Is It Time to Adopt Porfolio Budgeting?

What if the President and Congress made spending decisions based on what they wanted to achieve rather than on individual agencies and programs? That’s the premise of portfolio budgeting. Has its time arrived or is it still . . .

A Pipe Dream?

Maybe, but it is actually being done by other countries, such as Australia and Canada. A version of this was done in Washington State a few years ago, and it was called Budgeting for Outcomes. And at the federal level, a version of this is overseen by the Office of National Drug Control Policy which coordinates spending by several dozen agencies involved in the War on Drugs.

The bi-partisan Peterson-Pew Commission on Budget Reform recommends this approach in its November 2010 report, “Getting Back in the Black,” where they say: “Use budget missions or objectives as the core organizing device for the President’s budget.” In this report, they observe: “nearly one-half of FY 2009 budget authority for homeland security was provided to agencies outside the Department of Homeland Security,” and “. . . support for many purposes can be found in tax provisions that function like spending programs.”

A draft paper for the commission defines “portfolio” as a set of related programs and policy tools that address common outcomes and performance objectives. Each set of spending programs, tax expenditures, and regulatory authorities contributing to a major federal mission or goal constitutes a “portfolio” which can be analyzed to identify options for improved performance while generating budget savings.

Reorganizing existing budget accounts by mission or objective could help policy makers and the public better relate costs to results. It would also put in context the recent debate about duplicative and overlapping programs, as well as the President’s proposal to reorganize the government.

For example, if you focus just on the housing component of the budget, the federal government spent $54 billion in 2010 via HUD and Veterans housing rental, construction, and loan programs — but what isn’t reported is that it also spent $188 billion via the tax code (such as the mortgage interest deduction). In fact, the report notes that expenditures via the tax code ($1.2 trillion) equaled discretionary spending in the FY 2009 budget ($1.2 trillion).

Why is this worth addressing?

The Commission says that changing the rules of the game on how budget decisions get made is a key to solving the debt. In its more measured language: “. . . a stable and widely supported set of fiscal rules, targets, and new procedures are needed to stabilize – and, over time, lower – a dangerously high national debt burden.”

This is suddenly more pressing, as Standard & Poors has placed a “watch” on federal debt for the first time in its history, and this is reinforced by a warning from the International Monetary Fund, as well, that the federal government is sliding into a fiscal crisis for which it has no agreed-upon plan to address.

Fortunately, the Commission didn’t stop with its high-level recommendations. With help from its staff and consultants, they are now developing more detailed proposals on how to move ahead.

Earlier this week, I was invited to sit in on a panel session examining the portfolio budgeting concept as a “fresh opportunity to change the way budgets are developed and executed.”

Does the fiscal environment create an incentive for action?

The presenters – Steve Redburn and Paul Posner — noted that the goal of portfolio budgeting “is not to provide the answers to inherently political choices in the budget process but rather to provide a new set of questions whose answers will inform those choices.” They said portfolio budgeting is based on the premise that “achieving any important results or outcomes typically involves parallel and coordinated efforts cutting across the narrow confines of budge accounts, bureaus, and departments.”

What struck me was their observation that decision-making around the new federal priority goals that are now required under the GPRA Modernization Act of 2010 could be the launching pad for a new effort to improve budgeting more generally.

The panel session – an intersection of budget experts and performance experts – raised some interesting questions. For example, what are the incentives to conduct these kinds of analyses, and how would you get someone to actually use the results?

The incentive for the executive branch might lie in the recently passed GPRA Modernization Act, which requires OMB to develop cross-agency goals, designate a goal leader, and track progress quarterly. The incentive for Congress is more challenging, but it could be done via the Budget Committees, which are the almost only congressional committees with jurisdiction that cuts across all agency and program lines.

In fact, a long-lingering GAO proposal has been for that committee to support a Congressional Performance Resolution, much like its traditional Budget Resolution, where the Budget Committee would orchestrate the level of program performance needed from programs across the various authorizing committees in Congress. Maybe it’s an idea that could help address the virtual agency notion I raised in a blog post a couple weeks ago!

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Profile Photo Peter Sperry

I agree there is a great deal of potential in this approach but do not underestimate the difficulties of implementing it. budget portfolios are essentially anothe name for the budget function areas established in 1974. You can still find them in tables attached to President’s budget and they comprise the basic framework of the Congressional Budget resolutions. The goal in 1974 was to recognize budget functions which crossed departmental and appropriations subcommittee lines. The idea was that by establishing top line numbers for each budget function, the appropriators could move money between subcommittees and agencies to fund common programs. It sounded good on paper. Still waiting for any meaningful improvements to the appropriations process. The most challanging hurtle to overcome is that appropriators view the Budget Committees and their resolutions as minor annoyances which can be ignored with impunity in a good year and meaningless lip service in a bad one.

