Performance Budgeting 2.0:
Budgeting in the New Normal Environment
Dr. Alfred Ho
School of Public Affairs & Administration
University of Kansas
Defining Public Budgeting
 Budgeting is not just about numbers …
 It is a mechanism for setting social, economic, and political
goals and objectives, and for managing organizations,
programs and activities to achieve these goals.
 Budgetary decisions on revenues, spending, and debt reflect
many underlying values, ideologies, and policy priorities.
The Budgeting Context
Priorities &
Strategies
Budget
Institution
& Process
Leadership
The socialdemographic
environment
The mass
cultural &
value system
Budgetary decisions do not
happen in an institutional
& value vaccum!



Budget outcomes
Spending policies
(operating & capital)
Revenue policies
Fund balance and debt
The geo-political &
global economic
environment
The local economic
environment
The domestic politicallegal environment
The media- IT
environment
The “New Normal” for State &
Local Governments
 The “new normal” fiscal environment for the US
 Serious federal deficit and foreseeable worsening of the
problems
 State and local fiscal challenges
 Structural change in the U.S. economy and upcoming economic
challenges due to globalization and the changing geo-political
and global economic environment
 Changing demographic structure of the US
 Increasingly diverse and fragmented society with increasingly
ineffective mechanisms of social and value aggregation
 All these will make public budgeting harder and harder!
U.S. Government Spending Trends
Spending as a percentage of GDP
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Year
Total government
Source: OMB
Federal outlays
Federal grants
State & local expenditures from own sources
U.S. Government Spending Trends
 Federal revenues: FY2008: $2.5 trillion
FY2009: $2.1 trillion
FY2011: $2.3 trillion
FY2010: $2.2 trillion
FY2012: $2.5 trillion (est.)
 Federal spending: FY2008: $3 trillion
FY2009: $3.5 trillion
FY2010: $3.5 trillion
FY2011: $3.6 trillion
FY2012: $3.8 trillion (est.)
So the deficit of FY2009 was about $1.4 trillion.
FY2010, FY2011, FY2012 -- about $1.3 trillion, respectively.
-1,000.0
-2,000.0
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012 estimate
2014 estimate
2016 estimate
U.S. federal deficit as a percentage
of GDP
5,000.0
Amount in billions
4,000.0
3,000.0
2,000.0
1,000.0
0.0
Receipts
Outlays
Surplus or Deficit(−)
What are driving the spending
increases?
U.S. Government Spending as a Percentage of GDP,
by Major Spending Categories
FY
1960
1970
1980
1985
1990
1995
2000
2005
2008
2009
2010
Total
24.4
28.0
30.9
32.6
32.4
31.4
28.8
31.6
32.4
36.5
35.0
Defense &
Inter-national
9.9
8.5
5.4
6.5
5.5
3.9
3.2
4.3
4.5
5.0
5.1
Net Interest
1.7
1.9
2.6
4.1
4.2
4.0
3.1
1.7
1.8
1.4
1.4
Social
Security &
Medicare
2.2
3.6
5.5
6.2
6.2
7.0
6.4
6.9
7.4
8.3
8.4
Other
individual
payments
2.5
2.8
4.7
4.1
4.0
5.0
4.5
5.2
5.3
6.5
7.3
Other federal
1.9
3.0
4.2
2.9
3.0
1.6
2.1
2.2
1.8
3.8
1.6
State & Local
6.3
8.2
8.5
8.9
9.6
9.9
9.5
11.2
11.6
11.5
11.1
Comparing Healthcare and Social Security
Spending Changes with Revenue Changes
120%
Annual Percentage Change
100%
80%
60%
40%
20%
0%
-20%
-40%
Health
Dr. Alfred Ho, Public Admin. Univ. of Kansas
Medicare
Social security
Total Revenues
The “New Normal” -- Structural
Deficit Problems of the Fed. Govt.
 Even if the federal government has collected all the income
tax and social security payroll tax revenues it is supposed to
collect, it still cannot keep up with the rapid growth in
healthcare and social security spending.
