On the money

There’s a new money game in town — budgeting for outcomes — and several local and state governments say it has helped them reduce deficits, use revenue more effectively and increase taxpayer confidence. First defining what they want to accomplish, then divvying up the available funds based on priorities, state and local governments — including Iowa, Michigan, South Carolina and Washington, as well as Azuza, Calif., Los Angeles, Spokane, Wash., Snohomish County, Wash., and Multnomah County, Ore. — already are using the method. Washington Gov. Gary Locke first budgeted for outcomes in 2002 to help solve the state’s billion-dollar deficit, according to Peter Hutchinson, co-author of “The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis.”

The fact that some residents believe governments are not spending money wisely may be a direct result of how governments have always budgeted, which is based on costs, Hutchinson says. “[Governments] add up the salaries, the asphalt and pensions and then say, ‘Oh my gosh, we can’t afford this. So we either have to ask the taxpayers to send us more money or we have to cut.’”

One goal of budgeting for outcomes is to win back public support for government. But to realize that and other benefits, governments must think and budget differently.

The process

Rather than calculating service cost, governments using outcome-based budgeting determine the price residents are willing to pay for government services. Over the last 50 years, that price — 36 percent of personal income — has been nearly constant, Hutchinson says.

Using budgeting for outcomes, government departments must first identify the desired outcome, such as increased safety, and then define a goal, for example, a low crime rate. Budget planners then must determine what it will take to reach the outcome, such as more police patrols. Next, the departments have to create strategies and then determine how they currently contribute or how they or other departments can work to achieve the outcome. For example, the health department creates programs to improve health, but fire and public works departments could positively affect the community’s health, too.

While traditional budgets focus on funding departments, outcome-based budgets focus on purchasing results, with departments typically submitting bids to reach an outcome and an executive team reviewing and ranking bids from highest to lowest — the highest-ranked bids get funded, the lowest do not. Bids usually include information, such as what the department will produce, how much it will cost and for how long the department will produce that outcome.

Once priorities have been selected, a city might determine more than one way to achieve the outcomes. Therefore, a department finds out its budget when it sees which of its proposals were selected.

In outcome budgeting, everyone in the organization focuses on producing specific results that are important to residents, and the budget represents the choices that the government will purchase. “It’s a purchasing exercise with a lot of options, and the city council or county board purchases those things that will produce the most result for the money,” Hutchinson says.

New solutions to old problems

A few years ago, Snohomish County faced a mammoth deficit amounting to about 7.5 percent of the general fund. When its new county executive suggested budgeting for outcomes as a solution, finance director Roger Neumaier says people were open to it. “If your objective is to try to do what you did better with last year’s dollars, it’s going to have a different impact [on how budgets are prepared, versus] if your goal is to figure out what outcomes residents want and figure out how they want you to spend the dollars,” he says.

The county tried the new budget concept in 2004 for its 2005 budget. “We wanted to make sure everybody playing a role understood their role, understood the issues, had an opportunity to ask questions, and that included the public,” Neumaier says. The county conducted focus groups, meetings and resident surveys. “The program actually increased the confidence [in] the public perception of how we manage our dollars,” he says.

Spokane faced a potential budget shortfall of $5.5 million in 2004. Across-the-board cuts had been implemented several times, but that approach was no longer working, says Gavin Cooley, the city’s finance director.

In May 2004, the city used an outcomes-based budgeting process called Priorities of Government (POG) to cut $5.5 million from its 2004 budget. Spokane’s existing budget had to be re-adjusted due to a gap caused by labor settlements and other unbudgeted costs. A supplemental budget was prepared using the POG method and became effective for the last four months of 2004, Cooley says.

During that time, Spokane organized the “cabinet plus” — the city’s nine division heads, Mayor Jim West, the city attorney, the deputy mayor and the four heads of the major unions — and asked residents to help determine how the money should be spent. It met with the library board, the planning commission and neighborhood groups. The group also developed an online survey and held about 20 community meetings.

Based on use of city services, city council priorities and resident comments, Spokane identified eight key service priorities — growth and learning, healthy residents, healthy environment, leadership, mobility, reduced vulnerability, safety and a strong economy. The city then asked residents to rank each area’s importance and discovered that their top two priorities were improving public safety and mobility.

