The Economist (2010) in one of their issues pointed out ‘there is a need for a reinforced central government model, different from any authoritarian or imperative model of the past.’ The global economic crisis revealed to the world that not only markets are subject to downturns, but also public sector. In times of instability government represents the last resort of confidence for its nation. People want to believe that no matter what happens outside of the administrative walls, the political system is solid. Still, the financial crisis did significantly affect public sector as budgets were cut out. It caused negative response from the citizenry making governmental institutions rethink their budgeting policies. Any process that requires inputs to produce some amount of outputs needs evaluations for effectiveness. In the case of businesses, it is quite easy to apply financial statement analysis to understand whether a company performs good or bad. On the other side, it is irrational to evaluate governmental work based on financial statements as these authorities are not direct market participants. They play a role of authority responsible for monitoring markets. Still, every institution conducts project that have to be graded according to the outcome. Therefore, public institutions are subject to performance evaluation as well. Another concern was the taxpayers demand for the transparent system that would allow citizens exam where taxes are going.
There are a lot of techniques to estimate the performance of public sector. They are zero-based budgeting, target-based budgeting, program budgeting etc. However, recentperformance based budgeting has gained attention from scholars and governmental administration. The first step to understand the importance of the introduction of such techniques is to clarify what performance in the public sector is. Curristine T. in her paper ‘Government performance: lessons and challenges’ defines performance as a ‘yield or results of activities carried out in relation to the purposes being pursued.’ Regarding definitions of PBB itself there are several opinions. For instance, Mikesell (1999) defined performance based budgeting as connecting inputs to goals. Whereas, Joyce (1999) argued that PBB is ‘a sophisticated web of relations.’ The concept is believed to be created by Peter Drucker in the 1960s (Madhekeni, 2012). It later was developed by Rassapan via examples of using it in the public sector (Madhekeni, 2012). According to Tat-Kei Ho (2011), performance based budgeting has been under consideration of government in the USA for at least 30 years (p.391). Because that is its innovative nature as it directly incorporated performance evaluation into budgeting and administrative processes. Kong (2005) argues that there are two stages of implementation development of PBB. The first one was initiated by Hoover Commission in 1940s. However, due to lack of understanding of this method public sector gradually shifted to using other techniques. The second stage has begun in 1990s and is still evolving. Thus, at beginning it took local governments more time to implement PBB rather than central offices, however, as time passed the differences in effectiveness between large and small-sized institutions decreased (Ho, 2011). There are several assumptions that should be satisfied in order to effective implementation. First of all, political system should be stable. Moreover, in order to make right decisions people responsible for budgeting at state level should have the same amount of information about projects as the local level. At the same time, not all public institutions are professional. For instance, universities and other educational entities participate in markets directly; therefore they can use financial statements for budgeting.
PBB in all of the cases leads two main advantages: improved decision-making process and better delivery of service (Young, 2003). Moreover, there are additional benefits of implementing performance based budgeting. First of all, public sector manages to connect its current projects to long-term goals. Thus, governmental institutions gain effectiveness. Second of all, it becomes efficient in allocating its resources as it evaluates projects according to its benefit that it will bring to citizenry. Next, the communications among different divisions of public sector are improving because now the decision is made on collaborative base with employment of the necessary information rather than on retrospective vision. Therefore, PBB allows public sector to evaluate projects based on strategic planning that is very crucial nowadays. If to evaluate its effect on public itself, then taxpayers gain faith in governmental bodies, because the needs of the population are being satisfied. PBB also takes into account needs of all its stakeholders. As Denhardt and Denhardt (2000) argue, market-oriented policy implications will always be more efficient than old traditional public budgeting. Because that is high involvement of interested parties in the process of budgeting. Therefore, after 2008 when citizenry lost faith inability of governments to make decisions based on needs of the population, performance based budgeting helped government authorities to win back sympathy.
Among main disadvantages of PBB, some critics name the differences in perception of goals (Rubin, 2010). To be more exact, there can be the discrepancy in views from managerial and societal point of views. For instance, such factors as political ideologies, social and economic drivers can directly affect the administration responsible for implementation of PBB. Lautch (1987) argued that PBB is based more on ‘political rationality’ rather than ‘economic rationality.’ The reason is the source of data for public sector. Majority of governmental institutions base their decisions and forecasts on productivity data, which usually has high standard errors making this data of no practical use for budgeting. Moreover, according to Wellman and Van-Landingham (2008), any change in the political system can cause the cancelation of previous PBB strategies, as a new power has to build trust with all the stakeholders again. Therefore, in order to successfully implement PBB there should be sufficient capacity of managers to work on such aspects as ‘strategic planning, performance analysis, costs analysis, program budget analysis and communication with the public’ (Berman and Wang, 2000). Finally, PBB can produce very technical information which will be hard to digest by the public, so that its attractiveness for stakeholders will be less strong.
At the same time, there are other alternative techniques to measure performance of governmental projects. For instance, Joyce recommends using performance-informed budgeting (2003). In this case results of performance are used for information as it constitutes the basis for decision-making. However, PBB can be improved if only prior to implementing all the stakeholders will involve in the process of modeling the budget itself.
One of the most vivid examples of implementation of PBB is health care reform conducted by Barack Obama’s office. It was PBAM system, which is performance-based adjustment model. The idea was to connect final outputs with used resources rather than monitoring expenditures. According to West et al (2014), historically U.S. Army Medical Command employed ‘traditional’ budgeting methods, where they evaluate the performance on the basis of submitted budget. As a result of this performance based budgeting allowed managers to be liable for only those measures that have been directly influenced by their decisions, therefore, allowing them successfully to move towards the strategic goals (West et al, 2014). It allows MEDCOM, and other governmental bodies employing PBB to stay transparent so that the public has trust in the performance of administration and understands policies that are being held. For instance, since implementation of PBAM system MEDCOM increased gain in total production by 13.9%, improved efficiency by 3.3% and outperformed its accuracy numbers by 15% (Office of Management and Budget, 2009).
