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Assessing Reforms of Government Accounting and Budgeting1 November 5, 2004

Kenneth A. Smith, PhD, CPA* Assistant Professor of Accounting and Management Information Systems

Atkinson Graduate School of Management Willamette University

900 State Street Salem, OR 97301

smithk@Willamette.edu

Rita H. Cheng, PhD, CPA A.O. Smith Professor of Accounting School of Business Administration

University of Wisconsin – Milwaukee Milwaukee, WI

rcheng@uwm.edu AAA Section: Governmental and Non-Profit (Management Accounting if no submissions in Government)

1 An earlier version of this paper was presented at the 2004 Association for Budgeting and Financial Management conference in Chicago. The authors wish to thank conference attendees for comments as well as Howard Frank, Lee Schiffel, Ola Smith, and Fred Thompson. All remaining errors are our own.

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Assessing Reforms of Government Accounting and Budgeting ABSTRACT: We analyze four (4) frameworks for assessing the success of government reforms of accounting and budgeting systems and apply our analysis to performance budgeting reforms in U.S. states. We conclude that performance measures are not useful for the legislative problem of allocating resources among disparate goals, but they are useful for improving the quality and reducing the cost of providing services. Two of the frameworks come from the budgetary literature and focus on allocations (Outcomes view and Process view). The other two come from the accounting literature and focus on incentives among key actors (Monitoring view and Signaling view). The actors considered in this study are Voters, Legislators, Government Managers and the Media. Our theoretical analysis suggests that the four frameworks are often complementary rather than mutually exclusive; however, the Signaling view may provide the best framework for two reasons: 1) it provides insights into the net costs and benefits of adopting a reform and 2) it provides insights into policy suggestions that are likely to increase the adoption of beneficial reforms. Three policy suggestions are given: 1) Legislators should focus on incentives for managers to report performance measures, 2) Performance budgeting should be done on a comparable basis across states, and 3) Influential actors such as legislators and the media should be studied in greater detail. Keywords: performance measure, performance budget, government reform, service efforts and accomplishment 1.0 Introduction

The advocacy of state budget reforms is a current trend in the United States.

Professional associations are writing books (ICMA 2001, 2002; AGA {Walters 1998};

Urban Institute {Hatry 1999, Morley, Bryant and Hatry 2001}; GASB 2003), Academics

are producing prescriptions (Coplin and Dwyer 2000, Ingraham, Joyce and Donahue

2003, Kelly and Rivenbark 2003, Smith 2004), and legislation has been passed by nearly

every state (Melkers and Willoughby 1998, Snell and Grooters 2000). Yet one rather

startling and unsettling fact remains. Most of the current proposals are quite similar to

reforms advocated as early as 1907 (Kelly and Rivenbark 2003, Ridley and Simon 1938).

After nearly one hundred years and numerous studies, the same problems are redefined,

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the same solutions rediscovered, and the same outcomes result – the reforms are largely

ignored.

Our first paragraph is in italics as it is nearly identical to the opening paragraph of

Zimmerman 1977 (p. 108) regarding government accounting reforms. We see strong

similarities between municipal accounting reforms that occurred from late-1970 to mid-

1980 and the performance budgeting reforms of the last decade. This paper explores

these similarities with two goals in mind. First, we are interested in a general theory or

framework to assess any government management system reform. This general

framework is intended to be broad enough to apply to past, present as well as future

proposed reforms across several management systems – not just accounting or budgeting.

Second, we apply the framework to a current management reform – performance

budgeting by states – to look for support as well as insights into courses of management

action consistent with the theory. Proposing a general framework for assessing any

management reform is admittedly a high ideal – one to which we aspire more than we

expect to attain.

Reforms of government management systems are proposed on a frequent basis,

thus a credible assessment framework is a valuable tool to reformers as well as the

individuals that are impacted by the reforms2. Prior to 1992, the alphabet soup of reforms

included PPBS, MBO, ZBB, and Reagan’s “Privatize” reforms – about one per president

(see review in Kelly and Rivenbark 2003, chapter 2). The Clinton administration brought

us NPR, CFO’s, GPRA, and GMRA. Also in 1992, the GASB widely distributed its

Concepts Statement Number 2 on “Service Efforts and Accomplishments” in draft form

(final issued in 1994) and a book on “Reinventing Government” became a New York 2 Our theoretical analysis includes local, state and federal levels of government.

