform over time,
directly related to the mission of the program.
characterized by dimensions of quality that can be defined, and
readily available for measurement.
Effectiveness/Outcome Measures
Effectiveness indicators, also known as outcome indicators, measure the
results, accomplishments, or quality of the item or service provided. Some
systems distinguish between effectiveness indicators and outcome indicators,
defining effectiveness indicators as measures of the quality of the program
outputs-responsiveness, timeliness, compliance, accuracy, and customer
satisfaction-- and defining outcome indicators as measuring the degree of
program mission accomplishment.
Recognizing that the final outcomes of many government programs are not
fully under the control of program officials, some government have developed
two sets of outcome measures: intermediate outcomes and end of long-term
outcomes. The book Reinventing Government (Osborne and Gaebler)
describes them, respectively, as program outcomes and policy outcomes, with
the authors opining that program officials must examine both, although they
should not be held solely accountable for achievement of the latter. An
example of the two forms of outcome indicators follows.
Intermediate/Program Outcome |
End /Long-term/Policy Outcome |
Increase percent of arrests |
Reducing the crime rate resulting in successful convictions |
Some governments describe the two levels of effectiveness indicators as
performance benchmarks and strategic benchmarks. In this case, performance
benchmarks refer to productivity and service standards of performance of
individual government programs. By contrast, strategic benchmarks refer to
community and social goals, such as reducing teenage pregnancy rates or
reducing crime, on which a variety of organizations and factors have an
impact.
Efficiency Measures
Efficiency indicators quantify the relationship between input and output.
They can be expressed as productivity ratios (i.e., output divided by input),
or as unit-cost ratios (i.e., input divided by output). Efficiency indicators
measure how much output or outcome can be produced or provided by a given
resource level or how much input it takes to produce a given level of output
or outcome. As indicated earlier, input can be stated in monetary or
non-monetary terms, such as labor hours.
Some jurisdictions use productivity measures that combine dimensions of
efficiency and effectiveness into one measure, such as unit costs per
effective meter repair. For example, the unit costs of a piece of equipment's
repairs are included in the numerator, while only the number of successful
repairs are included in the denominator. Another type of efficiency measure
often used is the degree of resource utilization (i.e., the amount of
equipment or personnel downtime).
"Benchmarks" and "Service Efforts and Accomplishments"
Two other terms often expressed in relationship to performance measurement
are benchmarks and service efforts and accomplishments.
"Benchmarks" often is used synonymously with performance
measures, but for many it connotes additional meaning that goes beyond
performance measurement. The term benchmarking first emerged in the private
sector, which uses it to refer to the process of seeking best practices and
attempting to emulate them. Benchmarking in this sense is practiced by
governments, but the term also is used by the public seeker when referencing
comparisons of performance to a goal, past performance, or another program's
measurement data.
"Service efforts and accomplishments" is a term that was
coined by GASB in its research into the status of performance measurement
practice and research. GASB recommends use of the "classic"
performance measurement indicators-inputs, outputs, outcome, and
efficiency-but labels inputs as service efforts, outputs and outcomes as
service accomplishments, and efficiency measures as indicators that relate
service efforts to service accomplishments.
GASB also uses the term "explanatory information" to refer to
descriptive text that accompanies presentations of performance measurement
data. Relevant information to include would be factors or events influencing
program operations that affect its performance. GASB and others group this
information into types: 1) demographic data or events that are outside the
control of program personnel and 2) elements that the agency does control,
such as staffing patterns. When comparing and reporting performance among
jurisdictions, explanations or service profiles that describe differing
populations, geographic size, and terrain are particularly needed.
Sources of Data for Performance Measures
There are four major sources of data for use in measuring performance.
These sources are described below:
1. Managers can first turn to existing program records for performance
measurement data, such as workload counts, complaint records, and response
times for various services. Another program record is time logs, which are
either regularly maintained timesheets detailed by activity or special studies
undertaken periodically. Time logs frequently are used in computing
labor-related efficiency measures or compared with engineered work standards.
Standards are seldom available, however, for activities other than vehicle
maintenance and construction. Time logs of equipment utilization also can be
maintained, as well as those for labor.
2. Another source of performance measurement data is trained-observer
ratings. Trained-observer ratings are best used for assessing physical
characteristics, such as the condition of facilities and infrastructure.
"Their collection usually involves extra costs and special equipment,
such ad air and water quality monitors and street surface "roughometers".
3. Client surveys help measure perceptions regarding the adequacy of
services, any deficiencies, and the extent of usage of the service. Surveys of
the general population and businesses in the community also obtain feedback
about specific services and factual data, such as the extent to which
government facilities and programs are used by the public. The accuracy of
surveys depends on the degree of sampling error, quality of the questionnaire
design, knowledge of the survey respondent, and mode of interviewing (e.g., by
mail, telephone, or other means). While in-person or telephone interviews
usually yield the best information, the costs of using this mode can be
prohibitively high.
4. Accounting reports provide the revenue and expenditure data that
usually accompany reports of program activity and results (e.g., reporting the
total and net costs of operating the program). Sufficiently detailed
accounting systems also can report the per-unit costs - something government
accounting fails to do in many cases. Accounting reports also provide the
revenue and expenditure data that usually accompany reports of program
activity and results (e.g., reporting the total and net costs of operating the
program). Sufficiently detailed accounting systems also can report the
per-unit costs of providing a good or service, among other useful measures of
program efficiency.
Reporting Performance Measurement Data
Responsibility for reporting performance data can rest with a variety of
officials and departments. In some jurisdictions, the data are reported by
program officials. In the City of Portland, Oregon, the data are reported by
the auditor's office as well as being reported in the budget. In the State of
Florida, the information is reported by the Florida Commission on Government
Accountability to the People, a committee created by the governor. Yet another
variation is found in the State of Minnesota, where agency officials report
performance measures in annual reports, which are reviewed and evaluated as a
whole by the legislative auditor's office in a separate report.
When designing a reporting system, a government must consider the audience
for the report, level of detail, and frequency of reporting. The Innovation
Group proposes a three-tier model of performance measurement reporting.
The most outcome-oriented and least detailed information is provided in a
report to the public. The second tier of reporting, provided to upper
management, compares goals and objectives to effectiveness measures and uses
both its stated objectives and actual results achieved in assessing a
department's budget request and its overall efficiency in managing resources.
The third tier of reporting- to operations and program management
personnel-provides the most detailed information about a program, such as
monthly workload targets, assessment of personnel and equipment utilization,
and assessments of projected and actual service demands. Access to all three
levels of reports should - by law - be available to all citizens.
Elements of a Successful Performance Measurement System
A good performance measurement system possesses several important
characteristics. Performance measures should be based on program goals and
objectives that tie to a statement of program mission or purpose. They should
measure program results or accomplishments and provide for comparisons over
time. In measuring both efficiency and effectiveness, performance measures
should be reliable, verifiable, and understandable. They should be reported
internally and publicly. They require monitoring and should be used in
decision-making processes. Finally, performance measures should be limited in
numbers and complexity so that they provide an efficient and meaningful way to
assess the effectiveness and efficiency of key programs.
One of the most critical elements of the performance measurement system is
the measures themselves. Measures are developed by program officials and
employees, promoting employee buy-in to the performance measurement system,
and are reviewed annually to evaluate their relevance and usefulness and to
guard against the unintended creation of perverse incentives, such as
accepting only clients most likely to succeed. The measures are developed by
considering what information would be most useful and relevant for measuring
program performance, not by looking only at the program data already being
collected. Exhibit 1 presents a checklist for selecting and evaluating
performance measures.
It is important to have the right mix and number of measures. A government
may choose to report publicly only effectiveness measures; however, output,
process, and efficiency measures are useful for internal review and
administration of programs. Too many measures may be more than citizens,
legislators, and others can absorb, and they are expensive and time-consuming
to collect and track. On the other hand, having too few measures can lead to
the neglect of certain program area responsibilities and can create perverse
incentives.
In addition to performance measures being developed for an overall program
area of function, they also should be disaggregated, that is, separately
measured by significant client population, neighborhood, or other appropriate
category of workload. Program effectiveness can vary dramatically with the
client or neighborhood being served, and disaggregation can help to identify
needy or underserved groups and areas.
