Financial Management Series

Number 8
(Instructional Version)

Performance Measurement
& Performance Based
Budgeting (PBB)

Alan Probst
Local Government Specialist
Local Government Center
UW-Extension

Part I


Overview
Performance Budgeting
Originated in late 1940s

Congress enacted through National
Security Act of 1949 for newly formed
Department of Defense

Government Performance and Results
Act (GPRA)
Performance Budgeting

Based on the assumption that presenting
performance information alongside
budget amounts will improve budget
decision-making by focusing funding
choices on program results
Performance Based Budgeting
Performance based budgeting cannot begin
until a system of performance measurement
has been instituted
A functional performance based budgeting
system cannot be expected to produce the
long-term desired results in the first year of
its inception
Must build a Performance Based
Management System
Management Tool
Performance budgets focus on missions,
goals, and objectives to explain why money
is being spent and provide a way to allocate
resources to achieve specific results

PBB is intended to be a management tool for
program improvement, not a carrot and
stick methodology used to punish
departments for not meeting goals



Why is this Important?
Most Federal grants now require outcome
evaluations (performance measurement) in their
applications

Bond sales require indicators of financial condition
which are well presented by performance data

Local government revenues are becoming
insufficient making effective use of resources
imperative

Promotes the logical tie between planning and
budgeting

Why is this Important?
Both the Government Accounting Standards
Board (GASB) and the Government Finance
Officers Association (GFOA) are promoting
performance measurement indicating it may
soon become a requirement

Provides a way to quantify to the citizens
how well their local government is doing
compared to previous years and other
similar communities; i.e. how much bang
theyre getting for their buck

CAUTION!
One of the greatest mistakes in Performance
Based Budgeting is to make simplified
assumptions based on unrefined results and
then apply a system of rewards and
punishments based on them

Such an approach frequently yields adverse
program impacts
Unintended Consequences

If PBB used as a reward and punishment
system, how do you ensure that reducing a
budget by, say 5% for poor performance,
doesnt reap a future 20% decrease in future
performance?

How do you ensure youve considered all
factors that may have affected the decline in
performance?
Potential Flaws
Incorrect assumptions or conclusions

Police: Arrests are up; we gave you more
money, whats wrong?
Police: Arrests are down, we gave you more
money, whats wrong?
Do more arrests mean better police work,
more crime, less crime, better crime
prevention, or less police work?
Example
An effective Police Department deters crime, how does
one measure deterred crime?

Police arrests are down 5% from last year so, under
Performance Based Budgeting, we should reduce
the Police budget by 5% until they improve their
results

Such a simplistic approach fails to account for the
success of crime prevention efforts and community
policing, therefore, punishing good performance
Interim Solution
Until a performance measurement system can
be fully implemented, an interim solution
may help set the groundwork

Departments heads provide a bullet narrative
with annual budget requests including:
what department accomplished last year?
what is different in this years budget request?
what goals has the department set for the coming
year?


Part II
Performance
Measurement
Performance Measurement

The regular systematic collection,
analysis, and reporting of data that
tracks resources used, work produced,
and whether specific outcomes were
achieved by an organization


Note: Measurements are only meaningful to the degree that they
are a basis for strategic and operational decision-making
Performance Measurement
Performance Measurement should:

Be based on program goals and objectives that tie to
a statement of program mission or purpose
Measure program outcomes
Provide for resource allocation comparisons over
time
Measure efficiency and effectiveness for continuous
improvement
Be verifiable, understandable, and timely
Performance Measurement
Be consistent throughout the strategic plan,
budget, and accounting and reporting
systems over time

Be reported internally and externally (Federal
grants do and GASB may soon require it)

Be monitored and used in managerial
decision-making processes

Performance Measurement
Be limited to a number and degree of
complexity that can provide an efficient and
meaningful way to assess the effectiveness
and efficiency of key programs

Motivate staff at all levels to contribute
toward organizational improvement


Principles
Principle I


Establish broad goals to guide government decision-
making

Basis for the development of policies, programs, and
service types and levels to be provided

Developed after an assessment of community
conditions and a review of internal operations of the
government