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Times best-seller (Osborne and Gaebler 1992). Broad changes occurred internationally

under the concept of NPM, New Public Management (Hood 1995), as well as NPFM,

New Public Financial Management (Olson et al 1988). Most recently, the GASB (2003)

produced the Green Book3 “Special Report” with 16 criteria for performance reporting

within the Managing For Results (MFR) paradigm.

The remainder of the paper organized as follows. The next section discusses

similarities and differences between government accounting reforms and government

budgeting reforms as well as similarities between government and business accounting

and budgeting systems. The third section discusses four actors that are influential in

government reforms. The fourth section discusses four evaluation frameworks and the

roles of each actor. The last section develops a general framework for assessing

governmental management reforms and applies this framework to performance budgeting

in states.

2.0 Government Accounting and Budgeting Reforms

Budgets are undeniably more important than financial statements in local as well

as national governments. The budgeting process determines the winners of more

resources as well as the losers of political battles. Budgeting also aids in the two key

elements of a management information system: decision-making and control

(Zimmerman 2003). The budgeting process assists decision-makers within the

departmental units as well as the elected officials that must allocate scarce resources

among numerous competing proposals. The budgeting process also constrains the

behaviors of the appointed managers and employees, hopefully keeping them from

wasting or misusing governmental resources for non-governmental purposes. 3 The GASB Special Report has a green cover and green type throughout its body.

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The accounting systems within governmental entities are mostly ignored by

politicians and citizens as well as the managers and employees of the various agencies.

Prior to 1980, most reports did not follow Generally Accepted Accounting Principles

(GAAP) nor were the reports accompanied by a clean opinion from a CPA. Even now

that most local governments produce audited financial statements, the only significant

user of these reports are creditors. Empirical evidence suggests the audited reports have

value mostly for the small governments for which creditors are unfamiliar (Evans and

Patton 1987; Cheng 1994). The federal government has never needed audited financial

statements in order to borrow funds, so it is not surprising that audited GAAP federal

financial statements were not prepared prior to 2000.

Consistent with prior governmental accounting choice literature (see Luder 1992

and Cheng 1994 for reviews), this study adopts the view that all individuals generally act

as rational economic beings. However, this paper is not an econometric attempt to model

human behavior using only rationality and self-interest. Rather, there is evidence, as well

as a deep-seated hope, that most governmental employees are substantially motivated by

the desire to act professionally and perform at the highest levels in spite of numerous

constraints and scarce resources. Thus, we begin with well-intentioned and often

professionally-prepared managers; our model calls them “rational professionals”.

We believe that poorly designed management systems create enough incentives

for government managers to choose self-interest over professionalism. A rational

professional can ignore their own well-being for only so long. Unfortunately for the

believers in professionalism, the softening of the rational person into a rational

professional would not have changed any of the conclusions from our opening paragraph

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(Zimmerman 1977) regarding financial statement reform due to the poorly designed

reward systems of the early 1970’s. All things considered, we believe government

employees perform quite well unless the management systems are designed poorly;

therefore, organizational incentives matter in addition to management and leadership

(Behn 2002).

Kelly and Rivenbark (2003) provide a comprehensive and “non-evangelical”4

view of performance budgeting reforms. They address the tendency to oversell the

virtues of any budgeting reform. Their view of performance budgeting is also fairly

positive (vs. normative) as they describe what is actually occurring rather than what

should be occurring. They attempt to reconcile an apparently critical contradiction: 1)

the ongoing use of line-item budgets and 2) performance measures being a part of

resource allocation decisions. The factual presentation in Kelly and Rivenbark is both

deep and broad and many of their interpretations ring true; however, we do not believe

their “Process” view of assessing performance budgeting is sufficient or acceptable to the

evangelical reformers.

2.1 Business vs. Government

A significant element in Zimmerman’s (1977) analysis was to contrast accounting

practices in business with accounting practices in government. The purpose of this

exercise was to show that the fundamental organizational and measurement problems

faced in government are generally also faced in business. For whatever reason, business

organizations have generally worked their way through these constraints to adopt

management reforms while many governmental entities have not. Businesses appear to

4 Examples of the “true-believers” of performance reporting might include Herbert Simon (Ridley and Simon 1938), Harry Hatry of the Urban Institute, Jay Fountain of the GASB, Vice President Al Gore in the National Performance Review and David Osborne as author of Reinventing Government and other books.

