FINANCIAL MANAGEMENT/A new way to budget
Faced with declining revenue and cuts in state and federal aid, cities and counties are looking for new ways to meet an increasing demand for services with decreasing public funds. Franklin County, Ohio, has met the challenge with a performance-based budgeting system. When commissioners adopted Franklin County’s second performance-based budget in November, they welcomed new budget initiatives, capital improvement projects, raises for workers and the addition of new employees to enhance county services. The new funding commitments came in the wake of a two-year, $24 million revenue decrease.
Performance-based budgeting takes its cue from the private sector and uses three business standards: strategic planning, performance measurement and an unrelenting focus on the bottom line. The system is best understood when compared to its ancestral and prevalent cousin: the line-item budget. A typical line-item budget includes separate funds for personnel, miscellaneous services, materials and supplies, capital outlays and other categories, which collectively form a department budget. Line-item budgets are flawed by their inability to measure success, failure, efficiency or inefficiency. They can measure only incremental funding allocations.
Government performance should not be measured by funding allocations but by the results those allocations and subsequent expenditures produce. To measure a government’s performance, the government must first be divided into measurable program units. Franklin County is delineated into 210 service-producing programs, which are administered by 33 agencies. The programs are funded and evaluated using four primary performance measures: demand, output, result and efficiency.
“Demand” identifies the need for a program or service. If, for example, 5,000 residents in a community need their trash picked up each week, then 5,000 units is the “demand” for a theoretical “Refuse Collection Program.” “Output” is the number of households whose trash is collected each week, and “result” represents the benefit received by the customers as a result of their trash being picked up. “Efficiency” calculates the cost of picking up one household’s trash.
The four performance measures establish the cost of providing a service and help residents understand what benefits they receive as a result of that service. Performance-based budgeting also allows government to be more responsive to community needs. By examining the demand for services, governments can realign funding to best meet the diverse and changing needs of their constituents.
With performance-based budgeting, Franklin County is able to expose bureaucratic waste hidden in line-item budgets. In the first performance-based budgeting cycle, half of all county agencies requested less money than in the previous year, and during the second budget cycle an additional five departments requested less.
Performance-based budgeting works because it holds government to a higher level of accountability and demands efficiency. Perhaps most importantly, the residents of Franklin County now have a budget they can understand and one that clearly communicates what they receive in return for their investment in local government.
The author is president of the Franklin County, Ohio, Board of Commissioners.