(GFOA)
Principle II
Develop approaches to achieve goals

A government should have specific policies, plans,
programs, and management strategies to define how
it will achieve its long-term goals

It is the policies, plans, and programs that define
how the government will go about accomplishing
these goals

(GFOA)
Principle III
Develop a budget with approaches to achieve goals

Prepare and adopt a financial plan and budget that
moves toward achievement of goals within the
constraints of available resources

Provides for the preparation of a financial plan,
capital improvement plan, and budget options

(GFOA)
Principle IV
Evaluate performance and make adjustments

Program and financial performance should be
continually evaluated, and adjustments made, to
encourage progress toward achieving goals

Based on this review, the government may need to
make adjustments to the budget, plans, and policies
if goals are to be achieved

(GFOA)

Performance Indicators
Input
Output
Efficiency
Service Quality
Outcome
Explanatory Data
Performance Indicators should:
Be quantifiable and measurable
Be relevant, understandable, timely,
consistent, comparable, and reliable
Constitute a family of measures
- input
- output
- efficiency
- service quality
- outcome
Types of Performance Indicators
Input Indicators

- resources used to produce an
output
- examples
costs (direct costs plus fringe benefits)
labor hours
Types of Performance Indicators
Output Indicators

- quantity of units produced
- typically under managerial control
- examples
Miles of pipe visually inspected
Clients served
Types of Performance Indicators
Efficiency Indicators

- ratio of inputs used per unit of output (or
outputs per input)
- examples
Cost per unit: cost per ton of refuse collected, cost
per prisoner boarded, cost per transaction, etc.
Productivity: hours per consumer complaint, plans
reviewed per reviewer, etc.
Efficiency vs. Effectiveness
Efficiency is related to cost effectiveness,
i.e. lowest costs for a given output level

Effectiveness is related to if the service
level meets the demands of the citizens


Types of Performance Indicators
Service Quality Indicators

- how satisfied customers are
- how accurately a service is
provided
- how timely a service is provided
Percentage of respondents satisfied with service
Frequency of repeat repairs
Average wait time
Types of Performance Indicators
Outcome Indicators

- are qualitative consequences
associated with a program/service
- focus on the ultimate why of
providing the service
- examples include:
Reduction in fire deaths/injuries
Increase in job trainees who hold a job for more than six
months
Decrease in low birth-weight babies
Four-Step Methodology*
Step 1: Review and evaluate existing
department mission and cost center
goals
Step 2: Identify service areas
Step 3: Define service area objectives
Step 4: Identify indicators that
measure progress toward objectives

*(Fairfax County, VA Performance Measurement System)

Step 1
Cost Center Goal Statement

States what is to be accomplished (outcome)
States what is to be provided/produced
(output)
States why cost center exists
Identifies customers
Transcends several years
Begins with To and a verb


Cost Center Goal Template &
Example
To provide/produce (fill in service or product)
to (fill in customer) in order to (statement
what you intend to accomplish).


Maternal and Child Health Services
To provide maternity, infant and child health
care and/or case management to at-risk
women, infants and children in order to
achieve optimum health and well-being
Step 2
Identifying a Service Area
Identify your major activities
Do not identify every activity; only major
activities
- critical to success of agencys mission
- consume significant portion of cost center
(department) budget
- politically sensitive or frequently in spotlight
- significant customer service focus
Group activities that have common
objectives and/or customers
Step 3
Service Area Objectives
Support cost center goal
Reflect planned benefits to customers
Allow measurement of progress
Quantify portion of the cost center goal
that will be accomplished within the
fiscal year
Describe quantifiable future target
(optional)
Step 3
Objective Statement Template &
Example
To improve/reduce/maintain (accomplishment) by (a
number or percentage), (from X to Y) toward a target
of (a number).

