The Governor's Performance Budgeting Pilot Program, now in its third year of implementation, has not materially changed the budget process and it is not clear that it will. At the same time, most of the participating departments indicate that the program has helped them to do a better job of managing their programs. Other state departments can benefit from the lessons learned from the pilot project, and the administration should institutionalize those aspects which can improve the performance of state programs.
In this section, we provide an update on the performance budgeting pilot program and discuss the common themes and issues which have emerged as the administration has implemented this program. We conclude with recommendations that we believe can help to make the pilot program more effective.
What Is Performance Budgeting?
Performance budgeting differs from the traditional approach to budgeting in that it attempts to determine whether a program is achieving its goals by focusing on outcomes, rather than processes or inputs. For example, instead of focusing on the number of parks and employees managed by the Department of Parks and Recreation, performance budgeting would review an array of performance measures including customer satisfaction with the park system, the extent to which the department is protecting wildlife habitat, and the degree to which the department has increased access to parks.
In order to implement performance budgeting, departments must identify performance goals, or outcomes, and the performance measuresthat will be used to determine whether progress is being made toward achieving the desired outcomes. Resources are then allocated to departments in order to achieve specific goals.
Governor Initiates Pilot Project.In January 1993, the Governor proposed to change the state's budgeting process by pilot testing performance budgeting in four state departments. According to the Governor's Budget, the pilot program was being proposed because the state's traditional budget process was "seriously dysfunctional." The administration indicated that performance budgeting, along with quality improvement, offered the potential for substantial savings, improved performance, enhanced citizen satisfaction, and greater accountability in the delivery of state services.
The Legislature responded to the Governor's initiative by enacting Ch 641/93--the Performance and Results Act of 1993 (SB 500, Hill)--which established the program, required budget "contracts" between pilot departments and the Legislature, and set January 1, 1996 as the completion date of the pilot project. Budget contracts are supposed to require departments to deliver specified outcomes for a specified level of funding. They must identify criteria for evaluating outcomes and specify provisions for reinvesting savings resulting from performance budgeting.
Chapter 672, Statutes of 1994 (SB 1609, Hill) requires that a draft budget contract be submitted to the fiscal subcommittees of the Legislature by January 31 if the contract is proposed to be effective in the ensuing fiscal year.
Finally, the Legislature enacted Ch 779/94 (AB 2711, Valerie Brown)--the State Government Strategic Planning and Performance Review Act--which (1) requires the Department of Finance (DOF) to identify state agencies which should either develop a strategic plan or update an existing one, and (2) requires those agencies to report annually to the Legislature on steps being taken to develop performance measures that could be used for performance budgeting or performance review.
Legislative Analyst Office's Initial Assessment of Performance Budget and Pilot Project. In October 1993 we released a report on performance budgeting, including an assessment of the Governor's pilot program to that date. Figure 4 summarizes the key findings from that report, which apply broadly to performance budgeting as it had been tried in several states and localities.
| Figure 4 Performance Budgeting Key Findings From Other States and Localities LAO 1993 Report | |||
|---|---|---|---|
| The manner in which performance budgeting is applied and the results it produces vary widely among the states | ||
| In most instances, performance budgeting has not fundamentally changed the budget process | ||
| Implementation costs are significant | ||
| Performance measures need to focus on outcomes, not process | ||
| Performance needs to be verified independently | ||
| Performance budgeting requires a change in the Legislature's perspective towards the budget process | ||
| The Legislature must be willing to accept a longer-term view of implementation and results | ||
We noted in our report that the foundation of the Governor's pilot program--reshaping the state's budget process--would not be easy to accomplish because performance budgeting is a complex undertaking. Recognizing the important role the Legislature would have to play to ensure success of the project, we recommended the establishment of a joint legislative committee to oversee the pilot project and review the budgets of the pilot departments.
The Departments of General Services, Consumer Affairs, and Parks and Recreation were among the original four departments selected to participate in the pilot. The fourth department--the Stephen P. Teale Data Center--is no longer a participant. The California Conservation Corps and the Department of Toxic Substances Control were added in 1994; however, the latter department dropped out in 1995.