Profile Photo Andrew Krzmarzick

Great post, John. Would this require a massive training component to bring all appropriate agency staff up to speed? What’s the cost-benefit analysis there? How long would it take to implement?

Profile Photo John Kamensky

Peter – Yes, budget portfolios is similar to budget functions, but more discrete areas of focus, and around a broad outcomes (e.g., food safety, affordable housing, climate change, etc.) and would reach beyond the budget to include tax expenditures. This would, therefore, be broader than just appropriators. For this to work would likely involve changing the way Congress makes decisions/trade-offs so that different policy tools (taxes, regulations, grants, direct delivery of services, etc.) are addressed in a comprehensive way. That’s why this may be a pipe dream, but if the existing decision-making process doesn’t work any longer — and that’s what S&P and IMF seem to be suggesting — then it may be time to put the pipe dream on the table!

Andrew — I think this is more of a congressional than an agency-level implementation challenge. Right now, agencies cannot factor into their decision-making factors such as tax expenditures, and agencies are not empowered to make trade-offs across programs that may reside in different agencies. The recent GAO report points to 144 programs in 10 agencies, for example, that support teacher quality. Who makes the trade-offs on these? On the executive branch side, this could be addressed by OMB via the GPRA Modernization Act’s requirement for cross-agency goal-setting, but that may not be the solution.

Profile Photo Alison Simon

Nice post, John! What might make sense is to try something like this on a small scale or with just one part of the government. For example the import-export organizations. So many different agencies doing very similar tasks. If Congress could come up with priority goals, then a realignment could follow. I love the idea but think it may make sense to take it in smaller chunks rather than tackle the entire government at once. Thanks for posting!!

Profile Photo John Kamensky

Alison – I agree. Maybe the Obama reorg effort might be a pilot, so even if the agencies don’t get reorganized, the programs might be aligned in terms of potential goals and resources. This would be a great example of how the new authority under the GPRA Modernization Act’s cross-agency goal-setting could be used before trying to go governmentwide. . . .

Profile Photo Randy Steer

Unfortunately, both Congress and the Administration (ANY Congress, ANY Administration) tend to seize on any available distraction when faced with tough choices, so even though portfolio budgeting has a lot of intellectual appeal, right now it could allow the players to believe they’re fixing the problem when they’re really just doing a lot of box-shuffling. Using it in an ad hoc way for budget cutting, however, might give it a toehold. “Portfolio cutting” could be used in places where there’s a particularly strong suspicion of overlap, without the portfolio process getting more attention than the actual budget reductions.

Profile Photo John Kamensky

Randy – Your suggestion of “portfolio cutting” is intriguing, and it is a mirror of something David Obsorne, of reinventing government fame, came up with a number of years ago, which he calls “budgeting for outcomes” or “budgeting for results” that has been used successfully at state and local levels (notably WA, MI, and IA). In fact, the state-local Government Finance Officers Assn. touts it as a best practice. . . in this model, a governor or mayor defines his/her top priorities for what government should be achieving, funds those first, then whatever’s left over pays for the rest of the items in the budget. So the dynamics focus on what’s funded, not what’s cut.

Profile Photo Jon Stehle

If you were interested in this post, you should consider the upcoming session at Wednesday’s AABPA Symposium. The session will be in the afternoon and is titled: Beyond Financial Metrics: Key Indicator Systems as an Information Resource. This panel will highlight recently completed research into the ways that key indicator systems are being used in cities, states, and other countries, and discuss the development and potential uses of a key indicator system for the United States. Want more information? Check out http://www.aabpa.org or join the Budgeteers group.

Not yet registered for the symposium, but interested in this panel? Post a comment here as to what questions you would like to ask at the event – check back for the answers!

Profile Photo Steve Richardson

I share your dream, John, and think the GMA provides an opportunity to begin thinking in the big (government wide) box instead of the little (agency or budget activity) box. It will lead to more questions than answers, but they’ll be good questions.

Profile Photo John Kamensky

Hi Steve – Maybe a good signal on this may come from Zient’s upcoming report on reorganizing the trade functions in government – the OMB guidance that just came on on streamlining the regulatory system in trade is a good start! Maybe the trick is to do it in small bites rather than a sweeping restructuring of budget accounts, etc.