Maternal and Child Health Services
To improve the immunization completion rate of
children served by the Health Department by 3
percentage points, from 77 percent to 80 percent,
toward a target of 90 percent, which is the Healthy
people year 2010 goal.
Step 4
Indicator Definitions & Examples
Category Definition Example

Input Resources used to produce Cost (direct costs
an output plus fringe
benefits)
Staff hours


Output Quantity or number of units produced. Res. properties
Activity-oriented, measurable and assessed within
usually managerial control. Clients served
Calls responded
to
Step 4
Indicator Definitions & Examples

Category Definition Example

Efficiency Inputs per unit of output or outputs Cost per appraisal
per input Appraisal per
appraiser

Service Timeliness, accuracy and/or customer Errors per data entry
Quality satisfaction of the service provided operator
Response time
Percentage of
customers satisfied

Step 4
Indicator Definitions & Examples
Category Definition Example

Outcome Qualitative consequences Job trainees
associated with a program/service. who hold a
Focuses on the ultimate why of job for more
providing a service than 6
months


Input Indicators
Resources used to produce an output
Cost (budgeted or actual)
Staff-year equivalents (SYE)
Full-time equivalents (FTE)
Direct labor hours (DLH)
Costs as an Input Indicator
Direct costs plus fringe benefits
Direct costs are those devoted to a
particular service and include:
Personnel services
Operating expenses
Recovered costs
Capital equipment
Output Indicators
What was produced/provided
Usually end in ed
Questions to ask
What services were delivered?
What volume was provided?
How many units of service?

Examples
Service Area Indicator

Fire suppression Incidents responded to

Human Resources Vacancies filled

Library New materials circulated
Efficiency Indicators
Inputs used per unit of output
Cost per unit where the input is money/dollars
Productivity where the input is staff hours
Examples:
Cost per senior lunch served
Cost per client
Investigations conducted per detective
Hours per fire inspection

Efficiency Indicators
Service Area Indicator

Fire Suppression Cost per incident

Senior-based Services Cost per client

Human Resources Cost per vacancy filled

Custodial Services Cost per square foot
cleaned
Service Quality Indicators
Measures customer satisfaction,
timeliness, and/or accuracy of a service

Examples:
Customer surveys
Response logs
Error rates

Service Quality Indicators
Service Area Indicator

Fire Suppression Average suppression response time

Senior-based Services Percent of clients satisfied with
services provided

Human Resources Satisfaction rate with vacancy
processing

Custodial Services Percent of customers satisfied with
custodial services
Outcome Indicators
Describe the benefit of the service to
the customer
Describe what was changed or
accomplished as a result of the service
Questions to ask:
How has the customer benefited?
Why is the customer better off?
What is the impact of the service?
Outcome Indicators
Service Area Indicator

Fire Suppression Fire deaths per 10,000
population
Fire injuries per 10,000
population

Senior-based Services Percent of clients who remain in the
community after one year of service
or information.

Human Resources Average recruitment time

Custodial Services Percentile comparisons of cost per
square foot to IFMA standards
The Logic Model
Begin with the end in mind

Start by asking:
What results are we seeking?
What are we hoping to
accomplish?
How will we accomplish it?
What is the Logic Model?
A picture of a program
A way to show the relationship between
what we put in (inputs), what we do
(outputs) and what results occur
(outcomes)
Sequence of if/then relationships
Core of program planning and
evaluation
Logic Model
Inputs Outputs Outcomes
What we What we do Short-Term Medium-Term Long-Term
invest

Staff Workshops Awareness Behavior Conditions
Dollars Outreach Knowledge Decisions Environment
Volunteers Inspections Attitudes Policies Social
Materials Skills Economic
Equipment Civic
Technology

Logic Model Fire Suppression
Inputs Outputs Outcomes
What we What we do Short-Term Medium-Term Long-Term
invest

Staff Training Inspections Response Protection
Dollars Inspections Suppression time of lives &
Volunteers Emergency responses Fire property
Materials response Public containment (fire deaths
Technology education Prevalence injuries,
of smoke
detectors

Example
Service Area Objective
Teen Pregnancy Prevention

Acceptable Unacceptable

Reduce the teen pregnancy rate by 2 Increase the number of
pregnancies per 1,000 population localities with comprehensive
from 42 to 40 in localities with teen services from 20 to 27
comprehensive teen services
Performance Management Model
Goals General Goals of program:
Provide quality services to all customers
Maintain or improve performance
Provide economical services
Inputs Resources:
Money
Facilities
Equipment
Supplies
Contracted services

