California's Performance Budgeting Pilot Project:
A View from the Legislature
By Craig Cornett

Performance budgeting" is the allocation of government re-sources based on expectation of performance levels with a focus on outcomes rather than processes. Although not a new concept (the City of Los Angeles actually implemented a version of performance budgeting in the early 1950s), performance budgeting has received wide attention and interest in government in recent years. In fact, more than 20 states are currently involved to some extent with performance budgeting - including the State of California.

California's Pilot Project

In January 1993, the governor proposed to change the state's budgeting process by pilot testing performance budgeting in selected state departments. According to the governor, the pilot program was proposed because the state's traditional budget process was "seriously dysfunctional." The administration indicated that performance budgeting, along with other efforts at quality improvement, offered the potential for substantial savings, improved performance, enhanced citizen satisfaction, and greater accountability in the delivery of state services.

The Legislature responded to the governor's initiative by enacting legislation to establish the pilot program and require budget "contracts" between pilot departments and the Legislature. The pilot departments are the California Conservation Corps, the Department of Consumer Affairs, the Department of General Services, and the Department of Parks and Recreation. (See page 22 for a look at the Department of Parks and Recreation.)

Initial Assessment

In October 1993, we released a report on the general concept of performance budgeting and an assessment of the pilot program to that date. Among our early findings were:

• The manner in which performance budgeting was applied and the results it produced varied widely among the states.
• In most cases where it had been tried, performance budgeting had not fundamentally changed the budget process.
• The costs to implement performance budgeting were significant.
• Performance measures must focus on outcomes, not process.
• Performance budgeting requires a change in the Legislature's perspective towards the budget process.
• The Legislature must be willing to accept a longer-term view of implementation and results.

We noted that the foundation of the state's pilot program - reshaping the state's budget process - would not be easy to accomplish because performance budgeting is a complex undertaking. Recognizing the important role the Legislature would have to play to ensure success of the project, we recommended the establishment of a joint legislative committee to oversee the pilot project and review the budgets of the pilot departments.

Performance Budgeting Pilot Project After Five Years

Now that the program has been in place for five years, some themes and conclusions have become more evident.

Pilot Departments Have Refocused on Their Purposes and Goals. One of the most important benefits to come out of the project is that the pilot departments have focused much attention on redefining their organizations, updating their mission statements, adopting strategic plans (along with performance measures and goals), and managing in accordance with those plans. Consequently, the pilot departments have focused on performance management, which they believe is proving to be valuable to them and the programs that they administer. Most of the mechanisms put in place by the pilot departments - strategic plans, goals, performance measures, and means to capture and report progress - are pretty basic and fundamental to a business enterprise. In fact, these are practices that governmental entities should have been following all along. Nevertheless, if the pilot project goes no further than fostering performance management in state departments, and that management is maintained, the project will have served a useful purpose.

Departments Have Been Energized. Another positive result of the project has been the enthusiasm observed in most of the pilot departments, which often permeates throughout the entire organization. This enthusiasm has helped departments to focus on important goals and manage to achieve them.

Measuring Performance and Tying It to Budgets is Difficult. The pilot departments generally found that there was little baseline performance data against which to measure improvement. This has required establishing a means of collecting data in order to make ongoing assessments of improvement, which are at the heart of performance management. In addition, it has been difficult and time consuming for the departments to devise new budget formats that tie requested budget allocations to specific performance areas and outcomes.

Project Has Required Significant Resources. Most departments report that they have had to invest substantial resources into the project, which they have had to absorb within their existing budgets.

"Redirected Savings" Have Not Been Identified. One aspect of the pilot project was that up to half of the savings resulting from performance budgeting would be shared with the pilot departments. It is not clear whether this goal has been achieved because specific savings have not been identified.

Increased Administrative Flexibility. The budget contracts for the pilot departments have included relaxation of certain administrative controls so that departments could administer their programs more easily and thus meet their performance goals. Some of the administrative flexibilities were relatively minor, however. In addition, the results of granting the flexibilities have not been readily quantifiable.

The Bottom Line. The project has had many positive benefits to the state, but many of the project's initial expectations are yet to be met. For example, two central goals of the project - fundamentally changing the state budget process and generating substantial savings in program operations - haven't occurred. Progress has been made toward other program goals, such as improving program performance, enhancing citizen satisfaction, and producing greater accountability, but a final assessment on these goals is yet to come.

Where Does California Go From Here?

From a governmental management perspective, California's experiment with performance budgeting has been worthwhile. But as with other budgeting methods that have been introduced in the public sector over the years - "planning-programming-budgeting" in the 1960s to "zero-based budgeting" in the 1970s and 1980s - a budgeting method is not a panacea. As the pilot departments can attest, implementing a performance budgeting system and making fundamental changes to the way business is conducted takes a great deal of effort.

We believe that other governmental entities can benefit from the lessons learned from the four pilot departments, and the state should institutionalize those aspects which can improve the performance of all state programs. For example, if granting certain administratively flexibilities to the pilot departments has helped them manage better and achieve their goals, why not extend those flexibilities to all state departments? At the same time, however, it is important to remember a fundamental lesson from the project: improvement takes time and usually occurs incrementally.