Better cost data is the key to performance budgeting, expert says

Agencies must track the full cost of their operations before they can link spending decisions to performance goals, an expert said Thursday. John Mercer, a former counsel to the Senate Governmental Affairs Committee who wrote the 1993 Government Performance and Results Act (GPRA), said full cost accounting is essential to the Bush administration's initiative on performance-based budgeting. "When you do a full cost accounting, it allows you to clearly show the linkage between dollars and results," said Mercer, who is now deputy director for government performance at Logicon Inc., a Herndon, Va.-based consulting arm of Northrop Grumman. Agencies need to know how much a program costs before they can adequately assess its performance, according to Mercer. Mercer sees a clear connection between two Bush management reforms still under development: legislation that requires agencies to track the full costs of their operations, and a mandate that agencies use performance-based budgeting on a select set of programs in the fiscal 2003 budget. Budget examiners at the Office of Management and Budget are currently selecting a few programs at each agency that will use the budgeting technique, according to Mercer and other sources. Full knowledge of a program's costs enables lawmakers to make informed choices about how increasing or decreasing funding would affect program results, said Mercer. "Right now, if you try to cut funding, [agencies] say it will hurt and they will achieve less results. But they can't show how performance will decline," he said. "If [agencies] knew the unit cost of an activity, they could see what the impact of a change in funding would be." At present, many agencies are unable to account for the overhead, support, and nondirect costs associated with their programs. The Bush administration is crafting legislation that will require agencies to use accounting tools, such as activity-based costing, to determine those costs. Despite the success that agencies such as the Patent and Trademark Office have had with activity-based costing, businesses and agencies often fail to connect the accounting technique to their programs, according to experts. "A lot of folks have tried to implement activity-based costing and failed," said Joe Donlan, an accounting expert with Arthur Andersen who formerly served as deputy chief information officer at the Internal Revenue Service. Donlan is part of a working group at the Consortium for Advanced Management-International that is developing an application to walk agencies and businesses through the accounting process. The consortium is a Dallas-based nonprofit group that developed activity-based costing in the 1980s.