Step 1: Streamlining The Budget Process

Most people can't get excited about the federal budget process, with its green-eyeshade analysts, complicated procedures, byzantine language, and reams of minutiae. Beyond such elements, however, lies a basic, unalterable reality. For organizations of all kinds, nothing is more important than the process of resource allocation: what goal is sought, how much money they have, what strings are attached to it, and what hurdles are placedble reality. For organizations of all kinds, nothing is more important than the process of resource allocation: what goal is sought, how much money they have, what strings are attached to it, and what hurdles are placed before managers who must spend it.

In government, budgeting is never easy. After all, the budget is the most political of documents. If, as the political scientist Harold D. Lasswell once said, politics is "who gets what, when, how," the budget answers that question. See Note 13 By crafting a budget, public officials decide who pays what taxes and who receives what benefits. The public's largesse to children, the elderly, the poor, the middle class, and others is shaped by the budgets that support cities, states, and the federal government. But if budgeting is inherently messy, such messiness is costly. Optimally, the budget would be more than the product of struggles among competing interests. It also would reflect the thoughtful planning of our public leaders. No one can improve quality and cut costs without planning to do so.

Unfortunately, the most deliberate planning is often subordinated to politics, and is perhaps the last thing we do in constructing a budget. Consider our process. Early in the year, each agency estimates what it will need to run its programs in the fiscal year that begins almost 2 years later. This is like asking someone to figure out not only what they will be doing, but how much it will cost 3 years later--since that's when the money will be spent. Bureau and program managers typically examine the previous year's activity data and project the figures 3 years out, with no word from top political leaders on their priorities, or even on the total amount that they want to spend. In other words, planning budgets is like playing "pin the tail on the donkey." Blindfolded managers are asked to hit an unknown target.

OMB, acting for the President, then crafts a proposed budget through back-and forth negotiations with departments and agencies, still a year before the fiscal year it will govern. Decisions are struck on dollars--dollars that, to agencies, mean people, equipment, and everything else they need for their jobs. OMB's examiners may question agency staff as they develop options papers, OMB's director considers the options during his Director's Review meetings, OMB "passes back" recommended funding levels for the agencies, and final figures are worked out during a final appeals process.

Early the next year, the President presents a budget proposal to Congress for the fiscal year beginning the following October 1. Lawmakers, the media, and interest groups pore over the document, searching for winners and losers, new spending proposals, and changes in tax laws. In the ensuing months, Congress puts its own stamp on the plan. Although House and Senate budget committees, guide Congress' action, every committee plays a role.

Authorizing committees debate the merits of existing programs and the President's proposals for changes within their subject areas. While they decide which programs should continue and recommend funding levels, separate appropriations committees draft the 13 annual spending bills that actually comprise the budget.

Congressional debates over a budget resolution, authorization bills, and appropriations drag on, often into the fall. Frequently the President and Congress don't finish by October 1, so Congress passes one or more "continuing resolutions" to keep the money flowing, often at the previous year's level. Until the end, agency officials troop back and forth to OMB and to the Hill to make their case. States and localities, organizations and advocates seek time to argue their cause. Budget staffs work non-stop, preparing estimates and projections on how this or that change will affect revenues or spending. All this work is focused on making a budget--not planning or delivering programs.

Ironies riddle the process.

Uncertainty reigns: Although they begin calculating their budget 2 years ahead, agency officials do not always know by October 1 how much they will have to spend and frequently don't even receive their money until well into the fiscal year. OMB is especially prone to question unspent funds--and reduce the ensuing year's budget by that amount. Agency officials inflate their estimates, driving budget numbers higher and higher. One bureau budget director claims that many regularly ask for 90 percent more than they eventually receive.

Despite months of debate, Congress compresses its actual decision-making on the budget into such a short time frame that many of the public's highest priorities--what to do about drug addiction, for example, or how to prepare workers for jobs in the 21st century--are discussed only briefly, if at all.

The process is devoid of the most useful information. We do not know what last year's money, or that of the year before, actually accomplished. Agency officials devise their funding requests based on what they got before, not whether it produced results.

There are two ways to reduce expenditures. There is the intelligent way...going through each department and questioning each program. Then there is the stupid way: announcing how much you will cut and getting each department to cut that amount. I favor the stupid way.

