fedgazette

Changing the way lawmakers make spending decisions

Editorial

Steve Rothschild - Chairman, Twin Cities RISE!

Published March 3, 2001  |  March 2003 issue

Many a lawmaker has been heard lamenting that "there's no accurate way to compare results between programs," or that the data they're provided "doesn't measure meaningful outcomes" or "that there's little accountability once spending decisions are made." As a result, policymakers often make critical decisions based on incomplete, inadequate or misleading information. The consequences are that less effective programs are sometimes funded while more effective ones are not, and that all of us have less faith that our tax money is well spent. This issue is magnified by Minnesota's current $4.5 billion budget deficit, where decisions about what to support and what to cut are all the more important.

Why do lawmakers find themselves in this predicament? It's a function of both how spending decisions and how payments for services are made in government. First, lawmakers overwhelmingly make spending decisions based on a program's cost alone without a complete assessment of its benefit. Because the legislative process doesn't require the balancing of cost with revenue at the committee level where programmatic decisions are made, committees are held accountable for spending within a budget, not for delivering the "highest public return." Second, because most government spending is made in the form of a grant usually paid to the provider of service before the service is completed, it is not based on measurable outcomes but rather on expectations. Lawmakers often must make spending decisions without understanding a program's actual benefit, its return on investment or its value compared to alternatives.

Consumers, businesspersons and farmers wouldn't think of making economic decisions like lawmakers often do. They focus on benefit, value or return, not just cost, before making spending decisions. And, they make payment after the product or service is received, not beforehand. For example, do farmers buy the cheapest tractor or the one that provides the best return based on its revenue production, longevity and cost? And would a business pay for a service before it's provided or when it is delivered according to the specification?

Lawmakers could improve the quality of their spending decisions and receive greater value by incorporating these benefit and accountability rules into their decision making, too. But how?

First, utilize "return on investment" analysis for spending decisions instead of relying on cost comparisons alone. The advantages include assessing both the cost and benefit of programs, more easily comparing one program's value with another, more completely assessing program outcomes and also evaluating both short-term and long-term impacts of decisions. For example, the measurable benefits of training and educational programming include increased sales and income tax receipts from incomes and expense savings from reducing public subsidies like lower welfare payments.

Second, directly tying the payment of service to an actual outcome would create more accountability for results on the part of providers and government, and more confidence by policymakers and taxpayers that money is well spent.

Examples of return on investment analysis and outcomes payments already exist in state government. For example, a study by Minnesota Planning of the economic value of boosting incomes of those in poverty led to an innovative pay-for-performance pilot training program, which provided a 90 percent return on investment to the state. The state's return was achieved from two sources: higher sales and income tax receipts from higher incomes and lower state payments for health and welfare and prisons, totaling an average of $3,800 for each year at the higher income. When compared to the state's one-time cost for a successful trainee, the current state return equates to 42 percent and the discounted future return equals 400 percent. Similar analysis can be made for evaluating the effects of other programs that have both a social and economic value to government.

While some providers of public services might initially object to these changes, over time they will realize the benefits, too. Providers will develop new and innovative programs that generate more meaningful outcomes because they will be rewarded for the value of their outcomes, not merely because they offer a low-cost program. For example, in addition to lower-cost "welfare to work" programs that don't boost many individuals out of poverty, there will be more programming that ladders individuals further to "living wage jobs" because the return on investment to government will be higher and the payoff to providers will be greater.

It's impractical to expect lawmakers to make a wholesale change in the way they conduct business overnight, but what they might consider is asking each committee to adopt return on investment and outcomes payments for five programs it sponsors this year. In this way an assessment can be made of the benefits and difficulties in using these tools.

Lawmakers have a tough enough job dealing with competing interests and requests without the benefit of utilizing the best available tools to do their job. Adopting return on investment criteria for spending decisions and using more outcomes-based payments should improve the effectiveness and efficiency of government while also serving the public better.

Rothschild is the founder of Twin Cities RISE!, an anti-poverty nonprofit program. Previously he was an executive vice president of General Mills Inc.

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