by Phil Dean, Budget and Policy Manager
Utahns care not only about how much they pay in taxes, but also about the personal and public value of government services provided in return for those mandatory payments. With that in mind, good performance measures encompass a cost / benefit analysis—a way to look not only at cost, but also the volume and quality of government services provided in exchange for the cost. In other words, a good performance measure looks at whether precious taxpayer dollars are being spent wisely to achieve the “biggest bang for the buck.”
One component of the SUCCESS Framework initiative is for the Governor’s Office of Management and Budget (GOMB) to work with state agencies to establish performance measures using the quotient of quality throughput divided by operating expenses. In terms of Governor Herbert’s challenge to improve state agency operations, the goal is to increase quality (Q) and throughput (T) for every tax dollar expended (OE). Accordingly, the performance equation is:
effectiveness and efficiency = QT / OE
All three efficiency variables (Q, T, and OE) must include quantifiable measures that directly gauge system performance. The QT/OE measure is simply output divided by input. Output is defined by both the quality (Q) and quantity (or throughput) of goods or services produced (T). Operating expenses (OE) describe input.
In prioritizing the use of limited taxpayer resources in the budget-setting process, policymakers need to understand how much government services cost and exactly what outcomes are being purchased with those scarce public funds. The following examines how operating expenses, or the input cost portion of the QT/OE ratio, are measured.
Operating Expense Overview
Operating expenses (OE) describe all direct and indirect costs associated with the system as funded by all revenue sources (General Fund, Education Fund, federal funds, restricted funds, dedicated credits, etc.). Almost all operating costs are variable in the medium to long run, so OE should include both fixed and variable costs.
Direct Costs. Direct costs are those directly attributable to the system. Direct costs typically include personnel services, travel, cost of goods sold, and certain current expenses, data processing, and capital expenditures. For example, in a laboratory system, direct costs might include lab employee wages and benefits, travel for training purposes, lab supplies, and IT projects that directly support lab operations. Discretionary direct pass-through expenditures and benefit payments where the agency controls the expenditure amount and/or duration should be included in OE.
Indirect Costs and Direct Costs Charged Centrally. Indirect costs are generally incurred centrally and benefit multiple systems. Indirect costs may include personnel service expenditures in administrative or executive offices, centralized capital, and “overhead” current expense and data processing expenditures. Agencies determine a method to allocate indirect costs to specific systems that reflects usage and can be consistently applied through time. Allocating indirect costs based on full-time-equivalent (FTE) employees in a system is an acceptable method for calculating OE costs for systems without a federal cost allocation plan.
In some cases, direct costs may be charged centrally but ultimately benefit only one system. In such cases, it is important that these costs be fully allocated to the appropriate system. For example, organizations often invest in IT projects that automate processes for a specific system. If these processes are charged centrally and then costs are allocated inconsistent with usage, it is difficult to determine the impacts of the investment on efficiency and capacity.
Aligning Budgets with QT/OE Ratio
The state’s current budget structure does not always align with how an agency is organized. As the SUCCESS Framework continues to reach more and more of the work performed in state agency operations, the goal of GOMB is to better align the budget structure with operational organization. In addition, GOMB will evaluate future budget requests based on the potential impact to QT/OE.