American government is waist-deep in its worst fiscal crisis since World War II. But this crisis is different from those that have gone before, because it is becoming structurally permanent; many of the forces that created it are being hard-wired into our fiscal environment. Most prominent among these forces are a colossally irresponsible president and Congress that seem determined to add more than $4 trillion to the national debt in the next decade with ill-conceived tax cuts for the wealthy, and an inescapable demographic wave that is driving up the cost of entitlement programs.
Economic recovery will ease the pain, but it won't eliminate it. The only solution to what ails federal, state, and local governments today is to change they way they operate -- especially when it comes to writing their budgets.
The conventional approach to budgeting is fundamentally flawed, because it focuses entirely on what we must cut, while ignoring what we keep. That approach does little to improve the effectiveness of the 85 percent or 90 percent of public dollars that continue to be spent. It also never broaches the question of how to maximize the value of the tax dollars we do collect, even in hard economic times.
Smarter government. Success in today's era of permanent fiscal crisis requires smarter ways of doing the public's business. Our new book, The
Price of Government, describes a series of proven innovations that elected officials at every level of government can emulate. We show not only how vital services can survive the fiscal crisis, but how leaders can reinvent the way their bureaucracies work. We begin with smarter budgeting -- what we call Budgeting for Outcomes. We pioneered this process with Washington Gov. Gary Locke. It involves taking these key steps:
Getting a grip on the problem: How much of the fiscal crisis is short term, and how much is long term? Is it driven by revenue or expenses, or both?
Set the price of government: Establish up front how much citizens are willing to pay for government's services. Get agreement on a revenue forecast and any tax or fee changes. Recognize that citizens have figured out what price they are willing to pay, and that price has probably remained relatively steady for decades. You can calculate the price of government by determining the sum of all taxes, fees, and charges as a percentage of citizens' personal income.
Set the priorities of government: Define the five or 10 outcomes that matter most to citizens, along with indicators to measure progress.
Set the price of each priority: Divide the price or revenue among the priority outcomes on the basis of their relative value to citizens.
Develop a purchasing plan for each priority: Create "results teams" to act as purchasing agents for the citizens. Ask each one to decide which strategies have the most impact on its desired outcome. Ask the teams to start by developing a strategy map -- using available evidence about what really matters to create an explicit cause-and-effect diagram, showing the best ways to achieve their desired outcome. With a cause-and-effect theory in hand, they can draw up a general purchasing plan, laying out the key strategies they would use to produce that outcome.
In contrast to traditional budget development, this process stimulates enormous creativity, because it requires those involved to be clear about how they think activities add up to results. Doing so subjects each theory of what matters most to a challenge from every competing theory -- exactly the kind of debate the budgetary process should stimulate.
Solicit offers to deliver the desired results: Have the results teams issue "requests for results" to all comers, including their own government's agencies or departments, other governmental jurisdictions, unions, nonprofits, and businesses. Invite these "sellers" to propose how they would deliver the strategies and outcomes, and at what price. Then buy those proposals that experience suggests will provide the best results for the money.
Negotiate performance agreements with the chosen providers: These should spell out the expected outputs and outcomes, how they will be measured, the consequences for performance, and the flexibilities granted to help the provider maximize performance.
Budgeting for Outcomes focuses attention squarely on the need to buy better results -- and deliver higher-value government -- with the revenue that's available. The next question is "how?" The answer is smarter sizing, spending, management, and work processes. Here are 10 proven methods:
1. Strategic reviews. Divesting to Invest. Because time is short during budget season, smart leaders create ongoing review processes -- outside the budget process -- to develop new strategies and eliminate programs that are not central to their core purposes or are no longer valuable to citizens. There are many tools they can use to comb through every organization, from top to bottom, including program reviews, sunset reviews, special commissions, and subsidy reviews.
2. Consolidation. Politicians love to merge organizations, because it looks like they're taking action to save money. But simply moving boxes on an organizational chart can actually make matters worse, increasing costs while sowing confusion that hampers performance. A much more powerful alternative is to consolidate funding streams and policy authority into "steering" organizations that can purchase results from any "rowing" organizations -- public or private -- that can best produce them.
