Is It Time to Adopt Portfolio Budgeting?

A Pipe Dream? 

Maybe, but it is actually being done by other countries, such as Australia and Canada.  A version of this was done in Washington State a few years ago, and it was called Budgeting for Outcomes.  And at the federal level, a version of this is overseen by the Office of National Drug Control Policy which coordinates spending by several dozen agencies involved in the War on Drugs.

The bi-partisan Peterson-Pew Commission on Budget Reform recommends this approach in its November 2010 report, “Getting Back in the Black,” where they say: “Use budget missions or objectives as the core organizing device for the President’s budget.” In this report, they observe: “nearly one-half of FY 2009 budget authority for homeland security was provided to agencies outside the Department of Homeland Security,” and “. . . support for many purposes can be found in tax provisions that function like spending programs.”

A draft paper for the commission defines “portfolio” as a set of related programs and policy tools that address common outcomes and performance objectives. Each set of spending programs, tax expenditures, and regulatory authorities contributing to a major federal mission or goal constitutes a “portfolio” which can be analyzed to identify options for improved performance while generating budget savings.

Reorganizing existing budget accounts by mission or objective could help policy makers and the public better relate costs to results.  It would also put in context the recent debate about duplicative and overlapping programs, as well as the President’s proposal to reorganize the government.

 For example, if you focus just on the housing component of the budget, the federal government spent $54 billion in 2010 via HUD and Veterans housing rental, construction, and loan programs  -- but what isn’t reported is that it also spent $188 billion via the tax code (such as the mortgage interest deduction). In fact, the report notes that expenditures via the tax code ($1.2 trillion) equaled discretionary spending in the FY 2009 budget ($1.2 trillion). 

Why is this worth addressing now?

The Commission says that changing the rules of the game on how budget decisions get made is a key to solving the debt.  In its more measured language:  “. . . a stable and widely supported set of fiscal rules, targets, and new procedures are needed to stabilize – and, over time, lower – a dangerously high national debt burden.”

This is suddenly more pressing, as Standard & Poors has placed a “watch” on federal debt for the first time in its history, and this is reinforced by a warning from the International Monetary Fund, as well, that the federal government is sliding into a fiscal crisis for which it has no agreed-upon plan to address.

Fortunately, the Commission didn’t stop with its high-level recommendations.  With help from its staff and consultants, they are now developing more detailed proposals on how to move ahead. 

Earlier this week, I was invited to sit in on a panel session examining the portfolio budgeting concept as a “fresh opportunity to change the way budgets are developed and executed.”

Does the fiscal environment create an incentive for action?

The presenters – Steve Redburn and Paul Posner -- noted that the goal of portfolio budgeting “is not to provide the answers to inherently political choices in the budget process but rather to provide a new set of questions whose answers will inform those choices.”  They said portfolio budgeting is based on the premise that “achieving any important results or outcomes typically involves parallel and coordinated efforts cutting across the narrow confines of budge accounts, bureaus, and departments.”

What struck me was their observation that decision-making around the new federal priority goals that are now required under the GPRA Modernization Act of 2010 could be the launching pad for a new effort to improve budgeting more generally.

The panel session – an intersection of budget experts and performance experts – raised some interesting questions.  For example, what are the incentives to conduct these kinds of analyses, and how would you get someone to actually use the results? 

The incentive for the executive branch might lie in the recently passed GPRA Modernization Act, which requires OMB to develop cross-agency goals, designate a goal leader, and track progress quarterly.  The incentive for Congress is more challenging, but it could be done via the Budget Committees, which are the almost only congressional committees with jurisdiction that cuts across all agency and program lines. 

In fact, a long-lingering GAO proposal has been for that committee to support a Congressional Performance Resolution, much like its traditional Budget Resolution, where the Budget Committee would orchestrate the level of program performance needed from programs across the various authorizing committees in Congress.  Maybe it’s an idea that could help address the virtual agency notion I raised in a blog post a couple weeks ago!