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accept the uncertainty that exists in measuring organizational performance – or perhaps

business moves at such a speed that there is no alternative other than to move forward

with incomplete information.

The similarities between government budgeting and business budgeting are also

quite high, at least at the theoretical level. Both business and government must allocate

resources among competing programs and both are deeply concerned with how to

improve efficiency and effectiveness in the programs that have been selected. The basic

budget process involves the same two steps: 1) choosing an initial direction or set of

goals and 2) providing resources to the programs they believe will accomplish these

goals. In contrast to government, all businesses have clarity about their highest goal,

which is to earn a profit. Similar to government, however, the possible range of

programs to attain the highest goal is nearly infinite. While the highest goal of business

is to earn a profit, the exact degree of profit in relation to competing goals (such as

employee welfare, environmental policy and community support) is not clear. A trend in

business is to focus on “reasonable” rather than “maximum” profits and this creates many

of the same budgeting problems faced in government due to competing and ill-specified

top goals.

A popular reform in business today is to use non-financial performance measures

in a balanced scorecard (Kaplan and Norton 1996) for budgeting, strategic planning as

well as evaluating managerial performance. Both government and business have to

balance the budget system with other management systems to ensure that managers are

rewarded for behaviors that assist the organization and punished for behaviors that harm

the organization. Several textbooks have been written on this subject under the heading

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of “Management Controls” (Anthony and Govindarajan 2004, Simons 2000) and the

issues and topics relate to organizations in general, not just business organizations.

Finally, a common performance budgeting slogan in government, “do more with less”,

has long been a budgeting mandate in business.

Finally, the role of rational quantitative methods in business budgeting is fairly

similar to what we observe in governmental budgeting. Businesses often fail to use

rational methods such as computing the NPV (Net Present Value) of a potential

investment, even when the data to make the computations are readily available

(Zimmerman 2003). Not only that, but businesses often fail to follow the decision-rule

affiliated with NPV analysis – i.e. they make investments with negative NPV as well as

forgo investments with positive NPV. These apparently “non-rational”, or at least non-

deterministic, behaviors are evident in both successful as well as unsuccessful business

organizations. Similarly, there are both failed and successful business organizations that

rely primarily on quantitative and rational analysis.

3.0 Roles of Actors in Governmental Reform

Luder (1992) and Cheng (1994) review governmental accounting choice literature

and discuss a large set of possible influencers, or actors, who potentially impact whether

accounting reforms are adopted. In this study, we focus generally on only four actors:

Voters, Legislators, Managers and the Media. Voters have generally been modeled as

“rationally” ignorant (Downs 1957). There is very little evidence to suggest that voters

are actively promoting government reforms of accounting or budgeting systems in spite

of several well-funded projects that encourage citizen participation such as the Maxwell

School’s Government Performance Project (Ingraham et al 2003) and numerous projects

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funded by the Sloan Foundation. Absent the wide dissemination of useful comparable

performance data (Morley et al 2001), we do not believe voters will play a significant

direct role in performance measurement and budgeting reform. Even with comparative

performance measurement, voters primarily play an indirect role.

Thus, our analysis focuses mainly on the interactions between legislators,

managers and the media. Luder and Cheng consider several elected actors including

governors, mayors, and city or county council members; however, we restrict the analysis

to focus more clearly on the incentives for both rewards and punishments that are directly

provided to managers from the legislature (Horn 1995) and the media (Swoboda 1995).

Future analyses would certainly want to consider more elected actors, as well as other

potentially prominent actors like interest groups. Our view of managers is described in

the prior section as “rational professionals” who will work very hard under the

appropriate incentive scheme, but will not expend extra effort under an inappropriate

incentive scheme.

Our view of the legislative role in non-financial performance measurement reform

harkens back to the insights provided by Herbert A. Simon5 in 1938 (Ridley and Simon).

