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Objective-Based Budgets GPA 2012
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Objective-Based Budgets GPA 2012


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  • Budgeting is not about limiting spending…used by companies…fun…important…a continuous process…a waste of time…a key component in management…serious business…an annual exercis…central to a robust economy…a challenge at best…a tool…essential…broken ­ let's fix it…critical…fundamental to all public organizations and activities…building steam…an annual exercise that finance chiefs the world over love to hate…next to impossible…top priority…putting the strategic plan into operation…an estimate of planned expenditure over a given period…an attempt to balance supply and demand…making choices…as much about people as it is about numbers…a necessary and expensive evil – an exercise that returns little value for the effort put forth…long…even more vital if you're having trouble making ends meet…about having more financial freedom…easy…a pain…sophisticated…plans translated into financial terms…the operationalization of your business and your strategic plan…the process of allocating resources to prioritized needs…something that you should want to understand and be able to work to your advantage…an optimization exercise…about planning…a habit…a misunderstood and misused word in our vocabulary…a process to adopt budgets after policy makers consider the degree of difference between past and projected levels of expenditure…not the torture mechanism we've been trained to think it is…a detailed plan that represents specific objectives against which to measure results…the most important thing we do…linked with and consistent with other performance based reforms…telling your money where to go rather than asking politely where it went…important but most of us are reluctant to do it…a new accountability model that is prospective instead of retrospective…a tool that can be used to compare different management strategies…still dominated by some very bad habits…a 'necessary evil' to some
  • Example Objective: reduce tetanus Inputs – nurses, clinics, vaccines Activity – tetanus shot clinic Capable – even if it doesn’t succeed in each instance (health care) Output – series of three tetanus shots (capable of producing immunity)
  • Example: school department budget organized by line item (primary), school/department (secondary) and revenue source (tertiary) How much spending is supporting the strategic goals? How much of the technology budget is supporting teachers, students or administration? What fraction of tax expenditures are spent on the strategic goals?
  • Assumes one cost center for one grant, minimum
  • Arbitrary or approximate = bad but cheap; specific and exact = good but expensive
  • Example: early childhood and remedial ed are in the same program “improving educational outcomes” because they flow together in outcomes BUT after-school classes for parents and after-school PD for teachers don’t – even though they have similar costs (custodial, supplies, instructors)
  • Perverse effects – patients treated within 4 h may lead to ignoring pt who have already waited longer than 4 h; instead average waiting time less than 4 h.
  • Example – fire department responses (heterogeneous); vaccination series or regular education (standardized); sessions of professional development (activity)
  • Focus attention on large expenditures, in particular
  • Transcript

    • 1. Objective-Based Budgets Lisa Glickstein, PhD Andover Public Schools
    • 2. Googlisms! Budgeting is… …”a vehicle for making performance management operational in the public sector.” …”a framework that streamlines resource allocation decisions.” …connecting evaluation, management and costs.
    • 3. Presentation Overview Background  Definitions & Models  Benefits Creating an Objective-Based Budget  Process  Accounting Best Practices
    • 4. Background …say what now?!
    • 5. A Brief History… International Monetary Fund: Program Budgeting (1980’s) Government Performance & Results Act (1993): Federal agencies must report on performance (GPRA) measures annually Federal Performance Progress Report (SF-PPR) adopted in 2008
    • 6. General Budget Benefits Help to eliminate debt & adjust expenses to needs & circumstances Keep you informed as you compare plans with performance & allocate funds to close gaps Improve financial communication among stakeholders Allow you to take advantage of opportunities Help to achieve definite objectives
    • 7. Measures of success Effectiveness:  Efficiency: extent to which delivery of programs services at the achieve lowest possible intended & cost, without other outcomes sacrificing quality
    • 8. Definitions: Program – initiative designed to change a condition or situation Indicator – a change in characteristic of an individual, social structure or environment as a result of the program, eliminating external factors Performance measure – instrument or assessment tool used to measure an indicator Impact – amount of progress towards meeting objectives as a result of the program
    • 9. Definitions part 2: Objective – a measurable desired change Activity – discrete action item in your program plan Output – a group of activities that together are capable of producing a desired outcome Inputs – the people & things (with costs) needed to do activities & produce outputs Outcome – a qualitative or quantitative result of an output (measured during evaluation)
    • 10. Logic Model Framework Begin with Objectives (Goals) Develop Performance Measures & Indicators Link Inputs, Activities & Outputs (if- then relationships) Collect data on PM&I Evaluation Connect Performance (Outputs & Outcomes) back to Objectives (Impact)
    • 11. Evaluation: Indicators in the context ofdesign & implementation, programrelevance, efficiency, effectiveness,impact & sustainability Purpose in budgeting:  Identify programs or activities that are not cost-effective & cannot be made so & should be cut  Identify savings that can improve efficiency  Make judgments about the likely impact of external factors on PMI  Enable useful judgments about effectiveness when outcome measures are lacking
    • 12. Old Line-Item Budget Personnel Contractual Travel Equipment Supplies Other
    • 13. Line-Item Budgets: Weaknesses Lack information for resource allocation decisions  “[a] short-term perspective encourages incremental decisions, where the next budget is built on the previous one with only incremental adjustments” Requires top-down management to approve spending changes Weak accountability for results (focus on line items) Lack transparency
