GOVERNMENT PERFORMANCE AND ACCOUNTABILITY COMMITTEE

The Government Performance and Accountability Committee was assigned the responsibility to study state government performance and accountability practices as directed in House Bill No. 1497 and to monitor the status of state agency appropriations as directed by the Legislative Council.

Committee members were Representatives Al Carlson (Chairman), Ken Svedjan, and Dave Weiler; Senators Randel Christmann, Michael A. Every, and Ray Holmberg; Citizen Members Dick Hedahl and John Patrick Traynor; and Executive Branch Members Pam Sharp and Gordy Smith.

The committee submitted this report to the Legislative Council at the biennial meeting of the Council in November 2004. The Council accepted this report for submission to the 59th Legislative Assembly.

GOVERNMENT PERFORMANCE AND ACCOUNTABILITY STUDY

House Bill No. 1497 (2003) directed the Legislative Council to study state government performance and accountability practices. The study was to include a review of other states' performance budgeting practices and strategic planning efforts and how those practices and efforts may apply to North Dakota and improve North Dakota's budgeting process.

Performance Budgeting History in North Dakota

1993-94 Interim

The 1993-94 Budget Section requested that the Office of Management and Budget ask all agencies and institutions to include, to the extent possible, service efforts and accomplishments in the 1995-97 budget request forms and to use this information to support the executive budget. Service efforts and accomplishments are measures used to evaluate agency performance. The Office of Management and Budget developed a pilot project to incorporate service efforts and accomplishments into the budgeting process. The Office of Management and Budget developed statewide goals, objectives, and strategies and chose the following 14 budgets in 12 agencies to be involved in the program-based performance budgeting pilot project for the 1995-97 biennium:

1. Office of Management and Budget.
2. Information Services Division of the Office of Management and Budget.
3. State Auditor.
4. Central Services Division of the Office of Management and Budget.
5. Board of University and School Lands.
6. Department of Human Services - Aging Services - Vocational Rehabilitation Division.
7. Insurance Department.
8. Securities Commissioner.
9. Highway Patrol.
10. Department of Corrections and Rehabilitation - Parole and Probation Division.
11. Department of Economic Development and Finance.
12. Department of Tourism.
13. Parks and Recreation Department.
14. Department of Transportation.

Budget requests of these pilot agencies included information in support of meeting statewide and agency goals, objectives, and strategies. Under each major program of an agency, goals, objectives, and strategies were listed as well as the description and justification of the strategy and performance measures, including outcome, output, efficiency, effectiveness, and explanatory measures. The appropriation bills for these agencies included program line items rather than object code line items.

1995 Legislative Assembly

The 1995 Legislative Assembly chose to appropriate funds on a program basis rather than the traditional object code basis for 9 of the 14 pilot budgets:

1. Office of Management and Budget.
2. Information Services Division of the Office of Management and Budget.
3. State Auditor.
4. Central Services Division of the Office of Management and Budget.
5. Board of University and School Lands.
6. Highway Patrol.
7. Department of Corrections and Rehabilitation - Parole and Probation Division.
8. Parks and Recreation Department.
9. Department of Transportation.

The remaining five agencies listed below received object code line item appropriations but were expected to continue to monitor and strive to achieve agency performance measure goals and objectives:

1. Department of Human Services - Aging Services - Vocational Rehabilitation.
2. Insurance Department.
3. Securities Commissioner.
4. Department of Economic Development and Finance.
5. Department of Tourism.

The section below was included in 1995 Senate Bill No. 2015 providing legislative intent for the performance budgeting pilot project.

1995-96 Interim

As part of the performance budgeting pilot project, the Office of Management and Budget prepared agency performance reports included in North Dakota Delivers based on the measures developed for each agency.

The 1995-96 interim Budget Section reviewed reports on the pilot project and asked the Office of Management and Budget to continue to work with only the nine budgets in the development of the 1997-99 biennium budget requests and executive recommendation and that those agencies be subject to program reviews. In addition, the Budget Section asked that the appropriation bills for the 1997-99 biennium for the agencies with program line items include a separate section identifying the amounts for salaries and wages, operating expenses, equipment, and grants for each agency. The Budget Section also recommended that the 1997 Legislative Assembly review the program-based performance budgeting pilot project and determine if the project should continue.

1997 Legislative Assembly

The 1997 Legislative Assembly continued the program line item appropriations for the nine pilot budgets and object code line item appropriations for the remaining five agencies. The Legislative Assembly included a separate section in the appropriations bill for each of the agencies with program line items identifying the amounts appropriated by object code also. The Legislative Assembly did not include a section providing for reporting of the agencies' performance measures.

1997-98 Interim

The 1997-98 interim Budget Committee on Government Finance studied, pursuant to House Concurrent Resolution No. 3045, the current budgeting process, the results of the program-based performance budgeting pilot project, budget reforms in other states, and the feasibility of developing a legislative budget.

The committee recommended Senate Bill No. 2031, which was not approved by the 1999 Legislative Assembly but which would have required the Legislative Council to create a legislative budget committee to coordinate and direct activities involved in the development of budget recommendations to assist the Legislative Assembly as it develops the final legislative budget. The estimated cost of implementing provisions of the bill was $439,000 per biennium.