Michel Belanger Chairman, Quebec National Bank May 7, 1992

In sum, the budget process is characterized by fictional requests and promises, an obsession with inputs rather than outcomes, and a shortage of debate about critical national needs. We must start to plan strategically--linking our spending with priorities and performance. First, we must create a rational budgeting system.

Action: The President should begin the budget process with an executive budget resolution, setting broad policy priorities and allocating funds by function for each agency.

See Note 14

Federal managers should focus primarily on the content of the budget, not on the process. A new executive budget resolution will help them do that. The President should issue a directive in early 1994 to mandate the use of such a resolution in developing his fiscal year 1996 budget. It will turn the executive budget process upside down.

To develop the resolution, officials from the White House policy councils will meet with OMB and agency officials. In those sessions, the administration's policy leadership will make decisions on overall spending and revenue levels, deficit reduction targets, and funding allocations for major inter-agency policy initiatives. The product of these meetings--a resolution completed by August--will provide agencies with funding ceilings and allocations for major policy missions. Then, bureaus will generate their own budget estimates, now knowing their agency's priorities and fiscal limits.

Our own Environmental Protection Agency (EPA) tried a similar approach in the 1970s as part of a zero-based budgeting trial run. Although zero-based budgeting fell short, participants said, two important advantages emerged: a new responsiveness to internal customer needs and a commitment to final decisions. When participants voted to cut research and development funds because they felt researchers ignored program needs, researchers began asking programs managers what kind of research would support their efforts. EPA also found that, after its leaders had agonized over funding, they remained committed to common decisions.

Critics may view the executive budget resolution process as a top-down tool that will stifle creative, bottom-up suggestions for funding options. We think otherwise. The resolution will render top officials responsible for budget totals and policy decisions, but will encourage lower-level ingenuity to devise funding options within those guidelines. By adopting this plan, we will help discourage non-productive micro-management by senior department and agency officials.

Action: Institute biennial budgets and appropriations.

See Note 15

We should not have to enact a budget every year. Twenty states adopt budgets for 2 years. (They retain the power to make small adjustments in off years if revenues or expenditures deviate widely from forecasts). As a result, their governors and legislatures have much more time to evaluate programs and develop longer-term plans.

Annual budgets consume an enormous amount of management time--time not spent serving customers. With biennial budgets, rather than losing months to a frantic "last-year's budget-plus-X-percent" exercise, we might spend more time examining which programs actually work.

The idea of biennial budgeting has been around for some time. Congressman Leon Panetta, now OMB director, introduced the first biennial budgeting bill in 1977, and dozens have been offered since. Although none have passed, the government has some experience with budget plans that cover 2 years or more. In 1987, the President and Congress drafted a budget plan for fiscal years 1988 and 1989 that set spending levels for major categories, enabling Congress to enact all 13 appropriations bills on time for the first time since 1977.

In addition, Congress directed the Defense Department to submit a biennial budget for fiscal 1988 and 1989 to give Congress more time for broad policy oversight. At the time, Congress asserted that a biennial budget would "substantially improve DOD management and congressional oversight," and that a two-year DOD budget was an important step toward across-the-board biennial budgeting. Administrations have continued to submit biennial budgets for DOD.

The 1990 Budget Enforcement Act and the 1993 Omnibus Budget Reconciliation Act set 5-year spending limits for discretionary spending and pay-as-you-go requirements for mandatory programs. With these multi-year caps in place, neither the President nor Congress has to decide the total level of discretionary spending each year. These caps provide even more reason for biennial budgets and appropriations. In Congress, 7 out of 10 members favor a biennial process with a 2-year budget resolution and multi-year authorizations. The time is ripe.

We recommend that Congress establish biennial budget resolutions and appropriations and multi-year authorizations. The first biennium should begin October 1, 1996, to cover fiscal years 1997 and 1998. After that, bienniums would begin October 1 of each even-numbered year. Such timing would allow President Clinton to develop the first comprehensive biennial federal budget, built on the new executive budget resolution. In off years, the President would submit only amendments for exceptional areas of concern, emergencies, or other unforeseen circumstances.

Biennial budgeting will not make our budget decisions easier, for they are shaped by competing interests and priorities. But it will eliminate an enormous amount of busy work that keeps us from evaluating programs and meeting customer needs.