Recognizing the two main steps in budgeting noted earlier, Ridley and Simon state:

“Both the formulation of the objectives of government (agencies) and their evaluation relative to each other are legislative problems” (p. 2)

5 Note that Simon was a graduate student in 1938 and had not fully developed his concepts of bounded rationality which earned him the Nobel Prize. Rather, his overall optimism about the power of rational measurement and management are amazingly similar to early views of the potential of performance measures to “Reinvent Government” (Osborne and Gaebler 1992) during the “re-birth” of these ideas in the late 1980’s. It is a little surprising that Kelly and Rivenbark (2003) do not mention the work of Ridley and Simon (1938) in their otherwise comprehensive history of performance measurement, performance management and performance budgeting.

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Simon believed that rational performance measures did not provide any guidance to

legislators as they had to choose between how much to allocate to roads vs. prisons vs.

education. Simon believed that once an agency was given its allocation, rational

measurement and management could be used to improve the amount or quality of

services provided with the same input. In our opinion, legislators have two roles: 1) to

allocate resources among various agencies (and their only available guidance is their own

political or personal values), and 2) to provide an incentive scheme that appropriately

rewards and punishes managers for behaviors consistent with the goals of the

government.6

The media serves mostly as an impediment to innovative governmental behaviors.

Most innovations require experimentation in order to find the right formula for success.

The path towards innovation often involves mistakes and the press is quick to report on

any kind of real or perceived government scandal (Zimmerman 1977, Swoboda 1995,

Smith 2004). Non-financial performance measures undoubtedly raise as many questions

about government performance as they answer. Thus, most government managers and

legislators will resist reporting non-financial performance measures if they believe the

media will use those measures to criticize or embarrass.

4.0 Assessment Frameworks

6 Horn (1995) discusses the role of the legislature, especially in the context of institutional arrangements. In many ways Horn is concerned with the “who” question of providing government services, whether services are provided by public agencies or private enterprises. Our analysis is more concerned with the incentives structure given to the “who” regardless of their ownership. Also, Horn and many political scientists are concerned with the “what” question of policy, such as what should be done to individuals convicted of crimes. Our view is that the “what” question is a political or “legislative” (Ridley and Simon 1938) problem. Thus, we are concerned primarily with the “management” question, or how to most efficiently and effectively deliver the services that the legislature desires. When the legislature is hesitant or unwilling to state its desires, the value of performance measures is limited.

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Our review of the performance budgeting reform literature suggests two views of

assessing success: Outcomes and Process. Our review of the accounting reform literature

suggests the use of “positive rational” views predicted by either Monitoring or Signaling

arrangements. Each viewpoint is discussed next.

4.1 Outcomes View

Rivenbark and Kelly (2004) argue that many observers use an Outcomes view of

the success of performance budgeting reforms7. Basically, a budget reform is needed

because resources are allocated to the wrong programs. A successful reform is one where

the budget allocations across agencies or goals are different than before the reform –

otherwise the reform seems unnecessary. Rivenbark and Kelly believe the Outcomes

view is deterministic and therefore undemocratic. In addition, we believe the Outcomes

is limited because it views a continuous variable (extent of adopting the reform) as a

dichotomous variable (adopt or not adopt).

4.2 Process View

As an alternative to the outcomes view, Kelly and Rivenbark (2003; also

Rivenbark and Kelly 2004) offer a process view of assessment. Under this view,

budgeting decisions are not determined by performance measures. Rather, they believe

“performance budgeting has been successful when program performance information is

part of the budget deliberation process, even if counterintuitive outcomes result” (p. 51).

In concluding their journal article, Rivenbark and Kelly (2004) suggest the novel idea of

using a program evaluation approach for performance measurement itself – sort of

performance measures for performance measures. We see two interpretations of this

7 While Rivenbark and Kelly are focused on assessing performance budgeting, the outcomes view can be applied more broadly across the history of accounting or other management reforms. If the state of nature changes after the reform, then the reform was a success; a lack of change is a failure.

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assessment approach. The first is that we simply look at improvement in the performance

measures that are reported. A positive evaluation results when the measures indicate cost

savings or other desirable improvements. Since improvement appears to be the

consensus view of the value of performance reporting (Behn 2003, GASB 2003, Morley

et al 2001), this view of process evaluation sounds valuable. The problem is this

interpretation seems like a 100% rational view while the process view practically requires

the use of values in addition to rationality.

