[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!

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                           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.