    [Analytical Perspectives]
    [Budget and Performance Integration]
    [1. Budget and Performance Integration]
    [From the U.S. Government Publishing Office, www.gpo.gov]

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                       BUDGET AND PERFORMANCE INTEGRATION

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                      1. BUDGET AND PERFORMANCE INTEGRATION

      This Budget marks a significant step on the long road to a results-
    oriented government. It starts using performance measures to develop
    policies, to make budget decisions, and to improve everyday program
    management. The Administration is creating a government that promotes
    the outcomes that Americans want--such as better education for our
    children, the freedom to travel safely, and protection of our health--
    and does this in a cost-effective and efficient way.
      Achieving better program performance--particularly better performance
    for each dollar spent--is a high priority of this Administration.
    Congressional interest, reflected in the Government Performance and
    Results Act of 1993, set agencies to identifying performance goals,
    planning to achieve them, and reporting on results.
      What has been missing is systematic use of these measures to make
    decisions. In particular, performance measures are not directly linked
    to the budget--and yet it is the budget that drives policy development,
    allocates resources, and has undeveloped potential to support better
    management.
        Past and planned results are not shown with budget requests,
              let alone linked in a cost-and-results relationship.
        Program managers responsible for achieving results often do
              not control the resources they use or have flexibility to use
              them efficiently.
        Performance and cost data are recorded in separate systems
              and not integrated to provide timely, analytical, feedback to
              decision-makers and managers.
        Americans cannot readily assess program results, and cannot
              compare performance and cost across programs.

      Budgeting for Results. Eager to make government work better, the
    Administration used all of the performance information it could gather
    in making decisions for this Budget. It also began the transition to
    change the burden of proof, asking agencies and advocates to supply
    evidence of program effectiveness instead of assuming effectiveness in
    the absence of evidence to the contrary. In addition to funding high
    priority programs, the Budget devotes dollars to programs that are rated
    effective. The Budget proposes reforms for ineffective programs, reduces
    their funding or terminates them. Policy changes are proposed to
    increase program effectiveness and to improve the efficiency of programs
    and support services. The first section of this chapter, Budgeting for
    Results, analyzes shifts in resources and changes in policies made on
    the basis of this intense focus on performance.
      Foundation for Results. To create a foundation for continual
    improvement in the effectiveness of government, the President has begun
    to make results the focus of the budget process. Planning and evaluation
    will be integral to budgeting. The budget takes the first steps toward
    showing expected results and the resources requested to achieve each
    result. To give managers full information about programs and to
    encourage efficient use of resources, the budget needs a uniform measure
    of the full annual cost of the resources used that will be charged to
    each program and activity.
      In October, the President transmitted to Congress the Managerial
    Flexibility Act of 2001. Title II of that Act will charge employing
    agencies for the full annual accruing cost of Federal pensions and
    retiree health benefits, as reflected in this Budget. The Administration
    is developing proposals to charge for support services, capital assets,
    and hazardous substances cleanup where these resources are used. As
    explained in the second section of this chapter, Foundation for Results,
    these proposals do not change total budget outlays, budget concepts, or
    public-private cost comparisons. However, they would provide a better
    assessment of program costs.

      Managing for Results. Budget and Performance Integration is one of
    five interrelated initiatives in The President's Management Agenda,
    rolled out in August. The others are Strategic Management of Human
    Capital, Competitive Sourcing, Expanded Electronic Government, and
    Improved Financial Performance. The third section of this chapter,
    Managing for Results, shows that the objective of these five initiatives
    together is to create a transformation to year-round performance
    orientation through all levels of the Federal government.

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                                                ``We are not alone...''

      Governments here and around the world are devising strategies to assess and manage for results--both outputs
    (i.e., products and services delivered) and outcomes (i.e., the end result that is being sought, such as clean
    streets or reduced crime).

      Here in the United States, a growing number of States, counties and municipalities use ``performance
    budgeting'' as a tool for making policy and management decisions. Charlotte, North Carolina, and Dayton, Ohio
    undertake regular performance measurement. Sunnyvale, California has become internationally recognized for
    performance budgeting--allocating funding for tasks rather than for personnel, equipment, and supplies, with
    quantified objectives that are expected to be achieved with the funding. Indianapolis' budget provides mission
    statements, allocations by outcome objectives, and comparative performance measures.

      State governments are also using these tools. Missouri, Texas, Louisiana and Virginia use performance
    information extensively in the central budget office, while most States use performance information at the
    agency level.

      Successful implementation of performance-based budgeting has not been limited to this country. Over the past
    two decades, every year an increasing number of the 30 countries in the Organization for Economic Cooperation
    and Development are adopting a performance-based approach to management. New Zealand focused on ``buying
    outputs'' ten years ago. Australia and the United Kingdom are the leaders in focusing on outcomes. Canada and
    the Netherlands are close behind, with France and Japan still in the early phases of transforming to an outcome-
    focused approach.

      Australia develops effectiveness and efficiency outputs for its outcomes, and prices each output. The British
    system is more structured than Australia, employing performance service agreements, aim (or mission) statements,
    overarching objectives, performance targets, and statements of responsibility for delivery (achieving the
    targets). In linking resources with outcomes, the British Cabinet Committee's annual budget review allocates
    monies three years forward, making decisions on both broad outcome levels and the resources needed to achieve
    the outcome levels.