Action: OMB, departments, and agencies will minimize budget restrictions such as apportionments and allotments.

See Note 16

Congress typically divides its appropriations into more than 1,000 accounts. Committee reports specify thousands of other restrictions on using money. OMB apportions each account by quarter or year, and sometimes divides it into sub-accounts by line-item or object class--all to control over-spending. Departmental budget offices further divide the money into allotments.

Thus, many managers find their money fenced into hundreds of separate accounts. In some agencies, they can move funds among accounts. In others, Congress or the agency limits the transfer of funds, trapping the money. When that happens, managers must spend money where they have it, not where they need it. On one military base, for example, managers had no line item to purchase snowplow equipment, but they did have a maintenance account. When the snowplow broke down they leased one, using the maintenance account. Unfortunately, the 1-year lease cost $100,000--the same as the full purchase price.

Such stories are a dime a dozen within the federal bureaucracy. (They may be the only government cost that is coming down.) Good managers struggle to make things work, but, trapped by absurd constraints, they are driven to waste billions of dollars every year.

Stories about the legendary end-of-the-year spending rush also abound. Managers who don't exhaust each line item at year's end usually are told to return the excess. Typically, they get less the next time around. The result: the well-known spending frenzy. The National Performance Review received more examples of this source of waste--in letters, in calls, and at town meetings--than any other.

Most managers know how to save 5 or 10 percent of what they spend. But knowing they will get less money next year, they have little reason to save. Instead, smart managers spend every penny of every line item. Edwin G. Fleming, chief of the Resources Management Division of the Internal Revenue Service's Cleveland District, put it well in a letter to the Treasury Department's Reinvention Team:

Every manager has saved money, only to have his allocation reduced in the subsequent year. This usually happens only once, then the manager becomes a spender rather than a planner. Managing becomes watching after little pots of money that can't be put where it makes business sense because of reprogramming restrictions. So managers, who are monitors of these little pots of money, are rewarded for the ability to maneuver, however limitedly, through the baroque and bizarre world of federal finance and procurement. Solutions to these problems exist. They have been tested in local governments, in state governments, even in the federal government. Essentially, they involve budget systems with fewer line items, more authority for managers to move money among line items, and freedom for agencies to keep some or all of what they save--thus minimizing the incentive for year-end spending sprees.

Typically, federal organizations experimenting with such budgets have found that they can achieve better productivity, sometimes with less money.

During an experiment at Oregon's Ochoco National Forest in the 1980s, when dozens of accounts were reduced to six, productivity jumped 25 percent the first year and 35 percent more the second. A 1991 Forest Service study indicated that the experiment had succeeded in bringing gains in efficiency, productivity, and morale, but had failed to provide the Forest Service region with a mechanism for complying with congressional intent. After 3 years of negotiations, Washington and Region 6, where the Ochoco Forest is located, couldn't agree. The region wanted to retain the initial emphasis on performance goals and targets so forest managers could shift money from one account to another if they met performance goals and targets. Washington argued that Congress would not regard such targets as a serious measure of congressional intent. The experiment ended in March 1993. See Note 17 When the Defense Department allowed several military bases to experiment with what was called the Unified Budget Test, base commanders estimated that they could accomplish their missions with up to 10 percent less money. If this experience could be applied to the entire government, it could mean huge savings. Beginning with their fiscal year 1995 submissions to OMB, departments and agencies will begin consolidating accounts to minimize restrictions and manage more effectively. They will radically cut the number of allotments used to subdivide accounts. In addition, they will consider using the Defense Department's Unified Budget plan, which permits shifts in funds between allotments and cost categories to help accomplish missions.

OMB will simplify the apportionment process, which hamstrings agencies by dividing their funding into amounts that are available, bit by bit, according to specified time periods, activities, or projects. Agencies often don't get their funding on time and, after they do, must fill out reams of paperwork to show that they adhered to apportionment guidelines. OMB will also expedite the "reprogramming" process, by which agencies can move funds within congressionally appropriated accounts. Currently, OMB and congressional subcommittees approve all such reprogrammings. OMB should automatically approve reprogramming unless it objects within a set period, such as five days.