The 1997-98 interim committee also reviewed the history of program-based performance budgeting in North Dakota and other states and recommended that if the program-based performance budgeting pilot project were to continue, the Appropriations Committees should review agencies' performance and create, with agencies' input, performance measures for those agencies. Senate Bill No. 2031 also included a section indicating that a goal of the budgeting process is to include historic and anticipated agency performance as supporting information for budget recommendations.

1999 Legislative Assembly

The 1999 Legislative Assembly, in Senate Bill No. 2015, directed the Office of Management and Budget to discontinue the program-based performance budgeting pilot project when preparing the 2001-03 executive budget. The following agencies that were involved in the performance budgeting pilot project continued to have program-based line items in their appropriation bills:

1. Highway Patrol.
2. Department of Corrections and Rehabilitation - Adult Services Division.

Although the appropriation bills for these agencies contained program line items, the detailed supporting budget information identified the amounts provided for each program by object code (salaries and wages, operating expenses, etc.).

2001 and 2003 Legislative Assemblies

Although the performance budgeting pilot project was discontinued after the 1999-2001 biennium, a number of agency appropriations are made by programmatic line item rather than object code line item. The schedule below lists the types of line item appropriations for agencies for the 2003-05 biennium:

The committee learned the primary reasons the Legislative Assembly chose to discontinue the performance budgeting pilot project were:

1. The system focused too much on detailed inputs and outputs of agency programs, rather than outcomes or results.
2. The detailed performance budgeting information required more time to analyze than was available during a legislative session.
3. The performance measures were selected by agencies, with little input from legislators.
4. The focus was on agencies wanting program rather than object code line items in the appropriation bills.

North Dakota Agency Reporting of Performance Information

The committee reviewed the following questions asked of each agency during the 2003 legislative session by the House and Senate majority leaders relating to the purpose and performance of the agency:

1. What is the main purpose of your agency?
2. How do you measure the achievement of your purpose?
3. What can the legislature do, financially and otherwise, to help you achieve your purpose?
4. How can you report (measure) your results so the public can easily understand your purpose and evaluate your effectiveness?

Agencies submitted responses to the Appropriations Committees during the 2003 legislative session for the committees' information and review.

The committee reviewed the current performance reporting efforts of the following state agencies:

