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Home My WebLink About11/13/2012 Council Presentation - Priority Driven Budget processCredits This paper was written by Shayne C. Kavanagh, Jon Johnson, and Chris Fabian. Kavanagh is Senior Manager of Research for the GFOA's Research and Consulting Center in Chicago, Iltinois; he can be reached at skavanaghC�gfoa.org. Johnson is a Senior Manager, Research and Advisory Services, at the Center for Priority Based Budgeting; he can be reached at jjohnsonC�pbbcenter.org. Fabian is a Senior Manager, Research and Advisory Services, at the Center for Priority Based Budgeting; he can be reached at cfabianC�pbbcenter.org. The following individuals provided vatuable contributions to this paper: Marcia Arnhold Finance Director, Mesa County, Colorado Mike Bailey Finance Director, City of Redmond, Washington Kindte Bowden Office of Management and Budget Manager, City of Lakeland, Ftorida Steven G Chapman 11 Director of Finance, City of North Lauderdale, Florida Ed Hacker Strategic Planning and Continuous Improvement Manager, City of Lakeland, Florida Stanley Hawthorne AssisYant City Mlanager, City of Lakeland, Florida Anne Kinney Director, Research and Consulting Center, GFOA Fran McAskitl Director, Finance and Strategic Planning, Potk County, Florida Christopher Morritl City Manager, City of Roanoke, Virginia Roger Neumaier, CPA Finance Director, Snohomish County, Washington Jay Panzica Chief Financial Officer, City of Ventura, Califomia Walter C. Rossmanrt Assistant Budget Director, City of San Jose, California Lorie Tinfow Assistant City Manager, City of Walnut Creek, California Doug Thomas City Manager, City of Lakeland, Florida Kim Walesh Economic Devetopment and Chief Strategist, Gity of San Jose, California Wanda Wiltiams Research and Budget Director, City of Savannah, Georgia � Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Leading the Way to Priority-Driven Budgeting . . . . . . . . . . . . . . . . . . . . . . 2 Steps in Priority-Driven Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1. IdentifyAvaitabke Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2. Identify Your Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3. Define Your Priority Resutts More Precisely . . . . . . . . . . . . . . . . . . 8 4. Prepare Decision Units for Evaluation . . . . . . . . . . . . . . . . . . . . 10 5. Score Decision Units Against Priority Results . . . . . . . . . . . . . . . . 11 6. Compare Scores Between Offers or Programs . . . . . . . . . . . . . . . 13 7. Altocate Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8. Create Accountabitity for Results, Efficiency, and Innovation ..... 17 Condusion ...............................................19 Appendix 1: Building a Program Inventory . . . . . . . . . . . . . . . . . . . . . . . . 20 Copyright 2011 by the Government Finance Officers Association 203 North LaSalle Street, Suite 2700 Chicago, Illinois b0601 www.gfoa.org introduction The tradirional approach to governmental budg- eting is incremental: The cunent year's budget becomes the basis for the next year's spending plan, and the majority of the organizaaon's ana- lytical and political attenrion focuses on how to modify this year's spending plan based on rev- enues anticipated in the next year.` An incremen- tal approach is workable, if suboprimal, in peri- ods of reasonably stable expenditure and revenue growth because the current level of eYpenditures can be funded with relatively litde controversy. However, the incremental approach to budgeting is not up to the financial challenges posed by the new normal of relatively flat or decluung rev- enues, upward cost pressures from health care, pensions, and service demands, and persistent structural imbalances.Z Priority-driven budgering' is a common sense, strategic alternative to incremental budgeting. Priority budgeting is both a philosophy of how to budget scarce resources and a structured, although fleYible, step-by-step process for doing so. The philosophy of priority-driven budgeting is that resources should be allocated according to how effectively a program or service achieves the goaLs and objecrives that are of greatest value to the community. In a priority-driven approach, a government identifies its most important strate- gic priorities, and then, through a collaborarive, evidence-based process, ranks programs or serv- ices according to how well they align with the prioriaes. The government then allocates funding in accordance with the ranking. The purpose of this paper is to describe factors that have led governments to adopt priority budgeting and to identify the essential concepts and steps in such a process, including the adap- tations individual governments have made to customize priority-driven budgeting to local con- ditions. I'he paper is based on the e�eriences of the governments below, which were selected for variety in organization size, type of government, and approach to budgeting. T'his paper builds on prior publications about priority-driven budget- ing by taking a step back from specific approach- es to budgeting and describing the major steps in the process and then outlining options for put- ring those steps into operation. It is GFOA's hope that this paper will give those who are new to priority-driven budgeting a solid base from which to get started, and to provide veterans of priority-driven budgeting with ideas for further adapting and sustaining priority-driven budget- ing in their organizations. , �� ;, � , _ � � <� ,� � � ,;�� ;, � � •� � � � � �, � ?� t. ' , � . � �� y�� _ 9��. � _ . � �... �..�.-, z�.�,�,. ,. � . � �-ti�,. � .t � �, ..� Anatomy of a Priority-Driven Budget Process Leading the Way to Priority-Driven Budgeting Priority budgeting represents a fundamental change in the way resources are allocated. The governing body and the chief �ecutive must understand and support the process and commu- nicate that support throughout the organizarion. In addirion, these officials must be willing to carry out their decision-making responsibilities in a way that is consistent with a priority-driven process. The change an organization desires to bring about by virtue of implemenung priority- drivenbudgeting won't happen overnight, so those leading the move to priority budgeting must make it clear that this type of budgeting is not a one-rime event - it is the "new normal." I'o see the change through for the long-term, leaders must have a passion for the philosopl�y underly- ing priority-driven budgeting, but at the same time, they must not be overly committed to any parricular budgeting technique or process. They must remain adaptable and able to respond to the circumstances while remaining true to the philos- ophy. If the organizarion doesn't have this type of leadership, it might be better to delay priority- driven budgeting or look to another budgeting reform that has greater support.11ie "Philosophy of Priority-Driven Budgeting" sidebar describes the philosophy of priority-driven budgering and its central principles. Use these principles to test the support among critical stakeholders and to build a common understanding of the tenets the budget process will be designed around. Of course, not everyone in the organization can be eapected to immediately accept priority-driven budgeting with the same enthusiasm. The leader- ship must articulate why a priority-driven budget � � , _ ;,�.. .�� ,� �� -�� _, _� . � d ��'�� m' � �°� 3. � �, �.,_ -�`��,'�,.�,, . �.�. ��.� is something worth actively supporting and voting for, rather than just a"least-worst° outcome in a rime of revenue scarcity.' The leadership must also create a sense of urgency behind priority-driven budgeting by showing the financial forecasts, analysis, and other information that supports the need for a new approach to budgeting. Ensuring that a prioriry-driven budgeting process is suc- cessfully adopted requires organizarion-wide acceptance and a shared understanding of the entity's financial condition. For example, the City of Savannah, Georgia, shared aends in major rev- enue sources, reserves, and long-term forecasts to show that the city's revenues were entering a peri- od of protracted decline. Of course, the case need not hinge on financial decline. A case can also be made based improving the value the public receives from the tu� dollars government spends. Two groups in particular that must be recruited to support priority-driven budgering - elected officials and senior staff. Elected of€icials need to show consensus and support for priority-driven budgering to make it through the challenges in the budget process that will inevitably oceur. Ideally, at least one or two elected officials wi]1 be attracted to the philosophy so they can champion the idea with other officials. Elected officials may be particularly drawn to the fact that priority- driven budgeting allows them to set the organiza- tion's key priorities and see how services align or don't align with their priorities. Thisputs elected officials in an inEluenrial policy-making role - per- haps more powerful than under a traditional budgeting system. Elected officials who have e�erienced priority-driven budgeting consistent- ly say one of the main reasons they endorse it is because it allows them to achieve what inspired them to run for office in the first place - identify- ing the results and implemenring the policies that are most important to their community. Senior staff must support the process as well because priority-driven budgeting requires a sig- nificant time commitment from staff. If the board and CEO are behind priority-driven budgeting, it will go a long way toward getting senior staff engaged. Staff inembers who have experienced prioriry-driven budgeting say they suppon it because it gives them a greater degree of influ- ence over their own destinies. Staff no longer passively awaits judgment from the budget office; instead, they create their own solutions because priority-driven budgeting invites them to articulate their relevance to the community. To raise awareness about the move to priority- driven budgeting and to build support for ir among all stakeholders, the governments that shared their e�periences for this paper emphasize the importance of a communications and risk mit- igarion strategy. The strategy idenrifies major stakeholders, their potential concerns, and mes- sages and actions that can assuage those concerns. For eYample, employees might want to know if their job tenure will be affected, and cirizens might want to know the implications for service offerings. The need for transparency in the process cannot be emphasized enough - many organiza- rions create a specific Web page to provide employees and citizens with regular and timely updates on the process as it unfolds. Involving key stakeholders - such as the Chamber of Gommerce, labor union leaders, editorial staff from the media, and leaders of community groups and neighbor- hood groups - at appropriate stages in the process often provides the best form of "informal" commu- nicauon to the rest of the public. In communities such as Boulder, Colarado, and Fairfield, California, a town hall format was used as a eom- munication device. The first group was asked to invite others to subsequent meetings, and not only did they invite friends and family, but they brought them to the event. � , . � d • �� -� -�„r- � �� , ,�, n, �� z z �. � _ . , .a . m� . - . ... v,. _. R4 .. ..