The second interpretation of the process view is more problematic. The process

view supports the notion that the use of values is appropriate when deciding where to

allocate funds – even when those values suggest a funding decision in opposition to the

performance measures.8 Thus, evaluating the process view might actually be an

evaluation of how often (efficiency) and how well (effectiveness) legislators apply their

values to funding decisions. The efficiency measure would be some ratio of how often

the performance measures were used when making allocation decisions in proportion to

how many decisions were made. It is not clear how often legislators should be using the

performance measures, so evaluation of this efficiency measure is difficult.

The effectiveness ratio is even more difficult. If an elected official uses

performance information to support their pre-existing political values – is this inherently

wrong? Or are legislators only effective when they change their values? What if the

performance data challenges the very essence of the values on which the legislators

campaigned and were elected – would it be appropriate for them to change their values?

8 Consider the case of sex education and abortion. An elected official may have been elected on a platform that opposes these activities in general as well as using government funds to pay for these activities. What “process” should the elected official follow if performance measures show that public funding of sex education reduces the number of abortions?

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The process view is valuable in that it causes us to once again ask the (V. O.)

“Key” question of how legislators SHOULD use either rational performance information

or their own values to decide to fund roads vs. prisons vs. education; however, the

process view does not provide any new tools in which to answer this question.

4.3 Monitoring View

Zimmerman (1977) considers the strength of monitoring incentives - with voters

as the principals and politicians as the agents – to bring about municipal accounting

reform. He notes that fund accounting is typified by numerous columns of separate

entities without single consolidated statements. Most of the advocated reforms do not

seek elimination of the fund structure, but rather prescribe supplementary statements

which, in addition to the existing statements, would provide users (voters and creditors

primarily) additional information in a more readily usable form patterned after

commercial accounting (a full accrual consolidated balance sheet and a quasi-income

statement).9 Students of government accounting recognize that these reforms are

required via the Governmental Accounting Standards Board (GASB) recently issued

Statement No. 34 (1999). He then asks the following two questions about the apparent

staying power of “unreformed” systems:

1) What are the advantages of line-item budgeting that compel most nonprofit institutions to use these systems?

2) Given such a line-item structure, why are state officials loath to adopt reform proposals which do not, in any way, affect the line-item structure, but rather would only require supplementary reports?

At this point Zimmerman also offers his initial answers. Governments, it is

contended in this study, employ budgeting systems which adhere to strict budgetary

9 Sentences in italics in this section are nearly identical to Zimmerman 1977 – except when performance budgeting replaces fund accounting.

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separation (i.e. question 1) because these procedures constrain the public official to

behave in accordance with the legal mandate sanctioned by the legislative process.

Corporations do not employ such systems because alternative (less costly) procedures

exist for monitoring corporate managers. He argues that the result of poor corporate

decisions become evident in stock prices fairly quickly, but the results of inefficient

government actions become evident much more slowly and appear in the costs of real

estate (via either high taxes or low property values due to poor quality of services).

The paper also seeks to demonstrate that the reformers’ supplementary budget

reports are not produced (i.e. question 2) because there is very little demand for such

information. Since there are quite large transaction costs associated with the real estate

market, the individual’s ability to capture eliminated “inefficiencies” in higher property

values is diluted by these transactions costs. A significant appeal of recent budgetary

reforms is to become more “business-like” and to use outcomes or results measures that

allow monitoring of governmental accomplishments. A key point in Zimmerman’s

model is that he analyzes the problems between voters (agents) and elected officials

(principals) – not the problems between elected officials (as principals) and government

managers (agents). Our view is that the monitoring incentives for performance budgeting

will not be of sufficient strength to overcome the powerful value of line-item budgeting

(see also Kelly and Rivenbark 2003, chapter 3).

4.4 Signaling View

In spite of the appeal of Zimmerman’s analysis, municipal accounting has

undergone two significant reforms in the past 30 years. The more recent reform, GASB

34, could be classified as a monitoring change since it was mandated by the GASB and

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was generally opposed by preparers. Today, Zimmerman might argue that since

governmental accrual accounting did not evolve through “Economic Darwinism” (2003,

chapter 4), the net costs of its implementation exceed its net benefits. The generally

negative comments by preparers and the relative lack of praise or supporters identifying

the benefits are supportive of the view that GASB 34 does not provide net benefits.

