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Assessing Reforms of Government Accounting and Budgeting

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November 5, 2004


Kenneth A. Smith, PhD, CPA*
Assistant Professor of Accounting and Management Information Systems
Atkinson Graduate School of Management
Willamette University
900 State Street
Salem, OR 97301
smithk@Willamette.edu

Rita H. Cheng, PhD, CPA
A.O. Smith Professor of Accounting
School of Business Administration
University of Wisconsin Milwaukee
Milwaukee, WI
rcheng@uwm.edu




















AAA Section: Governmental and Non-Profit (Management Accounting if no
submissions in Government)

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An earlier version of this paper was presented at the 2004 Association for Budgeting and Financial
Management conference in Chicago. The authors wish to thank conference attendees for comments as well
as Howard Frank, Lee Schiffel, Ola Smith, and Fred Thompson. All remaining errors are our own.
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Assessing Reforms of Government Accounting and Budgeting


ABSTRACT: We analyze four (4) frameworks for assessing the success of government
reforms of accounting and budgeting systems and apply our analysis to performance
budgeting reforms in U.S. states. We conclude that performance measures are not useful
for the legislative problem of allocating resources among disparate goals, but they are
useful for improving the quality and reducing the cost of providing services. Two of the
frameworks come from the budgetary literature and focus on allocations (Outcomes view
and Process view). The other two come from the accounting literature and focus on
incentives among key actors (Monitoring view and Signaling view). The actors
considered in this study are Voters, Legislators, Government Managers and the Media.
Our theoretical analysis suggests that the four frameworks are often complementary
rather than mutually exclusive; however, the Signaling view may provide the best
framework for two reasons: 1) it provides insights into the net costs and benefits of
adopting a reform and 2) it provides insights into policy suggestions that are likely to
increase the adoption of beneficial reforms. Three policy suggestions are given: 1)
Legislators should focus on incentives for managers to report performance measures, 2)
Performance budgeting should be done on a comparable basis across states, and 3)
Influential actors such as legislators and the media should be studied in greater detail.

Keywords: performance measure, performance budget, government reform, service
efforts and accomplishment

1.0 Introduction
The advocacy of state budget reforms is a current trend in the United States.
Professional associations are writing books (ICMA 2001, 2002; AGA {Walters 1998};
Urban Institute {Hatry 1999, Morley, Bryant and Hatry 2001}; GASB 2003), Academics
are producing prescriptions (Coplin and Dwyer 2000, Ingraham, Joyce and Donahue
2003, Kelly and Rivenbark 2003, Smith 2004), and legislation has been passed by nearly
every state (Melkers and Willoughby 1998, Snell and Grooters 2000). Yet one rather
startling and unsettling fact remains. Most of the current proposals are quite similar to
reforms advocated as early as 1907 (Kelly and Rivenbark 2003, Ridley and Simon 1938).
After nearly one hundred years and numerous studies, the same problems are redefined,
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the same solutions rediscovered, and the same outcomes result the reforms are largely
ignored.
Our first paragraph is in italics as it is nearly identical to the opening paragraph of
Zimmerman 1977 (p. 108) regarding government accounting reforms. We see strong
similarities between municipal accounting reforms that occurred from late-1970 to mid-
1980 and the performance budgeting reforms of the last decade. This paper explores
these similarities with two goals in mind. First, we are interested in a general theory or
framework to assess any government management system reform. This general
framework is intended to be broad enough to apply to past, present as well as future
proposed reforms across several management systems not just accounting or budgeting.
Second, we apply the framework to a current management reform performance
budgeting by states to look for support as well as insights into courses of management
action consistent with the theory. Proposing a general framework for assessing any
management reform is admittedly a high ideal one to which we aspire more than we
expect to attain.
Reforms of government management systems are proposed on a frequent basis,
thus a credible assessment framework is a valuable tool to reformers as well as the
individuals that are impacted by the reforms
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. Prior to 1992, the alphabet soup of reforms
included PPBS, MBO, ZBB, and Reagans Privatize reforms about one per president
(see review in Kelly and Rivenbark 2003, chapter 2). The Clinton administration brought
us NPR, CFOs, GPRA, and GMRA. Also in 1992, the GASB widely distributed its
Concepts Statement Number 2 on Service Efforts and Accomplishments in draft form
(final issued in 1994) and a book on Reinventing Government became a New York