-' � . ... ... _ r il� r�.. , . . . .� Perhaps the primary risk to successful priority- driven budgeung that officials and other stake- holders might reject of the process because they see it as insufficiently legiamate - the process is thought to be flawed in some way that makes it a poor basis for allocating resources. Mitigate this risk by conferring "democratic" and substantive legitimacy onto priority-driven budgeting.b Democratic legitimacy means that the process is consistent with the will of the public. Engage the elected officials, the public, and employees in the process to achieve democraac legitimacy. When a budget process is seen to have democratic legit- imacy, it gives elected officials permission to resist narrow bands of self-interest that seek to overturn resource allocation decisions that are based on the greater good. demonstrate that this kind of budgeting is consis- tent with best practices, but, most of all, devote time to intensely study priority-driven budgeting. Some of the research participants for this artide studied it for two years before moving forward. Wliile two years of study will not be necessary for every government, becoming fluent in priority- driven budgeting allows the leadership to speak convincingly on the topic and lead an honest dis- cussion about the feasibility of priority-driven budgeting for the organization. If the organization decides to move forward, the leadership's e�ert- ise will allow it to design a credible process, define the roles of staEf in priority-driven budgeting, lead others through it, and aclapt to the pitfalls and curveballs that will be encountered. The next secrion describes the major steps in a Substantive legitimacy means that priority-driven priority-driven budgeting process and provides budgeting is perceived to be based on sound tech- options for answering the su� questions - listed nical principles. Use Govermnent Finance Officers below - for customizing priority-driven budget- Associarion (GFOA) training and publications to ing to your organization. Steps in Priority-Driven Budgeting There are eight major steps in a priority-driven budget process. F�hibit 1 provides a map for how the eight steps fit together, and the steps are more fully described in the following pages.' As the exhibit shows, the eight steps are not com- pletely linear. Steps 1 and 2 can begin at the same time, and Step 8 comes into play at many differ- ent points of the process. Identify Available Resources Before embarking on priority-driven resource alla cauon, the otganization must undergo a fundamen- tal shift in its appmach to budgeting. This shift, while subtle, requires that instead of first having the organization idenrify the amount of resources "needed for the next fiscal year, it should first clearly idenrify the amount of resources that are °available° to fund operations as well as one-time initiatives and capital e�enditures. As their first step in budget development, many organizations e�end a great deal of effort in completing the analysis of estimated eYpendi- tures to idenrify how much each organizational unit will need to spend for operations and capital c, ^a�:. e»»b 'y ' , � � �i ' - � � �.,� �A 2„ � � . � � � � • x3 ji J� E��?;� �'' ;�.�' .� ° '�' � ' . S �, 3 � � � '� ��s ��,�, � .. m ,� f: . ��, ! � �•`A - � -- . "�:� .., .. "_.. ,�._. .. _ "",�_m" - a. ,��,�`..:.: r.. �-., z � ,�� b �.�'€ �' a.�' �, � in the upcoming fiscal year. Once that "need° is determined, then the organizarion looks to the finance depamnent ar budget office to figure out how these needs are to be funded. An integral part of the priority-driven budgeting philosophy is to spend within your means, so the first step in developing a budget should be focusing on gain- ing a clear understanding of the factors that drive revenues and doing the rec{uisite analysis to develop a reasonably accurate and reliable rev- enue forecast in order to understand how much is available to spend for the upcoming fiscal year. Resources must also be clearly differenriated in terms of ongoing revenues versus one-time sources. The organization must be able to identi- fy any mismatch between ongoing revenues and ongoing �penditures (operarions) as well as between one-rime sources and one-time uses (one-time initiarives, capital needs, fund balance reserves). This analysis will ensure that the enri- ty can pinpoint the source of its structural imbal- ance and address it in developing its budget. This will also ensure that a government does not unknowingly use fund balance (a one-rime source) to support ongoing expenditures. Once the amount of available resources is identi- fied, the forecasts should be used to educate and inform all stakeholders about what is truly avail- able to spend for the next fiscal year. The organi- zation must understand and believe that this is truly all there is as it begins developing the budg- et. Sharing the assumptions behindxhe revenue projections creates a level of transparency that dispels the belief that there are °secrer funds" that will fiY the problem and establishes the level of trust necessary to be successful. In the first year, an organizaaon might choose to focus attention on only thase areas that do not have true structural balance. For most otganizarions, this will often include the general fund, but the jurisdic- tion might decide to include other funcfis in the process. Both Polk Counry, Florida, and the City of Savannah took steps to limit the scope of imple- mentation. For example, Polk County concentrated on the general fund, and Savannah �cluded capital projects from the process. 2. Identify Your Priorities Priority-driven budgeting is built around a set of organizational strategic priorities. These priori- ties are similar to a well-designed mission state- ment in that they capture the fundamental pur- poses for which the organizarion exists and are broad enough to have staying power from year to year. A critical departure fmm a mission state- ment is that the priorities should be expressed in terms of the results or outcomes that are of value to the public. These results should be specific enough to be meaningful and measurable, but not so specific as to say how the result or outcome will be actueved or become outmoded after a short time. Below are the five priority results determined by Mesa County, Colorado: Notice how these results are expressed in the "voiee of the citizen." A strategic plan, vision, and/or mission statement can serve as the ideal starting point for idenrifying the priority results. If you have an exisung strate- gic plan, it might be helpful to ground the priority results in these previous efforts to respect the investment stakeholders may have in them and to _ � :.�. -M- 3 � ,. ,,�, >,F � ,�, % � � �.� t. - A�� , . � �� , � �. � � � give the priorities greater legitimacy. If you don't have an existing plan, developing one as a prelude to prioriry-driven budgeting can provide a stronger grounding for the priorities. It might also help increase the enthusiasm of elected officiaLs and senior staff for prioriry-driven budgeting, as they seek a way to connect the new plan to deci- sions about annual resource allocations. The governing board also needs to be closely in�olved in setting the priorities. The priorities are the foundation of priority-driven budgeung, so that the governing board must fully support them. The role of an elected official is to set the results the organization is expected to achieve. Developing the priorities might also be a good place to involve citizens. Some communities have used traditional means of doing this, such as ciu- zen surveys, focus groups, and town hall meet- ings to engage citizens in helping establish the expected results for their community. Others are being innovarive. The City of Chesapeake, Virginia, recendy asked citizens viewing a result- setting exercise on their public access channel to s � ; . s 4 , _. ��..... . ,,, �..�f r � � "-.9,`, �' c �� µ ti,.. , ,a�.,, . ,� . , f.. . s � , participate online and share their thoughts on "what does the city exist to provide." Cities such as Walnut Creek, California, and Blue Ash, Ohio, set up kiosks in city facilities and asked citizens to participate in a brief survey that helped vali- date the city council's established results and to `wveight° the relative importance of those results to the community. 3. Define Your Priority Results More Precisel y 11ie foundation of any prioritization effort is the results that define why an organization eYists. Organizations must ask, "What is it that makes us relevant to the citizens?° Being relevant - pro- viding those programs that achieve relevant results - is the key purpose and most profound outcome of a priority-driven budgeting process. The challenge with results is that the terms can be broad, and precisely what they mean for each individual community can be unclear. For instance, take a result like "Providing a Safe Community," which is shared by most local gov- ernments. Organizations talk about public safety or providing a safe community as if it is an obvi- ous and specific eoncept. But is it? In the City of Walnut Creek, citizens and city leadership identified building standards for sur- viving earthquakes as an important influence on providing a safe eommunity. In the Gity of Lakeland, Flarida, however, not a single citizen or public official discussed earthquakes to define the very same result. In the City of Grand Island, Nebraska, the city highlighted community acceptance and eohesiveness as intrinsic to achieving a safe community (acknowledging their initiatives to help integrate a growing and important popularion of their community - immigrant farm workers). However community integration was not a relevant factor that would contribute to the safety of the community in Walnut Creek. Hence, the specific definitions of the community's results is where the identity of your community and the objective meaning of what is relevant is revealed. A powerful method for defining results was estab- lished in Strategy Maps by Kaplan and Norton." Strategy mapping is a simple way to take a com- plex and potenrially ambiguous objective - like achieving a safe community - and creating a pic- ture, or map, of how that objecuve can be achieved. Sometimes referred to as cause-and-effect diagrams or result maps, strategy maps provide an effective way for an organization to achieve clarity about what it aims to accomplish with its results. Strategy maps should be developed using cross- functional teams. Teams consist primarily of staff (both with subject matter expertise relating to the priority result and without), but they can also include elected officials and citizens. Fxtubit 2(on the following page) provides an example of a stxategy map from the City of Savannah for "high-perfornung government° (Savannah's equivalent of the "good governance" result described in the earlier sidebar). Savannah's map includes performance indicators to help gauge if the priority resuIt is being achieved Exhibit 3(on the following page) is a picture of a slightly different style of strategy map fram the City of San Jose, California, for its "Green, Sustainable City" priority result. The center of the map is the result, and the coneepts around � ;: � , �, � , , ��;.:� �,. , � �� the result are the definitions — they help the city clearly articulate its priorities: "When the City of San Jose (fill in the blank with any of the result definitions}, then we achieve a Green, Sustainable City." Consider San Jose's result map relative to your own community. Would your community define the relevanee of your organization by its ability to achieve a green, sustainable community? Would your communiry define a result like a green, sus- tainable com�nunity in a similar or different way? One of the challenges local governments face is trying to address what can seem like a growing (and seemingly limitless) eacpectation for pro- grams and services. One of the benefits of devel- oping strategy maps is that local governments can give citizens a more precise description of � �r .,a ; � � �.,� � ,.. ��.