The details of President Barack Obama’s decision to freeze discretionary budgets within the federal government will become clearer when his administration releases his new budget next week. There is already a lively political debate about whether a three-year freeze on discretionary spending beginning in October 2011 is a good idea, and whether the proposed boundaries—which exclude defense, homeland security, veterans’ care, and nondiscretionary social programs such as Social Security and Medicare—are the right ones.
But while that debate rages in the foreground, it is equally important that the White House and agencies think about how the budgeting process will work in the context of the freeze. If done well, it could be a spur for cultural change across federal agencies—with a stronger emphasis on ensuring that spending is focused on programs that work.
The president made it clear he does not favor an across-the-board budget freeze. Federal programs that are most effective will be retained—perhaps even grow—while those considered least effective will be cut. As the president said during the campaign, the problem with across-the-board budget freezes is that they can be “hatchets,” whereas what is needed is a “scalpel.”
What is also clear is this—with a smaller pot of money to go around, the environment for budgeting will be decidedly different in the coming fiscal year. There should be increased pressure on agencies to demonstrate that the funds they are seeking are necessary, and that the programs they propose actually work. This could have a beneficial and lasting impact on the culture of the federal government, beginning of course with the agencies grappling with discretionary budgets.
But there is another real possibility. Instead of focusing on what works in government, federal agencies may seek to play games to avoid facing the freeze. Programs that offer poor value for the taxpayer but have the loudest proponents may well remain in place and those that are more effective go. Some things will become clearer when the budget for FY 2011 is published next week. Are the programs slated for expansion really the most effective? Or are they the ones backed by the loudest proponents?
The real test, however, will be over the longer term since the changes proposed in next week’s budget are bound to be incremental. But the power of the president’s announcement is in the potential for it to have a lasting impact on agency culture. Here’s what we think the administration should do to ensure the spending freeze results in government that works most effectively for taxpayers rather than most effectively for special interests.
Steering federal agencies in the right direction
There are hundreds of federal agencies facing this new budget squeeze, from the Department of Health and Human Services and the Internal Revenue Service to the Justice Department and the Food and Drug Administration. Each should face a more challenging task in formulating next year’s budget request.
There is an important role for the White House in encouraging agency leaders to focus budget requests on programs that work. Specifically, the White House should:
- Ensure that agencies comply with the White House’s recently imposed requirement that they should formulate three to eight ambitious, outcome-oriented high-priority goals
- Require agencies to rank their programs depending on the contribution they make to the priority goals
- Have regular meetings with the leaders of key agencies through the next fiscal year to identify what they are doing in response to the new budget disciplines
- Require agencies to subject larger programs to external or peer review and engage with agencies in some depth on whether those programs work
- Where programs overlap across agencies or where there may be scope for duplication, meet together with the leaders of relevant agencies to identify the scope for savings
- Identify agencies that are spearheading a shift in organizational culture and showcase their work to others, perhaps by issuing guidance to other agencies or organizing events
- Offer support to those agencies that are keen to transition to a new organizational culture but lack internal capacity to drive change
- Identify agencies that are most likely to try to game the system, and ensure they are subject to additional scrutiny when their budget proposals are submitted
- Give the president a sense of which agencies have worked hardest to get the most out of the new budget disciplines and those which have done least so that he can consider this when making future appointments
It would be wrong to think that announcing a freeze in discretionary budgets alone will be enough to foster the right organizational culture across the federal government. But it is certainly an opportunity to catalyze a cultural shift at agencies so they are more acutely focused on ensuring federal dollars are focused on doing what works. That requires the White House and the Office of Management and Budget to place as much emphasis on improving management as they do on freezing budgets. If done correctly, the results could be stunning. If done poorly, well, not much will change. Let’s consider each scenario in turn.
An optimistic view of the world
Imagine working at an agency that knows it needs to prepare an overall budget for the next fiscal year that is no greater than this year. This year’s budget felt tight enough and on top of that there are pressures internally to spend more money—not just because of inflation but because more people relied upon the agency’s programs over the past year. Then imagine the secretary responsible for the agency remarks on the importance of tackling a particular issue, increasing the pressure to design new programs in response even though there’s no additional money.