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Our theoretical analysis includes local, state and federal levels of government.
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Times best-seller (Osborne and Gaebler 1992). Broad changes occurred internationally
under the concept of NPM, New Public Management (Hood 1995), as well as NPFM,
New Public Financial Management (Olson et al 1988). Most recently, the GASB (2003)
produced the Green Book
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Special Report with 16 criteria for performance reporting
within the Managing For Results (MFR) paradigm.
The remainder of the paper organized as follows. The next section discusses
similarities and differences between government accounting reforms and government
budgeting reforms as well as similarities between government and business accounting
and budgeting systems. The third section discusses four actors that are influential in
government reforms. The fourth section discusses four evaluation frameworks and the
roles of each actor. The last section develops a general framework for assessing
governmental management reforms and applies this framework to performance budgeting
in states.
2.0 Government Accounting and Budgeting Reforms
Budgets are undeniably more important than financial statements in local as well
as national governments. The budgeting process determines the winners of more
resources as well as the losers of political battles. Budgeting also aids in the two key
elements of a management information system: decision-making and control
(Zimmerman 2003). The budgeting process assists decision-makers within the
departmental units as well as the elected officials that must allocate scarce resources
among numerous competing proposals. The budgeting process also constrains the
behaviors of the appointed managers and employees, hopefully keeping them from
wasting or misusing governmental resources for non-governmental purposes.

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The GASB Special Report has a green cover and green type throughout its body.
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The accounting systems within governmental entities are mostly ignored by
politicians and citizens as well as the managers and employees of the various agencies.
Prior to 1980, most reports did not follow Generally Accepted Accounting Principles
(GAAP) nor were the reports accompanied by a clean opinion from a CPA. Even now
that most local governments produce audited financial statements, the only significant
user of these reports are creditors. Empirical evidence suggests the audited reports have
value mostly for the small governments for which creditors are unfamiliar (Evans and
Patton 1987; Cheng 1994). The federal government has never needed audited financial
statements in order to borrow funds, so it is not surprising that audited GAAP federal
financial statements were not prepared prior to 2000.
Consistent with prior governmental accounting choice literature (see Luder 1992
and Cheng 1994 for reviews), this study adopts the view that all individuals generally act
as rational economic beings. However, this paper is not an econometric attempt to model
human behavior using only rationality and self-interest. Rather, there is evidence, as well
as a deep-seated hope, that most governmental employees are substantially motivated by
the desire to act professionally and perform at the highest levels in spite of numerous
constraints and scarce resources. Thus, we begin with well-intentioned and often
professionally-prepared managers; our model calls them rational professionals.
We believe that poorly designed management systems create enough incentives
for government managers to choose self-interest over professionalism. A rational
professional can ignore their own well-being for only so long. Unfortunately for the
believers in professionalism, the softening of the rational person into a rational
professional would not have changed any of the conclusions from our opening paragraph
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(Zimmerman 1977) regarding financial statement reform due to the poorly designed
reward systems of the early 1970s. All things considered, we believe government
employees perform quite well unless the management systems are designed poorly;
therefore, organizational incentives matter in addition to management and leadership
(Behn 2002).
Kelly and Rivenbark (2003) provide a comprehensive and non-evangelical
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view of performance budgeting reforms. They address the tendency to oversell the
virtues of any budgeting reform. Their view of performance budgeting is also fairly
positive (vs. normative) as they describe what is actually occurring rather than what
should be occurring. They attempt to reconcile an apparently critical contradiction: 1)
the ongoing use of line-item budgets and 2) performance measures being a part of
resource allocation decisions. The factual presentation in Kelly and Rivenbark is both
deep and broad and many of their interpretations ring true; however, we do not believe
their Process view of assessing performance budgeting is sufficient or acceptable to the
evangelical reformers.
2.1 Business vs. Government
A significant element in Zimmermans (1977) analysis was to contrast accounting
practices in business with accounting practices in government. The purpose of this
exercise was to show that the fundamental organizational and measurement problems
faced in government are generally also faced in business. For whatever reason, business
organizations have generally worked their way through these constraints to adopt
management reforms while many governmental entities have not. Businesses appear to