The earlier reform was the fairly rapid adoption of audited financial statements by

cities and states along with obtaining the Certificate of Achievement from the

Government Finance Officers Association (GFOA) from the late 1970’s to the mid-

1980’s. Evans and Patton (1987) examined the strength of signaling as well as

monitoring incentives for financial managers (i.e. CFO’s) to expend effort and costs to

obtain the Certificate. To earn a Certificate, the city not only had to obtain an audit, the

city also had to engage in other “quality” financial practices such as issuing the audited

report in a timely fashion. Evans and Patton argue that cities that obtained the Certificate

will receive a higher bond rating and thus lower interest costs. Even a small decrease in

the basis points on debt can result in substantial cash savings. Thus, cities should be

willing to pay CFO’s a higher salary if the CFO appears to have the ability to earn the

Certificate. The empirical results supported this signaling hypothesis and no study to

date has seriously challenged the dominance of signaling over monitoring to explain

accounting reforms (Luder 1992, Cheng 1994).

There are two key elements for the signaling incentive to work well. First, there

must be an effective signal of the manager’s ability available to both the manager and the

manager’s boss – the legislature in our model. The signal is effective if it is costly to

obtain and only those individuals with higher ability can obtain the signal. The second

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key element is that the signal must represent a process that provides net benefits to the

government. In the case of the GFOA Certificate, this net benefit was lower interest

payments.

Recent developments suggest that these two elements may now exist for

performance reporting. The Association of Government Accountants (AGA) has just

announced a program to issue Certificate of Achievement in Service Efforts and

Accomplishments reporting (Fountain et al 2004). One of the authors participated in the

AGA’s training and believes that this Certificate will be costly to obtain and will only be

attainable by managers and agencies of higher ability in performance measurement and

performance management.

The second key element is perhaps more controversial, is there a net benefit from

performance reporting? Smith (2004) provides limited evidence of net benefits to cities

that voluntarily report performance measures. To the extent that a government engages

in a benchmark approach like projects of the ICMA, North Carolina or Ontario (Burke

2004), it seems quite possible that the value of service improvements will exceed the

costs of system implementation. However, if the government uses a “go it alone”

approach, the net benefits may not materialize.

5.0 A General Framework for Assessing Government Management Reforms The previous sections discussed four views of how to assess budgetary and

accounting reforms. In this section we first attempt to combine these in a general

framework to be applied more broadly to any governmental management reform.

Second, we reflect this general framework back upon the specific reform of performance

budgeting in states.

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5.1 The General Framework

The outcome viewpoint is limited in that it only measures a dichotomous “change

or no change” at the end of a very long and involved process. It is possible for the

outcome to remain the same while the reform had significant changes in organizational

interactions as well as the level of democratic participation. In spite of this limitation, the

outcomes view is valuable in that it suggests that costly reforms can only be worthwhile

when something of substance changes.

The process view attempts to resolve the limitation of the outcomes view by

focusing on the changes in the process that occur as a result of the reform effort. The

process view elevates the concept that decision-making should not be deterministic based

on quantitative measures. We provided evidence from business entities that supports this

“non-deterministic” view. Thus, the assessment of reforms needs to consider changes in

both the outcomes as well as the process. A problem with the process view is that it is

very difficult to measure the value of the process changes. It is also difficult to assess

when “non-deterministic” tools should be used.

The monitoring view focuses on the need for control of governmental

organizations and the people that work in those organizations. The monitoring view is

limited in that the costs of monitoring or mandating reforms are quite high. It is also

difficult to ensure that the reforms that are required are beneficial, especially when there

is limited evidence a priori of the benefits of the reform.

The signaling view focuses on reforms that take place voluntarily by individuals

or organizations of higher quality. These higher ability actors engage in reform due to

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the benefits to themselves as well as their organizations. The organizations are willing to

compensate the higher ability performers due to the net benefits of the reform. When

reliable signals are available, the measurement problems inherit in the process view can

be overcome. It may not be perfectly known how the process has improved, but the

presence of the signal gives strong support that a net benefit has accrued. The two

problems with the signaling view are the need for the signal to represent the net benefits

of the reform and the need for the signal to discriminate between higher and lower quality

managers.

When a management reform is in its early stages, reliable signals of effective

implementation of the reform will probably not be available. In these early stages, the

outcomes and process and monitoring views are the best tools available to assess the

success of these reforms. As the reforms become better understood and tangible evidence

accumulates as to signals of effective implementation, the signaling view provides insight

into who is truly implementing as well as greater insight into the net benefits and policy

implications on how to increase the number of reform adopters.