Performance Management Model
(cont.)
Activities Work processes:
Salting roads
Making arrests
Processing bills
Performing inspections
Outputs Goods & Services produced:
Statistical measurements
Miles of roads repaired
Tons hauled or recycled
Positions filled

Performance Management Model
(cont.)
Outcomes Results and Impacts
100% of customers will report being satisfied
95% will be error free
90% of services will be within +/- 2% of comparable
service within the private sector

Performance Measurement
Administration of customer satisfaction surveys
Tracking number of jobs, error rates, average per job
Cost comparison to private sector services
Quarterly and annual reports summarizing services
provided, ouputs ad outcome achievement
Remember
Quantify objectives
Associate objectives with an outcome
Word outcomes the same as objectives
Provide a complete Family of Measures
Avoid confusing indicators (e.g. efficiency and
service quality)
Reference the correct baseline to target year for
objective
Define service areas by program
objective/customers rather than process function

Part III

Benchmarking
Definition
Formal benchmarking is the continuous,
systematic process of measuring and
assessing products, services and
practices of recognized leaders in the
field to determine the extent to which
they might be adapted to achieve
superior performance.

Benchmarking & Best Practices, Treasury Board of Canada
Another Definition

Benchmarking is the practice of being
humble enough to admit that someone
else is better at something and wise
enough to try and learn how to match
and even surpass them at it.
Types of Benchmarking
Internal commonly one year
compared to a previous years
performance
External your performance compared
to another similar organization
Operational your recent annual or
periodic performance
Strategic long term performance
Internal Operational
Probably the most common measure at
the local government level
Measures current performance versus
an established benchmark from prior
performance
Example: Police Dept. criminal cases
closed this year versus the average
over the past ten years
External Operational
Measurements against other organizations
performance
Example:

Total Structure Fires Incidents Per 10,000 Population

0 20 40 60 80
Beloit
Eau Claire
Janesville
Platteville
Whitewater
Series2
Series1
POLICE
Violent Crimes Reported Per 1,000 Population
0
1
2
3
4
5
6
7
8
9
F
a
i
r
f
a
x

C
o
u
n
t
y
,

V
A
S
a
n

J
o
s
e
,

C
A
D
a
n
e

C
o
u
n
t
y
,

W
I
A
u
s
t
i
n
,

T
X
S
a
n

A
n
t
o
n
i
o
,

T
X
P
h
o
e
n
i
x
,

A
Z
M
i
a
m
i
-
D
a
t
e

C
o
u
n
t
y
,

F
L
Series1
Series2
Series3
Benchmarks
Internal Benchmarks

- Overall spending
- Growth in tax base
- Growth in income
- New home starts
- Miles within service
area
External Benchmarks

- Private sector wages
- Neighboring cities
- Similar sized counties
- Statewide groupings
- Statewide averages
Benchmark Standards
Program dollars spent per capita
Spending per $1,000 property
assessment
Percentage growth over time
Adjustments for inflation
Other specific service standards
Setting Targets
Benchmarking
National standards
Mandates
Board direction
Past Performance
Internal goals
Citizen demands
Part IV

Performance Based
Budgeting (PBB)
Performance Based Budgeting
(PBB)
Performance-based budgeting relies on:

1. Strategic planning
2. Operational planning
3. Performance accountability
4. A realistic performance measurement
system

to build budgets.


Performance-based Budgeting (PBB)
Performance-based budgets focus on return on
investmentthat is, what do we get for our investment of
resources?
Basic service level (or continuation of basic services)?
Increased services (more services to same recipients or
expansion of same services to more recipients)?
Better (higher quality) services?
More efficient services (cost savings in service
delivery)?
Mitigation or resolution of a problem?







Performance-based Budgeting
(PBB)

PBB is budgeting for results - with an eye
on the price tag

PBB emphasizes program effectiveness and bases decision
making (whether for continuation or enhancement of a
program) on outcomes.

