Consultant John Mercer helps agencies chart
their paths to performance-based budgeting

What is Performance-Based Budgeting?

It is important to understand that performance-based budgeting is not simply the use of program performance information in developing a budget. Performance-based budgeting does more than just inform the resource allocation decisions that go into the development of a traditional type of budget. In other words, it is not just "budgeting based on performance." Instead, it is the process by which a particular type of budget is developed -- a Performance Budget (or "program performance budget"). To design an effective system of performance-based budgeting, it is therefore vital to understand first exactly what the end product itself should be, what it should contain, and how it should look.

A true Performance Budget is not simply a Line-Item (or object class) budget with some program goals attached. It tells you much more than just that for a given level of funding a certain level of result is expected. A real Performance Budget gives a meaningful indication of how the dollars are expected to turn into results. Certainly not with scientific precision, but at least in an approximate sense, by outlining a general chain of cause and effect. The most effective governmental Performance Budget does this by showing, for each program area, how dollars fund day-to-day tasks and activities, how these activities are expected to generate certain outputs, and what outcomes should then be the result.

A program Performance Budget can be distinguished from a Line-Item Budget in a fundamental way. The line items show what each dollar will be spent on: salaries, benefits, office supplies, travel, utilities, equipment, etc. The Performance Budget shows what each dollar will accomplish, generally in the way of a measurable result achieved (such as a reduction in accidents, an improvement in health, an increase in customer satisfaction, etc.), or in the way of an activity performed (such as process a grant application, inspect a worksite, review a compliance activity, etc.). However, every program could (and probably should) be able to show its budget in both formats -- with the "bottom line" dollar amounts being exactly the same for each.

Several performance budget examples are illustrated on this web site, including on other pages. See the illustration of a local government performance budget on the page Local Government Illustration of PBB.

The first group of tables below illustrate the relationship between a higher-level, outcome-oriented goal in an agency's Performance Budget and the next lower-level goals of the supporting programs necessary to meet that goal, as well as an alternative view of the same costs as shown in the agency's Line-Item Budget (known as an Object Class Budget in the US Federal Government).  Note that the budget figures highlighted in gold are identical, while the figure in blue can be followed down to the next level of supporting goals and activities.

Agency	Chemical Industry Safety Agency
2018 Budget	$128,670,000
2018 Goal	Reduce the number of serious accidents in the toxic chemical industry by 6 percent from the 2015 level

 

Performance Budget Agency Outcome Goal	2017 Planned	2017 Actual	2018 Planned	2019 Planned
Percentage reduction in serious accidents from 2015 baseline in toxic chemical industry	2	2	4	6

 

Performance Goals	Total Cost
1. Achieve a reduction of 7% in the number of serious accidents in the manufacturing of toxic chemicals from the 2015 baseline	$52,400,000
2. Reduce the number of serious accidents in the transportation of toxic chemicals by 3% from the 2015 baseline	42,260,000
3. Achieve a reduction of 9% from the 2015 baseline in the number of serious accidents in toxic chemicals storage facilities	34,010,000
Total	$128,670,000

 

Agency Budget by Line Item (Object Class)
11.1	Full-time permanent employee salaries	$48,015,000
11.3	Other than full-time permanent employees	1,525,000
12.1	Civilian personnel benefits	17,404,000
21.0	Travel and transportation of persons	2,009,000
23.1	Rental payment to General Services Administration	6,609,000
23.3	Communications, utilities and miscellaneous charges	12,878,000
24.0	Printing and reproduction	1,373,000
25.4	Operation and maintenance of facilities	8,891,000
25.7	Operation and maintenance of equipment	3,098,000
26.0	Supplies and materials	9,547,000
31.0	Equipment	17,321,000
Total Budget		$128,670,000

 

The tables below illustrate the relationship between measurable performance goals in the Performance Budget and the program activities necessary to meet those goals, as well as an alternative view of the same costs as shown in the program's Line-Item Budget.  Note that the budget figures in blue are identical.

Program	Toxic Chemicals Storage Safety Program
2018 Budget	$34,010,000
2018 Goal	Achieve a reduction of 9% from the 2016 baseline in the number of accidents in toxic chemicals storage facilities and a reduction in the seriousness of the accidents so that no more than 28 hospitalizations are required

 

Performance Budget Program Goals	2017 Planned	2017 Actual	2018 Planned	2019 Planned
Percentage reduction in number of storage accidents from 2016 baseline	3	2	6	9
Number of hospitalizations required for more than one day due to storage accidents	32	31	30	28

 

Activity	Unit of Output	Number of Units	Unit Cost	Total Cost
1. Conduct inspections of toxic chemical storage facilities	An inspection conducted	4,975	$2,233	$11,110,000
2. Investigate incidents of spills and leaks	An investigation completed	1,985	$4,544	9,020,000
3. Conduct training and licensing of toxic handlers	A license issued	4,100	$3,385	13,880,000
Total				$34,010,000

 

Program Budget by Line Item (Object Class)
11.1	Full-time permanent employee salaries	$12,710,000
11.3	Other than full-time permanent employees	403,000
12.1	Civilian personnel benefits	4,602,000
21.0	Travel and transportation of persons	531,000
23.1	Rental payment to General Services Administration	1,747,000
23.3	Communications, utilities and miscellaneous charges	3,304,000
24.0	Printing and reproduction	363,000
25.4	Operation and maintenance of facilities	2,350,000
25.7	Operation and maintenance of equipment	819,000
26.0	Supplies and materials	2,550,000
31.0	Equipment	4,631,000
Total Budget		$34,010,000

 

This program Performance Budget and its Line-Item Budget are then cascaded down to the next sub-unit level, as illustrated in the following tables.  Here, Activity 3 from the Performance Budget above is shown as cascaded down to the sub-activity level.  Note that the budget figure in red for Activity 3 above is identical to the figures in red in both the Performance Budget and its Line-Item Budget shown below.  Also note that in both of these examples, only the program (or sub-program) goals and results are shown on a multi-year basis, in order to keep the examples simple.  However, an organization might find value in also tracking the multi-year trends in unit costs of an output.