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                              BUDGETING FOR RESULTS

      Testifying before Congress last May, the Director of OMB signaled his
    intention to focus on performance. ``Our main focus of the next months
    will be working toward full integration of budget and performance
    information, and using performance data to help make program and budget
    decisions.'' He described three specific steps in this direction.
        ``First, we will insist that agencies develop a credible
              linkage between resources and performance. We need to be able
              to answer the question: `What are we getting for what we are
              spending?' As we work to establish this linkage, we expect to
              make some changes to the traditional process of how we review
              budget requests, and the nature of our passback to the
              agencies on their requests.
        ``Second, we intend to improve our ability to understand the
              true cost of each program. Full costing of certain program
              budget accounts will necessitate significant accounting
              changes, and we are developing a legislative proposal
              permitting us to assign currently unallocated costs and
              present these in the budget.
        ``Third, you should see a more robust presentation of
              performance information in the FY 2003 President's Budget. We
              also intend to explore how a significant restructuring of the
              budget document itself might enhance public and Congressional
              understanding of government performance.''
      ``Work is already underway on these and several related initiatives.
    These tasks will engage nearly every OMB office, and will comprise a
    significant part of the workload over the next year.'' The Director
    concluded: ``We believe that this work will lead to a big potential
    payoff in improved effectiveness and efficiency of government.''
      OMB staff and agencies collected evaluations, studies, and performance
    documentation of all sorts from all sources to assess which programs
    were effectively improving desired outcomes. Within the Executive
    Branch, preliminary assessments of these materials were discussed, and
    agencies were urged to improve program performance and to improve
    evidence of effectiveness and linkage with program cost.
      Below are some of the results of this performance-oriented process of
    policy development and budget allocation. The examples illuminate ways
    in which policy makers and program managers can help government better
    serve its citizens. Deliberately, they are chosen to represent ``best
    practice''--examples from which other program managers and policy makers
    can learn. They are presented in five categories: (1) funding effective
    programs, which have demonstrated benefits greater than cost; (2)
    shifting resources toward more effective

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    programs from less effective ones that have similar purposes; (3)
    setting program targets and strategies based on understanding
    performance and cost relationships; (4) adding incentives to enhance
    program effectiveness; and (5) improving efficiency in programs and
    support services.

                           Funding Effective Programs

      Programs in this category are effective. They deliver real benefits
    for Americans--healthier babies and families, more disadvantaged youths
    off drugs and in school or job training, and advancing knowledge that
    can improve health and sustain economic growth. These programs have
    undergone evaluation, not only documenting their effectiveness, but
    developing understanding of the reasons for their success so that policy
    makers and program managers can sustain and build on it.
        Agriculture: Numerous government and private studies show
              that the Special Supplemental Nutrition Program for Women,
              Infants and Children (WIC) is one of the nation's most
              successful and cost-effective early intervention programs. The
              program saves lives and improves the health of women, infants
              and children who are nutritionally at risk. The Budget
              reflects this demonstrated success by fully funding the
              program in 2003 to enable all eligible persons who seek
              services to receive them. The request is sufficient to provide
              7.8 million persons with supplemental foods, nutrition
              education, and preventive health care each month in 2003. A
              contingency fund is available to serve an expanded number
              should that be necessary.
        Commerce: Although the U.S. gross domestic product (GDP)
              statistics are widely regarded as among the best in the world,
              they require continual improvement to keep pace with the
              nation's rapidly changing economy. Additional funding is
              proposed for the Bureau of Economic Analysis to improve and
              speed production of its statistics, on which government and
              business decision-makers depend.
        Health and Human Services: Community Health Centers provide
              high-quality health care that reduces hospitalizations and
              emergency room use, and prevents expensive chronic disease and
              disability. The Budget expands the number of centers by 1,200
              to serve an additional 6.1 million patients by 2006. Together
              with the National Health Service Corps, the Centers increase
              the number of health care providers in underserved areas.
        Health and Human Services: The 1997 National Treatment
              Improvement Evaluation Study found that treatment decreased
              primary drug use by 48 percent, alcohol and drug-related
              medical visits by 53 percent, and criminal activity by as much
              as 80 percent. Welfare dependency, and homelessness also
              declined. The Budget supports an additional 52,000 drug
              treatment slots.
        Health and Human Services: Funding for the National
              Institutes of Health, the world's leading research institution
              for biomedical and behavioral research, will increase to
              double its 1998 level. NIH conducts research in its own
              laboratories, but the vast majority of its funding supports
              researchers in universities, hospitals, and research
              institutes around the country through peer-reviewed grants.
              NIH has supported great advances in the detection and
              treatment of disease, and its recent work on the human genome,
              cancer, and many other diseases gives promise of accelerating
              breakthroughs.
        Labor: The Budget will support four more Job Corps centers
              for residential vocational training for disadvantaged youth
              than in 2001. At a unit cost of roughly $31,700 per service
              year, the Job Corps is the Department of Labor's costliest
              training program. However, evaluations have demonstrated that
              its benefits exceed its costs. Job Corps participants get
              jobs, keep them, and increase earnings over their lifetimes.
        National Science Foundation: The NSF, a leader among Federal
              agencies that fund basic research, will get more funding and
              programs transferred from other agencies. Of NSF's grants, 94
              percent are competitive, based on merit review. Each year,
              one-third of NSF's research and educational programs are
              evaluated for integrity, efficiency, and quality of results,
              so that all programs are reviewed in a three-year period. Of
              the dozen 2001 Nobel prize winners in the sciences, NSF
              supported eight for the research that won them the award. NSF
              quickly redirects resources to areas of emerging opportunity,
              and invests one-quarter of its research budget in areas where
              major breakthroughs are likely.

                Shifting Resources toward More Effective Programs

      Comparison of programs for similar purposes can lead to the conclusion
    that some are more effective than others. Shifting resources toward the
    better programs is one way to improve results, while the other programs
    seek ways to focus or reform their efforts.
        Commerce: Funding for technology innovation in the
              Department of Commerce was increased for the National
              Institute of Standards and Technology, a world leader in high-
              tech and basic industrial standards including work that led to
              the 2001 Nobel Prize in physics. The Patent and Trademark
              Office will also have more resources and set targets for
              faster patent and trademark processing. The Budget channels
              resources to higher performing programs by reducing funding
              for Manufacturing Extension Partnerships and the Advanced
              Technology Program, and terminating the Technology
              Opportunities Program.

