A how-to guide for budget reform: Part II

An outline of the BFO process

By Geoffrey Lawrence
  • Thursday, April 22, 2010

The challenges Nevada lawmakers will face during the 2011 legislative session won't be anything new.

But the approach they take to meeting those challenges should be.

Under the Budgeting for Outcomes (BFO) approach to state finances, there is no concept of a baseline, and the previous year's budget is not seen as an entitlement.

The approach instead begins with policymakers from the executive and legislative branches working together to establish an agreed-upon spending level. In Nevada, that could be the amount of projected revenues anticipated by the Economic Forum.

As a first step, the policymakers would rank in order of priority five to 10 long-term outcomes they want government to accomplish. These might include measurable improvements in K-12 student achievement, public safety and security, higher education, public health, workforce quality, mobility, etc. Once policymakers produce their prioritized list of desired outcomes, money is tentatively allocated toward each outcome, with the allocations representing the relative priority of each goal.

Then, results teams are organized for each of the five to 10 outcome areas and charged with determining the most cost-effective way of using available resources to purchase the desired but quantifiable outcomes.

Results teams typically consist of representatives from each agency that might play a role in achieving the specified outcomes, plus the governor's budget staff, as well as consultants, academics and think-tank analysts.

How does a results team determine the best approach for achieving its specified objective? Typically, it first reviews available research to identify all the factors that might contribute to the overall goal.

For instance, one of the policy priorities established in Washington state was to "improve the health of all Washingtonians." The components for achieving this goal that the results team identified were: (1) Identify and mitigate risk factors; (2) Mitigate environmental hazards; (3) Provide access to appropriate and quality physical and mental health care; and (4) Increase healthy behaviors.

Once the important components are identified, the results team evaluates the relative cost-effectiveness of accomplishing each one and develops a purchasing plan to allow the state to buy the best results with available resources. In Washington, the health care results team determined that, with limited resources, the state would get the most "bang for the buck" by focusing on mitigating environmental hazards (e.g. ensuring clean water, food, etc.) and increasing healthy behaviors (e.g. providing assistance for individuals to quit smoking).

Often, results teams discover that the most cost-effective way to produce a desired result may be unconventional. For instance, one of the priorities established by Washington's legislature was to reduce highway congestion. Among the solutions developed by the results team was increasing the presence of fiber optic cable in order to facilitate telecommuting. This approach allowed the state to achieve its policy priority more efficiently than through construction of new roadways.

After identifying strategies for producing the greatest possible results, results teams then develop plans for purchasing those results. They draft "Requests for Results," or RFRs, that solicit bids to accomplish the individual tasks the teams have identified. RFRs define the desired outcome and include at least three performance indicators to be used to measure success. RFRs also encourage program managers to develop new, collaborative initiatives between programs and offices.

The BFO process allows state government agencies to compete openly with local governments, public employee unions, non-profit institutions and private enterprise for contracts to provide a specified result. It also encourages program managers to think "outside the box."

The process is notably different from baseline budgeting in that the state declares what it will purchase and how much it is willing to pay — instead of receiving funding demands from departments and agencies with no attached performance guarantees.

After receiving funding proposals, the results team ranks the proposals in order of cost-effectiveness and then notifies bidders of the rankings, asking for better offers.

This second round of bidding has been viewed as critical in states that have used the BFO process. Often, program managers fail to take the process seriously in the first round of bidding and submit their standard funding requests. When the rankings are made public and program managers realize they may be in danger of losing their funding, they get serious about finding innovative means to deliver results at lower cost.

After the results team ranks the second round of proposals, it has its spending plan. The ranking offers unique flexibility because, if funding levels to the specified policy goal change during the legislative process, the spending plan adjusts simply by moving the budget line up or down along the rankings. This ensures that the most cost-effective expenditures — those ranked most highly — will remain in place as lower-priority expenditures are either added to or subtracted from the spending plan.

A central virtue of this dynamic is that it allows legislatures to clearly and simply establish final priorities. Yet at the same time, it prevents legislative micromanagement of executive-branch functions. As Frank Partlow notes in SAGE Nevada, "Working with the governor to establish such priorities is the proper business of legislators. Debating specific budget line items, like copy machines, as is often the case currently, is not."

The BFO approach is, quite simply, the most rational approach to state budgeting in existence. It has an immeasurable potential for delivering meaningful results to the citizens of Nevada — without overly burdening taxpayers.

This is an approach that Silver State policymakers should have adopted years ago. Today, given the state's current fiscal woes, it would be blatantly irresponsible to put off these reforms to the budgeting process any longer.

Nevadans need results. BFO can deliver.

Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. For more visit http://npri.org/.

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