Sub-Program	Office of Licensing and Training
2018 Budget	$13,880,000
2018 Goal Statement	Issue an anticipated 4100 licenses while achieving an average license trainee satisfaction rating of 3.5 on a 5-point scale

 

Performance Budget Sub-Program Goals	2017 Planned	2017 Actual	2018 Planned	2019 Planned
Number of licenses issued	3,850	3,872	3,980	4,100
Average license trainee satisfaction rating	3.3	3.2	3.4	3.5

 

Activity 3. Conduct training and licensing of toxic handlers	Unit of Output	Number of Units	Unit Cost	Total Cost
Sub-Activity 3.1. Conduct background checks on applicants	A background investigation completed	5,260	$783	$4,120,000
Sub-Activity 3.2. Conduct licensee training classes	A training class conducted	550	$13,609	7,485,000
Sub-Activity 3.3. Provide administration and support services	Work hour	28,715	$77	2,225,000
Totals	A license issued	4,100	$3,385	$13,880,000

 

Program Budget by Line Item (Object Class)
11.1	Full-time permanent employee salaries	$5,211,000
11.3	Other than full-time permanent employees	165,000
12.1	Civilian personnel benefits	1,887,000
21.0	Travel and transportation of persons	218,000
23.1	Rental payment to General Services Administration	698,000
23.3	Communications, utilities and miscellaneous charges	1,321,000
24.0	Printing and reproduction	145,000
25.4	Operation and maintenance of facilities	940,000
25.7	Operation and maintenance of equipment	327,000
26.0	Supplies and materials	1,020,000
31.0	Equipment	1,948,000
Total Budget		$13,880,000

 

GPRA & Performance-Based Budgeting

The Government Performance and Results Act of 1993 (GPRA) has always envisioned the complete integration of the Annual Performance Plan with the Budget – what is known as “Performance-Based Budgeting” or simply "Performance Budgeting." This integration is perhaps the single most powerful tool for implementing comprehensive Performance Management within government agencies. In fact, it was a particular example of a sophisticated and very effective use of this form of budgeting that directly inspired the origination of GPRA.

In his June 2001 testimony  before the House Subcommittee on Government Efficiency, John Mercer described Performance Budgeting and its relationship to GPRA. He explained some of its uses in resources allocation, program management, and accountability. Much of his understanding of the value of this type of budgeting was based on his experience in the model performance budgeting system that inspired GPRA.

A Guide to Performance-Based Budgeting

This website includes a 33-page guide to the Cascade Performance Budgeting system. This guide includes 24 tables and charts illustrating a step-by-step approach on how a government agency may develop an effective performance budget.

CASCADE Performance Based Budgeting Software™

The newly available CASCADE  Performance Based Budgeting Software™ is a uniquely effective solution for addressing the strategic planning and performance budgeting needs of Federal departments and other government agencies. CASCADE presents a truly innovative approach to instilling operational planning transparency and accountability in organizations of from 50 to over 5,000 managers.

• The developer of CASCADE is Capital Novus of Fairfax, VA, a well-regarded manufacturer of innovative software solutions, with a GSA Federal Supply Schedule contract and offices in five countries around the world.
   
• The lead design architect of CASCADE is John Mercer, the Senior Consultant for Government Performance at Capital Novus and internationally recognized as a “foremost expert in performance-based budgeting.”

Performance-Based Budgeting White Paper

In March 2002, a white paper by John Mercer on "Performance Budgeting for Federal Agencies"  was published. This paper explains what a Performance Budget is, some key steps in its development, and how it may be used.

Cost Accounting & Performance-Based Budgeting

A very important prerequisite to developing effective performance budgeting systems -- budget systems that can support comprehensive Performance Management all all levels of the organization -- was established in 1998 with implementation of a new accounting standard for federal agencies. The Federal Accounting Standards Advisory Board issued a standard for Managerial Cost Accounting that requires agencies to be able to develop a particular type of information essential to true performance-based budgeting. To cite a few lines from this standard (emphasis added):

The managerial cost accounting concepts and standards contained in this statement are aimed at providing reliable and timely information on the full cost of federal programs, their activities, and outputs. . . . In July 1993, Congress passed the Government Performance and Results Act (GPRA) which mandates performance measurement by federal agencies. In September 1993, in his report to the President on the National Performance Review (NPR), Vice President Al Gore recommended an action which required the Federal Accounting Standards Advisory Board to issue a set of cost accounting standards for all federal activities. Those standards will provide a method for identifying the unit cost of all government activities.

More information about this cost accounting reform may be found on this web site's pages on Activity Based Costing/Management and on ABC/M Compliance.

Performance Budgeting Initiative

During the administration of George W. Bush, senior officials at the Office of Management and Budget described Performance-Based Budgeting as being the Administration's top management priority. The importance of this reform was emphasized in the President's Budget each year. OMB also outlined specific requirements for the initial phases of this reform, both as part of the President's Management Agenda and as key elements in the Program Assessment Rating Tool.