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Examples of the true-believers of performance reporting might include Herbert Simon (Ridley and
Simon 1938), Harry Hatry of the Urban Institute, Jay Fountain of the GASB, Vice President Al Gore in the
National Performance Review and David Osborne as author of Reinventing Government and other books.
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accept the uncertainty that exists in measuring organizational performance or perhaps
business moves at such a speed that there is no alternative other than to move forward
with incomplete information.
The similarities between government budgeting and business budgeting are also
quite high, at least at the theoretical level. Both business and government must allocate
resources among competing programs and both are deeply concerned with how to
improve efficiency and effectiveness in the programs that have been selected. The basic
budget process involves the same two steps: 1) choosing an initial direction or set of
goals and 2) providing resources to the programs they believe will accomplish these
goals. In contrast to government, all businesses have clarity about their highest goal,
which is to earn a profit. Similar to government, however, the possible range of
programs to attain the highest goal is nearly infinite. While the highest goal of business
is to earn a profit, the exact degree of profit in relation to competing goals (such as
employee welfare, environmental policy and community support) is not clear. A trend in
business is to focus on reasonable rather than maximum profits and this creates many
of the same budgeting problems faced in government due to competing and ill-specified
top goals.
A popular reform in business today is to use non-financial performance measures
in a balanced scorecard (Kaplan and Norton 1996) for budgeting, strategic planning as
well as evaluating managerial performance. Both government and business have to
balance the budget system with other management systems to ensure that managers are
rewarded for behaviors that assist the organization and punished for behaviors that harm
the organization. Several textbooks have been written on this subject under the heading
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of Management Controls (Anthony and Govindarajan 2004, Simons 2000) and the
issues and topics relate to organizations in general, not just business organizations.
Finally, a common performance budgeting slogan in government, do more with less,
has long been a budgeting mandate in business.
Finally, the role of rational quantitative methods in business budgeting is fairly
similar to what we observe in governmental budgeting. Businesses often fail to use
rational methods such as computing the NPV (Net Present Value) of a potential
investment, even when the data to make the computations are readily available
(Zimmerman 2003). Not only that, but businesses often fail to follow the decision-rule
affiliated with NPV analysis i.e. they make investments with negative NPV as well as
forgo investments with positive NPV. These apparently non-rational, or at least non-
deterministic, behaviors are evident in both successful as well as unsuccessful business
organizations. Similarly, there are both failed and successful business organizations that
rely primarily on quantitative and rational analysis.
3.0 Roles of Actors in Governmental Reform
Luder (1992) and Cheng (1994) review governmental accounting choice literature
and discuss a large set of possible influencers, or actors, who potentially impact whether
accounting reforms are adopted. In this study, we focus generally on only four actors:
Voters, Legislators, Managers and the Media. Voters have generally been modeled as
rationally ignorant (Downs 1957). There is very little evidence to suggest that voters
are actively promoting government reforms of accounting or budgeting systems in spite
of several well-funded projects that encourage citizen participation such as the Maxwell
Schools Government Performance Project (Ingraham et al 2003) and numerous projects
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funded by the Sloan Foundation. Absent the wide dissemination of useful comparable
performance data (Morley et al 2001), we do not believe voters will play a significant
direct role in performance measurement and budgeting reform. Even with comparative
performance measurement, voters primarily play an indirect role.
Thus, our analysis focuses mainly on the interactions between legislators,
managers and the media. Luder and Cheng consider several elected actors including
governors, mayors, and city or county council members; however, we restrict the analysis
to focus more clearly on the incentives for both rewards and punishments that are directly
provided to managers from the legislature (Horn 1995) and the media (Swoboda 1995).
Future analyses would certainly want to consider more elected actors, as well as other
potentially prominent actors like interest groups. Our view of managers is described in
the prior section as rational professionals who will work very hard under the
appropriate incentive scheme, but will not expend extra effort under an inappropriate
incentive scheme.
Our view of the legislative role in non-financial performance measurement reform
harkens back to the insights provided by Herbert A. Simon
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in 1938 (Ridley and Simon).
Recognizing the two main steps in budgeting noted earlier, Ridley and Simon state:
Both the formulation of the objectives of government (agencies)
and their evaluation relative to each other are legislative problems
(p. 2)