1. University System - Section 18 of House Bill No. 1003 (2003) provides the accountability measures that are to be included in the State Board of Higher Education annual performance and accountability reports required by North Dakota Century Code (NDCC) Section 15-10-14.2. The section also requires the board to develop a strategic plan to define and prioritize University System goals and objectives. University System measures relate to education excellence, economic development, student access, student affordability, and financial operations.
2. Department of Commerce - Section 9 of House Bill No. 1019, approved by the 58th Legislative Assembly (2003), provides that the Department of Commerce report to either the Budget Section or another interim Legislative Council committee on North Dakota's economic goals and associated benchmarks. The Legislative Council assigned the responsibility to receive these reports to the interim Economic Development Committee. (The 2001 Legislative Assembly also had required the department to establish performance measures and to report to the Budget Section on the department's progress in meeting its measures after the first year of the 2001-03 biennium.)
   The Department of Commerce in cooperation with Job Service North Dakota, the Department of Human Services, and the University System is also to report on the number of individuals trained and the number who became employed as a result of each department's workforce development and training programs, including the state's investment, the areas of occupational training, the average annual salary of those employed, and the average increase in earnings 12 months after completion of training.
   The department has completed a 10-year strategic plan and completed its first performance report in 2003.
3. Information Technology Department - For the 2001-03 biennium, a section of legislative intent was included in 2001 House Bill No. 1043 providing that the Information Technology Department establish measures to assist the Legislative Assembly in determining the effectiveness and efficiency of the department's operations and report to the Information Technology Committee, the Budget Section, and the Legislative Audit and Fiscal Review Committee on the measures developed. North Dakota Century Code Section 54-59-19 requires the Information Technology Department to prepare an annual report for presentation to the Information Technology Committee, the Budget Section, and the Legislative Audit and Fiscal Review Committee. Although this section does not specifically require the department to include performance measure information, the department has been including performance information in the report.
4. Department of Transportation - The department completed its strategic plan for the years 2002 through 2008, which it updates annually. The department is in the process of developing measures that will relate to safety, system preservation and maintenance, budget management, project delivery, and employees.
5. Highway Patrol - The Highway Patrol has incorporated several operational objectives into its multiyear plan that it evaluates annually. The measures allow the Highway Patrol to evaluate its enforcement programs, educational programs, and prevention efforts. The measures also serve as a guide in determining what federal funds to pursue to assist in the Highway Patrol's mission. The agency reviews specific activities and projects annually as part of its program evaluations. Activities reviewed include miles of road patrolled, highway assists, accidents investigated, and vehicle safety inspections. Performance measures of the Highway Patrol include the number of fatalities per 100 million vehicle miles traveled, percentage of alcohol-related fatal crashes, total crashes per 100 million vehicle miles traveled, and seatbelt usage.
6. Department of Human Services - The department began its strategic planning efforts in 1998. Each division within the department developed program purpose statements and results measures that relate to the department's mission statement. The department's strategic plan contains two types of information:
   1. Program output/demand information, which is used to measure program results or the quantity of program services. It is often used to predict trends in program use and demand.
   2. Program results/efficiency information, which is used to measure how well a program's processes work or how efficiently the program is delivering services.
7. Department of Corrections and Rehabilitation - The department has had a strategic plan since 1997. The department develops and maintains two plans--one for the adult population which is for a two-year period and one for the juvenile population which covers a five-year period. Key performance measures for the Department of Corrections and Rehabilitation include those relating to public safety, institutional safety, education and treatment, and staff.
8. State Department of Health - The department began its first departmentwide strategic planning effort during the 2003-05 biennium. Previous planning efforts related to specific programs or were required by federal grants.
9. Bank of North Dakota - The Bank develops an annual strategic plan that contains specific objectives for each business unit of the Bank. The objectives are reviewed quarterly. The three major areas of evaluating the Bank's performance are:
   1. Financial performance - Standards for financial performance of banks are maintained within the banking industry and are useful for measuring the Bank's financial performance.
   2. Accomplishment of its mission - The Bank evaluates the extent to which it meets its mission to deliver quality, sound financial services that promote agriculture, commerce, and industry.
   3. Legislative expectations - The Bank monitors whether it is achieving the expected level of revenue for the state general fund each biennium.
10. Workforce Safety and Insurance - The agency has developed a performance measurement and accountability system that includes objective performance measures that help to ensure that the agency is fulfilling its responsibilities to workers and employers in North Dakota. Key components of the system include:
    1. The board governance policy manual that includes expected levels of performance and provides proposed measurements for assessing the achievement of these outcomes.
    2. A strategic planning process that establishes the short-term and long-term plan for the organization and development of 10 strategic goals.
    3. Quarterly operating reports that compare performance to benchmarks.
    4. A biennial performance evaluation that is conducted by workers' compensation industry experts and coordinated by the State Auditor's office. The evaluation is conducted at least every other year and evaluates selected departments to determine whether the agency is providing quality services quickly and cost-effectively. Results of these evaluations are reported to several legislative committees as well as the agency's board of directors and management.
    5. An internal audit department that conducts internal audits and compliance reviews and ensures that the departments and programs are properly functioning and operating.
    6. A pay-for-performance personnel system that allows each employee and manager through an annual performance review to be held accountable for that person's performance. Goals and benchmarks are integrated into the performance evaluations, and salary increases are based solely on performance.
11. Job Service North Dakota - Job Service North Dakota uses outcome measurements that are validated by procedures developed by the federal government.
    Job Service North Dakota has been developing annual plans since 1997. The goals or objectives for the following year guide all areas of the agency. The agency identifies specific strategies that will result in successful implementation of the agency's plan. At the end of each year, the agency evaluates its performance and learns from its successes and from areas that need continued improvement as it develops the plan for the following year.
12. Secretary of State - The Secretary of State's office uses both formal and informal methods to monitor its performance, accountability, productivity, and workload. The agency does not have a formal strategic plan currently in place.
13. Tax Department - The Tax Department uses indicators to measure its performance. Some indicators are easily quantifiable and measurable while others are more difficult to measure. The Tax Department has a strategic plan and the department continually monitors its effectiveness by examining what it does, how it accomplishes it, why it is being done, and how it can be done better. The committee learned that the Tax Department considers the total cost per $1,000 of revenue collected to be a key measure of the department's performance.

The committee observed that a number of agencies have already developed strategic plans and credible performance measures but the format and reporting varies substantially among the agencies.

State Auditor's Office Performance-Related Audits

North Dakota Century Code Section 54-10-01(4) requires the State Auditor to perform or provide for performance audits of state agencies as determined necessary by the State Auditor or the Legislative Audit and Fiscal Review Committee.

The State Auditor's office conducts financial statement audits, information systems audits, and performance audits. Two types of performance audits are conducted--operational audits and performance audits. Operational audits are conducted every two years for most state agencies. Performance audits are conducted by the State Auditor's performance audit team consisting of five staff members. Performance audits are comprehensive and indepth audits. The agency completes two or three performance audits each year. Performance audits address a number of objectives, including objectives relating to assessing program effectiveness and results, economy and efficiency, internal control, and compliance with legal or other requirements. The specific objectives for each performance audit vary based on the circumstances for which the audit is selected.

Recent performance audits completed by the State Auditor and presented to the Legislative Audit and Fiscal Review Committee include:

• Service payments for elderly and disabled (SPED) program of the Department of Human Services.
• Workforce Safety and Insurance.
• Job Service North Dakota.
• Veterans Home.
• Child support enforcement program.
• Contracts for services.
• Department of Veterans Affairs.

ConnectND - Performance Reporting Capabilities

The committee learned that the enterprise resource planning system (ConnectND) that is being implemented statewide by PeopleSoft, Inc., includes an enterprise performance management module for compiling and reporting performance measure information.

The committee received information on the use of the PeopleSoft enterprise performance management module for compiling and reporting performance measure data. The committee learned that the system allows the customization of reports for viewing certain performance measure data and identifying whether a measure is on target or not. These reports could be prepared by agencies and provided to legislative committees for review.

