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Turning Traditional Budgeting on Its Head

Inertia and incrementalism drive the process in most places. Budgeting for outcomes is a powerful way to overcome that.

Upside down piggy bank with coins nearby.
It is time to sweep traditional public budgeting into the dustbin of history. The way governments do their most important job -- deciding how to spend tax dollars -- hasn't really changed in a hundred, maybe a thousand, years. Like glaciers, budgets accumulate layers over time and become so large and slow-moving that they seem impossible to change.

Budget inertia means that funding levels continue to be adjusted incrementally each year. Revenue shortfalls are answered with across-the-board cuts that protect lower-performing programs, punish programs that deliver results and offend as few people as possible. New initiatives are funded only in the rare event of a surplus, if there's any money left after backfilling prior-year cuts or giving bigger pay raises. Problems remain unsolved, potential untapped and opportunities unseized. Leaders are unapologetic, claiming that the budget is "at the bone." Interest groups defend their favored programs against even the tiniest of reductions, equating funding level with value.

Thankfully, change is possible. A small and growing number of cities and other governments have taken on the status quo by budgeting for outcomes.

Budgeting for outcomes (BFO for short) was introduced to the public sector by David Osborne and Peter Hutchinson in their 2004 book The Price of Government, which inspired the state of Iowa and cities of various sizes -- from Fort Collins, Colo., to Redmond, Wash., to Baltimore, where I was budget director -- to turn traditional budgeting on its head. Here's how BFO is different:

The starting point: Traditional budgeting starts with what agencies spent the year before. The starting point for BFO is a set of outcomes that the jurisdiction wants to achieve, including indicators to measure progress. Roanoke, Va., another BFO city, has a "livability" outcome, with indicators such as percentage of homeownership and voter turnout rate. Here's a request for results issued by the city.

Funding targets: In traditional budgeting, agencies are given a funding target at the outset of the process. It is typically the previous year's appropriation, plus or minus some percentage, depending on the revenue projection. In BFO, funding is allocated to outcomes instead of individual agencies to start budget planning. The idea is for funding to be pooled, not siloed. In Baltimore, we found that the way the mayor and her senior team thought funding should be invested by outcome was wildly different from the city's actual budget. This realization led to a shifting of available dollars from traditional law enforcement to more proactive crime-reduction strategies, such as youth development and conflict mediation.

Budget submissions: In traditional budgeting, agency budget requests explain how the target funding amount will be spent. Line items are accounted for in excruciating detail, while information about how the spending will translate into service performance and outcomes is usually scant. In BFO, agencies submit proposals for each service they want funded, competing and collaborating with other agencies for funding. Fort Collins publishes service proposals, which it calls "offers," on its website for the public to review. Check out, for instance, the city's offers relating to economic health.

The debate: The goal of BFO is to shift the budget discussion from "what to cut" to "what to keep." BFO is about building the budget from the ground up, not adding and removing floors year to year. BFO doesn't take the politics out of budgeting -- nothing can do that -- but it does increase what I like to call the Outcome Quotient: the percentage of spending that is tied to rational analysis and results.

In the decade since the Great Recession, most cities and states have seen their costs, not to mention their needs, grow faster than their revenues. Aging infrastructure and residents, costly employee benefits, federal retrenchment, equity considerations and more are putting unprecedented pressure on government balance sheets. Leaders want to respond, but they are stuck with budgets full of fossilized priorities from generations past.

Cities are discovering the power of data to solve problems and cut bureaucracy. Now, they need to discover a data-driven budget process that redirects resources toward the outcomes of the future.

Andrew Kleine is the author of City on the Line: How Baltimore Transformed Its Budget to Beat the Great Recession and Deliver Outcomes (Rowman & Littlefield).

Andrew Kleine, a former Baltimore budget director, is a senior director in the Government & Public Sector division at EY-Parthenon, Ernst & Young LLP’s global strategy and consulting arm.
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