While understandable in some cases, such earmarks hamper agencies that seek to manage programs efficiently. Agencies should work with appropriations subcommittees on this problem.

Action: OMB and agencies will stop using full-time equivalent ceilings, managing and budgeting instead with ceilings on operating costs to control spending.

See Note 18

In another effort to control spending, both the executive and legislative branches often limit the number of each agency's employees by using full-time equivalent (FTE) limits. When agencies prepare their budget estimates, they must state how many FTEs they need in addition to how many dollars. Then, each department or agency divides that number into a ceiling for each bureau, division, branch, or other unit. Congress occasionally complicates the situation by legislating FTE floors.

Federal managers often cite FTE controls as the single most oppressive restriction on their ability to manage. Under the existing system, FTE controls are the only way to make good on the President's commitment to reduce the federal bureaucracy by 100,000 positions through attrition. But as we redesign the government for greater accountability, we need to use budgets, rather than FTE controls, to drive our downsizing. FTE ceilings are usually imposed independently of--and often conflict with--budget allocations. They are frequently arbitrary, rarely account for changing circumstances, and are normally imposed as across-the-board percentage cuts in FTEs for all of an agency's units- -regardless of changing circumstances. Organizations that face new regulations or a greater workload don't get new FTE ceilings. Consequently, they must contract out work that could be done better and cheaper in-house. One manager at Vice President Gore's meeting with foreign affairs community employees at the State Department in May 1993 offered an example: his FTE limit had forced him to contract out for a junior programmer for the Foreign Service Institute. As it turned out, the programmer's hourly rate equaled the Institute Director's, so the move cost money instead of saving it.

The President should direct OMB and agency heads to stop setting FTE ceilings in fiscal year 1995.

For this transition, the agencies' accounting systems will have to separate true operating costs from program and other costs. Some agencies already have such systems in place; others must develop financial management systems to allow them to calculate these costs. We address this issue in a separate recommendation in chapter 3.

This recommendation fully supports the President's commitment to maintain a reduced federal workforce. Instead of controlling the size of the federal workforce by employment ceilings--which cause inefficiencies and distortions in managers' personnel and resource allocation decisions--this new system will control the federal workforce by dollars available in operating funds.

Action: Minimize congressional restrictions such as line items, earmarks, and eliminate FTE floors.

See Note 19

Congress should also minimize the restrictions and earmarks that it imposes on agencies. With virtually all federal spending under scrutiny for future cuts, Congress is increasingly applying earmarks to ensure that funding flows to favored programs and hometown projects.

Imagine the surprise of Interior Secretary Bruce Babbitt, who a few months after taking office discovered that he was under orders from Congress to maintain 23 positions in the Wilkes-Barre, Pennsylvania, field office of his department's anthracite reclamation program. Or that his department was required to spend $100,000 to train beagles in Hawaii to sniff out brown tree snakes. Edward Derwinski, former secretary of Veteran Affairs, was once summoned before the Texas congressional delegation to explain his plan to eliminate 38 jobs in that state. See Note 20

Action: Allow agencies to roll over 50 percent of what they do not spend on internal operations during a fiscal year.

See Note 20

As part of its 13 fiscal year 1995 appropriations bills, Congress should permanently allow agencies to roll over 50 percent of unobligated year-end balances in all appropriations for operations. It should allow agencies to use up to 2 percent of rolled-over funds to finance bonuses for employees involved. This approach, which the Defense Department and Forest Service have used successfully, would reward employees for finding more productive ways to work. Moreover, it would create incentives to save the taxpayers' money.

Shared savings incentives work. In 1989, the General Accounting Office (GAO) discovered that the Veterans Administration had not recovered $223 million in health payments from third parties, such as insurers. Congress then changed the rules, allowing the VA to hire more staff to keep up with the paperwork and also to keep a portion of recovered third-party payments for administrative costs. VA recoveries soared from $24 million to $530 million. See Note 22

If incentives to save are to be real, Congress and OMB will have to refrain from automatically cutting agencies' budgets by the amount they have saved when they next budget is prepared. Policy decisions to cut spending are one thing; automatic cuts to take back savings are quite another. They simply confirm managers' fears that they will be penalized for saving money. Agencies' chief financial officers should intervene in the budget process to ensure that this does not happen.