Office of Management and Budget - Performance Measure Budget Forms

The committee received testimony from the Office of Management and Budget that it planned to incorporate state agency performance measure data in agency budget requests for the 2005-07 biennium. The Office of Management and Budget reported the performance information requested of agencies would be simple and focused by limiting the information only to the narrative sections of the budget requests. The committee, through the Legislative Council chairman, encouraged the Office of Management and Budget to proceed with including performance-related information in the 2005-07 biennium budget requests. Later in the interim, the committee received information from the Office of Management and Budget on the performance data that was submitted by agencies as part of agency 2005-07 biennium budget requests. The committee learned that 12 agencies submitted performance measures that the Office of Management and Budget described as credible. These agencies were Job Service North Dakota, Labor Department, Highway Patrol, Division of Emergency Management, Department of Commerce, Tax Department, State Library, Parks and Recreation Department, Protection and Advocacy Project, Seed Department, Council on the Arts, and Game and Fish Department. The higher education institutions and the Agricultural Experiment Station and Extension Service were planning to submit performance information at a later date. Five agencies were in the process of developing or updating performance measures and did not include the information and 10 agencies indicated they did not have performance measures. The remaining agencies included measures but the Office of Management and Budget reported that additional data would be needed for the measures to be useful.

The committee reviewed performance information submitted by the following agencies as part of their 2005-07 biennium budget requests:

1. State Library.
2. Tax Department.
3. Protection and Advocacy Project.
4. Job Service North Dakota.
5. Highway Patrol.
6. Parks and Recreation Department.

The committee noted that while a number of the agencies submitted very useful performance information, the format and the type of measures submitted varies among the agencies.

National Studies and Reports

The committee reviewed national reports on government performance and accountability and received testimony from representatives of the National Conference of State Legislatures, the Urban Institute, and private consulting firms regarding "Legislating for Results," a results-based government research project and other performance-based systems, including the "Balanced Scorecard" system of measuring government performance.

"Legislating for Results"

The committee learned that the National Conference of State Legislatures and the Urban Institute began studying state activities relating to results-based government in 1998 and is completing a "Legislating for Results" report to provide guidance for states in developing a performance or outcome-based system of evaluating the effectiveness of government services.

The committee reviewed the key aspects of "Legislating for Results" and learned that the following five key legislative actions are needed for obtaining useful outcome information:

1. Legislate a process for regular reporting of results-based information to the Legislative Assembly by each major state program, identifying clearly what the program has accomplished for the state's citizens, not merely what activities the program has undertaken.
2. Provide training in "Legislating for Results" for legislators and legislative staffs.
3. Ask legislative staffs to review in advance the performance information provided by agencies to identify issues for legislative consideration during hearings and other legislative sessions.
4. Seek explanations from agencies for variances on outcomes.
5. Establish a formal process for reviewing the quality of the outcome data. As the data is used for making major funding and programmatic decisions, it becomes necessary for the Legislative Assembly to have confidence in the data.

The report identifies the following six key legislative actions that are necessary for effectively using outcome information:

1. Examine outcome information as part of the budget request reviews.
2. Review state programs periodically outside the budget process to identify which services have strong results and which have poor or weak results. This will indicate to agency personnel that the Legislative Assembly is interested in results, not only activities and outputs. This will also encourage agencies and programs to focus on results and how best to deliver services.
3. Review the latest outcome information related to key issues as a basic starting point when developing policies and new authorizations.
4. Require that outcome information be included as a major criteria when establishing performance incentives for agencies and state employees. This will increase accountability of the agencies and employees and encourage them to focus on important service outcomes.
5. Support and encourage agencies to include outcome targets in service contracts and grants. This will increase accountability of contractors and grantees and encourage them to focus on important service outcomes.
6. Include outcome information when communicating with constituents. If possible, obtain from agencies, service outcome information relating to the constituent's county or city.

 "Balanced Scorecard"

The committee reviewed the "Balanced Scorecard" system of measuring government performance. The committee learned that the "Balanced Scorecard" concept involves the development of a program's vision and strategy and the critical success factors to achieve the vision. Key performance indicators measure the agency's progress in achieving its vision. The "Balanced Scorecard" concept:

1. Clarifies and builds consensus on strategic direction.
2. Communicates strategy and measures of success on all levels for staff and citizens.
3. Communicates cause and effect relationships.
4. Aligns behavior and increases the focus on priority initiatives.
5. Provides insight into the achievement of strategic objectives and goals.

Each agency program should have a clear and focused mission. Although programs may measure many outcomes, only 5 to 10 key performance measures should be monitored at the legislative level for each program. Other performance measures should have a cause and effect relationship to the key measures of the program.

