Policy Documents

Performance-Based Budgeting and Activities-Based Costing

Performance-based budgeting would require state government to develop quantifiable measures for all functions and then allocate tax dollars based on the effectiveness of meeting performance goals. Activities-based costing allocates tax dollars in a consistent and uniform manner. The Murphy Commission, a Policy Foundation project recommended both ideas in 1998.

Gov. Beebe sponsored a performance-based pilot program in 1999 while serving in the state Senate. State government employees resisted the idea, and legislators later ended an expanded performance program. But that has not stopped policymakers in other states from using the process.

The centrist Democratic Leadership Council, in a 2004 report ("Budgeting For Outcomes"), said the budget process should start by "first defining government priorities." The report describes a five-step process for achieving outcomes in state budgets:

Getting a grip on the problem.
Determining the price of government.
Setting the priorities of government.
Determining the price of each priority.
Purchasing priorities at the price citizens are willing to pay.

"(R)eforming the budget process itself by first focusing on defining priorities in government," the DLC report concludes, "will help policymakers deliver the results that taxpayers most value."

Taxpayers deserve the benefits of this process. Performance budgeting should be restored to at least one state department. One possibility is the Department of Economic Development, whose performance measures (employment and income growth) are easily quantifiable.

  • Performance-based budgeting should be restored in at least one state department. Activities-based costing should also be incorporated into the state's accounting system so expenditures are linked to costs and measurable performance outputs.