Some Departments Are Ahead of Others. Not surprisingly, the rate of progress in implementing performance budgeting has varied among the participating departments. As noted above, establishing a performance budgeting system is complicated, and some of the pilot departments are larger and more complex than others. Other factors contributing to a variation in progress include:
Despite these factors, and although much remains to be accomplished, departments have completed most of the preliminary tasks to implement performance budgeting, such as developing a strategic plan and defining performance measures; however, most of the departments have not established the computer-based systems which are required to collect and maintain performance data and generate reports of actual performance.
| Figure 5 Common Themes of the Performance Budgeting Pilot Program | |||
|---|---|---|---|
| Performance Impacts | ||
| Fiscal and Budgetary Impacts | ||
| Administrative Impacts | ||
Departments Have Refocused on Their Purposes and Goals. Pilot departments have exerted a considerable amount of effort to redefine their organizations, update their mission statements, adopt strategic plans (along with performance measures and goals), and manage in accordance with those plans. Consequently, the pilot departments are focusing on performance management, which they believe is proving to be valuable to them and the programs they administer. Most of the mechanisms that have been put in place in pilot departments--strategic plans, goals, performance measures, and the means to capture and report progress--are viewed as basic and fundamental to a business enterprise. Consequently, these are practices which state departments should have been following all along. Nevertheless, if the pilot program goes no further than fostering performance management in state departments, and that management emphasis is maintained, the pilot program will have served a useful purpose.
Departments Energized.It is clear that a very real and positive result of the performance budgeting pilot program has been the enthusiasm observed in most of the pilot departments. In some departments we have observed that the enthusiasm permeates throughout the organization. This enthusiasm has in many cases been channeled into department-wide efforts to determine what's important, and to whom, and to develop plans and strategies to keep the focus on important goals and manage to achieve them. Whether the benefits of this enthusiasm will be lasting will depend on the extent to which departments are able to keep focused on their goals, maintain their plans and strategies, and manage effectively. This in turn depends on the extent to which department staff at all levels remain committed and involved.
Measuring Performance and Tying It to Budgets Is Difficult.In a number of instances, departments have discovered that there is little or no baseline performance data against which to measure improvement. Where this occurs, departments must establish a means of collecting the baseline data that will enable the periodic assessments of improvement which are at the heart of performance management.
Those pilot departments which have progressed to the point of attempting to present budgets in a performance-based format have indicated difficulty accomplishing this task. For example, the Department of Parks and Recreation, which had previously indicated that its 1996-97 budget would be presented in a performance-based format, has instead provided a sample format in the Governor's Budget and has postponed until 1997-98 presenting its budget in a new display. Similarly, the California Conservation Corps has experienced difficulties in its attempt to develop a new budget format which ties requested budget allocations to specific performance areas and outcomes.
Significant Resources Have Been Invested. In our October 1993 report we noted that the cost to implement the pilot project would be significant; and, in the Analysis of the 1994-95 Budget Bill,we recommended that the DOF advise the Legislature as to its estimate of costs and benefits associated with the administration's performance budgeting plans. To date, no such estimate has been provided. Because departments are absorbing the costs to implement performance budgeting, the costs are not apparent. However, several pilot departments have acknowledged that there has been a substantial investment in staff time alone, and some departments have contracted for consultants to help in the development of strategic plans.
In last year's Analysis, we estimated that the state's total investment in the pilot project would be about $5 million by the end of the current year. We have not updated this cost estimate for the budget year because departments are not uniformly accounting for their expenditures for performance budgeting. In addition, some of them argue that they would incur similar costs regardless of performance budgeting. This latter point is arguable, as it seems apparent that participation in the performance budgeting pilot program has caused departments to embark on planning and other activities they would not have otherwise undertaken.
"Redirected Savings" Have Not Occurred.One of the "carrots" made available to departments volunteering to participate in the pilot program is the ability to redirect 50 percent of savings resulting from performance budgeting. Chapter 641 requires that such "gainsharing" be specified in annual budget contracts. To date, none of the current budget contracts provide for gainsharing. We do not know whether any budget contract for 1996-97 will provide for gainsharing. This is because none of the departments had submitted proposed contracts at the time this analysis was prepared.