 And not all baby boomers have retired yet. The worst
challenges are yet to come!
 This is a “structural problem” that can only be fixed by policy
changes.
 A better economy won’t solve this problem
 It requires hard choices by politicians and the public
Dr. Alfred Ho, Public Admin. Univ. of Kansas
Economic Challenges in the New Normal
Environment
 Globalization and technological revolution have led to
structural changes in the U.S. economy
 Decline of manufacturing, rise of the service economy,
outsourcing …
 personal income is not likely to grow rapidly, and we can’t
afford consuming in the same way as before.
 Foreseeable baby boomer retirement and the rapid rise of
healthcare costs will force the government spend more on
social security and healthcare
 Potential “crowding-out” effects on other spending, including
defense, community development, environmental protection
and energy, R&D, education, corrections …
 Some of these burdens will be shifted to state and local
governments
Dr. Alfred Ho, Public Admin. Univ. of Kansas
The “New Normal” Challenges &
the State & Local Fiscal Gap
 State and local governments faced tremendous fiscal
challenges for the few years during the Great Recession in
2008-2010.
 http://www.cbpp.org/files/9-8-08sfp.pdf (McNichol, et al. 2012)
 Many states still have budget shortfalls despite the recent
economic recovery (see Table 2, p. 6)
State & Local Responses to the
“New Normal” Challenges
 Cut higher education spending  allow tuition to increase







(privatization of state universities)
Cut local fiscal assistance (California, Connecticut, Maine, New
York, N. Carolina, Illinois …)
Cut capital and infrastructure spending (the stimulus package in
recent years reversed the trend slightly)
Withheld money for pension contribution
Drained the rainy day fund
Lay-offs, furloughs, cut new positions, stop hiring new people
Renegotiate with the unions on post-retirement benefit policies
Innovative ways to reduce health care costs
Demographic Changes in the New
Normal Environment
Wolf & Amirkhanyan (2010):
 Aging population  Implications for the future workforce,
the consumption power, and the economic growth rate
 Who will stay and who will leave? Will new immigrants
come to your community?
 Nationally, we will have a more diverse and heterogeneous
population, but
 Significant between-state and intra-state differences in
population growth
 Different implications for education and community
development programs and spending
Culture, Values, and IT
 To resolve the above economic, social, and demographic
challenges require social dialogues about:
 What are important to society?
 How should resources be distributed among different social
groups?
 Who should have access to the decision-making process? Does
everyone have equal access to power?
 Is it possible to build any social consensus on some of these
tough policy issues?
A Video on the Great Recession
Impact
 http://www.pbs.org/wnet/need-to-know/video/need-to-
know-december-16-2011-mayor-under-siege/12637/
 Big-city mayors across the United States are under growing
pressure to balance their budgets while still providing necessary
services. Need to Know chronicles three days spent with
Milwaukee mayor Tom Barrett, illuminating how one mayor
spends his time trying to drum up business, even while facing
withering attacks from some of his hard-pressed constituents.
 What is even more interesting are the comments by Dr.Tricia Rose,
professor of African-American cultural politics at Brown University, on
the impact of government cutback on inner-city minority residents.
Culture, Values, & the Media
 As shown above, factors that have a significant role in our
future policies:
 The political culture of society – are we willing to listen to
diverse views, compromise, and sacrifice some of our self
interests, given the growingly diverse and heterogeneous
population?
 What values and ideologies are driving our decisions? Are these
values helpful to solving these policy problems, or make the
problems worse?
 The Mass Media and IT
 What are their roles in facilitating the social discourse and
fostering social consensus?
 Do you think they are helping or hurting? Why?
Culture, Values, the Mass Media,
and IT
 Research has shown that the mass media and the new social
media have allowed more user-differentiation and market
segmentation
 Decline of the traditional mass media (e.g., TV channels, local
newspaper)
 More customer-tailored media (e.g., cable TV )
 More self-selective clustering of users
Implications for democracy and social consensus building?
Implications for the budgetary process?