Performance-based Budgeting (PBB)--A Logical Extension of Performance
Measures in Government
A growing number of states and communities have integrated outcome and
performance measurement with the budgeting process. The idea of incorporating
more performance data into the budget process is sometimes referred to as
performance-based budgeting. Performance budgeting is the allocation of
resources to achieve specific objectives based on program goals and measured
results. Its basic principle is to focus on accountability for service
quality, quantity, efficiency, and effectiveness-not just on meeting the
requirements of budget laws and not overspending the budget.
A budget functions as an instrument for financial and policy control, as a
guide for operations management, and as a vehicle for policy planning and
implementation. Before performance measurement can be integrated into
budgeting, agreement must be reached on program goals and priorities.
Decisions must be made on which measures adequately reflect whether progress
is being made toward achievement of the goals. Finally, the data must be
organized and collected.
Performance measures can contribute to the formulation and justification of
budget requests. They can serve to illustrate the benefits that can be
achieved with an additional level of resources made available to a program.
Similarly, in cases of shrinking resources, performance measures can help
governments make the case for budget reductions targeted in particular
programs or functional areas rather than effecting reductions with
across-the-board cuts.
Very few governments, however, know the exact amount of services and
outcome that will be provided at a given level of allocated resources. While
not a state government, perhaps the City of Sunnyvale, California, comes
closest to this ideal: The city council approves goals for city programs, and
the level of resources necessary to meet the goals is implicit. This system is
possible because Sunnyvale operates on a full cost - accounting basis;
thus, officials know how much it costs to provide each unit of output and
level of service. (See the next session of this report which outlines
Activity Based Cost Accounting, ABC Performance, budgeting and ABC enhance one
another and together form the basis for transforming government into a model
of lean and efficient operation).
The Avoidance of Micro-management by Legislators and Other Elected
Officials
Another advantage of using performance measures in budgeting is the
avoidance of micro-management. Budgetary control is moved from a focus on
inputs towards agreement on performance and outputs desired. This change lets
management exercise more creativity in performing their jobs and is designed
to reduce or eliminate the micro-management of inputs (i.e. resources) by
elected officials, keeping them focused instead on getting the best results
for the public's money. The budget serves as a performance contract between an
agency and elected officials. In contrast to traditional budgeting, the focus
is on the unit cost of achieving a particular outcome rather than on the unit
cost of providing a service.
[Editors Note: During the course of the Commission's work, agency
leaders and their deputies frequently complained of excessive legislative
micro-management in the affairs and programs of the agencies. Concern over
budgetary reprisals by certain legislators who are confronted on this issue
deters many agency personnel from challenging the practice. As a result the
"separation of powers" line between the executive and legislative
branches of Arkansas' state government continues to blur. When coupled with
the statutorily and constitutionally weakened office of the Governor in
Arkansas, it blurs even more. Legislators, in some cases, may tend to have
more influence over executive offices than the Governor.
The end product of legislator intrusion in Arkansas' executive branch is
seen not only in excessive micro-management, but in the abuse found in
agencies such as the Department of Human Service where self-serving deals and
contract abuse have made too many headlines in recent months. As noted
above, the move to performance measures in budgeting clarifies proper roles
and can end too much legislative influence over programs and thwart abuse and
misapplication of taxpayer funds]
Some Brief Performance-based Budgeting Examples
Many state and local governments have begun measuring the results of their
programs and services, but some have also begun measuring and reporting on
overall conditions in their states and communities as well. Oregon pioneered
this approach when it published Oregon Benchmarks in 1991. This report
recommended 158 measures (later adopted by the state legislature and increased
to 272 measures) to be used as "benchmarks: to gauge progress toward a
strategic vision of what the state should look like in the year 2010.
The vision itself was developed through a strategic planning process that
used public forums to elicit the views of the state's citizens. Oregonians,
for example, want their children's educational competencies to "meet high
minimum standards and rank in the top national and international tiers";
they want a developed environment that is "convenient, affordable,
accessible, and environmentally sensitive." Example of benchmarks for
these areas include: the state's ranking on national assessments of student
math skills, the miles of rivers and steams that meet state and federal water
quality standards, and the percentage of workers whose one-way commute between
home and work is less than 30 minutes.
Oregon Benchmarks presented the 1990 baseline levels for these and other
benchmarks and projected the desired levels of achievement for the years
1992,1995, 2000, and 2010. By comparing these projections to the actual levels
of accomplishment reported in subsequent years, the state's leaders and
citizens can judge whether Oregon is on its way to achieving its vision of a
preferred future.
Catawba County, North Carolina, began experimenting with performance
budgeting in 1992. Six departments received a lump-sum appropriation based on
revenue projections and - from that total ---negotiated outcomes that they
would be responsible for achieving .They could move moneys and positions as
they saw fit within their lump-sum allocation and did not have to justify
receipt of this total. The first year's results were seen during the budget
process for the following year. Departments budgeting under the old system
required average increases in their total budget of over 8 percent, whereas
departments budgeting under the new system required average increases of less
that 2 percent.
The Investment Decision Making Advantage of Performance-based Budgeting
Although performance-based budgeting provides much better information about
the actual outcomes of government than traditional program budgeting, the act
of choosing which outcomes to support with public dollars is still left almost
entirely to the political process. The Alliance for Redesigning Government in
its publication Deciding for Investment proposes a new process to aid
decision-makers in estimating the costs and consequences of each choice.
Called "investment decision-making," this process combines and
builds on the other processes already discussed, program outcome measurement,
jurisdictional benchmarking, and performance-based budgeting. What it adds to
this mix is a means for estimating the return on investment for public
spending.
Investment decision-making presupposes that a state or community has
established benchmarks through a public process, for example, to reduce the
percentage of families living in poverty from the current level of 10.1
percent to a 2.0 percent in the year 2010. Government leaders might consider
funding two policy initiatives related to this benchmark. One would have a
goal of moving 50,000 poor families out of poverty by 2010 through a
combination of job training programs, incentives to employers, and individual
development accounts. The other would prevent the ongoing formation of
impoverished families by using a combination of health, education, and
mentoring programs to reduce the number of teen births from 3,300 per year now
to 600 per year in 2010.
Under the investment decision-making process, experts would estimate the
cumulative monetary value (over a period of say, ten years) of achieving each
type of outcome: moving one family out of poverty, preventing one teen birth.
It is recommended that this value be calculated at three levels:
for the individual (increase in earnings, avoidance of child care costs,
etc.);
for government (increase in taxes paid, decrease in welfare expenditures,
etc.); and
for society as a whole (increased domestic spending, reduced crime, etc.).
Through a performance-based budgeting process, public
decision-makers can also get estimates on the average unit cost to the
government for each of these outcomes, that is, what it costs on average to
move one poor family out of poverty or to prevent one teen birth. By comparing
the cumulative value of the outcome to the cost, they can determine the return
on investment to the individual, government, and society. They key question is
whether the value of the outcome over time substantially outweighs the
present-day costs of the program or service. If one of the two strategies,
say, reducing teen births, offers a much greater return on investment, elected
officials may decide to shift priorities and spend more in that area.
The investment decision - making process also allows
officials to judge whether particular programs are good investments by
requiring program operators to report unit costs per outcome. For example, a
job placement service that has a low cost per client served may have a high
unit cost per outcome because very few of its clients find jobs that will move
them out of poverty. An expensive apprenticeship program, on the other hand,
may be a better investment if it is highly successful in placing its graduates
in good jobs. In order, to meet a goal of moving 50,000 families out of
poverty by 2010, officials may decide to invest more funds in the
apprenticeship program or, alternatively, find a new job placement agency with
a lower cost per outcome.
[Editors Note: In Arkansas, the use of Investment Decision
Making is needed, but will likely not come unless performance-based budgeting
linked with accurate cost accounting (see section on ABC accounting) is put in
place. An example of its possible application, however, is seen in the
state’s Department of Health. Dr. Sandra Nichols, head of that department,
shared her frustration with Commission members that she could not accurately
determine the "unit cost" of administering immunizations across the
state. Through Investment Decision Making linked to performance budgeting and
cost accounting, Dr. Nichols would eventually be able to contrast - as a
hypothetical example - the cost and benefits of delivering this needed service
through the present system, as an outsourced service, or by means of vouchers
for shots. She could then make a "bang for buck" decision that might
show a way to improve results for less cost.]