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        Housing and Urban Development: Housing vouchers are lower in
              cost per unit, at only 85 percent of the cost of Public
              Housing, and benefits are higher. More voucher recipients (26
              percent) than Public Housing dwellers (8 percent) live in
              census tracts with less than 10 percent poverty; evaluations
              are finding better educational, social and behavioral outcomes
              from the greater opportunities available in these
              neighborhoods. The Budget increases funding for housing
              vouchers, expands opportunities for families to choose housing
              that best fits their needs, and provides more help to see that
              vouchers are used effectively.
        Labor/Training: This Budget begins a wide-ranging reform of
              Federal investments in training and employment. In 2002, there
              are at least 48 overlapping training and employment programs
              scattered around 10 agencies. For several programs that are
              duplicative or have a history of poor performance, funding is
              reduced or terminated, reducing the number of programs from 48
              to 28. For the many other training programs where performance
              measures are inadequate or not comparable, a multi-year effort
              will begin to assess relative effectiveness, shift resources
              to programs that prove effective, and eliminate ineffective or
              duplicative programs.
        Labor: The backlog of the H1-B visa program will be
              eliminated by shifting funds from an ineffective grant
              program, and reforming the visa review process.
        Research: Rigorous peer review of proposals for research is
              an effective tool in selecting projects that are most likely
              to yield useful results. The Budget more than doubles funding
              for USDA's National Research Initiative, and reduces other
              agricultural research, in an effort to increase peer review.
              Also to promote merit-based competition, NOAA's Sea Grant
              program, and the Interior Department's toxic substances
              hydrology program will move to NSF.
        Corps of Engineers: For the Corps navigation program, the
              Budget funds improvements for those waterways with the
              greatest economic return, and limits funding for those with
              little commercial traffic.

                     Setting Program Targets and Strategies

      As programs learn to link performance and cost, they can set targets
    in their annual performance plan in line with their budget request. This
    helps to gain support for their request and holds them accountable to
    achieve the targets. Understanding relationships between cost and
    performance helps to achieve better performance, to gauge the additional
    cost of additional performance, and, in some programs, to set
    appropriate fees.
        Commerce: The National Weather Service, an effective
              program, got an increase in funding and specific targets to
              increase hurricane warning lead time two hours by 2005, double
              tornado lead time to 22 minutes by 2015, improve aviation
              forecasting accuracy by 13 percentage points by 2007, and
              improve temperature and river forecasts for a pilot region by
              2004. Lives will be saved by more timely evacuations; airline
              and energy industry costs and energy use will be reduced.
        Health and Human Services: The Food and Drug Administration
              plans to increase the speed of processing generic drug
              applications to act on 75 percent within six months of receipt
              in 2003, up from 50 percent in 2001. FDA will also triple
              inspections of foods it regulates that are imported into the
              United States.
        Housing and Urban Development: HUD has set a target to raise
              the minority homeownership rate to 50 percent in 2003.
        Justice: The Budget supports a six-month standard for
              processing all immigration applications. The Immigration and
              Naturalization Service will streamline and redesign its entire
              process, improving efficiency to reach this target. This will
              be done with a clear focus on thorough and timely screening of
              all applicants to ensure security. Justice has also set
              targets for immigration enforcement, prison crowding, and
              detention cost and quality.
        Social Security Administration: SSA has targeted an increase
              in retirement claims processed within 14 days from 84 percent
              in 2001 to 87 percent by 2003, an increase in customer
              initiated services available electronically from 21 percent to
              40 percent; and an increase in callers access to SSA's 800
              number within five minutes of their first attempt from 92
              percent in 2001 to 94 percent in 2003.
        Transportation: DoT manages programs to improve safety in
              all modes. They have set targets to reduce the number of
              serious airport runway incursions from the 52 last year. The
              Department also hopes to reduce highway fatalities and
              injuries by increasing seat belt usage to 90 percent by 2005,
              and reducing alcohol-related fatalities to 11,000 by 2005.
        USAID: The Budget increases funding for global efforts to
              combat HIV/AIDS. A rapid scaling up of the program will focus
              on four countries (Cambodia, Kenya, Uganda, and Zambia) to
              reduce HIV prevalence in young adults by 30 percent, increase
              the proportion of infected, pregnant women getting
              antiretrovirals to prevent mother-to-child transmision to 7
              percent, and increase the percentage of orphans receiving
              community services to 12 percent.

               Adding Incentives to Enhance Program Effectiveness

      Even effective programs can further enhance their results by adding
    incentives for grantees, contractors, and employees. For less effective
    programs, this could

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    provide a crucial boost to the search for innovation, efficiency, and
    new strategies.
        Agriculture: The Food Stamp quality control system measures
              how accurately States determine Food Stamp eligibility and
              calculate benefits. While the system is necessary to ensure
              program integrity, the current system's sole focus on payment
              accuracy does not recognize State efforts to achieve other
              important program goals, such as promoting access among
              working households. As part of Food Stamp reauthorization, the
              President proposes rigorous, but fair, reforms to the quality
              control system and performance bonuses for payment accuracy
              and customer service.
        Commerce: The Administration will propose that
              reauthorization of the principal legislation governing marine
              fisheries conservation enable the use of transferable fishing
              quotas in appropriate circumstances. This strategy can improve
              economic incentives for fishing investment and activity, which
              help both profitability and environmental sustainability.
              Currently, 20 percent of major marine fish stocks are over
              fished and another large fraction has unknown population
              status.
        Education: Vocational Rehabilitation State Grants are
              already rated effective, but States vary widely. As part of
              the initiative to integrate performance measures and budget
              decisions, companion Incentive Grants will be allocated to
              States based on their performance in helping individuals with
              disabilities obtain competitive employment.
        Energy: The Power Marketing Administrations provide an
              unusual example of improved incentives. PMAs receive their
              power from hydroelectric dams operated by the Corps of
              Engineers and the Bureau of Reclamation. In 2003, three
              additional PMAs will join Bonneville Power Administration in
              directly paying the Corps' operating and maintenance expenses,
              permitting the PMAs to negotiate directly with the Corps over
              their maintenance and upgrades.
        Health and Human Services: The effective Temporary
              Assistance for Needy Families (TANF) program began in 1996.
              TANF includes a system of high performance bonuses to reward
              States that have excelled in a variety of areas, including
              employment outcomes and continued access to benefits. The
              bonus to reward States with a reduction in out-of-wedlock
              births is less effective and so is being eliminated, with the
              funds redirected to develop new approaches to reduce
              illegitimacy and promote family formation.
        Labor: The Federal Employees' Compensation Act will charge
              agencies for the full cost of FECA administration as well as
              workers' benefits, and will implement a number of reforms to
              strengthen program integrity, discourage frivolous claims, and
              promote benefit equity.
        State: OMB and the State Department are coordinating an
              effort to right size the government's overseas presence.
              Information is being developed on how many employees from
              which agencies are stationed overseas and what they are doing.
              OMB and the State Department are developing a proposal whereby
              the many agencies that the State Department hosts will be
              charged for the full cost of the space and services that they
              use, providing a new incentive to balance cost against the
              benefit of overseas presence.
        Treasury: The United States proposes to negotiate a
              significant increase in the level of assistance provided to
              the poorest countries as grants rather than loans. The U.S.
              will focus this aid on countries with sound policy
              environments and demonstrated performance, and on operations
              that raise productivity. The institutions which distribute the
              aid will be asked to develop reliable performance and output
              indicators. The U.S. will increase its contributions in 2004
              and 2005 conditional on specific actions and the achievement
              of results.