% � �� . � � � � �� ; - ` �' � , 5 y� � � � �� , ..,� , �� ` � � �� t e �_ ..Q�, o..��, ��, �� , . ��,, the results that make local government relevant. This will establish a shared foundation, a com- mon context for evaluating and prioritizing the programs and services the jurisdiction offers. A service's relative priority can be evaluated only through a common belief about the results local government is striving to achieve. The City of Walnut Creek knew that citizens and community stakeholders needed to be involved in defining the priority results. The rationale was that the city's priority results would be legitimate only if community members were responsible for establishing the results and their definirions. The city reached out to the community on the radio, in the newspaper, and through the city's newsletters and Web site to invite any citizen to participate in one of several town hall meetings. At the meering, citizens were asked to submit answers to the question: "When the City of Walnut Creek , then they aclueve [the result the cirizen was focused on] ° The response from citizens was tremendous and generated a host of answers. City government staff inembers (who participat- ed in the meetings) were then responsible for summarizing the citizen's responses by develop- ing strategy maps. Lastly, when defining the priority results, consid- er whether some results might be more impor- tant than others. l his could have an impact on how programs are valued and prioritized. Elected officials, staff, and/or citizens can participate in ranking exercises, where each participant is given a quantity of "votes° (or dollars, or points, etc.) and can allocate their votes among all the priority results to indicate the relative value of one result versus another. It is important to make clear to participants that tlus ranking process is not a budget allocauon exercise (whereby the budget of a certain result is deternuned by the votes given to a result). Through such a ranking, participants can e�rpress that certain results (and therefore the programs that eventually influence these results) may have greater relevance to the community than others. 4. Prepare Decision Units for Evaluation The crux of priority-driven budgering is evaluat- ing the services against the government's priority results. Thus, the decision unit to be evaluated must be broad enough to capture the tasks that go into producing a valued result for citizens, but not so large as to encompass too much or be too vague. Gonversely, if the decision unit is too small, it may only capture certain tasks in the chain that lead to a result and might overwhelm the budget process with details. Our research subjects took one of two approaches to this issue: "offers° or "programs.° Offers. Offers are customized service packages prepared by departments (or perhaps designed by cross-functional staff teams or even private firms or non-profits) to achieve one or more pri- ority results. Offers are submitted to evaluation teams (typically comprising a cross functional group of staff, but possibly cirizens as well) for eonsiderarion against the organization's priority results. Often, the evaluation team will first issue a formal "request for results" that is based on the strategy map and defines for departments, or others who are preparing offers, precisely what the evaluation team is looking for in an offer. �' � l .�' _ � 1 � �i: � • „ �,, , � �. �� S � . ...... .. ..... ... ..a �..... . ,..�..;..- . .�<::,.. .... ..... ....<_... . .. ,.. ...... » ..... •',..,,.rh� �; �. .:: ' �.. . . . � Offers are purposely intended to be different from existing organizational subunits (like departments, divisions, programs) to make a direct connection between the decision-unit being evaluated and the priority results, to encourage outside-the-box thinking about what goes into an offer, and to make it easier for out- side organizations to participate in the process. For eYample, multiple departments can cooper- ate to propose a new and innovarive offer to achieve a result instead of relying on past ways of doing things. A private firm could submit an offer to compete with an offer made by govern- ment staf£ The drawback of offers is that they are a more radical departure from past practice and may be too great a conceptual leap for some. This could increase the risk to the process, but if the leader- ship's vision is for a big break from past practice, then the risk might be worth taking. For exam- ple, Mesa County's board is very interested in having private and non-profit organizations par- ricipate fuIly in its budget process at some point in the future, so the offer approach makes sense for Mesa County. Programs. A program is a set of related acuvities intended to produce a desired result. Organizations that use the "program" method inventory the pragrams they offer and then com- pare those to the prioriry results. Programs are an established part of the public budgeting l�i- con and some governments already use programs in their approach to financial management, so thinking in terms of programs is not much of a conceptual leap, or perhaps not a leap at all. This means less work and process risk. However, even when the concept of programs is familiar, be sure the "progratns° (ar offers) are sized in a way that allows for meaningful decision making. Programs that are too big are often too vague in their pur- pose to be accountable for results, and it can be difficult to fairly judge the impact of a program that is too small. Generally speaking, if a pro- gram equates to 10 percent or more of total e�enditures of the funds in which it is account- ed for, then the program shauld probably be bro- ken down into smaller pieces. If a program equates to either l percent or less of total e�.pen- ditures or $100,000 or less, it is probably too small and should be combined with others. Also, be aware that using programs might pro- vide less opportunity for outside organizations to participate in the budgeang process because the starting point is, by definition, the existing port- folio of services. For that same reason, radical innovation in service design or delivery method is less likely. 5. Score Decision Units Against Priority Resut ts Once the organization has identified its prioriry results and more precisely defined what those results mean, it must develop a process to objec- tively evaluate how the program or offer achieves or influences the priority results. Scoring can be approached in several ways. The first variation to consider is if a program or offer will be scored against all the otganization's priority results or just the one it is most closely associated with. The cities of Lakeland, Walnut Creek, and San Jose scored against all of the prior- ity results. The belief was that a program that inIluenced multiple results must be a higher prior- �. ,� �F- ,,::�,an ��...� � � , � � � ��. � � �� . , . ity - every taY dollar spent on a program that achieved multiple results was giving the taxpayer the best bang for the buck.° Alternatively, organi- zations like Mesa County, the City of Savannah, Polk Counry, and Snohomish County matched each program or offer with only one of the priority results and evaluated it against its degree of influ- ence on that result. Under this scenario, guidelines should be established to help determine how to assign a program or offer to a priority area as well as provide some sort of accommodaaon for those programs or offers that demonstrate important effects across priority result areas. Both of these approaches have been used successfully, so the right choice depends on which approach resonates more with stakeholders. In addition to scoring the offers or programs against the priority results, some organizations have included addirional factors in the scoring process. Examples include mandates to provide the service, change in demand for the service, level of cost recovery for the service, and reliance on the local government to provide the service (as opposed to community groups or the private sector). The governments believed that a pro- gram should be evaluated more highly if there was a mandate from another level of government, if there was an anticipated increase in demand for the program or that program received fees or grant dollars to significantly cover the costs to provide it. Finally, if the citizen had to rely solely on the govemment to provide the program or service and there was no other outside oprion available, then a program was believed to be of a slightly higher priority. The next variarion is how to actually assign scores to programs or offers. One approach is to have owners of the programs or offers (e.g., department staffl assign scores based on a self- assessment process. This approach engages the owners in the process and taps into their unique understanding of how the programs influence the priority results. Critical to this approach is a quality control process that allows the owner's peers in the organization (other departments) and/or external stakeholders (ciazens, elected officials, labor unions, business leaders, etc.) to review the scoring. The peer review grnup cha1- lenges the owner to provide evidence to support the scores assigned. A second approach to scor- ing establishes evaluation teams that are respon- sible for scoring the programs or offers against their ability to influence the priority results. Owners submit their programs or offers for the teams to review, and the teams score the pro- grams against the results. The priority-driven budgeting process becomes more like a formal purchasing process, where the departments are analogous to vendors andxhe evaluation teatns are like buyers. Evaluation teams could be made up entirely of staff, with representaaon both from staff inembers who have specific eYpertise related to the result being evaluated and others who are outside of that particular discipline. An alternarive team composition would include both seaff and cirizens, to gain the unic{ue perspectives of both eYternal and internal stakeholders. This second approach brings more perspecrives into the initial scoring and encourages cross-function- al teamwork via the evaluation teams. Another consideration is the particular scoring method to be used. For example, will evaluators have to use a forced-ranking system where pra grams/offers are fit into a top-to-bottom ranking or will each program be scored on its own merits, with prioritization as a natural byproduct? Each system has its advantages, but the important thing is to make sure the scoring rules are clear to everyone and applied consistently. The role of the elected governing board in this step is another point of potential variation in the scoring. In some organizations, the board is heav- ily integrated into the process and participates in the seoring and evaluation step. They have the opportunity to question the scores that have been assigned by the owner or the evaluation team, ask for the evidence that supports that score, and ultimately request that a score be changed based on the evidence presented and their belief in the relative influence that program or offer has on the priority results it has been evaluated against. In other organizations, the process can be implemented as a staff-only tool that is used to develop a recommendation to the governing body. Snohomish County uses this approach, as its culture and board-staff relation supports it. Regardless of which variations are selected, there are three important points to establish. The first is that to maintain the objectivity and trans- parency of the process, programs ar offers must be evaluated against the priority results, as they were defined collectively by stakeholders (see step 3). Secondly, scores must be based on the demonstrated and measurable influence the pro- grams or offers have on the results. Finally, the results of the scoring process will be provided as recommendations to the elected officials, who hold the final authority to make resource alloca- tion decisions. 