    • 14. Alternate Budget ClassificationsType Levels ExamplesFunctional Function Agriculture, forestry, fishing Main program & hunting AgricultureOrganizational Department/agency Department of Agriculture Office Office of Extension ServicesObjective or Program Cooperative ExtensionProgram-based Activity Farm management Capital project education Construction of storesInput/accounting Category Goods & Services(line item) Item Utilities Sub-Item Electricity
    • 15. Objective-Based Budgets Connect costs to outputs & outcomes How much did it cost to achieve outcomes (& objectives)?  How much per unit of change?  How much per unit of service? Compare relative cost (including all activities) of competing activities based on impact Linked to funding formulas, incentives or penalties in some models
    • 16. Objective-Based Budgeting: Benefits Improved prioritization of expenditures Improved service effectiveness &/or efficiency Greater freedom in allocating resources… …in exchange for greater accountability for results
    • 17. Objective-Based ModelsType Description Prioritization Effectiveness & EfficiencyProgram Simple Primary benefit Indirect only Expenditure by objectivesZero-Based Cost/impact Primary benefit Secondary Ranking system for cuts/growthPerformance- Penalties for Secondary Primary; risk ofLinked failure to meet performance performance distortion & targets cheatingFormula- Sector-specific Secondary Primary; risk ofFunding Failure to meet chronic cost objectives is underfunding penalizedPerformance Growth targeted Secondary Primary; risk ofIncentives to areas meeting overfunding performance targets
    • 18. Creating an Objective- Based Budget Critical Questions
    • 19. Program-Budget Process Forecast revenue, expenditures, deficit or surplus, & debt Adopt strategic plan policies & priorities Top-down budget for department & program allocations using the forecast & plans Assess prior year & projected outcomes for activities & outputs Create a bottom-up program budget within the allocation
    • 20. Simplified Process (grant or single program) Forecast total amount of grant & institutional resources (match) Adopt objectives (logic model or strategic plan) Allocate funds per objective Assess prior & projected outputs & outcomes Create the budget for each objective based on activities & outputs
    • 21. Creating a Zero-Based Budget Identify activities for each objective (include alternatives) Calculate costs of inputs for each activity Predict outputs, cost per unit output, & expected outcomes Select activities & outputs by relating impact to cost, budget
    • 22. New Objective-Based Budget Admin Costs  Objective 3 Objective 1  Output 31  Output 11  Activity 311  Activity 111  Activity 312  Output 12  Indirect Costs  Activity 121  Activity 122 Objective 2  Output 21  Activity 211  Output 22  Activity 221
    • 23. Barriers to change Accounting software Supporting administrative or indirect costs (not linked to an outcome) Apportioning a single direct cost across objectives (or sub-programs) Conforming programs to organizational boundaries Performance distortion (failure in non-measured areas) & cheating, if linked to incentives or penalties
    • 24. Accounting Software Assign PO a tag by activity or output and record separately (Excel) Add extensions to current accounting cost center for activities, outputs & outcomes Create programs as a group of cost centers (alternative approaches or linked activities) that are functionally linked to outputs & outcomes
    • 25. Organizational boundaries Split interdepartmental programs into sub-programs managed by each department Give ownership to one program partner (fiscal agent model) Ownership includes responsibility for fiscal record-keeping, data collection, personnel management, spending decisions & results
    • 26. Handling Direct & Indirect Costs Direct costs can  Indirect costs be entirely are shared allocated to a across an entire single program program or or sub-program, even multiple objective, or programs and even a single are impossible output or activity to allocate fairly with some effort & accurately ALLOCATE  SEPARATE
    • 27. Tracking Tools  Activity Logs  Track PO Grant Activity Log – Project DirectorDate Hours Activity Performance Measure3/3/09 2 Volunteer Training Build Capacity for Client Support Expense Activity LogDate Invoice Activity & Vendor Performance Measure Amount3/3/09 $ 800 Volunteer Training Build Capacity for Client (YMCA) Support
    • 28. Time & Effort (Direct Cost) TE Tools  TaskCoach  ToDoList  ProjectTimer  TimeTool  TimeGT  Xpenser(app)  TimeRecording (app)
    • 29. Best Practices “Make it work!”
    • 30. Create a Solid Program Each program or sub-program has one owner who reports on outputs &/or outcomes & is not accountable solely for spending according to budget Expenditures that serve the same purpose should be placed in the same program, even if operated by different departments or partners (create sub-programs if needed) Check that activities match program outputs (don’t just match similar activities)
    • 31. Select Strong Indicators Relevant to users (comprehensive summary measures) Representative (less likely to be influenced by external factors) Cost effective Comparable within sector Minimize perverse effects May be quantitative, qualitative or efficiency (cost per unit)
    • 32. Take Care with Outputs Standardized outputs can be linked tightly & predictably with funding for formulas, targets & incentives Heterogeneous outputs are of limited utility in funding decisions because of variability Quality-based outputs only lend themselves to incentive funding but can help reduce perverse effects Outcomes are unpredictable due to external factors which makes them less useful for incentives or targets Assign outcomes (impact) to higher level organizational structures or entities and outputs to lowest levels
    • 33. Presentation Leave out inputs (useful for managers, not for anyone else) Present a small number of the best & most relevant indicators Use summary measures (combine PMI) Perform cost-benefit analysis, especially among alternative approaches
    • 34. Measure Twice… Data collection system – robust instruments & process Data processing & analysis is timely & accurate Validate indicators for errors, manipulation, & methodological deficiencies
    • 35. …Cut Once! Evaluation must be timely & include periodic spending review - linking does nothing by itself to improve effectiveness or efficiency Allocate direct costs as accurately as is cost-effective IF you can estimate a cost per unit service you can plan future budgets based on cost/unit and number of projected units of service (formula funding)… …OR recalculate inputs (with cost changes) for desired outputs & account for changes in planned activities annually Track line items for post-hoc analysis of high or low-performing activity/outputs or programs
    • 36. Further Reading & Resources From Line-Item to Program Budgeting: Global Lessons and the Korean Case (John Kim, Ed) Performance Budgeting (Marc Robinson) A Basic Model of Performance- Based Budgeting (Marc Robinson and Duncan Last)