              Improving Efficiency in Programs and Support Services

      If the Federal role is appropriate and the program is effective or
    undergoing reform, then attention turns to the most efficient way to
    produce outputs. This is more difficult than in the private sector,
    where market price summarizes the value of the timeliness, accuracy,
    quality, and other characteristics of outputs. But attention to
    efficiency can result in the public getting more government services at
    the same or less cost.
        Agriculture: The Farm Service Agency and the Natural
              Resources Conservation Agency will work to reduce the
              reporting burden of the farmers they serve by 10 percent, and
              to increase the technical assistance to priority locations and
              the eligibility determinations they provide, while reducing
              cost.
        Agriculture: Rural Development has had considerable success
              centralizing loan servicing through a single, national office
              and information system. The Budget proposes that the Farm
              Service Agency emulate that success by establishing a service
              center to centralize farm loan servicing.
        Defense and Veterans Affairs: To increase the cost-
              effectiveness of providing medical care, the Department of
              Defense and the Department of Veterans Affairs will begin to
              coordinate with each other. They will share information to
              speed delivery of health services and ensure the safety of
              veterans who get care from both DoD and VA. They will also
              share resources instead of constructing new facilities,
              purchase supplies together, and coordinate patient
              transportation.
        Education: The Department of Education will reform the
              process of collecting Federal elementary and secondary
              education information from States in order to reduce
              administrative burden, maxi

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              mize the usefulness of data, and improve accountability for
              results. This reform will permit staff to focus on results,
              thereby releasing the Department from a culture of compliance
              and shifting to a culture of accountability.
        Education: The Department of Education's costs for
              administering student financial assistance programs will be
              consolidated in a single discretionary account. Requests will
              be tied to unit cost targets for major tasks, such as
              applications processing, loan origination, and loan servicing,
              and to annual estimates of participation in various programs.
              These changes will enable the Department to measure its
              progress in meeting productivity and cost-efficiency goals.
        Health and Human Services: HHS is a many-layered bureaucracy
              with 40 Human Resources offices competing for recruits, more
              than 50 Public Affairs offices, and more than 20 Legislative
              Affairs offices. These will be consolidated into four Human
              Resources offices and one each for Public Affairs and
              Legislative Affairs. Three building maintenance and
              construction offices will be consolidated into one this year,
              and two more will be folded in next year, in order to
              concentrate expertise and set priorities for capital projects
              across the Department.
        Justice: To use detention space efficiently, the Department
              of Justice will create a National Clearinghouse for Detention
              Space; State, local, and private providers will electronically
              post vacancies, rates, services, and other data. Justice will
              also explore purchasing private prisons.
        Labor: DoL is providing focused compliance assistance to
              help employers prevent labor law violations or correct them
              voluntarily. Efforts include making the rules more
              understandable, posting them on the Web, providing on-site
              consultations, and developing interactive electronic tools to
              help employers and others understand occupational safety and
              health regulations.
      These examples show that there are Federal programs with documented
    effectiveness. These programs attract support in the President's Budget.
    They show that making decisions based even on today's rough performance
    measures can improve results--by allocating resources to more effective
    programs, stimulating program reforms, providing constructive
    incentives, and cultivating good program management. The integration of
    performance measures in the budget process encourages their use in
    making decisions that improve results.

                             FOUNDATION FOR RESULTS

      Measurement leads to improvement, but it is hard to find good measures
    in the Federal government. For instance, currently many program managers
    cannot get a consistent, full measure of the costs of their programs
    from agency budget systems. Frequently they do not actively participate
    in developing performance measures for the performance plans required
    under the Government Performance and Results Act (GPRA). The goal of the
    Integration Initiative is to give program managers better information on
    costs, involve them in a process of setting goals that are commensurate
    with the resources requested, and then hold them accountable for
    results.
      In the same vein, while some agencies have made good progress in
    performance reporting under GPRA, a lot more needs to be done. Even
    information about the relationship of existing performance measures to
    the budget costs for specific programs is frequently not available for
    decision-makers and the public. This Administration has devoted
    substantial time and effort over the past year to integrating goals and
    costs, including making major changes in the budget volume.
    Notwithstanding this effort, it continues to be difficult to
    systematically assess either the effectiveness of programs, or their
    relative efficiency when compared to like activities in other areas of
    government and the private sector.
      This lack of full, consistent information is the result of long
    standing barriers in agency organizations and reporting systems, some of
    which are built into law. To just begin to correct these deficiencies,
    the following steps are needed:
        The government's program managers must participate in the
              development of broad objectives and annual performance goals,
              and link those objectives and goals to an annual budget
              request.
        Agency reporting systems must be able to report on these
              goals, objectives, and costs in an integrated information
              system that can be aggregated into the President's Budget
              request and the agency budget justification that is
              transmitted to the Congress. Agency reporting systems must
              also provide acceptable after-the-fact evaluation and
              financial information on how well goals and costs have been
              achieved.
      Making results the focus of the budget requires three significant
    changes. First, planning and evaluation--both oriented toward outcomes--
    must be thoroughly integrated into the budget process and documents.
    Second, the alignment of budget accounts--and especially their
    subdivision into ``program activities''--should be reviewed so that the
    budget can readily relate resources used to the results produced, and so
    that good management is supported. This can be done separately for each
    agency. Third, accounts and activities should be charged consistently
    for the full annual cost of the resources used. This requires
    legislation.
      In October, the Administration transmitted legislation to the Congress
    to charge the employer's share of the full accruing cost of retirement
    benefits to Federal employers. A companion bill to complete full charg

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    ing for other resources used to produce outputs is being developed for
    transmittal following this Budget. Together, these changes are important
    steps toward a more results-oriented government.
      The broad objectives of the Integration Initiative are clear enough,
    but, as with performance measurement in general, translating these
    objectives into specific goals and making the changes necessary to meet
    the goals is much harder and takes a long time. Many program managers,
    budget officers, performance measurement staff, and other government
    officials are struggling with this translation.