6. Compare Scores Between Offers or; Programs It is a"moment of truth° in priority-driven budg- eting, when the scaring for the offers or programs is compiled, revealing the top-to-bottom compar- ison of prioritized offers or programs. Knowing this, an organization must be sure that it has done everything possible up to this moment to ensure that the final scores aren't a surprise and that the final comparison of xhe offers or pro- grams in priority order is logical and intuitive. The City of San Jose engineered a peer review process through which the scores the depart- ments gave to their programs were evaluated, discussed, quesrioned, and sometimes recom- mended for change. The city established a review team for each of its priority results. The team first reviewed the strategy map to ensure that each member of the team was grounded in the city's specific definition of the result. NeYt, the review teams were given a report that detailed every program scored for the particular result under review. The teams met to discuss: • whether they understood the programs they were reviewing; • whether they agreed with the score given by the department (the departments scored their own programs); • whether they required further testimony or evidence from the department to help them better understand the score given; and • whether the seore should stand, or if the team would recommend an increase or decrease. All programs were evaluated in this manner until a final recommendation was made on program scores. The ciry invited the local business community, citizens representing their local neighborhood commissions, and labor leaders to review the scores. Walter Rossman, from San Jose's City Manager's Office, described their effort this way: "The participants found the effort informative as to what the city does; they found it engaging with respect to hearing staff in the organization discuss how their programs influence the city's results; and, most interesting, they found it fun ° San Jose's story is important because it demon- strated how stakeholders from various perspec- tives and political persuasions can all productive- ly participate in the priority-driven budgeting process. San Jose didn't ask these stakeholders to come together and rank programs: They didn't ask them to decide which programs should be cut or which ones should be preserved. They framed the discussion very simply: Evaluate how our programs help us achieve our results, and to what degree. The outcome of prioririzarion was therefore eYpected and self-evident, based on the common understanding of the programs and how the programs influence results. Stakeholders could be concerned that their favored programs might lose support in the course of priority-driven budgeting. Even when a program director or a citizen who benefits from a particular program understands why that pro- gram ranked low, they are not going to be pleased about it. Invite stakeholders from all sides, from within the organization and euen the community, to understand the process. Include stakeholdersat various points in the process so they might influence the outcome. Constantly communicate progress, throughout the process. Program c}irectors, stakeholders of a parricular program, organizational leadership, and staff might not enjoy seeing their program prioritized below other programs, but if they understand it, if they've had a chance to influence the process, and, most importandy, if they are aware of acrions they might take to improve the priority ranking of their program, the process will have a great chance for success. Lasdy, consider if the scoring of the programs or offers will be used only to decide where to make budget reducrions. Organizations such as the cities of Lakeland and Walnut Creek have used priorirization not only to balance their budgets, but also to understand how serviees that might appear less relevant to the city government might be relevant to other community groups. These groups might take responsibility for supporting or preserving a service. There could be great potential in engaging other communiry institu- tions - businesses, schools, churches, non-profits - about partnership opportunities. Peter Block has focused much attention on this issue in his boolt, Communiry: The Structure of Belonging. Citing the way we sometimes unduly rely on government to meet the community's needs, he highlights citizens' experiences of tak- ing accountability for the results they hope to see achieved. This occurs when cohesion is built between local government, businesses, schools, social service organizations, and churches. A complete and successful priority-driven budget- ing process doesn't conclude when the budgets for low-prioriry services are reduced - rather, it brings together otherwise fragmented institu- rions in society to find ways of providing services that may still be relevant to the community, even if they are less important to the prioriry results a local government seeks to achieve. 7. Altocate Resources Once the scoring is in place, resources can be allo- cated to the offers or programs. This can be done in a number of ways. One method is to first allo- cate revenues to each priority result area based on historical patterns or by using the priority's rela- tive weights, if weights were assigned. Allocating resources to a priority result area can be contro- versial because, as we will see, this allocation deternunes the number of offers or programs that will be funded under that priority area (e.g., how many public safety programs will be funded). There are no easy answers to this issue. As such, the designer of the process should look for ways to mitigate controversies associated with how muck funding is allocated to one result versus another and to prevent these allocations from becoming new types of organizarional silos. For instance, the designer should think about ways priority result areas can share information during the evaluation of programs or offers, andlor ways to joindy fund programs o� offers. Then, the offers or programs can be ordered according to their prioritization within a given priority result area and the budget staff draw a line where the cost of the most highly prioritized offers or programs is equal to the amount of rev- enue available {see Exhibit 4). The offers or pro- grams above the line are funded, and the ones that fall below the line are not. The board and staff will have discussions about the programs on either side of the line and about moving those offers or programs up or down, redesigning them to make more space above the line (e.g., lowering service levels), or even shifting resources among priority results. Variatians on the approach are possible - for example, there could be multiple lines representing multiple levels of funding cer- tainry. In the City of Redmond, Washington, programs above a top line were categorized as "definitely fund," while programs in between the top line and a bottom line were open to addition- alscrutiny. Another method is to organize the offers ar pro- grams into tiers of priority (e.g., c{uartiles) and then allocate reductions by tier. For example, pro- grams in the first tier might not be reduced, while programs in the lowest rier would see the largest , . �. , ,� , » ; ... ,�� =;�s � �; _ r, - ' �� , � ,. �..`, .. " - ��..,F.' reductions. The programs could be forced to make assigned reductions, or each department could be aven an aggregate total reduction target, based on the programs under its purview (with the implication being thar the department will weight its reducrions toward the lower-priority programs, although itwould have more flexibility to decide the precise reducrion approach than if the cuts were not done within the department). This tier approach generates discussion among board and staff about how much money is spent on lugher versus lower aer services in aggregate, as well as on resource allocation strategies for individual departments and programs. Exhibit 5 presents an e�mple of the vaiue this analysis can provide. It shows the total amount of money one city had historically spent on its lughest priority programs (e.g., the top tier) versus the others. This city was spending significantly less on the top tier than it was spending on the second tier, and less than it was spending on the third tier, as well. This raises interesting quesrions about spending patterns in the organization and builds a compelling case for change. Organizations also need to consider the funding of support services. Many of our research partici- pants elected to fund support services based on historical costs, making some reduction that was consistent with the reduction the rest of the organization was making. The magnitude of the reduction applied to any particular support serv- ice was based on its priority relative to other support services. A couple of our participants envisioned moving to a system wherein the cost of support services would be fully distributed to operating programs so support services would be affected according to the prioritization of the operating services they support. Another quesrion is how to handle restricted monies (e.g., an enterprise fund). One oprion is to handle special purpose funds (where there are restrictions on how the money can be used) sep- arately. For eYample, enterprise funds or court funds might be evaluated on a different track or budgeted in a different way altogether. Another option isto rank programs or offers without respect to funding source, but then allocate resources with respect to funding source. Knowing the relative priority of all the offers or programs might generate valuable discussion, even if there is no immediate impact on funding. For example, if a low-ranking offer or program is grant funded, is it still worth providing, especial- ly if that grant e�ires in the foreseeable future? Ideally, paracipants will become less fixated on funding sources, realizing that the government has more flexibility than it might think. For example, if a low-prioriry service is funded by a special earmarked taY, is there a way to reduce or eliminate that service and its taY, and increase a . .. u .. .; p , _;,, _ � ' ' ��` cs,.z ,��:�� i � _ �, . . . _., .