Kentucky Review of Performance-Based Budgeting

The committee reviewed a 2001 Kentucky Legislative Research Commission study of performance-based budgeting. Conclusions of the commission include:

1. Legislators must determine whether they want to hold agencies accountable for what they spend or what they achieve.
2. Performance budgeting is a tool that can improve accountability in the use of public resources. To date it has not been a good tool for improving efficiency in the use of public resources.
3. Performance measures should be carefully defined to accurately capture outcomes resulting from program activities.
4. Sufficient technical and staff resources should be devoted to training and maintenance of the system.
5. One of the most difficult aspects of performance budgeting is the definition of agency performance targets that can be reliably measured on a regular basis.
6. Performance measures should be independently validated on a regular basis.
7. Careful planning should limit the number of performance measures to a small set of well-crafted indicators.

National Conference of State Legislatures Review of States' Performance Budgeting

In 2002 the National Conference of State Legislatures reported on the experiences of a number of states that have developed performance budgeting systems. The states involved in the review were Florida, Minnesota, North Carolina, Oregon, and Texas. The report lists the advantages of performance-based budgeting as increased government accountability with more detailed oversight and better targeting of activities to citizens' needs. Disadvantages identified include significant paperwork and increased staffing to collect data, monitor, and report, particularly in states in which systems are not already established.

The report includes recommendations for developing and implementing a performance budgeting system. Major recommendations include:

1. Executive leadership and legislative commitment are essential for the development of performance budgeting. The executive branch must provide central direction and enforce agency commitment, and the legislative branch must be involved in selecting performance indicators and using the performance information in its decisionmaking process.
2. An oversight agency is needed to be responsible for developing agency instructions and performance reports and integrating this information into agency budget requests.
3. Legislators must be involved in selecting performance indicators to ensure that the measures are relevant to legislators' concerns. Performance measures should be linked to appropriations because agencies are more likely to be concerned with good performance when linked to funding levels.
4. Performance measures should be limited to those that are most relevant and best-defined.
5. The identification of unit costs for select programs such as cost per mile of new highway construction provides additional useful information for the legislature to use in its decisionmaking process.
6. Agencies need to specify how funding changes will affect performance results to provide legislators with relevant information for use in decisionmaking.
7. Although attempts have been made to use incentives and disincentives to improve agency performance, adjusting the amount of agency funding as an incentive or disincentive has not been successful.
8. Additional legislative staff may be necessary to assist legislators and state agencies develop, validate, and use performance information. In states in which staff resources have been dedicated to the performance process, including Florida and Texas, the system has been somewhat more successful than in states such as Minnesota and Oregon that have had relatively few staff members involved in the performance budgeting system.
9. Additional funding may be needed to develop more comprehensive information management systems to facilitate the collection, analysis, and presentation of performance information and its integration with budget requests.
10. Implementation of performance budgeting may take up to four years--18 months for an agency to design and receive approval of its proposed program structure and performance measures from the Governor and the legislature and another 30 months to complete the review of an agency's first-year performance measure results.

Other States' Performance and Accountability Practices

Based on a 2000 National Conference of State Legislatures report, 33 states have approved legislation providing for performance budgeting information. Six states--Florida, Louisiana, Maine, Missouri, New Mexico, and Texas--include performance information in agency appropriation bills. The majority of other states include the performance information in various budget documents available to those states' legislatures.

The committee reviewed performance-related information in other states, including Alaska, Florida, Louisiana, New Mexico, and Texas. The following chart compares legislative and performance information of the selected states to North Dakota:

The committee reviewed the structure of performance measurement systems in selected states, statutory provisions providing for the performance measurement systems, examples of appropriation bills, and performance measures for each state. The following is a summary of each state's system.

Alaska

Alaska began its performance measurement system in 1997 and phased it in over a three-year period:

• Year 1 - Mission statements were established for each program of each agency.
• Year 2 - Performance indicators for one-half of the agencies were established.
• Year 3 - Performance indicators for the remaining agencies were established.

By statute, Alaska requires agencies to submit performance measurement information to the legislature. State agencies submit proposed program missions and performance indicators to the legislature prior to each legislative session. Subcommittees of the appropriations committees review the proposed missions and measures as they develop the missions and measures for each agency for the next fiscal year. These missions and measures are included in a separate bill that is approved by the legislature. The Alaska legislature includes approximately 550 measurement indicators in the bill that is approved each year. Agencies are not required to develop a strategic plan as part of performance budgeting.

There is no formal interim reporting of performance measure information to legislative committees in Alaska.

Florida

Florida began its performance measurement system in 1994 and phased it in over a seven-year period. Use of the system is mandated by statute. Agencies are required to include performance information in their budget requests and the Governor is required to submit a performance-based program budget to the legislature.

When implementing the system, the first agencies selected to utilize performance budgeting were agencies that expressed an interest in being involved. In each subsequent year, a mix of large, medium, and small agencies was implemented.

Performance measures are included in each agency's budget request. Actual performance for two previous years, the current year's estimate, and the proposed target for the next year are presented. Key indicators for each agency are included in the appropriations bill and the implementing bill (a bill providing guidance and direction to agencies for implementing their appropriation). The Florida legislature considers approximately 1,000 measures associated with state agency programs. Although not required as part of performance budgeting, agencies in Florida are required to have a long-range strategic plan to guide their activities.

Unless an agency is requested by the legislature to report more frequently, agencies report their performance data annually as part of the agency budget request. Performance data of an agency is audited periodically as part of an agency performance review conducted by the legislature's Office of Program Policy and Government Accountability.