However, the costs of achieving those outcomes must be
scrutinized to ensure efficient service delivery and maximize
allocation of scarce resources.

Goal Setting
A SMART goal is defined as such:

Specific Is the goal clear and to the point?
Measurable Can you tell if it is
accomplished?
Attainable Is it a realistic goal?
Relevant Is it a priority of the organization?
Trackable Results are compared over time?

SMART Examples
Yes: To respond to all fire calls within the
city within 7 minutes of dispatch
No: To protect all property within the
city to a high level of safety

Yes: To process all building permit
requests within 48 hours of application
No: To process all building permit
requests in the shortest time possible
Rudimentary PBB
A rudimentary form of PBB to be implemented until a
formal system can be produced could include the
following in each departments budget request:
An explanation of the departments overall goals
An explanation of what the department has accomplished in
the past year
An explanation of what the department intends to
accomplish in the coming year
An explanation as to what is different from last year in the
proposed budget and why
A GASB compliant budget showing past year budget
expenditures

Performance-based Budgeting
(PBB)
Program Structure
Strategic plans, operational plans, and performance
based budgets are geared to program structures
Funds are appropriated to departments/programs
A program is a grouping of activities directed toward
the accomplishment of a clearly defined objective or
set of objectives
Program structure is an orderly, logical array of
programs and activities that indicates the
relationship between each

TOP TEN REASONS WHY PERFORMANCE-BASED
BUDGETING WONT WORK IN MY DEPARTMENT

10. It doesnt matter what we do because we have federal/state funding.
9. We just reorganized and we dont know what were doing yet.
8. Everything is just fine as it is; weve always done it this way.
7. Were too busy getting REAL work done to bother with this.
6. We need more staff, more money, more time, more ( fill in the blank ) to do
this.
5. We cant target outcomes; theyre too specific.
4. We cant measure what we do.
3. Youll misinterpret any information we give you.
2. We cant be accountable because we have no control over anything.
1. Were different. This shouldnt apply to us. We need an exemption.

OFTEN FOLLOWED BY:
All right, just give me a form and tell me
what you want me to say.

If I give them something, then
theyll go away. (Maybe this
whole thing will just go away.)
NOTE: This genie wont go back
into the lamp.
INSTITUTIONALIZING PERFORMANCE
MEASUREMENT:
Make performance an integral part of your
management processes.

Use metrics to understand and measure how a
process works and the results it generates.

Develop an internal performance accountability
process.

Integrate performance into policy and budget
decision making and everyday program
management.


POINTER: When you break down a policy, program, or
process into its component parts, you use "systems logic"
to develop a model of how it should work


INPUT OUTPUT & OUTCOME

PROCESS
EFFICIENCY
QUALITY
Managers should use metrics to gauge and assess program and
processes, diagnose problems, and formulate solutions.
INSTITUTIONALIZING PERFORMANCE
MEASUREMENT:
Example
Service Area Objective Input Output Efficiency
Service
Quality Outcome
Fire
Suppression
To maintain fire loss
at 0.02% or less of
Total Property
Valuation $249,000 77 $3,234
7.3
minutes
0.027%
fire loss
incidents
responded
to
cost per
response
Average
response
time
average fire
loss percent
Example 2


Service Area Objective Input Output Efficiency
Service
Quality Outcome
Street
Reconstruction 5% $1,374,500 4 4.7% 75% 7%
Capital Facilities

Maintain
construction cost
growth to no
more than 5
percent
Budget/actual
costs
Staff
Projects
completed

Engineering
design
costs as
a percent
of total
project
cost
Percent of
projects
complete
d on time
Contract
cost
growth (%)
Metrics (performance indicators) measure process and product.
Inputs Outputs & Outcomes Process
Efficiency:
Outputs
Inputs
Outputs or Outcomes
Cost
Outputs or Outcomes
Time
Quality:
Effectiveness in meeting the expectations of customers, other stakeholders;
and expectation groups.