Management and Communications
The most significant impact of performance measurement may be to improve
and strengthen internal managerial processes. Performance data are pivotal to
the success of several managerial initiatives, such as customer-focused
management, market-driven management, strategic planning, and total quality
management. Performance measurement is a communications tool that links
program staff together. This is increasingly valuable as governments move from
organizing work around hierarchical authority systems to multi-center,
horizontal teams.
Another valuable function of performance measures is to help governments
improve program operations. Regular and timely collection and monitoring of
performance data can alert managers to problems and encourage analysis of why
problems have occurred. In some cases, the data may indicate a need for
in-depth program evaluation. Moreover, establishing a performance measurement
system prior to undertaking a program evaluation can improve the quality and
efficiency of the evaluation can improve the quality and efficiency of the
evaluation by preparing managers to take an analytical approach to service
delivery and by providing a time series of data, which makes the findings more
conclusive.
Performance measures are valuable tools for managing programs that have
been contracted to the private sector. Outcome-related performance
requirements should be written into contracts whenever feasible.
Performance measures also are useful for motivating employees and in
evaluating the performance of supervisory and managerial employees. Care
must be taken, however, not to hold managers accountable for events
outside of their control. It is fair to hold managers accountable for
client benefits/impacts and work process outputs but not for outcomes.
In addition, performance measurement reporting provides accountability
to elected officials and to the public. Moreover, performance measures can
be excellent public relations tools for government to communicate the
results that governments are achieving with tax dollars.
In summary, performance measurement provides information useful in serving
ii variety of planning, budgeting, and management functions in government. It
is most useful as both a reporting system and a tool for serving a variety of
management processes.
Again the Commission acknowledges Michael Campbell, Ph.D.
with the Alliance for Redesigning
Government and Joni L. Leith with the Government Finance
Officers Association (GFOA).
PERFORMANCE-BASED PAY
Define and implement a system of performance-based pay for
all
Arkansas state employees and public K-12 employees,
including teachers.
For the last several years, pay-for-performance systems have become
widespread in the Unites States. The vast majority of private sector firms
operate under a system in which compensation and advancement is tied directly
to an individual's personal and professional ability to effectively accomplish
the job to which he or she is assigned. The Federal government has also
implemented performance-based pay for members of its Senior Executive Service.
And at the state level the concept of paying employees based on performance is
gaining momentum. Georgia, Colorado, Michigan, California, and Idaho are among
the leaders with programs such as Colorado Peak Performance and Georgia
Gains setting the pace for other states.
When Governor Pete Wilson implemented California's performance pay system
for management level employees, he succinctly summed up the major compensation
issue for most states, including Arkansas:
Rather than use pay as a reward system, our state has typically raised
pay uniformly under the old civil service model acrd regardless of
performance. This is no way to guarantee that government will become
efficient and responsive - all important objective at a time when our
resources are finite and shrinking and citizens are demanding governments
do more with fewer tax dollars. Pay systems which link employee
performance to organizational performance will contribute to leaner and
more efficient government-giving our citizens what they demand. It's what
I call a win-win-win. Employees improve, government performance improves
in terms of program cost to benefit, and taxpayer approval improves. What
are we waiting for?"
California Governor Pete Wilson
Governor Wilson is right. The basic premise underlying performance-based
pay seems so natural, so rooted in common sense, that it is difficult for most
Americans (including many Arkansans) to understand why government employees
are resistant to the idea.
Simply expressed, pay-for-performance means employees advance in their
organization and gain in pay according to how well they do their jobs
according to defined performance outputs that can be measured. Moreover,
they fully understand how their jobs relate to achieving the greater vision
expressed in their organization's mission statement; how they are tied to that
mission, and how it--in turn--relates to broader performance measures that
define organizational success. Performance pay encourages in all employees a
constant devotion to improvement and quality in both job performance and
skills enhancement. The focus on mission coupled with performance rewards
...also builds in an understanding that service--even public
service-ultimately serves the needs of people.
Additionally, performance-based pay creates an environment in which all
employees know what's expected, both individually and organizationally, and
how they will be evaluated and compensated for their service. When viewed in
this context it seems almost illogical that anyone would argue against or
resist the idea. And indeed, it is contested very little in most of the
industries and businesses of America where merit or performance pay is so
commonly accepted that to reward employees on any other basis would be the
exception rather than the rule.
Has compensation tied to performance worked? If the private sector offers
any indication, the answer is yes. Certainly there is a consensus among
private sector managers and workers alike that American business leads the
world in production, innovation, and business practice--and the incentives it
offers employees is undoubtedly a factor. The proliferation of performance pay
in the business sector has been a key element in the success of American
business and it follows that it could significantly improve government's
performance as well. But when policy analysts and senior government officials
began trying to import the idea to government it inevitably encounters
resistance.
This resistance can generally be summed up in three brief statements:
1. The Civil Service model is the way we've always done it: Over the
years, tire long-standing civil service approach, common to all levels of
government, has become some so entrenched that replacing it with something new
and different is bound to be resisted. Change is the most difficult goal to
achieve in any organization and people naturally resist it. In the culture of
"civil service", the system - even though it can be complex - has
becomes familiar, comfortable, and - as one official expressed it - "the
way we have always done it around here." That it fails to inspire
excellence - even in the face of such typical government reforms as Total
Quality Management (TQM) and other quality control reforms - is indication
enough, however, that a new system is in order - one based on real incentives
to do better.
2. The nature of government-absent profit motives, customer orientation,
and accountability - is that it has little incentive to change or improve
performance. Managers and employees alike can grow comfortable in the
automatically guaranteed process of fitting in slots or grades and moving up
the ladder based on length of service and seniority. Moreover, the argument is
sometimes advanced that since government is not a profit-making endeavor,
there is no need for performance pay - and certainly the monetary rewards such
as profit sharing are not available.
Still, in the face of these arguments, the facts suggest otherwise. First,
numerous surveys and anecdotal evidence both say citizens want to be treated
like customers by an efficient, friendly and competent provider of government
services -service they pay for, voluntarily, with their taxes. There is a
clear expectation of a return of quality and efficiency for their
public-service investment. And when they don't receive it, public sentiment
can turn ugly and government can pay a price in a loss of respect and
confidence. In this sense, government has every incentive to economize and
deliver good service ...and state employees have good reason to be
customer oriented.
Moreover, it is a fallacy - as well as a disservice - to suggest government
employees cannot be the beneficiaries of exceptional monetary rewards for
their service - rewards that parallel and sometimes exceed market-based
private sector pay. The price for achieving this higher pay however may be
more than unions, employee associations, and many current state employees are
willing to pay however. Still, where governments, absent performance and
quality controls, have grown bureaucratically and have too many employees -
especially employees who are ill-equipped or untrained to do the job - their
exists an opportunity for much better compensation. It's as simple as 1-2-3.
1. Eliminate excess jobs and learn to do more with fewer people --
people who are well-trained and willing to work hard in a highly
competitive system for rewards and exceptional compensation.
2. Introduce performance measures and competition into every facet of
government operations. The effect will transform government as these two
factors further lean out operations while improving overall performance.
3. Apply the dramatic cost savings that will inevitably come as a
result of items 1 and 2 above toward paying remaining state employees at
or above comparative market base..
While the thought of a reduced government workforce is unthinkable in
certain quarters (see "Unions" below), there are benefits to those
state employees who can function in a lean and competitive environment -
namely higher pay, constantly improving skills, and greater opportunity for
advancement.
Murphy Commission conversations with state employees, over the course of
the Commission's work in the agencies and at state employee association
meetings, found a number of them saying they would favor the trade - off-
fewer employees, but higher pay. Some also said they could work faster and
more efficiently, but the cultural protocol of state bureaucracy forces them
to "pace themselves." And many acknowledged that it is not
considered politically correct to talk of such concepts openly and if they
were to do so they would find themselves ostracized, possibly denied
advancement, and even threatened with the loss of their jobs.
Cultural taboos aside - think how remarkable it would be if performance pay
were to lead to much higher compensation in a lean and efficient system of
state government. The much resented practice of creaming wherein the
private sector, offering higher pay raids the public sector to lure away its
best employees after they have been trained at taxpayer expense, would end. 1n
fact, it might reverse.