The Budgeting Context
Priorities &
Strategies
Budget
Institution
& Process
Leadership
The socialdemographic
environment
The mass
cultural &
value system



Budget outcomes
Spending policies
(operating & capital)
Revenue policies
Fund balance and debt
The geo-political &
global economic
environment
The local economic
environment
The domestic politicallegal environment
The media- IT
environment
Performance Budgeting
 A tool that has been proposed since the turn of the 20th
century
 Use quantitative performance indicators to help budgetary
decisions
 Types of performance measures:
 Outcome measures (e.g., crime rates, % of users achieving the desirable
social/economic outcomes …)
 Output measures (e.g., unit of products / services produced, # of clients
served)
 Efficiency measures (e.g., cost per user, time used per case)
 Effectiveness measures (e.g., jobs created per $1 investment)
Traditional Performance Budgeting
 Use performance, especially outcomes, to drive budgetary
decisions
 Cut ineffective or unproductive programs
 Strive to get better value for money
 Gained popularity in the late 1980s & the 1990s
 Response to the anti-government movement that labeled
government as wasteful and ineffective
 The movement of “reinventing the government”
 Outcome-driven management
 A tool of accountability by managers
Does not work!
Failures of Traditional Performance
Budgeting
 Too managerially driven; Ignore the concerns and priorities
of politicians.
 Too much emphasis on “scientific objectivity” and
quantifiable measurability, and not enough focus on
perceptions. (To policymakers, “perception” is reality!)
 Mostly done by the management; seldom involve the line
workers, policymakers, service users, and citizens
 “What outcomes matter, and outcomes for whom?”
 The report tends to be too long and technical, and is not
user-friendly to the general public and policymakers
 Result: Policymakers ignore performance measurement
results in budgetary decision-making
Failures of Traditional Performance
Budgeting
 This is not to say that the traditional performance
measurement exercise is completely useless.
 We need to differentiate two types of resource allocation
activities, and different types of performance measurement
and reporting:
“Boundary” allocation decision
“program- /activitylevel” allocation
decision
driven mostly by values,
priorities, ideologies, and
political tactics
Can be more open to
economic, effectiveness, and
efficiency analysis
Failures of Traditional Performance
Budgeting
We should not mix up the “boundary” decisions with
“program decisions.
 Accountability of “boundary decisions”
 need to address the fundamental values and priorities (e.g., equity
and distribution questions, accessibility to services, societal
outcomes)
 The public and their elected officials should play an important role
in the process
 Accountability of program or activity-level decisions
 Focus more on the technical issues of effectiveness and efficiency
 Managers should drive the decisions, given the priorities set by
citizens and their representatives
 However, citizen participation may be critical in some cases
Time for
Performance Budgeting 2.0!
1. Think about the “value” of public services, not just the
“performance”
 The “Value” Formula:
𝑉𝑎𝑙𝑢𝑒 =
𝑂𝑢𝑡𝑐𝑜𝑚𝑒
𝐼𝑚𝑝𝑜𝑟𝑡𝑎𝑛𝑐𝑒 ×
𝐼𝑛𝑝𝑢𝑡
Driven by political
decisions and priorities, values,
and ideologies
Managers recognize that
input includes not only
governmental
budgetary investment,
but also investment
by other sectors through
Partnership and leveraging
Defined not just
by managers, but
also by
the public and their
representatives
Example: Best Cars 2012
Time for
Performance Budgeting 2.0!
2. Engage the public and major stakeholders
 What “outcomes” are important to the public / service users?
 Tools: citizen surveys (stated importance + derived importance
analysis), focus groups, citizen committees, neighborhood
meetings, service user feedback, data analysis of citizen service
requests
 Example – the Iowa Citizen-Initiated Performance Assessment
project. Lessons learned:
 Need a portfolio of engagement strategies
 Mindful of the costs and time of engagement on the staff and citizens
Time for
Performance Budgeting 2.0!
3. Focus on “outcomes” that matter!
 Don’t try to measure and report everything
 Outcome-driven logic model and strategic planning
Outcomes
Intermediate
Outcomes
Output
Activities
Input &
Resource
Allocation
Time for
Performance Budgeting 2.0!