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Note that Simon was a graduate student in 1938 and had not fully developed his concepts of bounded
rationality which earned him the Nobel Prize. Rather, his overall optimism about the power of rational
measurement and management are amazingly similar to early views of the potential of performance
measures to Reinvent Government (Osborne and Gaebler 1992) during the re-birth of these ideas in the
late 1980s. It is a little surprising that Kelly and Rivenbark (2003) do not mention the work of Ridley and
Simon (1938) in their otherwise comprehensive history of performance measurement, performance
management and performance budgeting.
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Simon believed that rational performance measures did not provide any guidance to
legislators as they had to choose between how much to allocate to roads vs. prisons vs.
education. Simon believed that once an agency was given its allocation, rational
measurement and management could be used to improve the amount or quality of
services provided with the same input. In our opinion, legislators have two roles: 1) to
allocate resources among various agencies (and their only available guidance is their own
political or personal values), and 2) to provide an incentive scheme that appropriately
rewards and punishes managers for behaviors consistent with the goals of the
government.
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The media serves mostly as an impediment to innovative governmental behaviors.
Most innovations require experimentation in order to find the right formula for success.
The path towards innovation often involves mistakes and the press is quick to report on
any kind of real or perceived government scandal (Zimmerman 1977, Swoboda 1995,
Smith 2004). Non-financial performance measures undoubtedly raise as many questions
about government performance as they answer. Thus, most government managers and
legislators will resist reporting non-financial performance measures if they believe the
media will use those measures to criticize or embarrass.
4.0 Assessment Frameworks

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Horn (1995) discusses the role of the legislature, especially in the context of institutional arrangements.
In many ways Horn is concerned with the who question of providing government services, whether
services are provided by public agencies or private enterprises. Our analysis is more concerned with the
incentives structure given to the who regardless of their ownership. Also, Horn and many political
scientists are concerned with the what question of policy, such as what should be done to individuals
convicted of crimes. Our view is that the what question is a political or legislative (Ridley and Simon
1938) problem. Thus, we are concerned primarily with the management question, or how to most
efficiently and effectively deliver the services that the legislature desires. When the legislature is hesitant
or unwilling to state its desires, the value of performance measures is limited.
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Our review of the performance budgeting reform literature suggests two views of
assessing success: Outcomes and Process. Our review of the accounting reform literature
suggests the use of positive rational views predicted by either Monitoring or Signaling
arrangements. Each viewpoint is discussed next.
4.1 Outcomes View
Rivenbark and Kelly (2004) argue that many observers use an Outcomes view of
the success of performance budgeting reforms
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. Basically, a budget reform is needed
because resources are allocated to the wrong programs. A successful reform is one where
the budget allocations across agencies or goals are different than before the reform
otherwise the reform seems unnecessary. Rivenbark and Kelly believe the Outcomes
view is deterministic and therefore undemocratic. In addition, we believe the Outcomes
is limited because it views a continuous variable (extent of adopting the reform) as a
dichotomous variable (adopt or not adopt).
4.2 Process View
As an alternative to the outcomes view, Kelly and Rivenbark (2003; also
Rivenbark and Kelly 2004) offer a process view of assessment. Under this view,
budgeting decisions are not determined by performance measures. Rather, they believe
performance budgeting has been successful when program performance information is
part of the budget deliberation process, even if counterintuitive outcomes result (p. 51).
In concluding their journal article, Rivenbark and Kelly (2004) suggest the novel idea of
using a program evaluation approach for performance measurement itself sort of
performance measures for performance measures. We see two interpretations of this

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While Rivenbark and Kelly are focused on assessing performance budgeting, the outcomes view can be
applied more broadly across the history of accounting or other management reforms. If the state of nature
changes after the reform, then the reform was a success; a lack of change is a failure.
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assessment approach. The first is that we simply look at improvement in the performance
measures that are reported. A positive evaluation results when the measures indicate cost
savings or other desirable improvements. Since improvement appears to be the
consensus view of the value of performance reporting (Behn 2003, GASB 2003, Morley
et al 2001), this view of process evaluation sounds valuable. The problem is this
interpretation seems like a 100% rational view while the process view practically requires
the use of values in addition to rationality.
The second interpretation of the process view is more problematic. The process
view supports the notion that the use of values is appropriate when deciding where to
allocate funds even when those values suggest a funding decision in opposition to the
performance measures.
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Thus, evaluating the process view might actually be an
evaluation of how often (efficiency) and how well (effectiveness) legislators apply their
values to funding decisions. The efficiency measure would be some ratio of how often
the performance measures were used when making allocation decisions in proportion to
how many decisions were made. It is not clear how often legislators should be using the
performance measures, so evaluation of this efficiency measure is difficult.
The effectiveness ratio is even more difficult. If an elected official uses
performance information to support their pre-existing political values is this inherently
wrong? Or are legislators only effective when they change their values? What if the
performance data challenges the very essence of the values on which the legislators
campaigned and were elected would it be appropriate for them to change their values?