                             Integrating the Process

      The first step in infusing planning and evaluation into budgeting is
    to produce greater collaboration. Some agencies report that these
    functions are already carried out by ``the same'' staff, and others are
    considering mergers. So far, the results of collaboration are usually
    more evident at the bureau than at the departmental level. Planning is
    more likely to precede budgeting at bureaus, and a crosswalk between
    performance goals and budget cost is often provided.
      The Environmental Protection Agency is an example of an agency that
    has made substantial progress. It has an integrated staff to create the
    budget, set output targets, and evaluate implementation. Another useful
    practice is followed by Health and Human Services, which holds a
    department-level joint plan and budget review for each of its operating
    divisions to prepare for the Secretary's budget submission to OMB.
      The second step is to make a serious commitment to outcomes--and to
    evaluation of relevant programs to understand how outcomes can be
    improved. A results-oriented budget starts from the agency's strategic
    plan and its priorities. What outcomes will the agency espouse? How do
    its programs and activities help to achieve each outcome? Targeting an
    outcome, which the agency may influence but cannot control, seems risky.
    Yet without a serious commitment to outcomes, the agency's programs may
    be efficient--but only accidentally will they be effective. Moreover,
    agencies without this commitment are likely to have so many
    ``performance measures'' that few capture attention, get agency
    priority, or aggregate into results that the public cares about. Below
    are two examples of outcomes related to agency outputs. Note in the
    first example how an outcome--highway safety--may be produced by the
    outputs of several different agency programs and activities taken
    together.
        Transportation. To reduce highway fatality and injury rates,
              DOT will test automobiles to ensure compliance with safety
              standards; promulgate new or revised safety standards in
              several areas; invest in infrastructure improvements to reduce
              conditions or factors most associated with highway fatalities,
              such as single vehicle run-off-the-road crashes (which cause
              38 percent of all deaths); and increase research into how the
              growing levels of driver distractions may increase accident
              rates.
        Veterans Affairs. To improve the overall health of veterans
              through high-quality, safe, and reliable health services (an
              outcome), VA has sharply increased its score on the Care Index
              (a measure of the degree to which VA follows nationally
              recognized guidelines for the treatment and care of patients
              with one or more of five major ailments) and on the Prevention
              Index (a measure of the degree to which VA follows nationally
              recognized prevention and early detection recommendations for
              eight diseases or health-risk factors).
      Finally, a single streamlined, integrated plan-and-budget document
    should eventually be produced. So far, agencies have included budget
    amounts in their annual performance plan, first at an aggregate level
    and then in more detail. They have also included performance measures in
    their budget justifications, sometimes linked with program resources.
    Plans are relatively streamlined; budgets rarely are--not even in the
    sense of a streamlined overview with supplementary volumes. The
    Department of Labor and some other agencies are working toward a single
    integrated document. But few have learned a lesson from great chefs:
    ``reductions'' take more time, but they have more flavor!

    [[Page 10]]

                               Improving Alignment

      Account and activity alignment should eventually fit the nature of
    each agency and bureau. Alignment needs to be considered with care.
    Consideration might begin with the question: What general principles for
    alignment contribute to creation of a results-focused budget?
      Attention naturally turns to programs for the public that carry out
    the agency's mission. The agency's Strategic Plan, which is based on its
    authorizing legislation and involves wide consultation, is a potential
    starting point for identifying strategic goals and the outcomes that the
    agency seeks to improve. If the agency's perspective or environment have
    changed enough to affect its strategic goals (e.g., the Department of
    Justice after September 11th), they need to be brought up to date. The
    agency's main goals could be listed, along with the outcomes that
    measure success in achieving each. This could provide an organizing
    framework for the integrated plan and budget document.
      The traditional--indeed Constitutional--purpose of the budget accounts
    is to control budgetary resources. That emphasis will continue, and no
    changes in budget concepts or total budget outlays are proposed as part
    of the Budget and Performance Integration Initiative. But the account
    structure needs review to ensure that it supports, or at least does not
    hinder, good management. From that perspective, all of the resources
    used by a bureau or other organization should be financed from one or
    more budget accounts associated with it. At an aggregate level,
    resources would be managed by those accountable for achieving results.
      Bureaus are clearly visible in the budget account structure of almost
    all Departments. Many accounts finance an entire bureau or office. Where
    there are more accounts, there is often a good managerial reason: a
    major program may have an account of its own; large mandatory transfers
    or grants may be in a separate account from administration and other
    complementary discretionary activities; if the bureau conducts programs
    and activities for very different major purposes, separate accounts may
    support better decisions. But multiple small accounts for similar
    purposes are usually unnecessary. And multiple accounts for different
    inputs or different activities leading to the same output or outcome may
    inhibit a manager striving for the best results. Some account
    consolidation might be useful.
      The ``program activity'' sections that subdivide budget accounts offer
    an opportunity to improve linkage between resources and results. In
    accounts that finance provision of goods, services, grants, transfers,
    credit, insurance, or regulation for the public, program activities
    could align the resources used with the results achieved--usually an
    output for the public, such as loans made--with related performance
    measures that influence desired outcomes, such as the percent of loans
    made to first-time homeowners and the percent that

    [[Page 11]]

    remain in payment status. This is sometimes current practice. But in
    other cases, these subdivisions may show inputs, some-but-not-all of the
    funding for an output, or an intermediate process that contributes to
    several outputs. Such practices make it difficult to show the full
    annual cost of resources used to achieve specific results. They also
    splinter responsibility for achieving results that Americans value.
    ------------------------------------------------------------------------

                        Immigration and Naturalization Service Program and Account Restructuring

    In 2003, the Administration is proposing a realignment of the Immigration and Naturalization
     Service's (INS's) account structure. In the past, INS had three accounts: salaries and
     expenses, construction, and immigration support. A person looking at the INS accounts could
     not determine how much money was spent on immigration enforcement or immigration services.
     Even looking at various fee accounts, one could not see how much of the money collected from
     application fees went to processing the application versus enforcing immigration law. The
     new structure provides the full picture of how much money collected from application fees
     went to processing the application versus enforcing immigration law. The new structure
     provides the full picture of how much money is spent to fulfill the agency's dual missions
     of enforcement and services.