Consider the Pinellas County Juvenile Welfare Board, in the Tampa-St. Petersburg area. The board uses $46 million a year from a dedicated property tax to contract with some 60 different not-for-profit organizations to improve outcomes for poor children. The board does no rowing itself, but these 60 providers offer a wide array of services, from child-care centers, to teaching parenting skills, to teen centers, to residential treatment services. The Juvenile Welfare Board measures their performance, weeds out the least effective, and moves money to strategies and organizations that demonstrate the greatest impact.
3. Rightsizing. Some organizations work better when reduced in size, but others are crippled. Finding the right size does not start with layoffs. Rather, it starts by asking whether organizations are doing the right work, aimed at producing the right results, in the most effective way. Then, it is essential to make sure the organization has the right staff with the right mix of skills to maximize the value delivered. Eliminating bureaucratic layers and closing regional offices can help an organization find the right size, while human-capital planning can help it develop the right skills.
Consider the Iowa Department of Transportation, which eliminated seven construction offices, five maintenance offices, and 27 maintenance garages during the recent fiscal crisis. It cut 403 positions (11 percent of its workforce), increasing the average span of control from one manager for every nine employees to one for every 14. To protect services like snow plowing and highway maintenance, the department bought new technology and cross-trained employees, so the same workers now handle both construction and maintenance. The bottom line: annual savings of $35 million, with no significant impact on core services.
4. Buying services competitively. The fastest way to save money and increase value is to force public institutions to compete. Nobody who doesn't own one thinks a monopoly is good for business. Why should it be any different in the public sector? When Steve Goldsmith was elected mayor of Indianapolis during the last fiscal crisis, he decided to make public agencies bid against private firms for the right to continue delivering public services. During the next four years, he bid out more than 30 services, from garbage pickup to operation of the city's wastewater treatment system. Close to one-half were won or shared by public agencies; the rest were won by private organizations. The average amount saved the first time a service was bid competitively was 25 percent. Within seven years, competition saved Indianapolis more than $120 million.
5. Rewarding performance, not good intentions. If public-sector managers don't know what they're getting for their money, chances are they aren't getting it. The solution is to set performance targets at all levels, measure performance against them, and reward those who improve. In a time of fiscal crisis, however, positive outcomes aren't enough. The new imperative improved outcomes for less money: value for dollars.
Baltimore provides a perfect example: With his CitiStat initiative, Mayor Martin O'Malley requires every department head to personally stand up and report on performance every two weeks. By giving direct, immediate, personal feedback, the mayor and his staff hold their department heads accountable for solving problems, improving performance, and saving money. In its first year alone, the initiative saved the city $13.6 million, helped cut violent crime by 24 percent and emergency hospital visits due to drug overdoses by 25 percent, and eliminated all but 200 of 2,700 illegal dumping grounds. Since O'Malley formed a "Leadstat" team, more than 1,000 lead sites have been cleaned up and lead poisoning among children is down 36 percent.
6. Smarter customer service: putting customers in the driver's seat. When public organizations let their customers choose between providers, rather than imposing services on them, they can achieve much greater customer satisfaction at less cost. With some services, the Internet even makes self-service possible, at enormous savings. But consider a low-tech service like care for developmentally disabled children.
During the 1990s, Minnesota's Dakota County stopped using grant funds to pay agencies for services and instead provided grants directly to families. The families chose the services they wanted, subject to certain controls, to make sure they used the money responsibly. This dramatically improved customer satisfaction, because families could now decide what made sense for them -- for example, having one parent quit work to care for a child, rather than using a caregiver paid by the county. Everyone was better off, and the county saved money. The innovation was so successful that it was adopted statewide.