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Consider the case of sex education and abortion. An elected official may have been elected on a platform
that opposes these activities in general as well as using government funds to pay for these activities. What
process should the elected official follow if performance measures show that public funding of sex
education reduces the number of abortions?
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The process view is valuable in that it causes us to once again ask the (V. O.)
Key question of how legislators SHOULD use either rational performance information
or their own values to decide to fund roads vs. prisons vs. education; however, the
process view does not provide any new tools in which to answer this question.
4.3 Monitoring View
Zimmerman (1977) considers the strength of monitoring incentives - with voters
as the principals and politicians as the agents to bring about municipal accounting
reform. He notes that fund accounting is typified by numerous columns of separate
entities without single consolidated statements. Most of the advocated reforms do not
seek elimination of the fund structure, but rather prescribe supplementary statements
which, in addition to the existing statements, would provide users (voters and creditors
primarily) additional information in a more readily usable form patterned after
commercial accounting (a full accrual consolidated balance sheet and a quasi-income
statement).
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Students of government accounting recognize that these reforms are
required via the Governmental Accounting Standards Board (GASB) recently issued
Statement No. 34 (1999). He then asks the following two questions about the apparent
staying power of unreformed systems:
1) What are the advantages of line-item budgeting that compel most
nonprofit institutions to use these systems?
2) Given such a line-item structure, why are state officials loath to adopt
reform proposals which do not, in any way, affect the line-item
structure, but rather would only require supplementary reports?

At this point Zimmerman also offers his initial answers. Governments, it is
contended in this study, employ budgeting systems which adhere to strict budgetary