It is not difficult to imagine a public sector where public service might
be more than a noble endeavor - it might hold the promise of some of the best
jobs in our society. The scenario of the public sector raiding the private
sector to lure away the best performers may yet happen - and why not given the
importance of government and its mission. Governance brings order and rules to
a civil society, protects rights, and provides for our common welfare. It
ought to be done exceptionally well. The best employees coupled with a
performance oriented approach can assure that it is.
3. Labor unions and employee associations have a vested self-interest in
saving jobs and preserving systems that lack accountability. More jobs and
people mean more power, more money, and more political influence. Their
ongoing effort to advance these goals often occurs at the expense of
performance and accountability reforms - and relegates the public good to a
lesser importance than their own agenda.
If there is a single overriding factor in the deterrence of
performance-based pay and the transformational effects it can have on
inefficient government, it is the entrenched resistance of labor unions and
employee associations. In a few states such as Texas and Florida recent
attempts to convert to Performance-based compensation systems were thwarted by
strong employee union opposition.
When Georgia proposed its move to performance pay the unions publicly
fought the proposal. While states across the nation were seeking to emulate
Georgia (,inquiries came from Pennsylvania to Rhode Island and many other
states say Georgia officials) Stewart Acuff, president of the Atlanta Labor
Council said, "Doing away with the civil service model is going to allow
human beings who are in management and supervisory roles to indulge their
biases, whatever those biases are." Even the national office of the
AFL-CIO weighed in saying, "It's going to be a reversion to the old
spoils system, something they are very capable of in Georgia."
Writing later about the Georgia performance pay revolution, Governing
Magazine, published by the Council of State Governments (COSG) said
this in response to broad union opposition. "But to those scores of state
and local managers with hat-fulls of stories about the job candidate that got
away, the burns they couldn't fire, the horrors of bumping, or the pure pain
and frustration of having to deal with central personnel bureaucracies lent on
blunting the most common-sense job action with paper piles of permissions,
Georgia's move to performance-based pay represents freedom to build a high
performance and responsive workforce."
WHO NEEDS CIVIL SERVICE? is the title of the COSG article on
Georgia's new pay system. It ran in the August 1997 issue of their
publication, "Governing." The following comments were drawn and
condensed from that article:
Under the terms of Georgia's new performance pay law the civil service
rights of anyone coming to work for the state after July 1, 1996 no longer
apply. Some 54,000 existing employees are still covered by the old
Georgia "merit" system - a civil service model. But all those folks
who have signed on with Georgia state government since that date can be
promoted, demoted or transferred instantly. Their raises are offered on the
basis of performance only. And they can be handed an envelope on any given
afternoon instructing them to clean out their desks and clear out of the
office on the spot, with no right of appeal. New hires are offered the same
basic benefits package as all other state workers, but otherwise their terms
of employment are radically different. Nobody hired by Georgia these all
"at will" employees.
Georgia's Democratic governor, Zell Miller sold his pay for performance
system as a key piece of his continuing drive to make government more
responsive to citizens. Miller was inspired, in part, by the popular book Death
of Common Sense, whose author, Philip K. Howard, was invited to Atlanta to
address the state's top management staff. Of particular interest at that
meeting was the "rules and regulations-based" nature of government
and how it gets in the way of performance.
Miller's Commissioner of Natural Resources, Lonice G. Barret, for one,
believes it's the perfect formula: A combination of personnel flexibility
coupled with "a little bit of insecurity" for employees will add up
to crackerjack government. "People should keep their jobs because they do
their jobs, and not because of some artificial policies or laws," he
says.
Of the two basic fears raised against the new personnel order in Georgia -
that it will lead to patronage hiring, on the one hand, and unshackle lousy
managers, on the other - the patronage argument is the one that supporters
tend to dismiss most readily.
Joe Tanner, Executive Director of the Governor's Commission on
Privatization of Government Services responded. "The biggest concern
raised about this was that you're going to politicize the system, that you're
going to be able to hire and fire anyone you please without good reason or
good cause, and that over a period of time the professionalism in state
government will evaporate. We countered that by pointing out the major
embarrassments that we had in some state agencies where you had all the abuses
- including political hirings, political firings, political contributions
being solicited by supervisors from subordinates - and it was all occurring
under the old civil service Merit System."
Even more to the point, says the Georgia System's new commissioner, W.
Daniel Ebersole, "there are a host of external factors that now mitigate
the broad return of patronage." He goes on to cite the media, federal and
state regulations, and a number of precedent setting court cases. "If we
don't treat people fairly, then the; have ample recourse to respond through
the legal system, and it's been my unfortunate experience that in most cases
they're not real reluctant to use it." Between the court remedies and the
ever watchful eyes of the media, abuse is kept to a minimum he says.
As the Murphy Commission surveyed states and collected data on performance
pay systems two states seemed to be among the most innovative. They are
Georgia and Colorado. The pay systems for these states are well documented in
extensive manuals too lengthy to reproduce here, but available for review in
Murphy Commission office. or on state internet sites. However, in the
appendices that follow--readers interested in more details will find partial
versions of these innovative plans for their review and study. Commission
offices also have on hand a number of other state performance pay plans.
In the foreword of this report, the Commission recommends that the Governor
form a special performance pay taskforce (in the context of an Accountability
Commission)--modeled after the Colorado design team that planned that state's
performance pay system.
A word about performance pay for teachers: Most Murphy Commission members
support it as a matter of principle and common-sense. Given that education
links directly to children and their futures (what could be
more important) why shouldn't those we entrust with this critical
mission be required to perform, have their performance evaluated, and be held
accountable. The education establishment will characteristically resist such
bold change offering endless reasons why it should not be adopted. In fact, it
can and should be the practice in our schools for many reasons. The
Commission's education task force will address this issue more fully in a
future report.
ACTIVITY-BASED COSTING
Incorporate activities based costing into the state's accounting system
with expenditures tied not only to costs but to measurable performance
outputs.
In Arkansas, each agency uses its own accounting system - all different -
in addition to the state's centralized accounting system to which they are all
linked. Having agencies utilize two systems is certainly redundant and costly.
But in addition to that there is no accounting uniformity between agencies.
What constitutes "administrative support" in one agency, is defined
differently in another...if defined at all. This absence of uniformity in
accounting makes it impossible to know how agencies account for their dollars
as allocated to traditional accounting categories because they are all
counting by a different set of rules. It has been the cause of both confusion
and concern for Murphy Commission members and other citizens who simply want
to know where the money goes and if it gets results.
Activities-based cost (or ABC) accounting allocates dollars as they're
spent in tile agencies--in a consistent and uniform manner - to
defined service activities and administrative and support functions. When tied
to outputs under a system of performance budgeting, ABC becomes a vital tool
of managerial information and needed public reports to citizens. At the push
of a button, citizens and government leaders alike could see--under an ABC
system--not simply how much money is being spent in an agency and its
departments, but where it is being spent in each agency relative to the vital
major services they provide, relative to their costs of operating, and
relative to what we have all agreed they should be accomplishing for the good
of the state.
Iowa has moved recently to an ABC system, and Virginia's Commonwealth
Competition Council has developed a software tool for their agencies that,
once installed on accounting computers as a special module--will not only
properly allocate costs to activities in agencies, but suggests whether or not
an activity is a good candidate for competitive outsourcing. On the education
front, the accounting firm of Coopers and Lybrand worked with a smaller
company, Fox River Learning, to develop an extraordinary ABC accounting system
for public education that tells parents to the penny where their education
dollars go and makes this process uniform from school to school. The company
will soon add a module to its costing program that also ties costs to academic
performance allowing the public to accurately assess the cost of academic
success or failure.
The Walton family Foundation sponsored a pilot program for the Fox River
system recently without much cooperation from Arkansas schools. The Murphy
Commission believes it deserves another look, and will bring both of these
programs (Fox River and the Virginia software) back to Arkansas for
demonstrations and more evaluation with an eye to pilot programs. More about
Fox River's Incite software will also be addressed in forthcoming report of
the Murphy Commission's education workgroup.