Requests for proposals for each priority were issued, and departments responded with bids that included what they would do, why they would do it and how much it would cost. Following a question-and-answer session with the departments, the cabinet-plus members voted on each bid in every priority. The bids received a composite score based on a high, medium or low ranking, and were ranked within the priority.

“Even if the fire chief was leaning toward the bids from the fire department, he was countered by … people from eight other divisions and [four] unions,” Cooley says. “You ended up with this top-to-bottom ranking and then allocated resources [based on] those rankings.”

In theory, the highest priorities were to be fully funded with low ranking items unfunded. “Of course there were a lot of things at the bottom of the list that we [had to] fund,” Cooley says. “You couldn’t just say, ‘We’re not going to fund that, regardless of how it was ranked.’ To [fund low-ranking priorities], we’d go back to some of the higher-rated bids and say, ‘could you scale this particular bid?’ In other words, ‘If you got 10 percent less than what you requested, what would that do to your service?’” Consequently, some of the higher-rated bids were watered down, he says.

The mayor, deputy mayor, CFO and budget director were to determine the final allocations, but Cooley says making cuts was so difficult, they pushed the process back to cabinet-plus members. For example, if there were $55 million in bids and $50 million in resources for public safety, the bidding department determined how to cut the bids by $5 million. “Those were pretty intense meetings when you’ve got the fire and police chiefs saying, ‘OK, we don’t have enough here, we know what the priorities are, we’ve heard from the residents, how are we going to make these allocations?’” Cooley says. “But they delivered and did a good job.”

Politics and tough decisions

Hutchinson says outcome-based budgeting requires a change in mindset — from thinking about paying for costs and funding departments to thinking about purchasing outcomes for residents. “It takes a lot of energy to get people to think differently, and they don’t all make it the first time around,” he says. “Most proposals are some version of what they’ve always submitted. It takes a second round or a second year or iteration for people to really start to get the idea.”

The budget system itself is problematic. “Budget systems simply don’t allow a look both at departments and outcomes at the same time,” Hutchinson says. “So sometimes the systems have to be restructured.” Spokane had to adapt its accounting system to the new budgeting method. “We re-programmed the underlying accounting system along the POG,” Cooley says.

He adds that an important part of POG is allocating money to prioritized activities. “You will never have enough money, so some activities will fall below the line and theoretically not get funded,” he says. “If activities are not separated, then that process breaks down.” For instance, if Fire-Management Information Services (MIS) were separated from Fire Operations, Fire MIS might receive a low rating, and lose funding, while Operations might be high and fully funded. If they are grouped together, both would receive funding, but some other activity would lose funding to balance the budget.

“It’s a balancing act. You can’t have a small number of very large bids that could never be totally dropped,” Cooley says. “On the other hand, you don’t want so many small bids that it overwhelms the voting.”

Take the time to explain

Neumaier says the challenge of outcome-based budgeting was communicating clearly to the departments, the cabinet-plus and the public. “If people understand why you’re doing something, what you’re doing and how they fit into it, it’s a lot easier for them to cooperate,” he says.

Despite the success of the new budgeting method, Spokane still had to lay off 154 of its 21,000 employees. Distancing the POG budget from that was hard, Cooley says. “[We told employees] ‘Don’t mistake some of the negative outcomes from a difficult budget with the budget process itself because the process helped alleviate a lot of the pressures we were feeling.’”

Cooley also says that last year departments did not have enough time to present and explain their bids and, because there were so many, the cabinet-plus did not have time to review them properly. Next year, the departments will have more time to present each bid.

Despite the opportunity for political pressures to influence the process, Hutchinson says implementing outcome-based budgeting is not as political as some think. “People want to know how you survive the politics the first time and [in the future]. Are there political winners and losers? Is it a Democratic or Republican way to budget? The answer is that it’s a common-sense way to budget, which is why the Republican governor of South Carolina is doing it, the Democratic governor of Iowa is doing it, the Democratic governor of Michigan is proposing it and the Republican legislature in Michigan is embracing it. It’s non-partisan.”

Cooley says the POG budget was never perceived as a Democratic or Republican process in Washington or Spokane. “[In the 2003-2004 budget year] it was presented by a Democratic governor and carried forward by a Republican-controlled legislature,” he says. “It reached across the aisle incredibly well.” In Spokane, he says leaders just wanted to get on with the business at hand.