Increased Administrative Flexibility.A long-standing and frequent complaint of state managers at all levels has been the inability to get the job done effectively because of a myriad of controls on their ability to administer programs. One of the more attractive features of the performance budgeting pilot project to departments is the prospect of being provided additional administrative flexibility. Although the 1995-96 budgets for the pilot departments reflect a relaxation of certain administrative controls, it can be argued that much of this flexibility is relatively minor and should have been provided regardless of the pilot program. For example, the Director of General Services is authorized to augment the budget by up to 10 percent, without DOF approval, in order to cover unanticipated service requests from customer departments.
On the other hand, the number of specific administrative flexibilities provided pilot departments in 1995-96 budget contracts increased significantly from those provided in 1994-95. Moreover, some of the flexibilities are significant. For example, the current budget contract for the Department of General Services (DGS) provides administrative flexibility in 12 areas. The flexibility provided the DGS ranges from the specific exemption from requirements to purchase goods from the Prison Industry Authority, to the ability to obtain a waiver of specific provisions of civil service law, with the agreement of the State Personnel Board, except for provisions relating to discrimination, unlawful employment, or applicant fraud, or where a waiver would conflict with the merit principles of the California Constitution.
Results of Flexibilities Generally Nonquantifiable. For the most part, pilot departments are unable to quantify the benefits of the administrative flexibilities which they have been provided. While it is not clear whether these flexibilities will have a marked impact on departmental performance, it does not make sense to subject departments to controls which add cost unless they also add policy value and further important oversight. Eliminating such controls should help departments to better focus on fulfilling their missions.
Controls of Questionable Value Should Be Eliminated. It is important to distinguish between controls which are in place for good executive or legislative oversight purposes and those that do not add value to government programs but rather get in the way of departmental attempts to focus on their primary missions. Some of the flexibilities granted to the DGS in the current year, while not minor, still reflect reasonable changes which should help the department to better focus its resources on fulfilling its various program requirements. We believe that the pilot program has identified a number of controls which add little or no value to state government. For example, limiting to 60 working days the length of time for which an emergency appointment may be made without the approval of the State Personnel Board. (The California Conservation Corps was authorized under the pilot to make such appointments for up to nine months.) In our judgment, relief from administrative controls is always desirable where the value to the control agency is relatively minor compared to the workload or delay the control imposes on departments.
Program Expectations Still to Be Met.
We recommend that the Department of Finance (DOF) and the performance budgeting pilot departments, advise the Legislature, during budget hearings, as to their evaluation of the pilot program and plans for performance budgeting in the future, including sharing with all state agencies lessons learned from the pilot program and the extent to which the DOF plans to relieve other departments of administrative controls found to be unnecessary as the result of the pilot program. We further recommend that any plans to expand elements of the pilot program to other departments include standards and guidelines to ensure that there is no unwarranted duplication of effort.
In initiating the performance
budgeting pilot project in 1993, the Governor identified a number of potential
benefits to this budgeting approach. These benefits, and our assessment of
the extent to which they have been realized, are shown in Figure
6. To date, performance budgeting has not realized the fundamental benefits
initially envisioned by the administration, as shown in the figure.
| Figure 6 Have Performance Budgeting Benefits Been Achieved? | ||
|---|---|---|
| Benefit | Met? | Comment |
| Change fundamentally the budget process | No | Only difference is budget contracts |
| Produce substantial cost savings | No | Unclear as to whether substantial savings will result |
| Improve program performance | Unclear | Not yet apparent |
| Enhance citizen satisfaction | Unclear | Has not been measured |
| Produce greater accountability | Unclear | A measure of accountability is expected under budget contracts |
We believe that there are several reasons for this lack of significant results to date. First, significant improvements in performance do not occur "overnight" and tend to take some time. Second, the experiences of other states and local governments suggest that it takes time to radically change long-standing budget processes. In order to achieve such changes, it requires the commitment of both the administration and the Legislature to shed their old approaches to the budget. Third, the program got off to a slow start and has suffered to some extent because it has been implemented in the absence of a definitive plan, with the result that each of the pilot departments has been left to its own devices to define the program as it applies to them.
Progress May Have to Be Incremental.Given the administration's experiences to date with performance budgeting, it may be that the only way the state can attain a better budget system is to make incremental changes. That is why we believe it is important to identify successful elements of the pilot program experience, institutionalize them, and keep expectations realistic and clear as to how the pilot program can improve the overall budget system. In our judgment, the administration should determine what incremental steps should be taken statewide, because it is has the current experience with the pilot program to draw upon, and it has been assigned responsibility by the Legislature to work toward changing the budget process.