It should be noted here, that the Murphy Commission also supports the
Deloitte & Touche and DF&A recommendation, issued in recent audit letters,
that Arkansas purchase and install a new centralized computer accounting
system. As documented in three successive management letters it is needed to
bring the state in compliance with GAPP. The cost is more than justified by
the efficiency and management benefits that will accrue as a result of this
action. But the Commission qualifies its recommendation with two points. 1)
Any new accounting system must provide for ABC. And 2) it must managerially
and financially accommodate performance-based budgeting.
The following more detailed discussion on ABC was drawn from a paper
developed by Mark D. Abrahams and Mary Reavly. It appeared in its original
form in Government Finance Review. Mr. Abrahams graciously allowed the
Commission to use this work which is presented here, as originally written,
with only a slight modification in the order of topics. Mr. Abraham is
president of The Abraham Group in Framingham Massachusetts, assisted the state
of Iowa in its transition to ABC and authored their state's policy manual and
handbook on that subject. He lectures on ABC frequently and is a member of the
Government Finance Officers Association (GFOA).
Mary Reavly heads the performance management and budgeting project for
Iowa's Council on Human Investment.
Activities Based Cost Accounting and the Performance Movement
Costing services is one of the biggest challenges facing governments today.
How can efficiency or competitiveness be measured without knowing service
costs? This briefing section provides an introduction to activity-based
costing (ABC) a methodology that assigns costs to activities based on the
activities' consumption of resources-and offers examples and guidance for
implementing ABC in a governmental environment. It discusses two
straightforward and manageable approaches to ABC: a "keep-it-simple
methodology" (KIS) for governments that desire a simple approach to ABC,
and a full-cost methodology. The intent is to illustrate the power of ABC for
decision making and management and to demystify and simplify ABC. These
concepts and steps are applicable to all governments.
The two fundamental components of ABC are costs and activities.
Costs. Costs are based on resources or inputs. These costs
correspond to various governmental charts of accounts generally consisting
of salaries, materials, equipment, facilities, and overhead.
Activity. Activities are the steps, or sequences of events that
convert inputs to outputs; they exist within programs. An activity focuses
on what an agency does as measured by the number of units or outputs
produced. A program is a series of activities that produce a product,
service or other output to achieve a desired result.
ABC is a tool used to identify the costs of providing government services
(see Exhibit 1). Activity-based management (ABM) focuses on the management of
an activity to continuously improve the efficiency of the activity (providing
the outputs at a lower cost), the quality of the activity (the right response
to community and customer needs), and the effectiveness of the activity
(providing services that contribute positively to a result or outcome).
allocation, activity flow, and performance measurement analyses.
SUPPORT FOR SERVICE REDESIGN
With activity-based data, governments are empowered to redesign processes
or to apply process-improvement techniques to reduce cost, improve customer
value, enhance accuracy, reduce response time, or otherwise improve efficiency
and effectiveness. ABC is the tool used to identify and compute costs for
activities and activity outputs. ABM uses the information in a management
environment with other tools such as service redesign and process improvement.
It is through ABM that ABC can fit and support performance management and
service redesign efforts.
Performance management - the system of managing service effectiveness,
quality, and efficiency based on measurable results- is the foundation for
managing for results. Activity inputs and outputs provide efficiency
information on the timelines, accuracy, and customer value. These
measures help to determine the extent to which the program purpose is achieved
and the program results (outcome) attained. The program, in turn, is aligned
to one of the state's policy objectives or that of an elected official.
Alignment and cost are the key to achieving the governor's (or any elected
official's) leadership agenda in a cost-effective manner.
Activities are evaluated on their efficiency and on the extent to which
they align with program and government wide goals. Ideally, an activity has
high alignment and low cost. Conversely, an activity with high cost and low
alignment is not necessarily providing value and is not efficient. An activity
can fall into one of four quadrants:
high cost, low alignment
high cost, high alignment
low cost, low alignment
low cost, high alignment
This analysis is important to reduce. activity costs and enhance the
alignment to results. A high-cost, low -alignment activity can be eliminated
as it does not provide value and is inefficient. A high cost, high-alignment
activity is a candidate for service redesign in order to reduce cost. A
low-cost, low-alignment activity is a candidate for elimination unless it can
be realigned to statewide policy objectives. A low-cost, high-alignment
activity is the ideal.
Activity-based data provide more informative reports than the traditional
line-item or organizational framework they were intended to address. ABC,
however, cuts through or supplements the traditional costing reports to
present the same information by activity to see how resources are spent. The
real value in ABC and ABM is to view government services from the perspective
of what people and equipment do to satisfy customers. For governmental
managers, the focus on activities rather than line-items or organizations is
seen as necessary for government personnel to better manage, understand, and
improve an activity, and for associating results with costs.
ABC CASE EXAMPLE FROM THE STATE OF IOWA
IMPLEMENTING an ABC PROJECT
An excellent illustration of an effective ABC system is The Iowa Department
of Transportation Paint Crews. ABC was developed for Iowa's transportation
department to. provide total activity costs and unit costs to the paint crews
three activities: 1) center line, 2) edge line, 3) curb, island, and
miscellaneous. This information was then used in a process analysis to
determine ways to improve the efficiency and effectiveness of the paint crews.
Several improvements were identified including:
performing work for other governments: down time was turned into
productive hours resulting in approximately $200,000 of revenue; and
unifying the speed of the trucks, which resulted in a higher overall truck
speed and fewer hours worked:
In order to implement an activity-based-costing project there are four
basic steps. (see Exhibit P.17). First, resources and costs must be organized
in terms of work unit costs, costs incurred on behalf of the work unit, or
government wide and department wide indirect costs. Second, costs need to be
categorized as either direct to an activity or indirect. For costs which
cannot be directly assigned to activities, an indirect cost methodology needs
to be selected: either the K1S or full-cost methodology. Third, direct and
indirect costs need be assigned or allocated to specific activities. Lastly,
unit costs need to be calculated by dividing the activity costs by the
activity outputs.
Step 1: Resources and Costs
The first step is to identify resources and costs. The Iowa ABC system uses
three categories of resources: work unit costs, costs on behalf of work units,
and governmentwide and departmentwide costs.
Work unit costs are actual costs charged to the work unit, paid by the
work unit. These costs will need to be assigned to activities. Salaries and
materials for the paint crews are examples of work unit costs.
Costs on behalf of work unit are actual costs incurred on behalf of the
work unit, paid elsewhere by another work unit, department data processing
costs incurred by the IDOT data processing unit on behalf of the paint crews.
These costs are similar in nature to work unit costs except these are paid
elsewhere. These costs will also need to be assigned to activities.
Government-wide and department-wide costs are actual costs incurred on
behalf of the work unit that are central to the government or the department.
Examples of these costs are fringe benefits, insurance, department directors,
and administration costs that need to be assigned or allocated to the paint
crews.
Step 2: Direct and Indirect Cost Assignment
Direct Cost Assignments. In activity-based costing, the more costs that
can be assigned directly to an activity, the easier the costing becomes.
Activity-direct costs may be identified within work unit costs or costs on
behalf of the work unit, but paid elsewhere. These are costs charged to the
work unit and paid by the work unit or costs charged to a different work unit
on behalf of the work unit. Any direct activity cost within the work unit or
within another work unit is identified and assigned directly to the activity.
Indirect Cost Assignments. There are many costs that cannot be directly
assigned to an activity. These costs need to be reviewed and allocated to the
activity. The basis for allocation depends upon the nature of the costs, as
illustrated below.
Costs
Telephone
Rest
Custodial service
Payroll
Data processing
Purchasing
Accounting
Treasurer
Personnel
Vehicles
Insurance |
Allocation Base
Number of phones
Square feet of space
Square feet of space
Number of Employees
Central Processing Unit (CPU) time
Number of purchase orders
Number of invoices
Number of checks
Number of employees
Number of miles driven
Number of employees |
For example, if an agency utilizes 100 telephones, 20 of which belong to a
particular activity, then one-fifth (20/100) of the phone bill can be assigned
to that activity.
STEP 3: Assign Costs to Activities
Direct and indirect cost assignment to activities is based on the selected
methodology. The IDOT paint crews determined the total costs for each of the
six regions for center line, edge line, and curb and island activities. For
one region, Central Iowa Transportation Center (CITC), total, and activity
costs were:
Activity
Center Line
Edge Line
Curb, Island
Total |
Costs
$ 164,604
356,893
132,280
$ 653,777 |
STEP 4: Defining Unit Costs Once costs are assigned to
activities, unit costs are determined by dividing the activity cost by the
number of outputs. For example, the IDOT paint crews divided activity costs by
the number of outputs to derive the unit costs as follows.