(Products)
(Services)
(Results)
(Expenditures compared to productivity;
caseload per staff member.)
(Cost per item produced, service
provided, or client served; cost per
result achieved.)
(Production or turnaround time;
timeliness of results.)
(Demand)
(Need)
(Size of Problem)
(Resources)
INSTITUTIONALIZING PERFORMANCE
MEASUREMENT:
The volume of performance
information that must be managed
can be staggering.
Watch out for the shotgun or
kitchen sink approach--
reporting just about every type
of measurement or statistic that
is already gathered or can be
counted easily. This leads to a
heavy emphasis on transactional
data--inputs and outputs--rather
than results.
INSTITUTIONALIZING PERFORMANCE
MEASUREMENT:
Concentrate on the development of balanced sets of
performance indicators in order to provide a clear picture of
performance without overwhelming users with needless detail

Five types of performance indicators:
Input
Output
Outcome
Efficiency
Quality

A balanced set may include more than one of any indicator
indicator type and none at all of some but must have at least
one measure of outcome, efficiency, or quality
INSTITUTIONALIZING PERFORMANCE
MEASUREMENT:
Present performance information at
different levels in order to surface key data
while maintaining the availability of support
and explanatory material.
Key Performance Indicators
Supporting Performance Indicators
General Performance Information
Explanatory Notes
Get consensus among data users on
indicator types and levels before indicators
are reported.
INSTITUTIONALIZING PERFORMANCE
MEASUREMENT:
A key performance indicator is a performance indicator that
is included in the Budget Supporting Documents

Factors in determining key level include:
Most direct measure of outcome?
Critical success factor?
Big ticket item?
Hot button item?
History and who values?
INSTITUTIONALIZING
PERFORMANCE MEASUREMENT:
General performance information (GPI) may be
included in the budget. However, values for general
performance indicators are reported for prior year
actual only.
GPI may include:

Multi-year histories or trends

External comparisons (national or regional)

INSTITUTIONALIZING
PERFORMANCE MEASUREMENT:
MANAGING ACCURACY:

Beware of:

High balls and low balls (unrealistically high
or low performance targets)
Instant replays (reporting the same
performance level over and over, regardless
of circumstances)
Greased pigs (indicators for which name,
definition, or method of calculation change so
often that you cant get a handle on them)
Beware of: (cont.)

Orphans (indicators for which no one
claims responsibility)
Statistical illiteracy (calculations that dont add
up)
Limp excuses (meaningless explanations of
performance variances)

Get the right start by developing
meaningful, valid, accurate, and reliable
performance indicators
Provide documentation for each
performance indicator identified in the
strategic plan.
Strategic planning guidelines include
performance indicators


MANAGING ACCURACY:
Establish the link between resources and
results early and maintain that link through
budget development, appropriation, and
budget control processes.

INTEGRATING PERFORMANCE INTO
BUDGET DECISION MAKING:

Set performance standards linked to appropriation levels

Performance standards are the expected levels of
performance associated with a performance indicator for a
particular period and funding level. They link dollars and
results

Performance standards are one way to demonstrate
RETURN ON INVESTMENT--what we can expect to receive
for our money (easier to explain to stakeholders)







Integrating Performance into budget
decision-making

Establish the link between resources and results early
and maintain that link through budget development,
appropriation, and budget control processes.

During budget development, performance indicator values
associated with the funding level recommended in budget
discussions are proposed performance standards

During the budget process, performance indicator values become
performance standards linked to the funding amounts actually
appropriated in the budget

Performance standards may be modified only through approved
processes

Performance standards are monitored and tracked
References
Performance Based Budgeting Putting The Pieces Together, Carolyn
S. Lane, Deputy Director, Office of Planning and Budget, Division of
Administration, State of Louisiana, September 2006

Performance Management: Using Performance Measurement for
Decision Making Recommended Practice (2002 & 2007) Government
Finance Officers Association (GFOA)

Fairfax Countys Performance Measurement System Performance
Measurement Team, Dept. of Management & Budget, Fairfax County,
Virginia, June 2006

Performance Management Handbook Eau Claire County, WI, January
2007

Moving From Line Item to Performance Based Budgeting: Craig Maher,
UW Oshkosh