    This proposal realigns the INS budget and account structure with the Department of Justice's
     and INS's Strategic Plan objectives, making it easier to track resources with results. It
     not only changes the account structure but also collapses the current program structure from
     13 different programs to six programs that directly link to performance objectives. It
     organizes similar enforcement actions together and clearly separates immigration services
     and support operations. The support and administration account is temporary, capturing the
     overhead and support costs that could not be easily spread in the first year. INS plans to
     spread these costs in the 2004 budget. This will complete the realignment of funding to
     allow for linking funding with performance goals--so the public knows what it is getting for
     its money.

    ------------------------------------------------------------------------

    [[Page 12]]

      Thoughtful long-term reforms are needed in budgetary structure to
    manage for results. The Federal Aviation Administration is improving its
    budget accounts for capital and research by aligning funds under
    performance outcome goals. The agency is also streamlining these
    accounts to increase managerial flexibility to achieve performance
    outcomes. A more extensive example of an agency working on this problem
    is the Immigration and Naturalization Service. The presentation on the
    previous page shows their prior account structure, how they transformed
    it, and how it lines up with INS's performance objectives.

                       Charging Full Annual Budgetary Cost

      To show the full annual budgetary cost consistently across all
    programs requires more than improving account and activity alignment. It
    also requires providing budget authority to cover the resources used for
    each program and oversight account, and charging all accounts for the
    full annual cost of using resources. Currently this is not
    systematically done.
        Civilian retiree health benefits have all been paid
              centrally for the whole government; military health benefits
              have been paid centrally by DoD and the small uniformed
              services. Costs are not shown when the benefits are earned;
              only when they are paid.
        Pensions for new civilian employees and for military
              employees were reformed in the mid-1980s, with employers
              paying their share of the accruing cost. But costs for
              employees hired earlier under the Civil Service Retirement
              System are only partly charged, and several small systems are
              pay-as-you-go, which creates an uneven effect across programs.
        Support goods and services are often paid centrally by
              agencies or provided to programs at less than full cost. There
              are indications that programs use different amounts and kinds
              of support in these circumstances than when they pay full
              cost. In other instances, agencies may allocate cost to the
              programs, leaving managers feeling burdened.
        Capital costs are most problematic. From the program
              manager's perspective, they may be zero if financed centrally,
              some share of acquisition cost if that is allocated, the
              rental value if office space is rented from GSA, or a
              substantial bite out of their budget for a rare capital
              acquisition.
      In sum, program costs are often lower than annual operating costs--by
    widely varying amounts--and sometimes higher. The Budget and Performance
    Integration Initiative will improve on this and begin to create more
    complete and uniform measures of annual budgetary cost across the
    government. That will begin to permit the fair comparison of the cost of
    one program with another.
      Two complementary legislative proposals--one already transmitted to
    the Congress and the other under development--would apply ``best
    practice'' consistently to show a more complete measure of budgetary
    cost where and when resources are used.
        To show resources where they are used, the second proposal
              would include a straightforward but powerful requirement: the
              full annual budgetary cost of resources used by programs shall
              be charged to the budget account or accounts that fund the
              program. More than one program might be funded by a single
              account so long as the amounts used are separately
              distinguished. These provisions would be deliberately general,
              leaving how they would be applied to case-by-case decisions on
              alignment.
        To show support services where they are used, the second
              proposal would create intra-governmental support revolving
              funds (ISRFs) from working capital, franchise, and other
              support revolving funds. Any support goods and services
              provided to more than one bureau would move into an existing
              fund or a newly created one. Like all other accounts, ISRFs
              would be charged for the resources they use and would charge
              programs and other customers enough to operate on a self-
              sustaining basis.
      Three other provisions of legislation would use pairs of budget
    accounts to change when costs are shown in the program accounts without
    changing the timing for the budget totals. These cover all major cases
    where resources are used long before or long after they are paid for.
        Pensions and retiree health benefits are earned as Federal
              employees work; they are paid much later, after the employees
              retire. The legislation already transmitted would require
              program and other employer accounts to pay the employer share
              of the accruing cost of these benefits to retiree benefit
              accounts, where they are offsetting collections. These
              accounts would pay the benefits when they come due.
        Similarly, programs that generate hazardous substances would
              be required to pay the accruing cost to clean up contaminated
              assets at the end of their useful life. These payments would
              go to funds responsible for the cleanup.
        In contrast, capital assets are bought before they are used.
              In this case, an agency Capital Acquisition Fund (CAF) would
              be created. Following good budget practice, the CAF would
              request budget authority (BA) up front to acquire assets that
              are included in the budget, and outlays would be recorded when
              payment was made. However, this BA would be in the form of
              borrowing from Treasury authority. The CAF would then borrow
              for the period of the asset's useful life; collect annual
              capital user charges in proportion to asset use, and make the
              mortgage payments to Treasury.
      The General Accounting Office supported these concepts for budgeting
    in the United States in a recent report, Accrual Budgeting: Experiences
    of Other Nations and Implications for the United States. (February
    2000).

