TCS Daily

Why Budgeting is a Faith-Based Initiative

By Jerry Ellig - April 10, 2007 12:00 AM

"Create a culture that promotes a common identity, innovation, mutual respect, accountability and teamwork to achieve efficiencies, effectiveness and operational synergies."

This verbiage came from:

a). A buzz phrase generator developed by a member of the Public Health Service in 1968

b). A Dilbert cartoon

c). One federal agency's strategic goal in its Fiscal 2006 Performance and Accountability Report

If you guessed "c," you're not only right, you also know one reason some of the annual "Performance and Accountability Reports" produced by federal agencies tell us little about either performance or accountability.

Congress required these reports when it passed the bipartisan legislation called the Government Performance and Results Act (GPRA) of 1993. Each year, these reports are supposed to define the outcomes the agencies seek to produce for citizens, identify measures that show whether the agencies are making progress on these outcomes, and disclose the results to Congress and the public.

Each year, a research team at the Mercatus Center at George Mason University evaluates the quality of the 24 reports that cover 99 percent of all federal spending. Reports receive a score between 1 and 5 on each of 12 criteria, with a score of 3 being "satisfactory."

There are some pretty good reports. This year, we had a virtually four-way tie for first place. Top honors went to the Department of Transportation, followed by the Departments of Labor and Veterans Affairs (tied for 2nd), and the State Department (4th). Other agencies can learn a lot from these reports.

But we can also learn a lot by examining the principal shortcomings in the less informative reports. This year's bottom four reports came from the Department of Health and Human Services (ranked 24th), the Office of Personnel Management

(23rd), and the Departments of Homeland Security and Housing and Urban Development (tied for 21st).

Reports that rank near the bottom tend to have three problems. First, their goals and measures focus more on activities and processes than outcomes. Second, they do not link the outcomes they achieved to the cost of achieving those outcomes. Third, they do not adequately explain shortcomings, management challenges, and management's plans to solve these problems.


An agency's strategic goals should outline the principal outcomes the agency seeks to produce for the public. A wonderful culture that promotes efficiency, effectiveness, and synergies is a means, not an end.

The Office of Personnel Management's report presents some good examples of process focus. OPM's strategic goals state that federal agencies will be "employers of choice" with "exemplary" human resource management practices; OPM will "have positive name recognition," as well as "constructive and productive relationships with external stakeholders." Key measures for fiscal 2006 included joining two human resources professional organizations and acknowledging receipt of congressional inquiries within 24 hours.

The Health and Human Services report did a better job of articulating outcome-oriented goals, but only one-third of the 35 performance measures in its report focus on outcomes. And fiscal year 2006 data for half of these measures are missing!


Citizens are entitled to know how much an agency accomplished—and they are also entitled to know how such each "success" costs. If Congress does not know how much it costs to produce various outcomes, then budgeting is a faith-based initiative.

The reports from our cellar-dwellers did not break costs down finely enough to make this kind of comparison possible. The financial tables in the Health and Human Services report divvy up costs by organizational components and budget functions, but not by outcomes. Homeland Security, Housing and Urban Development, and the Office of Personnel Management linked costs to strategic goals, but not to performance measures or outcomes.


Perhaps the most inexcusable deficiency is the failure to explain performance shortcomings, management challenges, and plans for improvement. An agency's management has complete control over how it presents this information. Failure to do well on these criteria suggests that management is not really using performance information to manage the agency.

In some reports, it isn't even possible to identify performance shortfalls. Health and Human Services, for example, reported only one missed goal—but it reported on only 35 "key" measures, with data missing for half of them. The Office of Personnel Management reports that it achieved all of its 58 goals—but, as most of these goals are operational and activity measures, not genuine outcomes, it's difficult to judge actual performance.

In other cases, the discussion indicates agency management has made little progress on some serious, longstanding issues. Housing and Urban Development's inspector general, for example, notes that 85 percent of financial management vulnerabilities in the Federal Housing Administration are "delayed with no projected resolution date."