�<<. . . .. . .� � .�..�.--- .. . ��3�'�'a�a° . ... .... ... . . e� �,... - ... $ (millions) $10 $20 $30 $40 $50 $60 general t� by an analogous amount? As the gov- ernment becomes more proficient at e�pressing the value it is creaung for the community, it should be better able to articulate these potenrial trade-offs to the community. Of course, no matter what method is selected to allocate resources, remember that priority-driven budgeting, like any budgeting process, is srill a political process. As such, it will not and should not lead to "scientific" or "apolitical" allocation of resources - rather, it should change the tone of budget discussions, from a focus on how money was spent last year to a focus on how the most value can be created for the public using the money that is available this year. 8. Create Accountabitity for Results, Efficiency, and lnnovation The owners of the programs or ofEers being evalu- ated might over-promise or over-represent what they can do to accomplish the priority result. T'o address this potential moral hazard, create meth- ods for making sure programs or ofEers deliver the results they were evaluated on. Many of our research participants anticipate using perform- ance measures for this purpose. For example, a program or offer might have to propose a standard of evidence or a metric to be evaluated against, so the organization can see if the desired result is being provided. Exhibit 6 is Pollz Counry's con- ceptual approach for connecting its priority result areas to key performance indicators. However, none of the research participants have reached what they would consider a completely satisfacto- ry state in this area. For those just starting out, the lesson is to understand where evidence is needed in your process design, but also to be patient with respect to when this part of priority-driven budg- eting will be fully realized. Other issues to consider as part of the priority- driven budgeting design are the efficiency of pro- grams or offers, and innovaaon in the design of pro�ams or offers. Although priority-driven budgeting will identify which programs or offers are best for achieving priority results, it does not speak directly to the efficiency with which those programs or offers are delivered or to innovative approaches to program delivery (although it might indirectly encourage these things). As such, the designers of the process might need to consider specific techniques for ensuring pro- gram efficiency. A proven model for improving efficiency helps avoid cost-cutting techniques that also cut productivity and degrade the results a program produces. For instance, a systematic method for reviewing and improving business processes could be implemented along with pri- ority-driven budgeting. One such method that GFOA research has shown to be effective for local governments is "Lean" process review - a system for identifying and removing or reducing the non- value added work rhat can be found in virtually any business process. You can learn more about Lean at www.gfoaconsulring.org/lean. Business process improvement ean also be incor- porated into a more comprehensive approach to reviewing program efficiency. Exhibit 7(on the following page) provides a sample program review decision tree that is inspired by work from the City of Toronto, Ontario. As the exhibit , .. , ,. ,, � �.� -� � _ ° a � �� , �� , � � 3 a.. ::s —P: k - '. 6 ��, ��,�,1 i^�` n T$ , . .. ..... ... .... _ ::.1...... ...._ . � *# � . ... F '...� ......... . ,,,,,.;.... �Y.�.� ... i�'I....... ... £9:�:ti'^.� .�.� shows, a program is subjected to a series of tests to see if it is being provided efficiently. For exam- ple, can the service be shared with other govern- ments? Can greater cost recovery be achieved through fees or fund raising? Can the private sec- tor provide the service more efficiently? Can Lean process improvement techniques be applied? Exlubit 7 also shows how the review might be linked to priority-driven budgeting - discre- tionary services are subject to a relevance test that asks the above questions about each priority program, while non-priority programs go through a divestment test. Finally, innovation tends to be the exception rather than the rule in the public sector, so the designers of the priority-driven budgeting GFOA Sam le o ' s "�" ° "�"' � p �� a�e� Program Review Tree process should consider how to encourage new ways of structuring programs or offers to best achieve the government's prioriry results. Some research argues that innovarion is a"discipline, just like strategy, planning, or budgeting"° Public managers who want to encourage innova- tion will need to develop and institutionalize dedicated processes to generate ideas, select the best ones, implement them, and spread the bene- fits throughout the organization. Along the way, public managers will need to make use of a vari- ety of unplementation strategies, including those that rely on the organization's own resources and those that seek to harness resources from out- side. Public managers will also have to create an organizational culture that is not just conducive to innovation, but acavely encourages and even Yes Yes MaMaeory Services . . (savice witliin maMate) tl � � Identify aganization & . �� ' tertns of transfer Assess impact & abandon program Proarem Imnrovement Plan •� Malysis of curcent siWatlon • Analysis of options . Recommendation Conclusion Priority-driven budgeting represents a major shift from traditional budgering methods. A clear understanding of the priority-driven budgeting philosophy should be in place before proceeding down this path, along with a strong level of sup- port - especially from the CEO (whose role is normally to propose the budget) and, ideally, the governing board (whose role is to adopt the budget). Prioriry-driven budgeang is not a process that is brought in to f� a structural deficit; instead, it becomes the way an organiza- tion approaches the resource allocation process. It brings with it an important cultural shift - moving from a focus on spending to a focus on actueving results through the budget process. Priority-driven budgering should be perceived by all stakeholders as a process that improves deci- sion-making and changes the conversarions around what the organization does (programs and services), how effecrive it is in accomplishing its priority results, and how focused it is on allo- cating resources to achieve its results. The success of your process design rests on a clear understanding of the principles of priority- driven budgeting, outlined in the eight steps pre- sented in this paper. A priority-driven budgeting process can be approached in several ways, so keep in mind the major levers and decision points to create a process that works best for your culture and environment, and that embraces the concepts of democratic and substanrive legit- imacy. The governments that participated in this research show that there are opportunities to introduce fl�ibility in the process - but keep in mind that with that flexibility comes risk, if changes are made that don't embrace the basic principles of priority-driven budgeting. Research what other organizations have done and ask them about their long-term suceess in shifting to the "new normal" in local government budgeting. Understand that priority-driven budgeting is a process that will evolve and improve over ume - don't expect perfection in the firsr year. Engage outside help where needed to design the process, develop successful commu- nication plans, incorporate citizen involvement, and insritute a process. Enjay new conversations that were not possible before, and embrace the transparency in decision-making that accompa- nies the priority-driven budgering prncess. As your organizarion adapts to the new normal, the process will guide decision-makers in making resource allocations that fund the programs that are most highly valued by the organization and, more importantly, by the citizens who depend on those programs and services for their well being, comfort, and eYpected c{uality of life. �� . ; , ��ti� ' • ,, �� £�� a ,:r , a a-,��. ' �, _ ,, . �...,'=�,.a. .. , . . ,. . : �. . . � demands it. The Public Innovator's Playbooh describes one approach to encouraging innova- rion in this kind of systematic way.'� Introduction Financial constraints have forced many govern- ments to take a hard look at the services they offer. A fundamental step is to inventory all the service programs a government offers. A program inventory clari€ies the breadth of services provid- ed and, ideally, highlights key characteristics of each pro�am (e.g., the full cost of providing the program and the level of revenues that program directly generates to support its operations}. The inventory provides the basis for discussion about the services that should be provided. Steps to Take 1. Define your objectives and goals for the pro- gram inventory. Identifying a program is as much art as it is science - an inescapable amount of subjecuvity is involved. Therefore, to make judgments as effectively as possible, make sure you are clear on why you are devel- oping a program inventory. Some of the potential purposes are: . Understanding the complete scope of services government provides. . Communicating the scope of services to the public in a format that is easy to understand and can be digested by the average citizen (i.e., not too detailed). • Drawing distinctions between the results (that matter to citizens) provided by dif- ferent programs. To achieve this, progratns cannot to be too large or vague. • Beginning to show the true cost of doing business by describing what government does on a meaningful level, and then iden- tifying costs for those programs. • Laying the groundwork forpriority-driven budgeting, where pro�ams receive budget allocations based on their contributions to the government's priority objecrives. • Laying the groundwork for program review, where programs are subjected to efficieneytests to determine if the service delivexy method employed is optimal. 2. Decide what information the program inven- tory shoutd contain, in addition to the basic description of the program. Opaons to con- sider include: • Full cost. The full cost of the program is its direct cost plus its indirect cost (overhead charges). Full-cost accounting makes the true cost of offering a service transparent, wlueh allows better planning and deeision making. It also helps show that the organ- ization is achieving the expected level of , � � ; ° �,,;��' �a � � F z � � - �� , �� , . � �, v, �....�.4.f��.