Looking at country perspective, currently all 50 states utilize some form of performance measures according to Young (2003). They use PBB during some stages in the process of preparing budgets. This trend is due to the increased understanding of the importance of strategic planning. However, Hou et al. argue that even if, prior to the recession, the use of PBB was extensive, as the financial crisis evolved less and fewer states employed this model (2011). Because that was refocusing from projects that were thought to be successful to resource’s allocation (Hou et. Al., 2011). Policy implications regarding PBB vary from state to state. Currently, 47 states have their own performance based budgeting tools. According to Melkers and Willoughby, 31 states use PBB in their legislation requirements, while 16 states use executive requirements. As Pattison (2002) pointed out Florida extensively uses performance based budgeting in its strategic planning process. As numbers show, more than 20 institutions are employing PBB to budget 55 projects. All in all, at state level actual impact of PBB is minimal as Jordan and Hackbart said (1999). They conclude that “performance is not likely to be a major factor in determining the executive recommendations, but it is a consideration.” At local level, the results of PBB implementation are more positive. Poister and Streib pointed out that performance improved in such aspects as quality of decisions made, allocation of money, etc. (1999).
On the example of Maryland, it can be concluded that PBB was implemented successfully (Hou et al. 2011). They managed to use StateStat software to gain access to necessary data. It allowed them gain efficiency in their decision-making process. At the same time, the recent crisis showed inefficiency of PBB in Louisiana (Hou et.al. 2011). In California performance based budgeting showed low results as well, because of lack of necessary data. However, in Colorado showed the highest efficiency level among all states after the crisis years. Thus, it managed successfully implement PBB in its daily operations. In Florida, local authorities agreed upon the usefulness of performance based budgeting, but they also pointed out that it is not quite efficient. In Georgia, local institutions were not able to communicate to the citizenry the fact that they started using PBB method. Therefore, public could not evaluate the importance of PBB as it did not show any significant improvements as well. In contradiction, New Jersey managed efficiently communicate its budget decisions to population via publishing periodic agency program describing where each penny is going. However, this openness and transparency did not highly correlate with efficiency of budgeting. New York decided to start implementing PBB in three areas: public and road safety, economic development and unemployment issues and health care. Although, the state was very enthusiastic about exploiting the performance based budgeting, still it is unclear whether PBB is working or not, because public access to outcomes of budgeting is limited. In Oregon, the situation is worse. Due to consequences of the recession, the authorities decided to cut the budget of the state. Therefore, the state had to reconsider strategic planning leaving no space for successful implementation of performance based budgeting tools. Utah started using PBB in order to evaluate the efficiency of its tax policies. Although the state agrees upon the fact that performance based budgeting is crucial in order to sustainably develop the economy, still after the crisis it is too costly to implement it. Washington in its turn found out that it is more ‘useful when proposing changes to meet agency budgetary needs’ (Hou et al. 2011). In Kentucky, it is hard to implement PBB as agencies may not submit information on their performance. Thus, it is difficult to evaluate the scope and efficient of performance based budgeting. Iowa, on the other hand, has not adopted PBB in its legislation. In Massachusetts, there were several obstacles making it hard for local authorities to implement performance based budgeting. First of all, lack of specialists who are able to model and infuse the tool in the system of budgeting. Second of all, necessary legislation making it easy and effective to gather input data and distribute results to citizenry. In Texas a lot of attention is paid to performance measures so that PBB is at one of the most advanced levels here.
Hager G. et.al. (2001) in their research of policy implication of PBB in the U.S. came to conclusion that ‘legislators must determine whether they want to hold agencies accountable for what they spend or what they achieve.’ It poses a serious question as public is very concerned where tax payers money is going, however, they do not considerate long-term advances of such projects. It is also very crucial to balance needs of all the stakeholders which is quite difficult to achieve. Therefore, it is necessary to attract the best specialist in the field to carefully evaluate all the inputs and outputs and come up with the optimal allocation of resources that will leave everyone happy. There also should be collaboration between legislators and agencies. Both sides possess different data and might pursue different long-term goals. Therefore, it is very important to develop communication channels that would take into consideration needs of both sides. All of these facts prove one more time the necessity of developing strategic planning tools. If in the past public sector was regarded to be the separate entity from the market, now it is vivid that all the concepts of trade relationships can be applied to governmental authorities as well. Authorities should also put the accent on the credibility of data used for budgeting. As different parties possess various level of access to information, it is very important to assure that data is homogeneous among participants.
In conclusion, it worth saying that PBB reflects current needs of society. After the plunge in the global markets of 2008 people started losing faith not only in markets but also in the public sector. ‘Irrational’ bail-out precedents and other events organized in order to decrease the negative effect of the recession made it clear that management of governments’ projects needs changes. The authorities can reach this goal via implementing PBB. Performance based budgeting serves more as an accountability tool giving to public information necessary to evaluate the effectiveness of policies that governmental agencies are conducting. It helps public sector to look after the quality of work provided, cut costs and increase the effectiveness of conducted projects. However, empirical research of many scholars has shown that PBB is more efficient on the local level rather than state. Therefore, there is a room for development and adaptation of performance based budgeting. There are drawbacks in the implementation of PBB (high costs, necessity to build excellent communications between divisions, etc.), however, the positive impact it has on budgeting is of high importance, as it contributes to sustainable development and helps to achieve strategic goals.
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