    [[Page 13]]

      Full Funding for Federal Retiree Costs. To make quick progress on
    these practices, the Administration split the required legislation into
    two parts. In October, the first bill--``Budgeting and Managing for
    Results: Full Funding of Retiree Costs Act of 2001''--was transmitted to
    Congress as Title II of the Managerial Flexibility Act of 2001.
      The proposal charges to salary and expense accounts in all Federal
    agencies--most of which are funded by discretionary appropriations--the
    employer's share of the full annual accruing cost of retirement benefits
    above and beyond the amounts that are charged now. The bill requires
    charges for:
        the full accruing cost of the Civil Service Retirement
              System and the parallel Foreign Service and CIA pensions,
        retired pay for the small uniformed services (Coast Guard,
              Public Health Service, and NOAA),
        retiree health benefits for civilian employees in the
              Federal Employee Health Benefit Program, and
        retiree health benefits for the seven uniformed services.
              For the latter, accrual of health benefits for those 65 and
              over will start in 2003 under existing law, and accrual of
              benefits for younger retirees is proposed to start in 2004.
      Existing liabilities are amortized by mandatory payments from the
    general fund, and benefit payments are mandatory.
      This component of cost was proposed first because it could be
    implemented largely by changing the amounts paid from and to existing
    accounts. These costs are displayed by account in the 2003 Budget for
    2003 and beyond, with comparable estimates published for 2001 and 2002.
      The bill does not change total budget outlays or the surplus/deficit;
    it shifts costs from central mandatory accounts to increase the affected
    discretionary accounts on the civilian side by $9.2 billion. The
    additional discretionary amounts were treated as an adjustment in this
    Budget.
      Thus, the Budget requests sufficient funding by account for this
    conceptual change, except for programs that are funded by user fees.
    Under OMB Circular A-25, the costs of the latter programs are expected
    to be covered by their fees. The adjustment for accounts producing
    support goods and services is made in their customers' budget accounts.
      This legislation would fully fund the employer share of all Federal
    pensions, retired pay, and retiree health benefits by agency payments to
    the retiree benefit funds each year as they are earned by employees. It
    would amortize past unfunded liabilities on a regular schedule by
    payments from Treasury to the retiree benefit funds. The legislative
    language requires the appropriate amounts to be paid out of all salary
    and expense appropriations, just as they are now for the Federal
    Employee Retirement System (FERS) and the Military Retirement System
    (MRS).
      These charging practices would go a long way to close the gap between
    current budgetary cost and uniform full operating cost so that cost and
    results can be compared with each other and across programs.
      The bill would not change the government cost that would be compared
    with private offers in a public private competition. These costs are
    already included in the OMB Circular A-76 comparison. But it moves
    toward the possibility of fair competition without the current
    burdensome process.
      Full Budgetary Cost and Performance Integration. As discussed above,
    the Administration is developing a second proposal to charge uniformly
    for other resources where and when they are used. It is intended for
    transmission to Congress after this Budget. Implementation would start
    in the fiscal year 2004 Budget, but with additional implementation in
    future years. This proposal covers the 24 CFO Act agencies, except that
    the Director of OMB may extend the support goods and services provisions
    to other agencies.
      While still under review, this proposal's key goal is to facilitate
    the full annual budgetary cost of resources used by programs being
    charged to the budget account or accounts that fund the program. More
    than one program may be funded by a single account so long as the
    amounts used are separately distinguished. How this is worked out in
    each agency--and how closely it hews to the spirit of aligning costs
    with outputs and outcomes--will determine where the costs defined in the
    other provisions will be charged. To retain the current degree of
    flexibility to deal with changing circumstances, the proposal will
    include limited transfer authority.
      None of the budgetary changes in this proposal will affect the
    ``bottom line'' of the budget as a whole, or the basic budgetary
    concepts of budget authority, obligations, and outlays. They do increase
    the amount of discretionary budget authority that must be appropriated
    to capture the full cost of programs. The effect of this will be that
    programs that produce outputs for the public will recognize
    discretionary spending in the budget at the time when they incur costs.
      Therefore, for each program, the budget account would show the total
    budgetary resources used to pay annual operating cost. Comparison of
    resources and results will be systematic when allocating resources; and
    managers will have timely feedback and better resource control with
    which to achieve better results.

                              MANAGING FOR RESULTS

      What you measure is what you get. The greatest initial impact from
    integrating performance and budgeting is that we will begin to get
    better results for each budget dollar. In the slightly longer run,
    managing for results will continually improve program outcomes. The
    President's Management Agenda launched this ef

    [[Page 14]]

    fort last August. The Agenda includes five government-wide initiatives
    that are intended to work together as a mutually reinforcing set of
    reforms. In addition to Budget and Performance Integration, they are
    Strategic Management of Human Capital; Competitive Sourcing; Expanding
    Electronic Government; and Improving Financial Performance.
      The Strategic Management of Human Capital Initiative will align human
    resources with programs and their outputs, so that real as well as
    budgetary resources will be focused on producing results. The
    Competitive Sourcing Initiative will give program managers more choice
    in the character and cost of the inputs they buy with the budgetary
    resources they control. The Expanding Electronic Government Initiative
    will help programs to coordinate and deliver services. And the Improved
    Financial Performance Initiative will integrate financial and
    performance information that, together with Budget and Performance
    Integration, will provide timely, analytical feedback to managers. These
    Initiatives place more authority and accountability for outputs at the
    operating level, use working groups and intermediate levels of
    management to coordinate programs to influence outcomes effectively, and
    focus top management on policy development and oversight.
      The basic idea is to align authority, staff, and all resources used
    with specific bureaus and programs, to provide flexibility in the use of
    those resources, and to hold managers and staff accountable--with
    rewards when successful--for achieving agreed-upon results. Following
    the spirit of accountability, this Budget is presented by Agency rather
    than by cross-cutting functions.
      These five government-wide Presidential initiatives were selected
    because in each area the Federal Government is operating below
    potential, yet there is also a clear path to improvement with a major
    pay-off at the end. As a goal post, each of the initiatives included
    standards setting forth the characteristics that would define the
    success to be achieved over the next three years. OMB is working with
    agencies to customize the progress that each agency should make this
    year to achieve full success within three years. Agencies will earn
    ``green lights'' on progress for each quarter in which they meet the
    milestones along their agreed pathway to success.