�. :�. �,�,,; �,s= _. ��' Appendix 1: Building a Program Inventory cost recovery for a given service. Full cost- ing is especially important if the govern- ment envisions eventually going to a prior- ity-driven budget process. . Alignment with strategic goals. Knowing how programs contribute to priority goals enables organizations to develop more strategic cutback strategies. . Service level. Describe the level of services provided to the public. If service is being provided at a premium level, perhaps serv- ice levels can be lowered to reduce costs. • Mandate review. List and clearly define any mandates a program is subject to. Then review the current service level against the mandate requirements. Perhaps the service level being provided is higher than what the mandate requires. • Demand changes. Is demand for a service going up or down? If demand is going down, perhaps the program can be cut back and resources shifted elsewhere. If demand is going up, steps can be taken to manage demand. For eYample, perhaps means tesring can be applied to a social services program. . Support from program revenues. Describe the extent to which the program is sup- ported by its own user fees, grants, or intergovernmental revenues. Is there an opportuniry to achieve greater coverage of the full costs of the program? 3. Develop forms and temptates. Create tools departments can use to describe their pro- grams in a manner that is consistent and that captures the information needed to fulfiIl the purpose of the inventory. Consider tesring the forms and templates with one or two depart- ments and then distributing them to a wider group. Also consider providing training and an official point of contact for questions. with verbs - programs are action-oriented. For eYample, programs in a sherifPs office might include crime invesrigations, deten- tions, and court security. However, programs should not be described in terms of overly detailed tasks. For instance, "supplying a bailiff for court rooms° is a task within the court security program, not a program itself. 5. Find the right tevet of detail. A program is a set of related activiries intended ta produce a desired result. When constructing a program inventory, it can sometimes be challenging to find the right level of detail. If a program is too big or encompasses too much, it will not provide sufficient information - that is, it will be very difEicult to describe the precise value the program creates Eor the public or to use program cost information in decision making. However, if program definitions are too small, decision makers can become overwhelmed with detail and be unable to see the big pic- ture. In addition, tracking program costs for very small programs is generally not cost- effective. Generally speaking, if a program equates to 10 percent or more of the total �penditures of the fund in which it is accounted for, then the program should probably be broken down into smaller pieces. And if a program equates to 1 percent or less of total e�penditures, or to $100,000 or less, it is probably too small and should be combined with others. This is just a guideline - there could be valid reasons for going outside of these parameters. For exam- ple, a small program could be much more important than its cost suggests. Here are some other points that have proven helpful in identifying programs: A program is a group of people working together to deliver a discrete service to identifiable users. A program grnups aIl tasks that a cus- tomer of that program would receive and does not break one program or service into mulriple items based on tasks. 4. Differentiate programs from functions. Departments or divisions (i.e., public health, courts, public works, sherif fl are often described as functions or nouns: These are not programs, which are more often described • As far as possible, a program is individual — a program with its own name, cus- tomers, and staff team. Each program stands alone and is distinct from like pro- grams in a similar service area. . Programs that are handled by less than 1 FTE are combined with other existing programs. A program uses an e�sting name that is familiar to customers and staff, andlor it uses a name that could stand on its own and would be understandable to the aver- age reader. Notes 1 The concept of incremental budgeting was developed by Aaron Wildavlsky. See, for example: Aaron Wildavsky, The Politics of the Budgetary Process (Boston: Little, Brown,1964). 2 Robert Behn discusses the shortcomings of incremental budgeting in a cutback environ- ment in the following article: Robert D. Behn, "Cutback Budgering," Journal of Policy Analysis and Management, Vol. 4, No. 2(Winter,1985). 3 Priority-driven budgeting is also known as "budgeting for results° and "budgeting for outcomes," although the latter is used to describe a specific method of priority-driven budgeting. 4 Personal interviews were conducted with the managers who led priority-driven budgeting at these entities. 5 Behn. 6 Mark Moore emphasizes that these two sources oflegirimacy are essential to making any big public policy change. Mark Moore, Creating Public Value (Boston: Harvard University Press,1997). 7 Diagram inspired by Eva Elmer and Christopher Morrill, "Budgeting for Outcomes in Savannah,° Government Finance Review, April 201Q 8 Budgeting for outcomes was the subject of The Price Of Government: Getting the Results We Need in an Age of Permanent Fiscal Grisis by David Osborne and Peter Hutchinson (New York: Basic Books, 2004). 9 Robert S. Kaplan and David P. Norton, Strategy Maps: Converting Intangible Assets into Tangible 0utcomes (Boston: Harvard Business Press, 2004). 10 Peter Block, Community: The Structure of Belonging (San Francisco: Berrett-Koehler Publishers, 2008). 11 William D. Eggers and Shalabh Kumar Singh, The Public Innovator's Playbooh: Nurturing Bold Ideas in Government {New York: Deloitte, 2009). 12 Eggers and Singh. ;�� 3 s� � �� r � a � ''�� ..:: � � s�,, . ��...� ' �s��,_� Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Leading the Way to Priority-Driven Budgeting . . . . . . . . . . . . . . . . . . . . . . . . 2 Steps in Priority-Driven Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1. Identify Available Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2. Identify Your Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3. Define Your Priority Resutts More Precisety . . . . . . . . . . . . . . . . . . 8 4. Prepare Decision Units for Evaluation . . . . . . . . . . . . . . . . . . . . 10 5. Score Decision Units Against Priority Resutts . . . . . . . . . . . . . . . . 11 6. Compare Scores Between Offers or Programs . . . . . . . . . . . . . . . 13 7. Atlocate Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8. Create Accountabitity for Results, Efficiency, and Innovation ..... 17 Gonclusion ...............................................19 Appendix 1: Building a Program Inventory . . . . . . . . . . . . . . . . . . . . . . . . 20 Copyright 2011 by the Government Finance Officers Association 203 North LaSalle Street, Suite 2700 Chicago, illinois b0601 www.gfoa.org Leading the Way to Priority-Driven Budgeting Prioriry budgeting represents a fundamental change in the way resources are allocated. The governing body and the chief executive must understand and support the process and commu- nicate that support throughout the organization. In addition, these officials must be willing to carry out their decision-making responsibilities in a way that is consistent with a priority-driven process. The change an organization desires to bring about by virtue of implementing priority- driven budgeting won't happen overnight, so those leading the move to priority budgeting must make it clear that this type of budgeting is not a one-time event - it is the "new normal." To see the change through for the long-term, leaders must have a passion for the philosophy underly- ing prioriry-driven budgering, but at the same time, they must not be overly committed to any particulaz budgeting technique or process. They must remain adaptable and able to respond to the circumstances while remaining true to the philos- ophy. If the organization doesn't have this type of leadership, it might be better to delay priority- driven budgeting or look to another budgeting reform thathas greater support. The "Philosophy of Priority-Driven Budgeting° sidebar describes the philosophy of priority-driven budgeting and its central principles. Use these principles to test the support among critical stakeholders and to build a common understanding of the tenets the budget process will be designed around. Of course, not everyone in the organization can be expected to immediately accept priority-driven budgeting with the same enthusiasm. The leader- ship must articulate why a priority-driven budget Perhaps the primary risk to successful priority- dxiven budgering that officials and other stake- holders might reject of the process because they see it as insufficiendy legiamate - the process is thought to be flawed in some way that makes it a poor basis for allocating resources. Mitigate this risk by conferring "democratac" and substantive legitimacy onto priority-driven budgeting.fi Democratic legitimacy means that the process is consistent with the will of the public. Engage the elected officials, the public, and employees in the process to achieve democratic legitimacy. When a budget process is seen to have democraric legit- imacy, it gives elected officials permission to resist narrow bancls of self-interest that seek to overturn resource allocation decisions that are based on the greater good. demonstrate that this kind of budgeting is consis- tent with best pracaces, but, most of all, devote time to intensely study priority-driven budgeting. Some of the research participants for this article studied it for two years before moving forward. Wlule two years of study will not be necessary for every government, becoming fluent in priority- driven budgeting allows the leadership to speak convincingly on the topic and lead an honest dis- cussion about the feasibility of priarity-driven budgedng for the organization. If the organization decides to move forward, the leadership's �pert- ise will allow it to design a credible process, define the roles of staff in priority-driven budgeting, lead others through it, and adapt to the pitfalls and curveballs that will be encountered. R. _ � y �R � : � r>.,�,�. _ , � , � � 3 The next section describes the major steps in a Substantive legitimacy means that priority-driven priority-driven budgering process and provides budgeting is perceived to be based on sound tech- options for answering the s� questions - listed nical principles. Use Government Finance Officers below - for customizing priority-dxiven budget- Association (GFOA) training and publicarions to ing to your organization. in the upcoming fiscal year. Once that "need" is determined, then the organizarion looks to the finance department or budget office to figure out how these needs are to be funded. An integral part of the priority-driven budgeting philosophy is to spend within your means, so the first step in developing a budget should be focusing on gain- ing a clear understanding of the factorsthat drive revenues and doing the requisite analysis to develop a reasonably accurate and reliable rev- enue forecast in order to understand how much is available to spend for the upcoming fiscal year. Resources must also be clearly differentiated in terms of ongoing revenues versus one-time sources. The organization must be able to identi- fy any mismatch between ongoing revenues and ongoing �penditures (operations) as well as between one-rime sources and one-time uses (one-time initiati�es, capital needs, fund balance reserves). This analysis will ensure that the enri- ty ean pinpoint the source of its structural imbal- ance and address it in developing its budget. This will also ensure that a government does not unknowingly use fund balance (a one-time source) to support ongoing e�enditures. Once the amaunt of available resources is identi- fied, the forecasts should be used to educate and inform all stakeholders about what is truly avail- able to spend for the next fiscal year. The organi- zation must understand and believe that this is truly all there is as it begins developing the budg- et. Sharing the assumptions behind the revenue projections creates a level of transparency that dispels the belief that there are "secret funds° that will fu� the problem and establishes the level of trust necessary to be successfuL In the first year, an organization might choose to focus attention on only those areas that do not have txue structural balance. For most organizations, this will often include the general fund, but the jurisdic- tion might decide to include other functs in the process. Both Polk County, Florida, and the City of Savannah took steps to limit the scope of imple- mentation. For e�mple, Pollz County concentrated on thegeneral fund, and Savannah excluded capital projects from the process. 