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Sentences in italics in this section are nearly identical to Zimmerman 1977 except when performance
budgeting replaces fund accounting.
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separation (i.e. question 1) because these procedures constrain the public official to
behave in accordance with the legal mandate sanctioned by the legislative process.
Corporations do not employ such systems because alternative (less costly) procedures
exist for monitoring corporate managers. He argues that the result of poor corporate
decisions become evident in stock prices fairly quickly, but the results of inefficient
government actions become evident much more slowly and appear in the costs of real
estate (via either high taxes or low property values due to poor quality of services).
The paper also seeks to demonstrate that the reformers supplementary budget
reports are not produced (i.e. question 2) because there is very little demand for such
information. Since there are quite large transaction costs associated with the real estate
market, the individuals ability to capture eliminated inefficiencies in higher property
values is diluted by these transactions costs. A significant appeal of recent budgetary
reforms is to become more business-like and to use outcomes or results measures that
allow monitoring of governmental accomplishments. A key point in Zimmermans
model is that he analyzes the problems between voters (agents) and elected officials
(principals) not the problems between elected officials (as principals) and government
managers (agents). Our view is that the monitoring incentives for performance budgeting
will not be of sufficient strength to overcome the powerful value of line-item budgeting
(see also Kelly and Rivenbark 2003, chapter 3).
4.4 Signaling View
In spite of the appeal of Zimmermans analysis, municipal accounting has
undergone two significant reforms in the past 30 years. The more recent reform, GASB
34, could be classified as a monitoring change since it was mandated by the GASB and
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was generally opposed by preparers. Today, Zimmerman might argue that since
governmental accrual accounting did not evolve through Economic Darwinism (2003,
chapter 4), the net costs of its implementation exceed its net benefits. The generally
negative comments by preparers and the relative lack of praise or supporters identifying
the benefits are supportive of the view that GASB 34 does not provide net benefits.
The earlier reform was the fairly rapid adoption of audited financial statements by
cities and states along with obtaining the Certificate of Achievement from the
Government Finance Officers Association (GFOA) from the late 1970s to the mid-
1980s. Evans and Patton (1987) examined the strength of signaling as well as
monitoring incentives for financial managers (i.e. CFOs) to expend effort and costs to
obtain the Certificate. To earn a Certificate, the city not only had to obtain an audit, the
city also had to engage in other quality financial practices such as issuing the audited
report in a timely fashion. Evans and Patton argue that cities that obtained the Certificate
will receive a higher bond rating and thus lower interest costs. Even a small decrease in
the basis points on debt can result in substantial cash savings. Thus, cities should be
willing to pay CFOs a higher salary if the CFO appears to have the ability to earn the
Certificate. The empirical results supported this signaling hypothesis and no study to
date has seriously challenged the dominance of signaling over monitoring to explain
accounting reforms (Luder 1992, Cheng 1994).
There are two key elements for the signaling incentive to work well. First, there
must be an effective signal of the managers ability available to both the manager and the
managers boss the legislature in our model. The signal is effective if it is costly to
obtain and only those individuals with higher ability can obtain the signal. The second
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key element is that the signal must represent a process that provides net benefits to the
government. In the case of the GFOA Certificate, this net benefit was lower interest
payments.
Recent developments suggest that these two elements may now exist for
performance reporting. The Association of Government Accountants (AGA) has just
announced a program to issue Certificate of Achievement in Service Efforts and
Accomplishments reporting (Fountain et al 2004). One of the authors participated in the
AGAs training and believes that this Certificate will be costly to obtain and will only be
attainable by managers and agencies of higher ability in performance measurement and
performance management.
The second key element is perhaps more controversial, is there a net benefit from
performance reporting? Smith (2004) provides limited evidence of net benefits to cities
that voluntarily report performance measures. To the extent that a government engages
in a benchmark approach like projects of the ICMA, North Carolina or Ontario (Burke
2004), it seems quite possible that the value of service improvements will exceed the
costs of system implementation. However, if the government uses a go it alone
approach, the net benefits may not materialize.
5.0 A General Framework for Assessing Government Management Reforms

The previous sections discussed four views of how to assess budgetary and
accounting reforms. In this section we first attempt to combine these in a general
framework to be applied more broadly to any governmental management reform.
Second, we reflect this general framework back upon the specific reform of performance
budgeting in states.
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5.1 The General Framework
The outcome viewpoint is limited in that it only measures a dichotomous change
or no change at the end of a very long and involved process. It is possible for the
outcome to remain the same while the reform had significant changes in organizational
interactions as well as the level of democratic participation. In spite of this limitation, the
outcomes view is valuable in that it suggests that costly reforms can only be worthwhile
when something of substance changes.
The process view attempts to resolve the limitation of the outcomes view by
focusing on the changes in the process that occur as a result of the reform effort. The
process view elevates the concept that decision-making should not be deterministic based
on quantitative measures. We provided evidence from business entities that supports this
non-deterministic view. Thus, the assessment of reforms needs to consider changes in
both the outcomes as well as the process. A problem with the process view is that it is
very difficult to measure the value of the process changes. It is also difficult to assess
when non-deterministic tools should be used.
The monitoring view focuses on the need for control of governmental
organizations and the people that work in those organizations. The monitoring view is
limited in that the costs of monitoring or mandating reforms are quite high. It is also
difficult to ensure that the reforms that are required are beneficial, especially when there
is limited evidence a priori of the benefits of the reform.
The signaling view focuses on reforms that take place voluntarily by individuals
or organizations of higher quality. These higher ability actors engage in reform due to
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the benefits to themselves as well as their organizations. The organizations are willing to
compensate the higher ability performers due to the net benefits of the reform. When
reliable signals are available, the measurement problems inherit in the process view can
be overcome. It may not be perfectly known how the process has improved, but the
presence of the signal gives strong support that a net benefit has accrued. The two
problems with the signaling view are the need for the signal to represent the net benefits
of the reform and the need for the signal to discriminate between higher and lower quality
managers.
When a management reform is in its early stages, reliable signals of effective
implementation of the reform will probably not be available. In these early stages, the
outcomes and process and monitoring views are the best tools available to assess the
success of these reforms. As the reforms become better understood and tangible evidence
accumulates as to signals of effective implementation, the signaling view provides insight
into who is truly implementing as well as greater insight into the net benefits and policy
implications on how to increase the number of reform adopters.
5.2 The Framework applied to Performance Budgeting
Returning to the specifics of assessing performance budgeting as a reform, we
have three conclusions. First, it appears that there is limited value in focusing on
allocations. Performance measurement and performance management are tools that
provide substantial assistance in improving service quality and reducing service cost.
There is little evidence that performance measures provide unequivocal insight into V.O.
Keys question of how to allocate funds across disparate goals. Rather, our analysis
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suggests reforms should focus on incentives that legislators and the media provide to
managers.
Second, the evidence from other studies of performance reporting suggests that
improved performance occurs at a much greater rate when performance measures are
compared (Morely et al 2001). The case studies from ICMA, North Carolina and Ontario
support this approach. Thus, the value of performance budgeting reforms should greatly
increase if U.S. states implement their systems in a manner comparable to other states.
Very little attention has been paid to making performance budgeting reforms comparative
and this analysis suggests this may be the most important policy issue.
Third, this analysis suggests that relevant actors should be considered in order to
gain the service improvements envisioned by performance budgeting. Horn (1995)
provides an extensive analysis of legislative incentives. Researchers should look to this
and other sources to describe reasons for the current go it alone strategies. Researchers
also should look to mechanisms that legislatures could use to increase the value of
performance budgeting for service improvement in the areas the legislature is willing to
state goals as well as how to use performance budgeting to remain vague for the areas
where the legislature is unwilling to clearly state goals.
The other key actor is the media. While relatively little peer-reviewed research
discusses the role of the media in accounting and budgeting reforms, the media is a
widely known and extremely powerful influence on what information government
officials are willing to share publicly. Researchers should consider the literature in the
areas of Communications, particular public relations in order to develop strategies to
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reduce the penalties for reporting performance measures and doing performance
budgeting.