    [[Page 15]]

                      Strategic Management of Human Capital

      A growing portion of the Federal workforce will become eligible to
    retire over the next decade. Good human resource management is needed to
    ensure that people with the necessary skills are hired, trained, and
    retained to provide public services. Human resources, as well as
    budgetary resources, need to be aligned with programs and activities
    that produce results. Aligned managers should be delegated the authority
    they need to get the job done, including more flexibility to hire and
    manage personnel, rather than hampered by excessive layers of review.
    The Integration and the Human Capital initiatives both link rewards to
    individual and group success in reaching performance goals. Below are
    examples of good practice.
        Treasury implemented knowledge management systems to help
              preserve and share the experience and institutional memory of
              retiring employees.
        The Veterans Affairs Healthcare Network for Upstate New York
              involves its employees in developing work unit ``stretch''
              goals at least 10 percent higher than the consensus
              expectation for the amount of work that will be accomplished.
              Employees have a stake in their success through a ``goal
              sharing'' incentive program, where modest awards are based on
              reaching goals at the regional and unit level. Since the
              program began, the program has reduced cost per patient and
              improved customer service and satisfaction.
        The General Services Administration's Public Buildings
              Service allocates regional office budgets based on nine
              performance measures. Targets are set for each measure, and a
              portion of the Performance Excellence Pool goes to regions for
              each goal they exceed. Organizational and individual
              performance has improved across the measures, with lower costs
              and better efficiency, effectiveness, and customer
              satisfaction.

                              Competitive Sourcing

      The President's Management Agenda includes an initiative to acquire an
    increasing proportion of commercial goods and services through
    competition among and between public and private sources. The process,
    as defined in OMB Circular No. A-76, relies on a performance-oriented
    statement of work and a comparison of the full costs to the taxpayer for
    each source. Last March, OMB set a target for agencies to compete or
    convert to contract not less than 5 percent of their FAIR Act
    inventories of commercial work performed by Federal employees in 2002.
    Agencies were asked to compete an additional 10 percent of their FAIR
    Act inventory in 2003. The agencies will retain all of the savings
    achieved through Competitive Sourcing.
      Innovation and efficiency are stimulated when agencies compete the
    acquisition of support goods and services from providers in their own
    agency, other agencies, or the private sector. Savings are generated
    which can be put to use in support of the agency's mission. The
    Department of Defense has competed 218 competitions since 1955, of which
    57 percent were retained in-house, and 43 percent converted to contract.
    When retained in-house, the average savings were 34 percent.
      However, OMB Circular A-76 is a cumbersome and complicated process. It
    requires developing a performance-based contract, conducting a
    management study to design a most-efficient-organization for the in-
    house bidders, and making an elaborate cost comparison. The process
    needs to be reformed to allow program managers to be free to acquire the
    support goods and services that best meet their needs.

                         Expanding Electronic Government

      E-government can improve the coordination, efficiency, and
    effectiveness of delivering information and services to the public.
    These projects may bring together programs producing different outputs
    toward common outcomes, and help them to deliver services from the
    customer's perspective. In order to make the government truly ``citizen-
    centered,'' agencies will have to work together around the needs of
    citizens and businesses--not agency boundaries. Citizen-centered
    government will use the Internet to give citizens the ability to go
    online and interact with their government. Below are some interesting
    examples.
        The Department of Commerce is using the Internet to serve
              businesses interested in international trade and minority
              contracting opportunities. Census uses e-government for its
              economic surveys of firms, and will use it more for the 2010
              census of population.
        The Department of Labor's Occupational Safety and Health
              Administration accepts health and safety complaints over the
              Internet. In addition, individuals can use the Internet to
              discover lost pensions, and a pilot project allows people to
              calculate their approximate retirement benefits on-line.
        The National Science Foundation was the first agency to
              perform all of its critical interactions with its proposal
              applicants through the web. Over 99 percent of the proposals
              the agency receives are submitted electronically.
        The Social Security Administration is rapidly expanding
              online customer service options. These include making
              retirement claims, receiving Medicare replacement cards,
              checking account status on-line, getting access to change
              one's address and telephone number, and making direct
              deposits.

                         Improving Financial Management

      Financial management is a natural complement to budgeting. Better
    account and activity alignment with performance is needed; resources
    should be charged where they are used. This congruence would facilitate
    accounting, and the emphasis on performance would provide incentives
    for, as well as facilitate, cost accounting. Performance, budgeting, and
    accounting information potentially could be entered using standard
    analytical software at the program and activity level, where

    [[Page 16]]

    it would be familiar and used as timely feedback, making it likely to be
    accurate. All entries should be fully coded to the Standard General
    Ledger. The modules as a whole could then be uploaded and consolidated.
        Transportation is implementing a new Department-wide
              financial management system that is geared towards capturing
              transactions at the source, automating the matching of
              expenditures to the obligating document, and obtaining
              electronic approvals. By capturing transactions at the source,
              this process reduces the likelihood of erroneous payments and
              posting the charges to the wrong contract. All organizations
              in DOT are working to convert to the new system by the end of
              calendar year 2002.
        The Treasury Franchise Fund consists of eleven ``business
              activities,'' each with a separate account established to
              facilitate financial reporting. Although the audited financial
              statements of the Fund are presented on a consolidated basis,
              its financial system generates individual financial statements
              for each business activity. Revenue and expense data are
              recorded and reported by business line. Direct and indirect
              costs are identified by each business activity and reported
              internally on financial reports.
        The Social Security Administration included a comprehensive
              footnote disclosure in its Accountability Report that
              described the method they use to classify operating expenses
              by strategic goal. SSA aligns its strategic goals with its
              request for new budget authority as part of its annual budget
              request. They applied the same method to allocate primary
              administrative expenses to each strategic goal and reconciled
              that to the operating costs reported on the Statement of Net
              Cost.
        The Department of Education is using activity-based costing
              in its student financial assistance (SFA) programs to improve
              efficiency. SFA has worked with managers to define program and
              business activities, assign cost, and map the activities. A
              user-friendly reporting tool provides managers with on-line
              multidimensional views of the results. Quarterly management
              reports are provided to managers showing the cost of their
              business processes and providing insight into the drivers of
              those costs. Managers are being assigned cost reduction
              targets, which this system and benchmarking with private
              industry and other agencies will help them to meet.
        The Environmental Protection Agency provides integrated
              financial and programmatic data to the agency's managers to
              support decision-making based on costs. For example, EPA is
              tracking the cost for all major IT projects by phase. Agency
              cost accounting for the Superfund program has resulted in over
              $2.8 billion in cost recoveries. And the agency's accounting
              structure has been redesigned to provide the costs of
              achieving the goals, objectives, and sub-objectives embodied
              in their Strategic Plan and budget.
      All five of the President's Initiatives thus contribute to the
    performance orientation and effectiveness of the Federal Government.