Positive results

In addition to balancing the Snohomish County budget, Neumaier says the process has also increased the public’s trust and has educated them about its challenges. “Many people didn’t really believe we were facing budget problems until they got involved in trying to fix them,” he says. “You cut back on the things you don’t need as much during tough times and then you do more of the things residents care about during good times.”

In the beginning, he says, county officials’ goals included: a change in thinking and culture; a budget that would pass the council 5-0 with no council provisions; a budget tied to clearly articulated performance measures for which the departments are held accountable; a budget that at each development stage can be clearly justified by its cost and contribution toward the end goal; a budget that provides for Snohomish County priorities efficiently; and a balanced budget five-year trend.

Neumaier says most of those have been realized. The process has enabled the county to spend taxpayer money better, more effectively and in a way that is more responsive to residents.

Spokane’s immediate goal for outcome-based budgeting was to close the 6 percent gap in its 2004 budget. It accomplished that and also engaged the community and city employees, created a more knowledgeable management team and helped pass a $117 million street repair levee.

“We ended up with a lot of cross-pollinization between the divisions and the departments because you suddenly had the legal department reading about bids from the fire or police departments and learning about those organizations,” he says. “In terms of team-building of the executive management team, that benefit alone would be a great reason to proceed with a POG approach.”

Residents also understand the city’s budget challenges better, which has resulted in more confidence in local government. “The 2005 budget is the worst budget the city has ever faced, [which] you’d think would have a commensurate effect on public confidence in government,” Cooley says. “In fact, we took the worst budget and, for the first time in over 35 years, we budgeted fewer expenditures than revenues.”

Pick participants carefully

Outcome-based budgeting is time-consuming, difficult and not for the faint of heart. But the benefits can be well worth it. “It is an excellent tool for asking yourself, ‘Are we doing things in the best way possible?’” Neumaier says.

While understanding the process conceptually and systematically is important, choosing those who participate in the planning is critical. “Part of why we were successful [was] we picked bright people from across the county and put them on results teams,” Neumaier says. “We gave them some rules but allowed them to innovate a little.”

Hutchinson says that governments see tremendous improvements during the second year because everyone knows the rules, and leaders and residents are supportive. He also says a two-part process — a submission, a ranking, a re-submission and then a re-ranking — can be beneficial the first time a budgeting-for-outcomes plan is used.

Cooley says a good communication plan — especially for employees — is the key to success. “Our communications director [is helping us] develop a formal communications plan for the budget process now,” he says. “We didn’t do that before.”

Spokane’s 2006 budget is focusing on performance measures. “Let’s have a clear explanation of what we’re buying within those bids, and let’s have performance measures so that we can come back the next year and say, ‘Did you deliver what you said you would deliver?’” Cooley says.

Hutchinson says the goals for an outcome-based budgeting process should be progress, not perfection. “Nobody does it perfectly the first time,” he says. “There are plenty of bumps in the road. There are people who just do not get it or refuse to do it. But virtually every time, you have [enough] people who do get it that you are encouraged about doing it again.”

Nikki Swartz is a Kansas City, Mo.-based freelance writer.

Secrets of successful outcome-based budgets

Governments interested in outcome-based budgeting are most worried about the difficulty of the process, according Peter Hutchinson, co-author of “The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis.” What are the secrets to making the process work most effectively, even in the first year? Hutchinson and Gavin Cooley, finance director for Spokane, Wash., suggest:

• Leadership: Two of three local leaders — the mayor, the chief of staff and the finance director — must wholeheartedly back outcome-based budgeting, Hutchinson says.

• Accountability: According to Hutchinson, government should want each department to be accountable for its services, with consequences for non-delivery, including losing the deal or performing the work again at the department’s own expense. Governments should consider building contingencies into the project itself.

• Transparency: Regularly communicate with residents and update the city council weekly, Cooley says.

• Resident feedback: Cooley says it is important not to just ask residents questions but to let them know their responses will be considered.

• Technology: Spokane’s MIS department ranks the bids, communicates the process and gathers input internally and externally using the Internet.

• Dedicated executive team: One of the more controversial aspects of Spokane’s executive team was that it included the heads of the four major labor unions. “I cannot stress how important that was because the labor groups are key to the whole process and getting the message out to the employees,” Cooley says.
  — Nikki Swartz