Activity
Center Line
Edge Line
Curb, Island
Total
|
Costs
$ 164,604
356,893
132,280
$ 653,777 |
Outputs
1,248 miles
2,656 miles
5,386 gallons |
Unit Cost
$ 131.89/mile
134.37/mile
24.56/gallon |
Two Costing Methodologies
The selection of an appropriate ABC methodology is dependent on the costing
objective. In establishing rates, is the objective to recover service costs?
If so, total costs will be needed for rate setting. Will the government be
preparing a managed competition bid? Or outsourcing or privatizing a service?
If so, total costs less unavoidable costs (such as the department director)
will be required. Is service redesign or process improvement the objective?
Here, comparable costs of the existing process and the redesigned or improved
process will be needed to measure the extent of cost saving. Is an
activity-based budget being prepared to support program or performance
budgeting? For this goal, estimated budget costs at the activity level will be
needed.
This article suggest two basic ABC methodologies: the keep-it-simple (KIS)
method and a full-costing method. The following chart summarizes the authors'
recommended options for various objectives.
Description
Rate Setting
Managed Competition
Service Redesign
Activity Based Budgeting
Process Improvement |
Costing Objective
Total Costs
Avoidable Total Costs
Comparable Costs
Budget Estimates
Comparable Costs |
ABC Methodology
Full Costing
Full Costing
KIS Costing
KIS Costing
KIS Costing |
Keep-it-simple Methodology. The KIS methodology addresses the
objectives of comparable and budget estimate costing, but is not the suggested
methodology where rate setting, managed competition, outsourcing, or
privatization are desired. The KIS approach reasonably assigns costs to
activities without speeding a significant amount of time costing them out. It
is a methodology in keeping with the American Institute of Certified Public
Accountants' spirit of: It is much better to be approximately right than
precisely wrong. In many cases, detailed data will be available. The KIS
methodology should not be used where detailed data are available.
Costs are allocated based on total direct salaries using the KIS
methodology. The following example of a department having a program budget of
$9,068,750 is used to illustrate the process. The budget consists of the
following:
Activities |
Direct Salaries |
Other Direct Costs |
Total Costs |
Administration |
|
|
$ 1,318,750 |
Activity A2 |
1,213,250 |
300,000 |
1,513,250 |
Activity B1 |
2,321,000 |
1,700,000 |
4,021,000 |
Activity B2 |
105,500 |
125,000 |
230,500 |
Total |
$ 5,275,000 |
$ 2,475,000 |
$9,068,750 |
Of the $9,068,750 of total program costs, $5,275,000 is for direct activity
salaries, $2,475,000 for other direct activity costs, and $1,318,750 for
administrative costs. The objective is to allocate or assign the
administrative costs to the four activities, A1, A2, BI, and B2.
The basic formula for assigning departmentwide costs to activities is based
on direct salary costs: the costs to be assigned are divided by total direct
salaries. To assign the administration costs of $1,318,750 in the program
budget illustrated above to the activities, the following formula is used.
Costs to be Assigned $1,318,750
Total Direct Salaries $5,2 15,000 * 25 %
Administrative costs of $1,318,750 are then assigned to the four activities
by multiplying the activities by multiplying the Activity Direct Salaries by
25% as follows (totals may not agree due to rounding)
Activity A1 Direct Salaries
$1,635,250 x 25%
|
|
= $ 408,813
|
Activity A2 Direct Salaries
|
1,213,250 x 25%
|
|
= 303,313
|
Activity B1 Direct Salaries
|
2,321,000 x 25%
|
|
= 580,250
|
Activity B2 Direct Salaries
|
11 05,000 x 25%
|
|
= 26,375
|
Totals
|
$5,275,000
|
|
$1,318,750
|
The $1,318,750 of administration costs are assigned to the four activities
and are then added to the direct salaries by activity along with other direct
costs to derive the total costs by activity:
Activity
|
Direct Salaries
|
Administrative Costs
|
Other Direct Costs
|
Total
|
Activity Al
|
$ 1,635,250
|
$ 408,813
|
$ 350,000
|
$2,344,063
|
Activity A2
|
1,213,250
|
303,313
|
300,000
|
1,866,563
|
Activity B1
|
2,321,000
|
580,250
|
1,700,000
|
4,601,250
|
Activity B2
|
105,000
|
26,375
|
25,000
|
256,875
|
Totals
|
$ 5,275,000
|
$1,318,750
|
$2,475,000
|
$ 9,068,750
|
The advantage of this methodology is its simplicity. straightforward
manner.
It is an acceptable methodology for assigning costs in a simple,
Full Costing Methodology. The full-cost methodology addresses the
objective:, of total costs and avoidable costs. It is the suggested
methodology for agencies that are performing rate setting, managed
competition, outsourcing, or privatization projects. This methodology assigns
or allocates each cost element based on a particular rationale. the following
discussion will illustrate how this full-costing approach was implemented in
the ABC costing for Iowa's DOT paint crews.
Full Costing for IDOT Paint Crews
When the Iowa Department of Transportation (IDOT) implemented ABC for the
paint crews, the objective was to compute the full costs of the paint crews.
The methodology described in the following section will provide a detailed
step-by-step example of ABC implementation in a government environment.
Although this is a state government example, the concepts and methodologies
are applicable to all governments.
The paint crews, a work unit within the maintenance division of IDOT, are
responsible for paint striping activities on roads. As the paint crews were
selected for an ABC analysis to determine how competitive the crews were in
providing services, they underwent a managed competition analysis requiring a
detailed costing of their three activities. Activity-based costs for the
fiscal year ending June 30, 1996.
The three activities-1) center line and no passing markings, 2) edge line
markings, and 3) curb, island, and miscellaneous markings-are performed within
six regions. The central region, identified as CITC, serves as one example of
the ABC full-costing methodology. The following example illustrates the cost
allocation process through the various cost categories-personnel, material,
facility, vehicle and equipment, and overhead. Totals may not agree due to
rounding.
CITC incurred $653,777 of total costs for the three activities as
follows:
Center Line No Passing
|
$164,604
|
Edge Line Markings
|
356,893
|
Curb, Island, Misc.
|
132,280
|
Total
|
$653,777
|
CITC Direct Labor. The paint crew employees have a formal system in
place to record their time in relation to the activities performed during the
day. A total of $211,143 of direct labor was identified for CITC.
Borrowed direct labor related to painting costs is the amount of labor that
CITC used from other IDOT cost centers. Borrowed labor costs were $17,345.
This amount, however, included vehicle operating costs of $1,154 which are
accounted for in another category, making the net borrowed direct labor salary
amount $16,191.
Work for others, the amount of time of paint crew employees that was
assigned to other activities and, accordingly, did not contribute to painting
activities, was determined to be $5,463.30.This amount was reduced by $145.97
relating to overhead contained in the gross figure. Thus, $5,317.36 was the net amount
of work for others. A summary of the CITC direct labor costs follows.
Description
|
Total Salary $ |
%of CITC |
Amount of work for
others
|
Total Activity Based Costs
|
Permanent
|
$ 103,325
|
67.45%
|
$ (3,586.38)
|
$ 99,738.62
|
Supervisor
|
49,860
|
32.55
|
(1,730.62)
|
48,129.38
|
Total CITC Perm Labor
|
153,185
|
100.00%
|
$ (5,317.00)
|
$147,868.00
|
Temporary
|
57,958
|
|
|
57,5158.00
|
Total CITC Labor
|
$ 211,143
|
|
|
$ 205,826.00
|
Borrowed Time
|
16,191
|
|
|
16,191.00
|
Total Payroll
|
227,334
|
|
|
$ 222,017.00
|
Less Work for Others
|
(5,317)
|
|
|
|
Total Adjusted Pay
|
$ 222,017
|
|
|
|
The allocation of direct salaries was made based on hours by paint
activity. From this, a percentage of hours by paint activity was compiled as
follows.