Evaluation of Pilot Program May Help Shed Light.In this regard, the DOF is required by Chapter 641 to report its evaluation of the pilot program. The report, which was due January 1, 1996, is required to address (1) the extent to which performance budgeting results in a more cost-effective and innovative provision of government services, (2) gainsharing rewards to each department in the program, and (3) the specific innovations which brought about gainsharing savings. The report had not been released at the time this analysis was prepared; however the DOF advises that the report will be available in time for budget hearings. The report may shed some light on the administration's plans for performance budgeting beyond the four pilot departments.
Standard Approaches Lacking.In last year's Analysiswe noted that as a result of the independent approach to performance budgeting occurring in the pilot departments, there was no assurance that information technology systems necessary to make performance budgeting work would be developed in a manner which would prevent duplication of effort and the development of redundant computer applications. We also noted that without guidelines, the Legislature would not be assured that performance reports submitted by the pilot departments would be in a consistent, easy to read format. Consequently, the Legislature adopted supplemental report language requiring the DOF to develop guidelines for information technology systems and reporting formats. The guidelines had not been developed as of the preparation of this analysis.
Lessons Should Be Shared.As noted above, the pilot departments will have invested, by the end of the current year, approximately $5 million related to the performance budgeting pilot department. For the most part, the pilot departments believe that the performance management benefits have warranted this investment. Although two of the pilot departments recently agreed to collaborate to produce a performance budgeting newsletter, it is not clear as to the extent to which the lessons learned by the pilot departments will be shared with other departments which could benefit from improving their management practices, or when or how such sharing will occur. Given the state's significant investment in performance budgeting, it makes sense to share with allstate agencies the important findings and recommendations developed by the DOF and the pilot departments as a result of their experience with the pilot program. This is important even if the official pilot program is not extended, because there is nothing to prevent other departments from independently implementing performance budgeting.
Analyst's Recommendation.In our review of the DOF, we recommend that the department provide the Legislature a status report on the pilot program at the time of budget hearings. In that regard, we believe there is merit in having a broader administrationperspective on performance budgeting--one which reflects pilot department views as well as those of the DOF. This is because the pilot departments have learned much about what works, and what doesn't work in attempting to implement performance budgeting. Also, the pilot departments have supported one another in their mutual efforts to improve program performance through participation in the pilot program and have developed a core competency in management reform which can be useful to other state agencies.
Consequently, we recommend that the DOF and the performance budget pilot departments advise the Legislature, during budget hearings, as to their evaluation of the pilot program, and plans for performance budgeting in the future, including sharing with all state agencies lessons learned from the pilot program and the extent to which the DOF plans to relieve other departments of administrative controls found to be unnecessary as the result of the pilot program. We further recommend that any plans to expand elements of the pilot program to other departments include standards and guidelines to ensure that there is no unwarranted duplication of effort.
In 1995, the Legislature enacted major legislation to reorganize and improve the state's information technology oversight responsibilities. In addition, the Governor initiated a number of actions intended to improve the state's implementation of information technology.
Aside from the reorganization, relatively little progress has been made toward resolving many of the major problems which three independent reports identified in 1994. (Portions of the following analysis were contained in our report entitled "State Information Technology: An Update," issued on January 23, 1996).
Figure 8 summarizes the major responsibilities assigned by Chapter 508 to the DOIT.