7. Don't buy mistrust -- eliminate it. The sad truth of bureaucracy is that 20 percent of government spending is designed merely to control the other 80 percent. The ruling assumption is that most of us, given the opportunity, will lie, cheat, and steal. Not only does this approach undermine performance, it is incredibly expensive. The smarter move is to first win voluntary compliance by simplifying the rules, working in partnership with and educating compliers, making the process of compliance easier (without lowering the performance standards), creating incentives that reward compliance, and reserving punishment for those who willfully violate the rules.
Ten years ago, for example, U.S. Occupational Safety and Health Administration (OSHA) officials in Maine were intensely frustrated by the failure of their traditional inspect-and-fine approach. While the officials won gold medals from Washington for issuing the most citations and fines, Maine's workplace safety records were the worst in the nation. So they decided to try something different: They asked the 200 employers with the highest volume of injury claims -- 45 percent of the state's total -- to create employee teams that would survey hazards in their plants and correct most of them within 12 months. As long as the company was making a good-faith effort, OSHA would forgo its traditional inspections and fines.
It worked. During the previous eight years, OSHA inspectors had identified 37,000 hazards at 1,316 worksites. In the new program's first two years, employee teams identified 174,331 workplace hazards and corrected 118,671 of them. Two of every three companies reduced their injury and illness rates, and payable worker's compensation claims by the 200 companies dropped by 47.3 percent -- far outpacing declines in other companies.
8. Using flexibility to get accountability. From the governments of New Zealand and the United Kingdom to the U.S. Education Department's Office of Federal Student Aid (FSA), examples abound of performance-based organizations that have willingly accepted greater accountability in return for freedom from rules and regulations that impede performance. Charter schools use the same formula, with even more independence and accountability: They are free from many state and district rules, and most operate independently of any district, but they can be closed down if they don't perform. Gov. Tom Vilsack of Iowa is even working on a "freedom communities" initiative, in which the state would give groups of local cities and/or counties new flexibilities if they modernized their structures, combined services, and created mechanisms to measure performance and report it to the public.
9. Making administrative systems allies, not enemies. All organizations are creatures -- or prisoners -- of their internal systems. Traditional budget, accounting, personnel, procurement, and audit systems are nests of red tape that tie employees up in knots. The messages these systems send about following bureaucratic rules are much more powerful than any leadership exhortations to perform better.
To get lasting improvements in performance, public leaders have to modernize and streamline these systems. The payoff is dramatic savings: Two major procurement reform bills passed by Congress, in 1994 and 1996, had already saved $12 billion by the end of 1997. Milwaukee's purchasing department was able to cut its staff by nearly two-thirds and its budget by more than 55 percent by simplifying processes, investing in technology, and giving more authority to departments. Montgomery County, Md., managed to shrink its accounts payable staff by more than one-half simply by giving departments authority to pay invoices in amounts up to $5,000 rather than sending them to a central accounts payable department.
10. Smarter work processes: tools from industry. To do more with less, organizations must ultimately change the way they work. Some of this involves wholesale substitution of new methods and strategies. But much of it requires that existing work processes of all kinds -- from street repair to eligibility determination to tax collection -- be streamlined.
Industry has developed several powerful tools to do this. Total Quality Management trains and empowers small teams of employees to make continual small improvements in their work processes. WorkOuts, invented at General Electric, bring people together for three to five days to solve problems. Leaders set a time limit for finding answers, approve or reject recommendations on the spot, and keep everyone on the job until it is done. And Business Process Re-engineering is a radical, "clean sheet" redesign of complex, large-scale business processes, to increase their efficiency and quality in dramatic ways.
That citizens want value for their money is no mystery. We all want as much value as we can get from each dollar we spend -- including what we spend on government. The price and value of government are up against the price and value of housing, food, clothing, health care, and countless other goods and services that meet people's needs. The price of government is limited, therefore, by the value that citizens want -- and get -- from government, compared with the value they want and get elsewhere. Government can compete -- and stay relevant -- only by delivering more value per dollar. But the only way to accomplish that is to reinvent the way we do the public's business. Our public institutions must learn to work harder, but more important, they must learn to work smarter.