Louisiana

Louisiana began its performance measurement system in 1997. Louisiana phased in components of the system rather than phasing in agencies, requiring all agencies to implement a component of the system at the same time. Louisiana statutes require agency strategic plans and the use of performance-based budgeting.

The components were phased in over three years:

• Year 1 - Program descriptions for each agency were required.
• Year 2 - Key performance indicators, semiannual reporting, and strategic plans were required.
• Year 3 - Key objectives and quarterly reporting were required.

Agencies include proposed objectives and performance measures for the upcoming fiscal year in each agency's annual operational plan that is submitted as part of the agency's budget request. The Governor includes the key objectives and performance measures for each agency in the executive budget recommendation. During the session, the objectives and measures are considered by the appropriations committees and included in the appropriations bill. The Louisiana legislature includes approximately 1,100 objectives and 2,300 performance indicators in its appropriations bill each year. Agencies are required to develop and maintain a five-year strategic plan.

Agencies report quarterly on performance relating to key performance indicators and semiannually relating to supporting indicators. An interim legislative performance review subcommittee meets semiannually to review agency performance. The State Auditor reviews agency performance systems for reliability and validity but does not audit the performance data.

New Mexico

New Mexico began its performance and accountability system in 1999 and is phasing it in over a five-year period. A mix of small, medium, and large agencies began using the system in each of the five years. Performance budgeting is required by statute in New Mexico.

Agencies submit proposed performance measures along with each agency's budget request. Actual performance for two previous years, the current year's estimate, and the proposed target for the next year are presented. Approximately 1,000 performance measures, including output, outcome, efficiency, and quality measures, are included in the appropriations bill. Agencies are not required to prepare strategic plans as part of performance budgeting.

Agencies report actual performance annually as part of the budget request process. Periodically, the legislature has required quarterly reporting. The performance data reported by agencies is not audited.

Texas

Texas began its performance measurement system in 1992, with all agencies implementing the system. Performance budgeting is required by statute.

Texas requires agencies to develop a strategic plan, to include five-year outcome measure projections, and to include performance measures in agency budget requests. The Texas legislature considers output, outcome, efficiency, and explanatory measures as it develops each agency's appropriation, with a total of approximately 2,200 performance measures included in the appropriations bill.

Agencies submit quarterly reports of actual performance, including an explanation of any variance from the target exceeding 5 percent. The Legislative Budget Board staff prepares budget and performance assessments based on actual agency performance which are provided to all legislators.

The State Auditor's office is responsible for auditing the performance measure information provided by state agencies.

OTHER STATES' TESTIMONY

The committee received testimony from staff and a former legislator representing other states that have developed and implemented a performance and accountability system, including Alaska, New Mexico, and Texas. Major comments and suggestions include:

1. The Legislative Assembly should:
   1. Require use of the system by statute.
   2. Customize the system to accomplish the intended result for North Dakota - Don't duplicate another state's system - Each state is unique.
   3. Keep the system simple initially - It can be refined later.
   4. Agree on a system approach among legislative leadership.
   5. Authorize an agency or committee (legislative or legislative/executive) to oversee development and implementation of the system.
   6. Preplanning is very important to ensure that the system operates as intended and to eliminate changes during implementation which frustrate everyone involved.
   7. Provide adequate and ongoing training at the agency, executive, and legislative levels.
   8. Provide consistent direction for agencies.
   9. Define the data to be measured so everyone understands the result.
   10. Focus on clear, key performance measures.
   11. Use software to gather and report on the data.
   12. Use incentives, benchmarks, and consequences.
   13. Commit to the process for the long term.
   14. Be patient - Implementing the system takes time.
   15. Refrain from having unrealistic expectations about the system - It is a tool to use in decisionmaking - It does not make decisionmaking easier.
   16. Use the data to make policy and funding decisions at the legislative level.
2. A government performance and accountability system:
   1. Empowers legislators to ask the right questions.
   2. Provides useful information (what the agency has accomplished with the state's investment).
   3. Helps legislators focus on policy.
   4. Assists in making appropriation and policy decisions.
   5. Increases public confidence because measures are understandable to the public.
3. Strong legislative leadership, training sessions, and the presentation of outcome-based information to standing committees, in addition to appropriations committees, will assist in acceptance of the system by a majority of the legislature.
4. The development of measures should begin at the agency level because agency directors are much more knowledgeable of their programs and appropriate measurements. The Legislative Assembly needs to be involved in establishing key measures for each program.
5. Many sources exist to assist in the development of outcome measures, including the federal government and other states' programs.
6. Performance measures assist in understanding agency activities but do not provide firm answers to budgeting.
7. Some states use both traditional and program line items in agency appropriations; however, legislators should focus on outcomes rather than line items because outcomes relate more directly to policy. States may appropriate by traditional line item, but the line items should not be the focus of the budget discussion.
8. Agencies should report quarterly on key measures; however, to appropriately manage agency programs, program directors should be measuring substantially more outcomes than those reported to the Legislative Assembly.
9. Establishing a procedure to verify the reliability of the data should be implemented after the outcome-based reporting system has been implemented.