| Figure 7 Major Features of Recent Information Technology Reform Legislation (Ch 508/95, SB 1, Alquist) | ||
|---|---|---|
|
Eliminates the Office of Information Technology and creates the Department of Information Technology (DOIT), with expanded duties and authority. (See Figure 8 for details.) | |
| Establishes two information technology advisory bodies to provide advice to the DOIT. One advisory entity is comprised of senior state information technology managers; the other is comprised of nonstate government individuals. | |
| Establishes policy direction in key areas, including (1) public access to public information contained in state computer files, (2) development of a statewide strategy to facilitate computer-based information sharing among departments, and (3) improving the management of information technology projects. | |
| Limits the role of the Department of Finance regarding information technology projects to the approval of the expenditure of funds. | |
| Figure 8 Department of Information Technology Major Responsibilities Under Ch 508/95 (SB 1, Alquist) | ||
| Oversee the management of information technology in state agencies, with authority to suspend or terminate projects. | |
| Develop and implement a strategy to facilitate information sharing among state computing systems. | |
| Determine which information technology applications should be statewide in scope, and ensure that such applications are not developed independently or duplicated by state agencies. | |
| Develop and maintain a computer-based file, accessible to the Legislature, of all approved information technology projects. | |
| Develop statewide policies and plans that recognize the interrelationships and impact of state activities on local governments, including local school systems, private companies that provide services to state agencies, and the federal government. | |
| Requires the Department of Information Technology to submit the following reports (due date): | |
Since the airing of the state's information technology issues in the first half of 1994, the Governor and his administration have taken a number of constructive steps to address both the state's information technology situation in general, as well as specific information technology issues. These steps include:
Individual Departments Take the Initiative.Despite the lack of statewide progress in resolving many of the state's information technology problems, some departments are unilaterally implementing various recommendations made in the three information technology reports issued in 1994. These include the Department of Corrections and the Public Employees' Retirement System, which have, for example, employed quality assurance consultants to oversee implementation of major projects. In addition, the Franchise Tax Board (FTB) and the Department of Housing and Community Development (HCD) have utilized recent changes in state contracting policy to pay contractors out of either enhanced revenues (FTB) or reductions in program costs (HCD) resulting from a project. To the extent these individual departmental initiatives are successful, they may serve as useful models for information technology efforts in other departments. Clearly, the DOIT is the designated state agency to disseminate the lessons learned from these initiatives as it develops statewide policies in response to Chapter 508.
Several Major Projects Still Need Close Review.In our January 1996 report, we identify several major information technology efforts which have experienced various implementation difficulties. These projects continue to warrant legislative oversight because they face uncertain futures as to when they will be completed, how much it will cost to complete them, and the extent to which anticipated benefits will be realized. Many of these projects, along with other issues involving the application of information technology are addressed in this Analysisas part of our review of individual departmental budgets, and are listed below.
In addition to the unresolved issues cited in the 1994 reports, we have identified additional tasks and challenges which we believe the administration should address as it implements Chapter 508. We address these tasks and challenges in more depth in this chapter in our review of the DOIT, and summarize them in Figure 9 (see next page).
| Figure 9 Information Technology Tasks and Challenges Requiring Attention | ||
|---|---|---|
| Clarification of Responsibilities. The respective information technology oversight roles of the Departments of Finance and Information Technology (DOIT) are not clear to many departments and need to be clarified. | |
| Method of Funding the Department of Information Technology Is Inequitable. The administration's funding of the department almost equally among two data centers and the General Fund is fundamentally flawed and should be replaced | |
| Year 2000 Program Conversion. The DOIT has taken positive steps to address the problem of converting the state's computer programs to accommodate the year "2000." Given the importance of this issue and the potential conversion costs (more than $50 million), it will be essential to move forward quickly in a well-planned, cost-effective manner. | |
| Use of the Internet. State use of the Internet is exploding, and while there are many benefits to be derived, cost and usage implications need to be addressed. | |
| Keeping the Legislature Informed. The flow of information from the administration to the Legislature relating to state information technology projects has been curtailed and needs to be restored. | |
| Assuring the Success of Information Technology Projects. In certain cases, the state should use independent experts to verify and validate proposed projects and work delivered by contractors in order to ensure project success. | |
We believe that the Legislature's continued attention to the state's information technology situation is warranted not only because of the considerable attention which the Legislature has given this matter in recent years and the size of the administration's information technology program (exceeding $1 billion annually), but because of the growing dependence of state operations on an information technology infrastructure. Unless identified flaws in that infrastructure are repaired, the ability of many state departments to maintain levels of service in an era of constrained funding runs the risk of being seriously compromised.
