Performance-Based Budgeting

Performance-based budgeting (PBB) is another critical tool states can utilize to improve efficiency and accountability. Under PBB, budget allocations are tied directly to measurable outcomes and performance data. Efficiency can be enhanced by clearly defining goals and metrics, embedding performance data into budgetary, and program development. Under this approach, funding decisions are tied to measurable outcomes. Agencies must justify their budgets by demonstrating past performance and setting future goals.

According to the National Association of State Budget Officers (NASBO), 46 states collect performance data in some form for budget decision-making. In practice, this ranges from comprehensive performance budgeting systems, such as those mandated by law in New Mexico, to simpler requirements where agencies submit annual performance measures with budget requests.

"Efficiency can be enhanced by clearly defining goals and metrics, embedding performance data into budgetary, and program development."

Best Practices for Performance-Based Budgeting

NASBO identified some key practices for implementing PBB, including:

  • Clear Goals and Metrics: Before formulating a budget, agencies should set specific performance targets. For example, a state health department might propose goals such as increasing immunization rates or reducing the cost per patient.
  • Embedding Performance Data in Budgeting: Many states now include performance reports alongside budget proposals. A 2021 NASBO survey found that most states use performance data to inform either the governor’s budget proposal, legislative appropriations, or both.
  • Regularly Reviewing and Updating Metrics: Performance budgeting is an ongoing process. NASBO recommends states start with a few key measures and gradually refine them over time to build a culture of data-driven decision-making.

Different Models of PBB

States have adopted different models of PBB based on their needs and legislative structures:

  • New Mexico: The Accountability in Government Act mandates that agency budget requests include performance measures. The state also requires quarterly performance reports and has established a legislative performance review system (LegisSTAT) to evaluate program effectiveness.
  • Illinois: The Budgeting for Results initiative, enacted in 2010, requires the governor’s budget to include performance measures for each department. The Budgeting for Results Commission annually reviews agency performance and makes recommendations, allowing Illinois to categorize programs by effectiveness.
  • Colorado: Under the SMART Government Act, each department must create a performance plan and submit annual progress reports. Colorado also requires agencies to justify new funding requests with evidence, ensuring resources are directed toward effective programs.
  • Tennessee: The Governmental Accountability Act of 2013 requires agencies to integrate performance metrics into their budgets. The state further strengthened its approach by establishing the Office of Evidence and Impact in 2019. This office helps align budget requests with evidence-based practices and evaluates program effectiveness.

Many states now include a “performance program report” alongside the dollars. A 2021 NASBO survey found most states use performance data to inform either the governor’s proposed budget, the legislature’s appropriations, or both​. This gives legislators information on how well programs are working when deciding funding. NASBO notes that implementation of performance budgeting is evolutionary and states should refine what they measure and how they use the data over time.