Answer: As I understand the situation your legislature has a significant budget short fall and will have to make across the board cuts in next years agency budgets if alternative solutions are not found. I disagree with across the board cuts because those organizations that are operating with some efficiency will be penalized while others with inefficient practices will survive with little impact. The result is to encourage inefficiency in all organizations in order to minimize the impact of budget cuts. The rule here is what you promote is what you get. Now the question is which organizations are operating more efficiently than others and how can you reward efficiency.

Specific recommendations for the budgeting process:
1. Require all agencies to submit their budgets in terms of the functions they perform. Each function will have its own budget including all administrative funding. If this is the first year for doing this some agencies my require assistance in determining just what constitutes a function. A function should be almost totally independent such that it can be moved from one department to another easily if restructuring is required or if not funded will have little impact on other functions.

For example some functions such as those in the highway department should be general in nature. The State Highway maintenance function in its description should list all of its sub-functions with the percent of its budget. allowed for each i.e.. striping, bridge repair, resurfacing etc. This gives the highway department the option of allocating the percent of its budget as it sees necessary to each sub-function. But if the legislature disagrees with the allocation of highway maintenance funds it can specify how the funds are to be spent. In all cases funding is more tightly controlled by the legislature when individual functions are funded rather than agencies. The funding of functions has obvious advantages for the legislature giving it greater control over funding.

2. A list of all the states functions along with descriptions of each function is then presented to the legislature. Each legislator is asked to prioritize the list of functions. The prioritized list is the basis for negotiating the budget starting at the top of the list. Functions near the bottom of the list will receive less funding or may not be funded at all.

3. The Performance budgeting process should be based on functions because they are more easily measured. The performance measurement of an agency is murky at best and probably worthless because of the mix of its functions and the difficulty in measuring them as a group. When performance measures are applied to functions they can be directly tailored to the “product” that the function produces. After several years of performance data have been collected it is possible to determine which functions are more efficient through their performance data and reward them with continued funding.

4. Agencies which fail on a year to year basis to meet their performance goals should be subject to having their suspected functions audited for waste in their use of state resources. This should be done through the State Auditors office using “Enhanced Auditing” which I have recommended. The auditing team would audit the agency for its use of all state resources including man hours. And would use time-study auditors to time study the work processes performed in each function. The result of this audit would allow all costs to be rolled up into a funding formula for the function. A funding formula represents the cost of a single “product” produced by the function. The funding formula is structured such that if you want to know what this years budget for a function should be you simply multiply the funding formula by the number of products that is expected to be produced by the function. In the case of highway striping the product is specified in terms of “striping miles”. The result is not an estimate but the actual budget that the function will be required to meet or explain why the budget was not met. the advantage of this process is that the funding formula can be used year after year with minor adjustments for salary increases and other costs due to inflation or until one of the functions processes changes. This provides a budgeting method that is far superior to current methods which are based on estimates or educated guesses.

5. Now let’s examine where the tax dollars are going. What most states will find is that salaries and travel make only about 50% of the budget while payments to public schools and purchases of state supplies and vehicles makeup the bulk of the budgets remainder. Generally purchases are made by employees for what ever price is offered. This is why I recommend a Statewide Purchasing System because it involves such a large part of the state’s budget it will yield the greatest return on investment for the state. Competitive purchasing can also reduce the problem of rising Medicaid prescription drug costs.