Paint Activity
|
Hours
|
Percent
|
Center Line No Passing
|
1,293
|
28.39%
|
Edge Line Markings
|
1,858
|
40.80%
|
Curb, Island, Misc.
|
1,403
|
30.81%
|
The percentage of hours was then multiplied by the payroll costs to derive
the direct labor costs for the three activities as follows:
Labor Type
|
Costs
|
Center Line
|
Edge Line
|
Curb, Island
|
Percentage
|
100%
|
28.39%
|
40.80%
|
30.81 %
|
Direct Permanent
|
99,739
|
28,318
|
40,693
|
30,728
|
Borrowed
|
16,191
|
4,597
|
6,606
|
4,988
|
Supervisor
|
48,129
|
13,664
|
|
|
Temporary Total
|
$222,017
|
$63,037
|
$ 90,582
|
$ 68,400
|
CITC Material Costs. Material costs were broken down by type of
material and by the six regional cost centers. Material types include the cost
of beads, other materials, white paint, and yellow paint. The cost of each
type of material was allocated to the activities based on the amount of
material usage for each activity. IDOT also tracked the gallons of yellow and
white paint and the consumption for reflective beads by the three activities.
The percentage of consumption was then multiplied by the costs to determine
the material costs per activity. The consumption of the various materials and
material costs for the paint crews totaled $313,580, allocated as shown here.
The cost category called "Other" amounted to $5,054 and was
allocated based on this methodology as follows
Activity
|
Total Gallons
|
Percent
|
Costs
|
Center Line
|
9,220
|
20.30%
|
$1,026
|
Edge Line
|
32,164
|
70.81%
|
3,579
|
Curb, Miscellaneous
|
4,037
|
8.89 %
|
449
|
Total
|
45,421
|
100.00%
|
$5,054
|
CITC Facility Costs. Facility costs included facilities and utilities. In
all but one location the paint crew employees share the building with other
IDOT employees. The percentage of each building occupied by the paint crews
was determined in order to allocate facility costs to paint crews. The
buildings were depreciated on a straight-line basis over 20 years. The
facility costs were allocated based on the amount of hours charged for each
activity; the percentage of hours was then multiplied by the facility costs to
derive the labor costs for the three activities as follows.
Description
|
Costs
|
Center Line
|
Edge Line
|
Curb, Island
|
Percentage
|
100%
|
28.39%
|
40.80%
|
30.81%
|
Depreciation
|
2,777
|
788
|
1,133 |
856 |
Utility charges
|
2,931
|
832
|
1,196
|
903
|
Total
|
$5,780
|
$1,620
|
$2,329
|
$1,759
|
CITC Equipment and Vehicle Costs. Equipment and vehicle costs included data
on all vehicles used by each paint crew region including the vehicle number,
original cost, repair and maintenance operating costs, salvage value, and
purchase date. Vehicles wee categorized into two classes: light and heavy
equipment. Light equipment had an estimated useful life of four years. Heavy
equipment had an estimated useful life of 10 years. the vehicles were
depreciated using straight-line depreciation depending on their class and net
of salvage value.
The equipment and vehicle costs charged to CITC were $71,034. These cost:,
were allocated to the three activities based on heavy equipment hours,
factored as the relationship of two vehicle hours for three labor hours. A
summary of the allocation methodology follows.
Activity
|
Labor
|
Factor
|
Calculated Vehicle Hours
|
Percent of Hours |
Center Line
|
1,293
|
67%
|
862
|
28.4%
|
Edge Line
|
1,848
|
67%
|
1,239
|
40.8%
|
Curb, Island
|
1,403
|
67%
|
935
|
30.8%
|
Totals
|
|
|
3,036
|
100.0%
|
The percent of calculated vehicle hours was then multiplied by the total
equipment costs to derive the amount of equipment and vehicle costs allocated to each activity.
Description
|
Costs
|
Center Line |
Edge Line |
Curb, Island
|
Percentage
|
|
28.4%
|
40.8%
|
30.8%
|
B-G Depreciation
|
291
|
83
|
119
|
90
|
Idle B-G
|
6,239
|
1,771
|
2545 |
1,922 |
B-G Repair
|
16,228
|
4,608
|
6,621
|
5,000
|
Heavy Equipment
|
16,322
|
4,634
|
6,659
|
5,028
|
Heavy Operating
|
31,117
|
8,835
|
12,696
|
9,587
|
Heavy Repair
|
837
|
238
|
341
|
258
|
Total
|
$ 71,034
|
$ 20,168
|
$ 28,981
|
$ 21,884
|
CITC Overhead Costs. CITC overhead costs consist of administrative
services, operations and finance, special purpose, and maintenance division
costs. First, a percentage to allocate overhead costs to the paint crews was
calculated as follows.
Actual expenditures CITC
|
|
$ 617,935
|
Less Materials
|
$ - 313,580
|
|
Less 1/2 of equipment repairs
|
-8.114
|
-321,694
|
(Total CITC adjusted expenditures)
|
|
$ 296,241
|
Total IDOT budgeted expenditures
|
|
$218,835,119
|
Percentage allocated to paint crews
|
|
1,354%
|
The percentage to allocate to the paint crews then was multiplied by the
administrative services, operations and finance, and special purpose costs.
The maintenance division costs were allocated based on the percentage of
adjusted CITC costs to the maintenance division total expenditures as follows:
Total adjusted expenditures |
$296,241
|
Total maintenance division expenditures |
$99,000,424 =
.30%
|
summary of the allocation follows.
Description
Costs
|
Percent
|
Paint Crew Allocation |
Administrative Services
|
4,011,141
|
.1354%
|
5,430
|
Operations and Finance
|
19,093,421
|
.1354
|
25,847
|
Special Purpose
|
3,163,297
|
.1354
|
4,282
|
Maintenance Division
|
94,451
|
.3001
|
283
|
Total
|
|
|
35,843
|
|
|
|
|
The IDOT and state overhead costs of $35,843 were allocated to the three
activities based on the CITC equipment and vehicles cost allocation
percentages discussed earlier. A summary of this allocation follows.
Description
Costs
|
Center Line
|
Edge Line
|
Curb, Island
|
Percentage
|
|
28.4%
|
40.8%
|
30.8%
|
DOT/Stat OH
|
35,843
|
10,179
|
14,624
|
11,040
|
Finally, CITC other overhead costs and small total costs were allocated
based on the percentage of gallons of paint used.
Description
Percentage
Other Overheads
Small Tools
Costs
4,084
1,510
|
Center Line
20.3%
829
307 |
Edge Line
70.8%
2,891
1,069
|
Curb, Island
8.9%
363
134 |
Activity and Unit Costs Summary. A summary of the three activity costs
by cost category follows.
Description
Total |
Center Line |
Edge Line |
Curb, Island |
Direct Labor |
$ 222,019 |
$63,037 |
$ 90,582 |
$ 68,400 |
Facility |
5,708 |
1,620 |
2,329 |
1,759 |
Materials |
313,580 |
68,472 |
216,418 |
28,690 |
Overhead |
41,435 |
11,312 |
18,584 |
11,539 |
Vehicles & Equip |
71,035 |
20,163 |
28,980 |
21,892 |
Total |
$ 653,777 |
$ 164,604 |
$ 356,893 |
$ 132,280 |
Once costs are assigned to activities, unit costs are determined by
dividing the activity costs by the number of outputs. The IDOT paint crews
divided their activity costs by the number of outputs to derive the unit costs
as follows.
Activity |
Costs |
Outputs |
Unit Cost |
Center Line |
$164,604 |
1,248 miles |
$131.89/mile |
Edge Line |
356,893 |
2,656 miles |
134.37mile |
Curb,lsland |
132,280 |
5,386 gallons |
$ 24.56/gallon |
Total |
$ 653,777 |
|
|
SUMMARY Activity-based costing has proven to be a powerful management tool
in the state of Iowa's performance management system by providing important
cost information. Iowa managers have advocated a thoughtful approach to
costing government services by encouraging a "keep-it-simple"
methodology to achieve specific complexities of the full-costing methodology.
These methodologies have allowed program personnel to work with fiscal
personnel to provide a blend of cost and program data for balancing efficiency
and effectiveness in the delivery of public services.