2. Identify Your Priorities Priority-driven budgeting is built around a set of organizational strategic priorities. These priori- ries are similar to a well-designed mission state- ment in that they capture the fundamental pur- poses for which the organizarion exists and are broad enough to have staying power from year to year. A critical departure from a mission state- ment is that the priorities should be expressed in terms of the results or outcomes that are of value to the public. These results should be specific enough to be meaningful and measurable, but not so specific as to say how the result or outcome will be achieved or become outmoded after a short time. Below are the five priority results determined by Mesa Counry, Colorada Notice how these results are e�ressed in the `boice of the citizen." A strategic plan, vision, and/or mission statement can serve as the ideal starting point for identifying the priority results. If you have an e�usting suate- gic plan, it might be helpful to ground the priority results in these previous efforts to respect the investment stakeholders may have in them and to . ��_ � . �. ., �� , , � � » ��.. F� .� �..�� _ � �; participate online and share their thoughts on "what does the city exist to provide ° Cities such as Walnut Creek, California, and Blue Ash, Ohio, set up kiosks in city facilities and asked citizens to participate in a brief survey that helped vali- date the city council's established results and to `�eight° the relative importance of those results to the community. 3. Define Your Priority Results More Pretisety The foundarion of any priorirization effort is the results that define why an organization exists. Organizations must ask, "What is it that makes us relevant to the citizens?° Being relevant - pro- viding those programs that achieve relevant results - is the key purpose and most profound outcome of a priority-driven budgeting process. The challenge with results is that the terms can be broad, and precisely what they mean for each individual community can be unclear. For instance, take a result like "Providing a Safe Community," which is shared by most local gov- ernments. Organizarions talk about public safety or providing a safe community as if it is an obvi- ous and specific concept. But is it? In the Ciry of Walnut Creek, citizens and city leadersiup identified building standards for sur- viving earthquakes as an important influence on providing a safe community. In the City of Lakeland, Florida, however, not a single citizen or public official discussed earthquakes to define the very same result. In the City of Grand Island, Nebraska, the city highlighted community acceptance and cohesiveness as intrinsic to achieving a safe community (acknowledging their initiarives to help integrate a growing and important population of their community - immigrant farm workers). However community integration was not a relevant factor that would contribute to the safety of the community in Walnut Creek. Hence, the specific defuutions of the community's results is where the identity of your community and the objective meaning of what is relevant is revealed. A�werful method for defining results was estab- lished in Srrategy Maps by Kaplan and Norton.° Strategy mapping is a simple way to take a com- plex and potentially ambiguous objective - like aclueving a safe community - and creating a pic- ture, or map, of how that objecave can be achieved. Sometimes referred to as cause-and-effect diagrams or result maps, strategy maps provide an effective way for an organization to achieve clarity about what it aims to accomplish with its results. Strategy maps should be developed using cross- functional teams. Teams consist primarily of staff (both with subject matter expertise relating to the priority result and without), but they can also include elected officials and citizens. F�thibit 2(on the following page) provides an eYample of a strategy map from the Ciry of Savannah for "high-perfornung government° (Savannah's equivalent of the "good governance" result described in the earlier sidebar). Savannah's map includes performance indicators to help gauge if the priority result is being achieved. Exhibit 3(on the following page) is a picture of a slightly different style of strategy map from the City of San Jose, California, for its "Green, Sustainable City" priority result. The center of the map is the result, and the concepts around .. _. � � ,... n a "� � � � ' r . , .> ��: - ' ^ a , ., .. �.,,M.:,.7.7 .. .�.... ., .S�'a , w ...,__ . .,... . .. . �. _ _. ... ,. . .... .... < . _ . ..4 ... 4 .�--n -�.. ._ ,�,�:�,, the results that make local government relevant. This will establish a shared foundation, a com- mon conteYt for evaluating and prioritizing the programs and services the jurisdiction offers. A service's relarive priority can be evaluated only through a common belief about the results local governmenr is striving to achieve. The City of Walnut Creek knew that citizens and community stakeholders needed to be involved in defining the priority results. The rationale was that the city's priority results would be legitimate only if community members were responsible for establishing the results and their definitions. The city reached out to the community on the radio, in the newspaper, and through the city's newsletters and Web site to invite any citizen to participate in one of several town hall meetings. At the meeting, ciazens were asked to submit answers to the question: "When the City of Walnut Creek , then they achieve [the result the cirizen was focused on] ° The response from cirizens was tremendous and generated a host of answers. City government staff inembers (who participat- ed in the meetings) were then responsible for summarizing the citizen's responses by develop- ing strategy maps. Lastly, when defuung the priority results, consid- er whether some results might be more impor- tant than others. This could have an impact on how programs are valued and prioritized. Elected officials, staff, and/or citizens can participate in ranking exercises, where each participant is given a quantiry of "votes° (or dollars, or points, etc.) and can allocate their votes among all the priority results to indicate the relarive value of one result versus another. It is important to make clear to participants that this ranking process is not a budget allocation exercise (whereby the budget of a certain result is deternuned by the votes given to a result). Through such a ranking, participants can e�press that certain results (and therefore the programs that eventually influence these results) may have greater relevance to the community than others. 4. Prepare Decision Units for Evaluation The crux of priority-driven budgeting is evaluat- ing the services against the government's priority results. Thus, the decision unit to be evaluated must be broad enough to capture the tasks that go into producing a valued result for citizens, but not so large as to encompass too much or be too vague. Conversely, if the decision unit is too small, it may only capture certain tasks in the chain that lead to a result and might overwhelm the budget process with details. Our research subjects took one of two approaches to this issue: "offers" or "programs." Offers. Offers are customized service packages prepared by departments (or perhaps designed by cross-functional staff teams or even private firms or non-profits) to achieve one or more pri- ority results. Offers are submitted to evaluation teams (typically comprising a cross funcrional group of staff, but possibly ciuzens as well) for considerarion against the organization's priority results. Often, the evaluation team will first issue a formal °request for results" that is based on the strategy map and defines for departments, or others who are preparing offers, precisely what the evaluation team is looking for in an offer. �� ,,. � a . g » ,�, � ;� „ � , �. t.. _ .� �,.� � � ,�� „�An�� iry — every taY dollar spent on a program that achieved multiple results was giving the taxpayer the "best bang for the buck." Alternatively, organi- zations like Mesa County, the City of Savannah, Polk County, and Snohomish County matched each program or offer with only one of the priority results and evaluated it against its degree of influ- ence on that result. Under this scenario, guidelines should be established to help deternune how to assign a program or offer to a priority area as well as pmvide some sort of accommodation for those programs or offers that demonstrate important effects across priority result areas. Both of these approaches have been used successfully, so the right choice depends on which approach resonates more with stakeholders. In addition to scoring the offers or programs against the priority results, some organizarions have included additional factors in the scoring process. Examples include mandates to provide the service, change in demand for the service, level of cost recovery for the service, and reliance on the local government to provide the service (as opposed to community groups or the private sector}. The governments believed that a pro- gram should be evaluated more highly if there was a mandate from another level of government, if there was an anticipated increase in demand for the program or that program received fees or grant dollars to significandy cover the costs to provide it. Finally, if the citizen had to rely solely on the government to provide the program or service and there was no other outside option available, then a program was believed to be of a slightly higher priority. The next variarion is how to actually assign scores to programs or offers. One approach is to have owners of the programs or offers (e.g., clepartment staffl assign scores based on a self- assessment process. This approach engages the owners in the process and taps into their unique understanding of how the programs inIluence the priority results. Critical to this approach is a quality control process that allows the owner's peers in the organization (other departments) and/or �ternal stakeholders (citizens, elected officials, labor unions, business leaders, etc.) to review the scoring. The peer review group chal- lenges the owner to provide evidence to support the scores assigned. A second approach to scor- ing establishes evaluarion teams that are respon- sible for scoring the programs or offers against their ability to influence the priority results. Owners submit their programs ar offers for the a � Y,,;,�a � r :..