Perhaps because it's still struggling to integrate many disparate pieces, Homeland Security seems well aware of its management challenges. Its report clearly discloses performance shortfalls and describes some corrective actions. The leadoff transmittal letter from the secretary indicates a sincere commitment and effort to improve performance.

The Payoff from Improved Disclosure

Each of these agencies' reports would have vaulted out of the cellar if it had simply achieved a "satisfactory" score on the attributes I've just discussed. OPM would have tied for 8th place, HUD and DHS would have tied for 11th, and even HHS would have finished 16th instead of last.

For agencies, the payoff from improved disclosure is big. For citizens and taxpayers, it's priceless.

Jerry Ellig is a senior research fellow at the Mercatus Center at George Mason University and coauthor of the Mercatus Center's annual Performance Report Scorecard. For more detailed documentation of the Mercatus Center's scoring of every agency's report, see here.



Natural History
A bureaucracy is the natural habitat of bureaucrats, providing all the ready defenses and obstacle courses that they require to prosper and nest in cliques (called 'empires') at the expense of the general economy, not to mention the destruction of any hope of progress.

What about the idea of just allowing people to provide the same services as the government pretends to be able to do, then see whether people choose one over the other. For example, the US has the quaint idea that only government can run airports, yet we see that in other countries they have been successfully privatized, even in the more socialist euroland countries.

Sarbanes-Oxley Act
It's a good thing the Feds are exempt from their laws or we'd have to build a lot more prisons. Isn't it odd that we hold private companies to higher standards than we do our government? Or, is it just a reflection of the big government fawning capitalism hating press?


Introduction to Sarbanes-Oxley

The Sarbanes-Oxley Act was signed into law on 30th July 2002, and introduced highly significant legislative changes to financial practice and corporate governance regulation. It introduced stringent new rules with the stated objective: "to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws".
It also introduced a number of deadlines, the prime ones being:
- Most public companies must meet the financial reporting and certification mandates for any end of year financial statements filed after November 15th 2004 (amended from June 15th).
- smaller companies and foreign companies must meet these mandates for any statements filed after 15th July 2005 (amended from April 15th).

SOX and government
Although SOX isn't directly applicable to government, it is finding its way to government. Although Sarbanes and Oxley were the principal sponsors, the law was really the work of the COSO (Committee on Sponsoring Organizations, aka the Treadway Commission) and other ideas of primarily large corporations and academics. One group had very large budget (corporations) and the other only vaguely had an idea that budgets exist (academics)- as a result, they crafted a very effective internal controls "the framework" that is incredibly complex in practice because efficiency and clarity never seemed to be part of their design objectives. Part of problem is the fact that the sponsors were large corporations used to spending on finance and academics who live in an environment where money flows like water.

The good news is that in an effort to remain "relevant", the organizations that govern non SOX & governmental audits-the AICPA's Auditing Standards Board and the Government Accountability Office (GAO) are both incorporating PCAOB (Public Company Accounting Oversight Board-the quasi governmental organization created by SOX)pronouncements into their standards.

In short, there'll be spillover from SOX to government.

Before you think however, dealing with the beast will automatically mean government will "get it" with regard to SOX's more onerous requirements-remember that from 1887 to 1976, (but especially after the passage of the Hepburn Act in 1906) the ICC pretty much had its way in creating idiotic pronouncements that had the effect of strangling railroads.

When the government inherited the bankrupt Northeast railroads that became "Conrail", the government still retained the ICC when it was clear that it was a millstone around the industry's neck, making for a rigid, inflexible, undercapitalized and unprofitable rail industry.

Starting with the Staggers Act, the ICC's noose was loosened. When they finally killed it in 1995, it was replaced with 2 regulators. Economic matters are now the purview of the STB (Surface Transportation Board) and safety matters are the purview of the FRA or Federal Railroad Administration. The STB still hasn't solved the problem of "shipper captivity". The FRA is pretty good as federal agencies go, especially on the front line-where FRA regulators are often experienced, fair and reasonable. However as is typical of the federal government- the proliferation of lawyers in the agency over experienced railroaders in some key positions occasionally results in over reaction and wordiness.

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