State Agency Testimony

The committee received testimony from state agency representatives regarding the development and implementation of a government performance and accountability system. Significant comments and suggestions included:

1. Measures should:
   1. Be useful to the agency and understandable and important to the Legislative Assembly.
   2. Focus on state policy outcomes.
   3. Add value to decisionmaking.
   4. Be benchmarked against regional or national data.
   5. Be consistent and usable.
   6. Use existing data sources.
   7. Be simple to compile.
   8. Be limited in number. Too many measures and objectives for each program are difficult to maintain and evaluate.
   9. Be easily communicated to the public.
   10. Be flexible and adaptable to a changing environment.
   11. Address the effectiveness of a service provided by a number of agencies cooperatively.
   12. Be developed with substantial input from agency employees.
2. Reporting that is not compatible with the measures developed should be eliminated.
3. The amount of additional workload that may be required of agency personnel should be considered.
4. For some programs, quality data is available but quantitative or unit-cost data is not available.
5. Some performance information is communicated to the Legislative Assembly during the legislative session, but due to time constraints during a legislative session, this information is generally not the focus of legislative discussions. A more formal process would improve the communication of this information to legislators.
6. Consistent information in agency strategic plans is important.
7. Agencies need adequate resources to develop a strategic plan and associated measures and to collect, analyze, and report performance-related data.
8. Adequate data collection and analysis systems are needed to measure performance and make meaningful decisions regarding resource allocation and program effectiveness.
9. Meaningful performance measures evolve over time and require commitment of management and staff - Patience is essential.
10. Continued monitoring of performance measures by appropriate individuals is essential for the measures to be meaningful and allow an appropriate, proactive response by staff, if necessary.
11. Evaluation of the performance measures on a regular basis ensures the measures are appropriate.
12. Every employee must have a stake in the success of the organization. Rewarding positive performance entices employees to be innovative which moves the organization to higher levels of achievements.

Committee Member Observations

Major comments and suggestions made by committee members include:

1. A review of preliminary performance information indicates the need for a consistent and standardized format for agency reporting of performance information.
2. Additional staff resources may be needed to allow the Legislative Council staff to analyze performance data at the level needed for the Legislative Assembly to adequately review the information.
3. Agencies may have the capability to identify key measurement indicators but may require additional resources to gather the necessary data to provide meaningful information.
4. The Legislative Assembly should focus on reviewing agency performance measures not strategic plans.
5. The system should be simple, understandable, and measurable to provide results that are useful.
6. The University System should utilize the higher education performance reporting system already in place under NDCC Section 15-10-14.2 as it provides performance data.
7. The State Auditor should, as a part of each agency's biennial audit, review select agency performance measures for accuracy, but not complete a comprehensive review of all agency measures.

Government Performance and Accountability System - Implementation Timelines

The committee considered the time period needed for implementing a government performance and accountability system. The committee learned that the timeframe used by most other states that have implemented a similar system ranged from one to seven years. The committee considered implementing a system over two bienniums and received preliminary information from the Office of Management and Budget regarding the agencies that could potentially begin using the system during each of the next two bienniums as follows:

Performance Measure Example

The committee reviewed an example of a possible format for agency reporting of select performance measurement data of the agency as presented by the Legislative Council staff. The example relates to a possible measure for the Department of Corrections and Rehabilitation.

Agency goal - Maintain or reduce the number of inmates.

Agency objective - Reduce the inmate recidivism rate.

The agency would also provide explanations of the reasons why variances occurred in certain years and, to the extent possible, how the agency's recidivism rate compares to other states' rates or national benchmarks. The establishment of the target would also be established based, to the extent appropriate, on other states or national benchmarks.

Recommendations

The committee recommends House Bill No. 1035 to:

1. Create a government performance and accountability system to be established and maintained by the Office of Management and Budget subject to the input and review of the Government Performance and Accountability Committee. The system is to focus on results of major agency activities and is to provide agency managers, the Governor, the Legislative Assembly, and the public with the information necessary to evaluate and assess agency performance and accountability for the purpose of ensuring that state government services are effective and state resources are used efficiently.
2. Establish a statutory Government Performance and Accountability Committee consisting of up to eight legislators, two citizens, a representative of the Office of Management and Budget, and a representative of the State Auditor's office. The chairman of the committee may also invite up to six additional legislators to participate when committee discussion relates to their legislative standing committee assignments. The committee is to monitor state government performance and accountability by reviewing state agency missions, goals, objectives, strategic plans, and performance measurement data. The committee is also to assess the effectiveness of the government performance and accountability system.
3. Provide that the Legislative Council staff is to assist the committee in performing its duties and responsibilities, including the development of a consistent format for agencies and departments to submit their biennial goals and objectives or strategic plans and performance measurement data, analyzing proposed performance measures prior to committee review, and summarizing performance measurement data for the committee or Legislative Assembly.
4. Provide that the Office of Management and Budget implement the system for executive branch agencies over two bienniums and that initially agencies prepare and present biennial goals and objectives and related performance measurement data for major programs of the agency for the next biennium. Within two years of approval by the Legislative Assembly or the Government Performance and Accountability Committee of an agency's performance measures, each agency must establish and maintain a three- to five-year strategic plan to guide its operations and activities.
5. Require each agency to prepare an annual performance report summarizing its goals and objectives, including comparisons of performance results to performance targets, explanations of any major variances from performance targets, and multiyear trends in performance.
6. Provide that the State Auditor, as part of each agency's biennial audit, review select agency performance results.
7. Allow for incentives and reviews for agencies based on their performance.
8. Include provisions relating to the legislative and judicial branch participation in the system.
9. Provide for University System participation but in accordance with statutory provisions already in place under NDCC Section 15-10-14.2, which provides for performance and accountability reporting.
10. Require performance measurement data to be included in agency budget requests.
11. Include appropriations totaling $404,859 from the general fund for the 2005-07 biennium for administering the government performance and accountability system. The appropriation includes $200,000 and one full-time equivalent (FTE) position for the Office of Management and Budget, $89,668 and one FTE position for the State Auditor, and $115,191 and one FTE position for the Legislative Council.