4. Think about “Governance”, not “Government”
 At each level, think about how to partner with other sectors
and leverage their resources and capacity
Outcomes
Intermediate
Outcomes
What are the roles of the government and
other sectors?
Should the government provide, produce,
lead, coordinate, and/or foster?
Output
Activities
Input &
Resource
Allocation
Time for
Performance Budgeting 2.0!
5. Effectiveness and cost-efficiency still matter  Need to
build a culture and system of business process improvement
 Example: INDYSTAT in the City of Indianapolis
http://www.indy.gov/eGov/City/OAP/IndyStat/Pages/Home.aspx
How to allocate resources
more cost-effectively
among activities/programs to
achieve the desired outcomes?
Time for
Performance Budgeting 2.0!
6. Capacity Building for Data-Driven Decision-Making
 Governments today do not lack data on program activities
 Service requests, program outputs, police and fire statistics, GIS-based
data, housing and property data, survey data ….
 A “smart” government knows how to leverage and harness the
“intelligence” of the data to make better decisions and deliver
services more cost-effectively
 Needs capacity building on:
 IT infrastructure, GIS, data interoperablity and integration efforts, data
analysis
Time for
Performance Budgeting 2.0!
6. Capacity Building for Data-Driven Decision-Making (con’t)
 Example – an ongoing project by Alfred Ho
Time for
Performance Budgeting 2.0!
7. Communicate, Communicate, Communicate!
 IF:
 citizens are thinking about the “value” of public services, not just
performance; and
 value is partly derived from “values” and perceived importance of
services; and
o perception is fluid and moldable, and not a static phenomenon
 Then:
 The government should proactively communicate with citizens about its
values and underlying rationales of policy decision-making
 It should also proactively counter the growingly fragmented political
culture
Time for
Performance Budgeting 2.0!
7. Communicate … (con’t)
 There should be a portfolio of communication strategies to
target different citizen types and preferences
 Different media should be used not as “mutually exclusive”
strategies, but as mutually reinforcing mechanisms
Percentage of Jury Pool Respondents
Citizen Engagement – Communication Channel
Preferences in 2009 (Aug-Nov)
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
How do Indianapolis residents
want to receive information from the City?
n = 1,152. All responses were weighted by household income.
1st Choice
2nd Choice
3rd Choice
Citizen Engagement – Communication
Channel Preferences in 2010
Communication Channel
Preferences in 2011 – Pew
Source: Rainie, L., et al. (2011). How the Public Perceives Community Information Systems.
Washington, D.C.: Pew Research Center’s Internet & American Life Project.
Time for
Performance Budgeting 2.0!
Come to Mayor’s
Night outs
Get the
e-newsletters
Are they effectively
linked?
Visit the City’s
website
Get the mail
newsletter
Facebook
targeting the
younger
generation
Conclusion
 Strategies matter, but policymakers and managers should be
mindful of the political environment
 Strategies suggested above should be adapted to the political
environment
 Roles and strategies of the union matter
 System and capacity building matter
 You may engage the citizens and get their input very effectively,
but if you don’t have the capacity and good management system
to deliver, you have a bigger problem because expectations have
been raised.
 Leadership matters
 Visioning, bringing people together, and communicating
Conclusion
 Budgeting under the New Normal will be about:
 Doing more with less
 Doing less with less for some departments and programs
 Doing more with more for some programs, if those programs
are of high priorities and value to the public
 How to cut spending and raise more revenues depends
heavily on:
 How the social discourse of values and priorities are conducted
 The values and ideologies of the leadership & the community
 The managerial capacity of the government to deliver
 “Performance” matters, but the old way of measuring and
reporting performance may not.
Questions?
 Please feel free to email me if you have any questions.
Alfred Tat-Kei Ho
Associate Professor
School of Public Affairs & Administration
Wescoe Hall, room 4076
University of Kansas
Lawrence, KS 66045
Email: alfredho@ku.edu