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From : http://strategisys.

com/pbb

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 satsifaction, 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 2016 2016 2017 2018


Agency Outcome Goal Planned Actual Planned Planned
Percentage reduction in serious accidents from
2 2 4 6
2015 baseline in toxic chemical industry
Performance Goals Total Cost
1. Achieve a reduction of 7% in the number of serious accidents in the
$52,400,000
manufacturing of toxic chemicals from the 2015 baseline
2. Reduce the number of serious accidents in the transportation of toxic
42,260,000
chemicals by 3% from the 2015 baseline
3. Achieve a reduction of 9% from the 2015 baseline in the number of serious
34,010,000
accidents in toxic chemicals storage facilities
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
Achieve a reduction of 9% from the 2010 baseline in the number of accidents
2018 Goal 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 2016 2016 2017 2018
Program Goals Planned Actual Planned Planned
Percentage reduction in number of storage
3 2 6 9
accidents from 2015 baseline
Number of hospitalizations required for more
32 31 30 28
than one day due to storage accidents
Unit of Number Unit Total
Activity
Output of Units Cost Cost
1. Conduct inspections of toxic An inspection
4975 $2233 $11,110,000
chemical storage facilities conducted
2. Investigate incidents of spills An investigation
1985 $4544 9,020,000
and leaks completed
3. Conduct training and
A license issued 4100 $3385 13,880,000
licensing of toxic handlers
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 Issue an anticipated 4100 licenses while achieving an average license trainee
Statement satisfaction rating of 3.5 on a 5-point scale
Performance Budget 2016 2016 2017 2018
Sub-Program Goals Planned Actual Planned Planned
Number of licenses issued 3850 3872 3980 4100
Average license trainee satisfaction rating 3.3 3.2 3.4 3.5
Activity 3. Conduct training Unit of Number of Unit Total
and licensing of toxic handlers Output Units Cost Cost
A background
Sub-Activity 3.1. Conduct
investigation 5260 $783 $4,120,000
background checks on applicants
completed
Sub-Activity 3.2. Conduct A training class
550 $13,609 7,485,000
licensee training classes conducted
Sub-Activity 3.3. Provide
administration and support Work hour 28,715 $77 2,225,000
services
Totals A license issued 4100 $3385 $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.

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