In this Analysiswe discuss several specific departmental information technology programs and recommend actions to the Legislature regarding these programs. Figure 10 lists those departments and projects discussed elsewhere in this Analysis, where we have identified information technology issues.
| Figure 10 Budgets With Information Technology Issues Identified in the 1996-97 Analysis | |
|---|---|
| Departments | Issue |
| Board of Equalization | Migration of computer applications to Teale Data Center |
| California Community Colleges | Technology planning guide |
| California State Lottery | New gaming system |
| Corrections | Correctional Management Information System (CMIS) |
| Education | Educational Technology |
| Franchise Tax Board | Bank and Corporation Tax System |
| General Services | Telecommunications |
| Health and Welfare Agency Data Center | Various |
| Information Technology | Statewide planning and oversight |
| Motor Vehicles | New computer improvement project |
| Office of Emergency Services | Staffing level for new information technology unit |
| Resources Agency | California Environmental Resources Evaluation System (CERES) |
| Student Aid Commission | Financial Aid Processing System (FAPS) |
| Teale Data Center | Various |
| Barstow Veterans' Home management system | |
In this overview we discuss the following compensation issues:
For salary/benefit increases, the budget proposes $156 million for higher education and $32 million for the California Highway Patrol. The budget does not propose funds for new pay or benefit increases for other state employees.
Higher Education. The budget includes $156 million from the General Fund for salary and benefit increases at the University of California and the California State University, as shown in Figure 11.
California Highway Patrol. The budget includes about $32 million in 1996-97 from various special funds in the California Highway Patrol's (CHP's) budget for the annualized costs of the highway patrol officer MOU approved by the Legislature in Ch 768/95 (SB 544, Dills). Figure 12 details these costs. (We discuss a fiscal issue related to this MOU in our analysis of the CHP's budget request.)
| Figure 11 | |||
| Higher Education Salary and Benefit Increases 1996-97 Governor's Budget General Fund | |||
|---|---|---|---|
| (In Millions) | |||
| University of California (UC) | |||
| 5 percent faculty salary increase, effective 10/1/96 | $28.4 | ||
| 2 percent staff salary increase, effective 10/1/96 | 17.4 | ||
| Full-year cost of 1995-96 salary increases | 9.7 | ||
| Merit salary adjustments | 31.7 | ||
| Subtotal | ($87.2) | ||
| California State University (CSU) | |||
| Salary and benefit increases to be negotiated | $64.4 | ||
| Full-year cost of 1995-96 salary/benefit increases | 4.2 | ||
| Subtotal | ($68.6) | ||
| Higher Education Total | $155.8 | ||
| Figure 12
California Highway Patrol Salary and Benefit Increases | |||
| Pay for additional half hour per day (lunch) | $19.5 | ||
| Education attainment/incentive pay | 10.7 | ||
| Pay for 18 or more years of service | 1.7 | ||
| Increased base for overtime payment purposesa | 1.9 | ||
| Savings on health insurance premiums | -1.9 | ||
| Total | $31.9 | ||
| a 1996-97 Budget Change Proposal. | |||
The MOU also included several provisions that attempt to streamline the personnel rule-making process, the process for appeal of minor disciplinary actions, and the layoff process. These provisions apply only to the highway patrol officers covered by the MOU. The administration, however, has expressed an interest in extending the same or similar provisions to other state employees through collective bargaining currently underway with the other bargaining units.
The patrol officer MOU expires June 30, 1997. The terms of the MOU, however, provide that the state and the employee representatives may reopen the agreement to bargain pay and benefit issues on or after March 1, 1996.
Other State Employees. Other state employees last received a general pay increase (3 percent) on January 1, 1995. The budget does not propose funds for new pay or benefit increases for these employees.
The Department of Personnel Administration should report to the budget committees during budget hearings on the administration's collective bargaining proposals and the status of negotiations.
The Department of Personnel Administration (DPA) began negotiations in 1995 with the 21 bargaining units representing rank-and-file state employees (other than higher education) for new MOUs governing compensation and other terms and conditions of employment. These MOUs are to replace MOUs that expired June 30, 1995. At the time this Analysiswas prepared, the DPA had concluded an MOU only with the bargaining unit for highway patrol officers (as discussed above). Under current law, the provisions of the 20 expired MOUs generally remain in effect pending adoption of replacement MOUs.
In our analysis of the DPA's budget request, we recommend that the DPA report to the budget committees during budget hearings on the administration's collective bargaining proposals and the status of negotiations.
In our overview of employee compensation issues in the Analysis of the 1995-96 Budget Bill, we discussed at some length the need to strengthen the Legislature's oversight of proposed collective bargaining agreements. In order to assure the Legislature has the opportunity to appropriately review new MOUs, we continue to recommend that the Legislature adopt the following policies:
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