Squaring that circle is never going to be easy, but this agency’s leadership decides that it needs to focus on ensuring that the scarce funds available are used on the programs that are most effective. The agency is fortunate that it starts with clarity about what it is trying to achieve as a whole, with five well-defined, outcome-based goals agreed a few months earlier. Agency leaders ask program managers to set out how their programs contribute to these priority goals.
The process is coordinated by a small team at the agency’s center. They are able to create a ranking of programs—those that are the most effective at delivering the agency’s goals and those where the bang for buck is less clear. Some programs that are modestly effective come out low in the rankings as others are able to demonstrate their impact more strongly. And other programs that are effective at their particular goals but poorly aligned to the agency’s overall objectives come out relatively low on the ranking.
The exercise prompts staff responsible for lowly ranked programs to think hard about whether it is possible to increase the programs’ impact with a smaller budget. Often the answer is no, but in a number of cases they find ways to do so, either by leveraging funds from other sources or targeting programs more effectively at those people who really need them.
The central team also thinks about which of its programs duplicate those of other agencies. Through conversations with the leaders of other agencies, the agency’s leadership concludes that a number of programs could be merged, releasing significant savings for both agencies. The central team is also tasked with thinking about innovations for the future that could help improve efficiency. They visit other agencies to see what they have done, and come up with a list of a dozen simple innovations that would improve internal efficiency.
The agency’s senior team is equally committed to the overall mission of the agency and they understand that the budget cuts cannot be across the board so they have to fall most on those programs that are least effective. And if that means reprioritizing from one leader’s span of control to another, then the leaders stand together in communicating that message to external stakeholders and to the staff. The leaders spend considerable time in meetings with key interest groups the agency interacts with in order to win their support for the exercise. The initial response is understandably frosty as interest groups realize that there will be losers as a result of new budget disciplines, but over time there is a shared understanding that it’s better for everyone if the agency’s programs focus on what works best in delivering the agency’s overall mission. Outside groups play their part by helping to distinguish programs that work best for their constituents from those that are less effective than they need to be.
As part of the work, the agency launches a staff competition on how to improve efficiency. Staff from the agency’s offices around the country come up with hundreds of ideas of how to make the budget go further. One member of the staff suggests that it’s worth spending 10 minutes with people who come for an appointment while teaching them how to get their work done online so that they don’t need to physically come in next time. Another suggests that booking travel tickets for staff trips in advance and on nonrefundable fares could save a great deal of money.
The winner of the competition works in a call center and points out that a tenth of the queries they deal with are because folks don’t understand how to fill in a particular form and so they telephone for help. The winner suggests that the form should be redesigned so that it’s much clearer to use—a step that might save tens of millions of dollars. There’s only one winner of the competition, but the real value is in all the ideas, dozens of which are implemented. The agency finds that it is able to cut the annual costs of administration by around 10 percent.
The overall effect is that the agency is able to find some headroom to address the secretary’s new priorities. The secretary understands that the agency simply can’t afford all the new programs she would like to see, but there are enough funds to pilot some new approaches that are likely to have the most impact. All the time, the agency’s leaders take seriously their role in leading and motivating staff.
It’s not easy, of course, to steer an agency through a tough budget period. All managers are invited to forums with the leaders of the agency so that everyone understands the bigger picture and context and how to explain it to staff and stakeholders. The forums also ensure that leaders know how the staff is feeling and understand what they need to do to keep the morale up. But the result is that when the agency submits its next budget submission to the Office of Management and Budget—covering FY 2012—it is much more informed than in previous years. They are confident that they can live with no more money—and actually deliver more by focusing on doing what works.
As the president’s initiative does not end after one year, neither does this process. In many ways, it becomes part of the agency’s culture to continually think about ways to improve the effectiveness of its operations, to ensure that its money is used on doing what works, and to listen to its staff on how to increase organizational efficiency. What starts off as a period of tight budget controls becomes a new organizational norm. And the agency gets a reputation for being well led, clear about its objectives, and effective at ensuring that programs genuinely deliver. It wins awards, and finds it remarkably easy to attract the most talented workers. After a few years, the budget pressures recede, and the agency finds that it is able to make an extremely convincing case for increasing the scope of its activities as a result its budget increases faster than other agencies.