AN INDEPENDENT AUDIT OF STATE GOVERNMENT
Provide for a fully independent audit of state government overseen by a
bipartisan audit committee comprising a preponderance of members outside of
state government's management and legislative sphere.
(And, as a prelude to the formation of an audit committee, implement the
recommendations contained in the management letters issued by the accounting
firm of Deloitte & Touche over the course of three successive state
government audits--1995, 1996, and 1997.)
Since 1995 the accounting firm of Deloitte & Touche has conducted three
audits ) in state agencies and issued three management letters relative to
those audits. Copies of these letters are available in the Murphy Commission
or Arkansas Policy Foundation offices for anyone seeking to review them.
Over the course of the three audits, these three letters presented
recommendations on reportable conditions in 27 state agencies or functional
areas ...and recommendations concerning improvement or corrections to
accounting, administrative, and operational matters in 20 agencies or
functional areas.
The implementation of many of these recommendations could save the state
millions of dollars and improve operations. For example, one series of
recommendations which focused on the state's risk management procedures could
save the state $2-$15 million (see Deloitte management letters) And yet after
three years of audits, around half of the audit recommendations still remain
unresolved as expressed in the most recent audit report. In fact, Commission
analysis shows that as many as 75 of a total of 144 recommendations remain may
be still at issue as we move into the third year of the audit. The wording of
many of these recommendations, over three years, has remained exactly the
same. Business and corporate America would find the slowness of the response
frightening.
The Commission is suggesting to the Governor that a special bipartisan
public oversight group be empowered to oversee greater responsiveness to the
current audit recommendations. The Murphy Commission will also suggest that
this group could and should evolve into a citizen-based commission (see
introduction to this report and recommendations concerning an Arkansas
Government Accountability Commission) tasked with arranging and overseeing an
independent state audit and continually reviewing state government for
opportunities to competitively outsource state services. The Virginia
Commonwealth Competition Council, established under Governor George Allen's
administration, will be among the programs advocated as a model.
In recommending that the state conduct its own outside independent audit,
the Murphy Commission also recommends the establishment of an independent
audit committee with reporting responsibility to a bipartisan citizen
oversight group, The Arkansas Government Accountability Commission (AGAC).
Deloitte & Touche recommends that the audit committee should be comprised of
five non-government citizens having no contracts with the state, but
possessing business and financial experience plus one person from the
executive branch and one from the legislative branch. The five citizen members
and the executive branch member should be appointed by the Governor and the
'legislative branch member by the Speaker of the House.
The duties of the audit committee should be developed by the AGAC and
should include:
1. Selection of an independent CPA firm to conduct the audit of the State's
Consolidated Financial Report
2. Meeting with the CPA firm at least twice annually (more if needed),
once to review the audit scope and once to review a draft of the report of
the CPA firm.
3. Meeting at least quarterly with the CIA (Chief Internal Auditor) to
review and approve the audit plan and reports.
The Audit Committee will also report directly to the Governor quarterly and
will prepare a report annually for the Legislature. The executive branch would
provide staff support, through the AGAC, to assist the Audit Committee.
Moving from the current status regarding auditing is essential. While the
current audit firm selection process is conducted in accordance with the
applicable state bidding/selection process, a change to put the external audit
selection and reporting function under the audit committee as proposed would
be a significant procedural improvement. Financial reporting responsibilities
and internal audit functions are dynamic in today's society, and this suggests
that the objectives and purposes of the state's internal auditing functions
must be fully reviewed to determine whether they are serving the state and its
citizens as well as they did when first established.
Key questions should drive the evaluation. Are the efforts of the skilled
auditors within Legislative Audit and the various agency audit functions
actually focused toward the risks that are present in today's society and
government functions? Why should the state provide the audit function for each
city and county that chooses not to have an external audit function? Should
this responsibility - and benefit -be at the local level? Should the audit
functions be focused on compliance with laws, regulations and state directives
rather than on the balance of the petty cash fund in Anycity, Arkansas? What
is the relative risk that the petty cash fund outage at Anycity is of greater
concern than the compliance with laws, regulations and other pertinent
requirements? Is timely reporting by these internal audit functions more
important than the continuation of business as usual? These questions and many
other issues remain, for the moment, open to more scrutiny.
Risk assessment, overseen by an independent citizen committee - not the
legislature, not the executive branch - is the key to proper
utilization of the valuable resources we have in the legislative and other
audit functions. Their proper direction should be the duty of the committee as
it works independent of the branches, but closely with them in the interest of
all citizens and the state.
A consideration in this regard would be to bring all auditors currently
employed by the various agencies and commissions under the authority of a
single state auditor, with the consolidation of the audit functions under the
authority of the Committee. Any savings from such a consolidation could be
dramatic and used, in part, to fund the independent audit initiative. With the
audit function under the care and direction of the Committee and the Chief
Internal Auditor (CIA), no one within state government - not the legislature
and not the agencies and not the commissions- will control the direction and
outcomes of the audit function. Given the skills of some of the state's
current in-house auditors, this move could be made quickly with little concern
for the competency of the CIA.
The recommendation for an independent audit, is reinforced by the fact that
the Government Finance Officers Association (GFOA) just included such an action
as best practice for all states. Below is a summary of GFOA's best practices
statement.
GFOA Recommended Best Practice, 1997
Establishment of Audit Committees
Background.
The auditor of a state or local government's financial statements must be
independent, both in fact and in appearance. A properly constituted audit
committee helps to enhance the financial statement auditor's real and
perceived independence by providing a direct link between the auditor and the
governing board.
One important advantage of an audit committee is that it helps to
facilitate communication between management, the auditors, and the governing
board. An audit committee also limits the reliance governing bodies must place
on the technical expertise of the independent auditor. An audit committee is
useful, too, in helping to focus and document the government's process for
managing the financial statement audit.
In recent years, the importance of audit committees has come to be
recognized increasingly in both the public and private sectors. This
importance is reflected in the requirement set by generally accepted auditing
standards that auditors determine that the audit committee (or its equivalent)
is informed of various matters of importance related to the financial
statement audit.
The audit committee should play an advisory role to the governing body.
Management and the governing board remain ultimately responsible for the fair
presentation of the financial statements and for obtaining and monitoring the
financial statement audit.
Recommendation.
The Government Finance Officers Association (GFOA) makes the following
recommendations regarding the establishment of audit committees by state and
local governments:
1. Every government should establish an audit committee or its equivalent.
Reliable audits arc essential to the credibility of financial reporting by
state and local governments. The audit committee is a practical tool that a
government can use to enhance the independence of the external auditor, and
hence the reliability of the financial statement audit.
2. The audit committee should be formally established by charter, enabling
resolution, or other appropriate legal means.
3. The members of the audit committee collectively should possess the
expertise and experience in accounting, auditing, and financial reporting
needed to understand and resolve issues raised by the independent audit of the
financial statements.
4.A majority of the members of the audit committee should be selected from
outside of management. At the same time, the audit committee should include at
least one representative each from the executive and legislative branches of
the government.
5. At a minimum, the head of the internal audit function should possess a
college degree and appropriate relevant experience. It also is highly
desirable that the head of the internal audit function hold some appropriate
form of professional certification (e.g., certified internal auditor,
certified public accountant, certified information systems auditor).
6. All reports of internal auditors, as well as the annual internal audit
work plan, should be made available to the government's audit committee or its
equivalent.
|
Making A Difference In Arkansas
The Arkansas Council on Economic Education (ACEE) is a private, non-profit, non-partisan, educational organization founded in 1962 to
promote economic literacy in Arkansas.
http://www.arkeconed.org
Peer-Reviewed Research
The Arkansas Policy Foundation is an educational organization that regularly submits its research to scholarly journals that use a peer
review process.
Journal Publications
'Regulation of financial derivatives in the U.S. code'
Derivatives Use, Trading and Regulation
(London, U.K.) Palgrave Macmillian Ltd.
February 2006
Read Online
'Deflation & Economic Growth'
QJAE
(Piscataway, N.J.) Transaction Periodicals Consortium, Rutgers University
Summer 2006
Policy Foundation research on this topic cited by Arkansas Attorney General Mike Beebe
(Opinion No. 2005-291)
'A review of state statutes regulating financial derivatives in the USA'
Pensions, an International Journal
(London, U.K.) Palgrave Macmillian Ltd.
2004
Read Online
|