5.2 The Framework applied to Performance Budgeting

Returning to the specifics of assessing performance budgeting as a reform, we

have three conclusions. First, it appears that there is limited value in focusing on

allocations. Performance measurement and performance management are tools that

provide substantial assistance in improving service quality and reducing service cost.

There is little evidence that performance measures provide unequivocal insight into V.O.

Key’s question of how to allocate funds across disparate goals. Rather, our analysis

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suggests reforms should focus on incentives that legislators and the media provide to

managers.

Second, the evidence from other studies of performance reporting suggests that

improved performance occurs at a much greater rate when performance measures are

compared (Morely et al 2001). The case studies from ICMA, North Carolina and Ontario

support this approach. Thus, the value of performance budgeting reforms should greatly

increase if U.S. states implement their systems in a manner comparable to other states.

Very little attention has been paid to making performance budgeting reforms comparative

and this analysis suggests this may be the most important policy issue.

Third, this analysis suggests that relevant actors should be considered in order to

gain the service improvements envisioned by performance budgeting. Horn (1995)

provides an extensive analysis of legislative incentives. Researchers should look to this

and other sources to describe reasons for the current “go it alone” strategies. Researchers

also should look to mechanisms that legislatures could use to increase the value of

performance budgeting for service improvement in the areas the legislature is willing to

state goals as well as how to use performance budgeting to remain vague for the areas

where the legislature is unwilling to clearly state goals.

The other key actor is the media. While relatively little peer-reviewed research

discusses the role of the media in accounting and budgeting reforms, the media is a

widely known and extremely powerful influence on what information government

officials are willing to share publicly. Researchers should consider the literature in the

areas of Communications, particular public relations in order to develop strategies to

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reduce the penalties for reporting performance measures and doing performance

budgeting.

6.0 Conclusion

This paper explores a general framework for assessing management reforms in

government. We analyzed two viewpoints from budgeting (outcomes and process) and

two from accounting (monitoring and signaling). We conclude that the signaling view

has the best potential, but it can not be used until information is available regarding the

costs and benefits from a particular reform. Future research should examine the role of

legislators and media in increasing incentives for what appears to be a net beneficial

reform. Also, we find that performance budgeting efforts that focus on unique

approaches may actually be limiting the wider adoption of performance management

reforms. We recommend adopting performance budgeting approaches that are

comparable across jurisdictions.

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EXHIBIT 1 Summary of Assessment Viewpoints

Actors Monitoring Signaling

Broad View People are mostly looking out for themselves, Government is inherently inefficient – always needs reform because of bad people (and ineffective systems).

People generally want to help and do their professional best, but not at great personal cost. Whenever given a decent chance to shine (i.e. a reward), mgr will rise up and perform.

Voter PRINCIPAL. Info disadvantage; high cost/low benefit to obtain info; so “rationally ignorant”.

N/A as key component. (NOTE: While not a main actor – will be primary beneficiary.)

Elected AGENT. Info advantage; easy to hide info; shares info only when needed to maintain position.

PRINCIPAL. Pleased when mgr documents efficient results (rewardable); also wants mgr to avoid risk (loss of re-election chances).

Mgr SUB-AGENT. Info advantage; easy to hide info; shares info only when needed to maintain position, but structure (i.e. city mgr) can “insulate” from short-term political incentives.

AGENT. Desires to do good as well as improve compensation; one path is to “signal” they “do good” via either Certificate or Performance measures.

Actors Outcomes Process

Broad View Reformers know best – what they prescribe is good and should be followed. No general theory of individual behavior (rational or other).

Recognizes that quantitative tools should not completely override individual judgment. No general theory of individual behavior. Are individuals viewed as rational and greedy or rational and nice or not rational?

Voter N/A as key component. N/A as key component.

Elected Generally viewed as obstinate by reformers – not clear why they do not actually use the suggested reforms.

Legislative decisions are complex and require both personal judgment (i.e. values) as well as modern tools. Feasible to think about the “reformed” information, but still act similarly to when this information was not available. If values and tools in conflict – values usually triumph.

Mgr N/A as key component. N/A as key component.

22

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