A less optimistic view
Now imagine a different world—a world in which the agency’s leaders are extremely concerned about the risk of their budget being frozen next year. They know that some kind of budget squeeze might be inevitable in the long term across all federal discretionary budgets, but that could be years away. And if there are to be tight budgets, then the most sensible place for cuts to fall is on other agencies. After all, their work is less important than ours.
In this scenario, the coming fiscal year’s budget is not the real issue as the agency’s leaders know the changes are incremental. Next year, FY 2012, is the year to worry about as that’s where the big changes are likely to start. The agency is pleased that the White House does not plan an across-the-board cut in budgets—and so the priority for the coming year is to demonstrate to OMB that its budget needs to be protected.
The immediate priority is developing a strategy to defend the budget for next year. The budget process doesn’t heat up for a good few months, but there is still work to be done to prepare. It’s important to find out early what the White House really cares about, and then prepare briefs on why the agency’s programs are incredibly important. These briefs need to be the backdrop for every conversation with the White House over the next year. Even though the evidence base for demonstrating the programs’ effectiveness is limited, its leaders know this won’t matter if they can build a coalition of support for the programs. Private lunches on Capitol Hill and conversations with powerful interest groups help ensure that there is vocal support for the agency’s work.
By the time budget submissions are due, the agency’s leaders haven’t really had time to evaluate the programs that they are responsible for, but they know that any tightening in the budget would be seen by their stakeholders as a sign of the agency’s weakness. And they are good at communicating that to OMB when the time comes. It hasn’t occurred to the leaders to seek the views of staff or external stakeholders on whether there are ways to improve the bang for buck of the agency.
The agency submits a budget that inflates its real needs, and fully expects the White House to cut it to something closer to its current budget. It is relieved that when the numbers come out for FY 2012 they seem to have been one of the relative winners—a small increase in budget largely in line with inflation projections. Not as much money as the agency’s leaders would have liked, but not a bad result in the circumstances. And enough to rest on their laurels for a further year until the process starts again for FY 2013.
Other agencies, meanwhile, find that their budgets have been hit hard, with a number of their key programs cut by 30 percent. They tried to persuade the White House that their programs were delivering value for the taxpayer, but they just didn’t know how to present their message in a way that resonated. The data was there but it wasn’t in a form that OMB understood. And in any case, they didn’t build a constituency of pressure outside the executive branch for their programs and so OMB felt they were the least painful programs to cut.
The losers are hurt by the reduction in their budgets, but they learn from the experience. They know that they need to find clever ways of promoting their objectives. It’s too late to argue for an increase in budget, but there is a group of special interests calling for additional tax expenditure in this policy area. They organize meetings with these lobby groups and help them formulate stronger arguments calling for tax reforms. Because tax expenditures don’t count against agency budgets, it doesn’t really matter whether the overall cost to the taxpayer is greater than direct spending, but they do increase the agency’s prominence.
How agencies react to the new budget disciplines will have a crucial impact on who wins. If agencies use the budget freeze as a catalyst for culture change within their organizations—spurring staff to think harder about which programs really work and which don’t—then the winner will be the American people. But if agencies think the best way forward is to try and game the system, then there is a real risk that the exercise will fall on its face.
Thankfully, this is not a game of chance. The White House sets the rules of the game for setting budgets. By defining some clear parameters early on, it has the ability to make it much more difficult for agencies to game the system. In particular, it should require agencies to define clearly the goals for their work and then ensure that programs are ranked on the basis of the impact they have on these goals. For large programs, it should stipulate that there should be external or peer reviews before budget submissions are finalized.
The White House should engage in a dialogue throughout the year with agencies to ensure that they are taking the process seriously, and offer practical support and guidance to agencies that would benefit from it. Showcasing agencies that are rising to the challenges particularly well would be a good way to encourage good behavior. Lastly, the White House should ensure that in determining budgets it genuinely rewards those agencies that are able to demonstrate that they are doing what works.
Jitinder Kohli is a Senior Fellow at the Center for American Progress who works on government efficiency, regulatory reform, and economic issues.
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