� _ <s city's specific definition of the result. Ne�rt, the review teams were given a report that detailed every program scored for the particular result under review. The teams met to discuss: • whether they understood the programs they were reviewing; • whether they agreed with the score given by the department (the departments scored their own programs); • whether they required further testimony or evidence from the department to help them better understand the score given; and • whether the seore should stand, or if the team would recommend an increase or decrease. All programs were evaluated in this manner until a final recommendation was made on program scores. The city invited the local business community, citizens representing their local neighborhood commissions, and labor leaders to review the scores. Walter Rossman, from San Jose's City Manager's Offiee, described their effort this way: "The participants found the effort informarive as to what the city does; they found it engaging with respect to hearing staff in the organization discuss how their programs influence the city's results; and, most interesting, they found it fun.° San Jose's story is important because it demon- strated how stakeholders from various perspec- tives and political persuasions can all productive- ly participate in the priority-driven budgeting process. San Jose didn't ask these stakeholders to come together and rank programs. They didn't ask them to decide which programs should be cut or which ones should be preserved. They framed the discussion very simply: Evaluate how our programs help us achieve our results, and to what degree. I'he outcome of prioritization was therefore �pected and self-evident, based on the common understanding of the programs and how the pro�ams influence results. Stakeholders could be concerned that their favored programs might lose support in the course of priority-driven budgeting: Even when a program director or a citizen who benefits from a particular program understands why that pro- gram ranked low, they are not going to be pleased about it. Invite stakeholders frorn all sides, from within the organization and even the community, to understand the process. Include stakeholders at various points in the process so they might influence the outcome. Constantly communicate progress, throughout the process. Pmgram directors, stakeholders of a parricular program, organizational leadership, and staff might not enjoy seeing their program prioritized below other programs, but if they understand it, if they've had a chance to influence the process, and, most importantly, if they are aware of actions they might take to improve the priority ranking of their prograrn, the process will have a great chance for success. Lasdy, consider if the scoring of the programs or offers will be used only to decide where to make budget reductions. Organizations such as the cities of Lakeland and Walnut Creek have used prioritization not only to balance their budgets, but also to understand how services that might appear less relevant to the city government might , �� „ � ; . ��, � ��;� . �.. - �` � ��. _ <. ��., �� .,. �,N ,. „ ,..:.�:, :� _... . reductions. The programs could be forced to make assigned reductions, or each department could be given an aggregate total reducrion target, based on the programs under its purview (with the implication being that the department will weight its reducrions toward the lower-priority programs, although itwould have more flexibility to decide the precise reduction approach than if the cuts were not done within the department). I'his tier approach generates discussion among board and staff about how much money is spent on higher versus lower tier services in aggregate, as well as on resource allocation strategies for individual departments and programs. F�hibit 5 presents an example of the value this analysis can provide. It shows the total amount of money one city had historically spent on its highest priority programs (e.g., the top tier) versus the others. This city was spending significantly Iess on the top tier than it was spending on the second tier, and less than it was spending on the third tier, as well. This raises interesting questions about spending patterns in the organization and builds a compelling case for change. Organizations also need to consider the funding of support services. Many of our research partici- pants elected to fund support services based on historical costs, making some reduction that was consistent with the reduction the rest of the organization was making. The magnitude of the reduction applied to any particular support serv- ice was based on its priority relarive to other support services. A couple of our participants envisioned moving to a system wherein the cost of support services would be fully distributed to operating programs so support services would be affected according to the prioritization of the operating services they support. Another question is how to handle restricted monies (e.g., an enterprise fund). One option is to handle special purpose funds (where there are restrictions on how the money can be used) sep- arately. For example, enterprise funds or court funds might be evaluated on a different track or budgeted in a different way altogether. Another option isto rank programs or offers without respect to funding source, but then allocate resources with respect to funding source. Knowing the relative priority of all the offers or programs might generate valuable discussion, even if there is no immediate impact on funding. For example, if a low-ranking offer or program is grant funded, is it still worth providing, especial- ly if that grant e�ires in the foreseeable future? Ideally, participants will become less fu�ated on funding sources, realiaing that the government has more flexibiliry than it might think. For example, if a low-priority service is funded by a special earmarked taY, is there a way to reduce or eliminate that service and its t�, and increase a $ (millions) $10 $20 $30 $40 $50 $6Q shows, a program is subjected to a series of tests to see if it is being provided efficiently. For eYam- ple, can the service be shared with other govern- ments? Can greater cost recovery be achieved through fees or fund raising? Can the private sec- tor provide the service more efficiently? Can Lean process improvement techniques be applied? E�►ibit 7 also shows how the review might be linked to priority-driven budgeting - discre- tionary services are subject to a relevance test that asks the above questions about each priority program, while non-priority programs go through a divestment test. Finally, innovation tends to be the exception rather than the rule in the public sector, so the designers of the priority-c}riven budgering GFOA Sample Program Review Tiee «rv� �M� process should consider how to encourage new ways of structuring programs or offers to best achieve the government's priority results. Some research argues that innovation is a"discipline, just like strategy, planning, or budgeting."" Public managers who want to encourage innova- tion will need to develop and institutionalize dedicated processes to generate ideas, select the best ones, implement them, and spread the bene- fits throughout the organization. Along the way, public managers will need to make use of a vari- ety of implementation strategies, including those that rely on the organization's own resources and those that seek to harness resources from out- side. Public managers will also have to create an organizaaonal culture that is not just conducive to innovation, but actively encaurages and even � � , �,. �,,;1 rvo Yes Yes Itlenfrfy organization 8. m terms of transfer i Assess impact 8 abandon program Proaram Imorovement Plan • Analysis of current siWatiort . Malysis of options . Recommendation _, . � , . . ,,. . .. 's � t � '�' � : � �s � ..,. .... . ..<.� ,. .,, <�.......... . .. ,... . ' ... . .. 7<.: �„_ ,. , .a .. " ...... '�„�... .. .::3. .. ;,..... ., ! Mantlarory Services (service witliin marMare) Introduction Financial constraints have forced many govern- ments to take a hard look at the services they offer. A fundamental step is to inventory all the service programs a government offers. A program inventory clarifies the breadth of services provid- ed and, ideally, highlights key characteristics of each program (e.g., the full cost of providing the program and the level of revenues that program directly generates to support its operations). The inventory provides the basis for discussion about the services that should be provided. Stepsto Take 1. Define your objectives and goals for the pro- gram inventory. Identifying a program is as much art as it is science - an inescapable amount of subjectivity is involved. Therefore, to make judgments as effectively as possible, make sure you are clear on why you are devel- oping a program inventory. Some of the potentiaL purposes are: • Understanding the complete scope of services government provides. • Communicating the scope of services to the public in a format that is easy to understand and can be digested by the average citizen (i.e., not too detailed). • Drawing distinctions between the results (that matter to citizens) provided by dif- ferent programs. To achieve this, programs cannot to be too large ar vague. • Beginning to show the true cost of doing business by describing what government does on a meaningful level, and then iden- rifying costs for those programs. • Laying the groundwork for priority-clriven budgering, where programs receive budget allocations based on their contributions to the governmenYs priority objecrives. • Laying the groundwork for program review, where programs are subjected to efficieneytests to deternune if the service delivery method employed is opumal. 2. Decide what information the program inven- tory shoutd contain, in addition to the basic description of the program. Options to con- sider include: • Full cost. The full cost of the program is its direct cost plus its indirect cost (overhead charges). Full-cost accounting makes the true cost of offering a service transparent, which allows better planning and decision making. It also helps show that the organ- ization is achieving the e�.pected level of �, i � fi�.�...,_ �.: � � ;, � .. .., �; �.. , ,� � �.i,� _.. � � :�� i , � � ,..;:: E ,, f"a„�, .. �... . ,,,.u... .. . ..... , . ..... . , � - . .-. : _ s . �. m . a.a...,. .. _� . .... . . :... . ... ... � �'�°`,..� _-- - �"'. .�.� . Appendix 1: Building a Program Inventory As far as possible, a program is individual — a program with its own name, cus- tomers, and staff team. Each program stands alone and is distinct from like pro- grams in a similar service area. Programs that are handled by less than 1 FIE are combined with other existing programs. A program uses an eYisang name that is familiar to customers and staff, and/or it uses a name that could stand on its own and would be understandable to the aver- age reader. �. _ .,..., ,. ; ... ,� ,,- . ��;. _ . . .. ,;,,... , � �� ; � ,. . � , �.. o ��. a ,