The committee also recommends that the Legislative Council chairman invite representatives of the National Conference of State Legislatures and the Urban Institute to conduct performance and accountability training for state agency personnel in North Dakota.

BUDGET MONITORING

Since the 1975-76 interim, a Legislative Council interim committee has been assigned the responsibility of monitoring the status of major state agency and institution appropriations. The Government Performance and Accountability Committee was assigned this responsibility for the 2003-04 interim. The committee's review emphasized the expenditures of major state agencies, including the charitable and penal institutions, the state school aid program, and major program appropriations of the Department of Human Services. The committee also monitored oil revenues, compliance with legislative intent, and selected special funds.

Oil Revenues, Oil Production, and Oil Market Prices

The committee received status reports from the Legislative Council staff on oil tax revenues, oil production, and oil market prices for the 2003-05 biennium. The committee learned that the market price per barrel of oil in August 2004 was $39.65, or $16.88 more than the projected price per barrel of $22.77.

Through August 2004 general fund revenues from oil and gas production taxes were $33.2 million, or $7.5 million more than the March 2003 forecast. General fund revenues from the oil extraction taxes were $18.1 million or $700,000 more than the March 2003 forecast for the same period. The committee learned that the Office of Management and Budget August 2004 revised revenue forecast projects that because oil tax collections are anticipated to be more than originally projected, $16.8 million will be deposited in the permanent oil tax trust fund by the end of the 2003-05 biennium, $16.1 million more than the original estimate.

Agency Compliance With Legislative Intent

The committee received a report from the Legislative Council staff on state agency compliance with legislative intent for the 2003-05 biennium. The report is based on information gathered by the Legislative Council staff during visitations with agency administrators and fiscal personnel in early 2004. The report contains information on agency compliance with legislative intent, agency changes, budget concerns, staff changes, and other areas regarding agency operations and appropriations. In addition, the report includes a number of analyses of special funds.

Status of Appropriations of Major Agencies

The committee reviewed Legislative Council staff reports regarding the status of major appropriations, including state school aid, Department of Human Services programs, and charitable and penal institutions. The following were the key items included in the reports:

1. The Department of Public Instruction current estimate for unspent state school aid funds at the close of the 2003-05 biennium is $1,555,048. This estimate is based on the actual number of weighted student units during the first year of the biennium which was 107,927, or .4 percent less than the original estimate of 108,381 and the original estimate of 106,258 for the second year of the biennium. Any funds remaining unspent at the end of the biennium are by law to be distributed as follows:
   1. The first $250,000 for providing reimbursements to chief administrators of joint powers agreements.
   2. The next $1 million for providing reorganization bonuses.
   3. Any remaining amount as additional per student payments.
2. The 2003 Legislative Assembly appropriated $51.9 million for teacher compensation payments of $1,000 for first-year teachers and $3,000 for second-year returning teachers. The appropriation anticipated 8,559 returning teachers would qualify for the $3,000 payment and 250 first-year teachers would qualify for the $1,000 payment. Due to changes in the actual number of qualifying personnel, approximately $488,000 in teacher compensation payments is anticipated to be unspent at the end of the 2003-05 biennium and will be distributed to school districts pursuant to a statutory formula at the end of the biennium.
3. Actual expenditures for the Department of Human Services through August 2004 for the temporary assistance for needy families (TANF) program were $13 million, $1.6 million or 10.9 percent less than estimated expenditures of $14.6 million.
4. Based on actual expenditures through June 2004, the Department of Human Services is estimating total Medicaid expenditures for the biennium will total $931 million, $28.5 million more than the original appropriation estimate of $902.5 million. The 2003-05 biennium general fund share of Medicaid expenditures is projected to be $2.2 million less than the original appropriation due to the enhanced federal matching percentage approved by Congress for a portion of the biennium.
5. Total expenditures at the charitable and penal institutions for the first year of the 2003-05 biennium were $83.2 million, which is $2.2 million or 2.5 percent less than estimated. Total revenues for the period were $27.8 million, which is $3 million or 9.8 percent less than estimated primarily due to revenue shortfalls at the Developmental Center and State Hospital resulting from undesignated general fund budget reductions made by the Legislative Assembly.