6.0 Conclusion
This paper explores a general framework for assessing management reforms in
government. We analyzed two viewpoints from budgeting (outcomes and process) and
two from accounting (monitoring and signaling). We conclude that the signaling view
has the best potential, but it can not be used until information is available regarding the
costs and benefits from a particular reform. Future research should examine the role of
legislators and media in increasing incentives for what appears to be a net beneficial
reform. Also, we find that performance budgeting efforts that focus on unique
approaches may actually be limiting the wider adoption of performance management
reforms. We recommend adopting performance budgeting approaches that are
comparable across jurisdictions.
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EXHIBIT 1
Summary of Assessment Viewpoints

Actors Monitoring Signaling
Broad View People are mostly looking out for
themselves, Government is
inherently inefficient always
needs reform because of bad
people (and ineffective systems).
People generally want to help and do their
professional best, but not at great personal
cost. Whenever given a decent chance to
shine (i.e. a reward), mgr will rise up and
perform.
Voter PRINCIPAL. Info disadvantage;
high cost/low benefit to obtain
info; so rationally ignorant.
N/A as key component.
(NOTE: While not a main actor will be
primary beneficiary.)
Elected AGENT. Info advantage; easy to
hide info; shares info only when
needed to maintain position.
PRINCIPAL. Pleased when mgr documents
efficient results (rewardable); also wants
mgr to avoid risk (loss of re-election
chances).
Mgr SUB-AGENT. Info advantage;
easy to hide info; shares info
only when needed to maintain
position, but structure (i.e. city
mgr) can insulate from short-
term political incentives.
AGENT. Desires to do good as well as
improve compensation; one path is to
signal they do good via either
Certificate or Performance measures.

Actors Outcomes Process
Broad View Reformers know best
what they prescribe is
good and should be
followed. No general
theory of individual
behavior (rational or
other).
Recognizes that quantitative tools should not
completely override individual judgment. No
general theory of individual behavior. Are
individuals viewed as rational and greedy or rational
and nice or not rational?
Voter N/A as key component. N/A as key component.
Elected Generally viewed as
obstinate by reformers
not clear why they do
not actually use the
suggested reforms.
Legislative decisions are complex and require both
personal judgment (i.e. values) as well as modern
tools. Feasible to think about the reformed
information, but still act similarly to when this
information was not available. If values and tools in
conflict values usually triumph.
Mgr N/A as key component. N/A as key component.

22
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