ZERO-BASE BUDGETING must be the first manual on budgets and planning to have caused a run on Washington bookstores. Its current popularity may be laid directly to the president-elect. After issuance by an obscure business publisher in 1973, the book languished until Jimmy Carter's promise to institute zero-base budgeting in the federal government "by executive order the day I become President."
The term zero-base budgeting actually refers to a planning rather than a budgeting process per se. As Carter has said: "Zero-base budgeting strips down the budget each year to zero and starts from scratch, requiring every (activity) that spends the taxpayer's money to rejustify itself annually." In practice, this means that managers within government agencies are required to prepare "decision packages" describing each current or proposed operation under their immediate supervision. These "packages" detail the purpose of the activity, current expense levels, suggested efficiency measures and standards, alternative means of providing the service, and consequences of alternative funding strategies, including increases, reductions, or even outright termination. "Packages" are ranked in terms of cost/effectiveness and then passed through successive administrative layers for consolidation, review, and cuts.
The process is aggressively "bottom-up" in that it relies on middle and even lower level managers both for ideas and for the smooth operation of the system. When Carter first applied it to state government in 1972, he had difficulty communicating its purpose and methods to the thousands of Georgia employees whose cooperation was required. Indeed, it caused considerable controversy in the state that year and it promises to be equally controversial at the federal level this year. Representative Brooks of Texas, Chairman of the House Government Operations Committee and a key figure with respect to Carter's reorganization plans, has already made known his opposition. Other influential demurrals have been heard. Eventually, however, the technique took hold in Georgia, even in the face of first-year agency budget cuts which ranged up to 15 per cent; a 1976 survey of Georgia's agency budget officials indicated that an over-whelming majority favored retaining ZBB.
The author of Zero-Base Budgeting, Peter A. Pyhrr. developed the technique for Texas Instruments in 1969 and adapted it for Jimmy Carter's use as governor of Georgia in 1972. His book is inevitably something of a paean to zero-base budgeting as well as a detailed, highly instructive, albeit sometimes repetitive, manual. Some of the major criticisms of zero-base budgeting which it attempts to refute include the following:
(1) ZBB produces a blizzard of paper-work.
In Georgia, 10,000 decision packages, most of two-page length, were produced by 65 agencies in the first year. Zero-base review began at the very lowest administrative levels. Very little effort was made to define tasks along strict functional lines. As a result, decision packages were written on a variety of topics (programs, people, and line items of expenditure, as well as functional activities) which often overlapped.
(2) ZBB offers at best a one-dimensional view of governments.
Zero-base budgeting was originally developed as a means of controlling "staff" services within Texas Instruments. Such services constitute the nonproductive portion of corporate activity, and as such lend themselves to ranking according to cost and effectiveness. In government, however, ZBB is applied to productive "line" as well as "staff" support services. Establishing priorities is doubly difficult when the mix of activities is often as important or more important than the cost-effectiveness of individual functions.
(3) ZBB is politically naive.
Zero-base budgeting relies heavily on lower and middle level managers.In private industry, such managers will be tempted to shade activity evaluation rankings to protect the jobs of those working for them, but will be restrained to a degree by the tendency of the system of to reward them for saving money and lowering unit costs. In government, on the other hand, managers evaluate their success and standing by the size of their staffs and budgets. It is thus inevitable that some will respond to a ranking system by placing favorite or vulnerable activities at the top of the list, regardless of merit, and more critical or politically unassailable activities at the bottom of the list, assuming that they will survive even the most searching scrutiny.
(4) ZBB assumes a logical organizational structure.
When Jimmy, Carter applied ZBB to the Georgia state budget, he simultaneously rationalized and reduced the number of state agencies. Despite Pyhrr's claims to the contrary, the two steps were not necessarily linked.Indeed, zero-base budgeting is relatively blind to organizational structure, a major flaw which would have limited its success in Georgia if simultaneous reorganization had not taken place.
Such conventional criticisms of zero-base budgeting are obviously important and well-founded. They raise issues which the new administration should consider carefully before attempting to install it on a large scale. They are not, however, conclusive. As Pyhrr states, each of the above deficiencies may be overcome through strong management and an imaginative reshaping of zero-base concepts of fit new structures. At the same time, conventional criticisms of zero-base budgeting tend to overlook what may be the central flaw in the process: its functional rather than program orientation.
Government operations and budgets may be broadly viewed on three different levels: operating, functional and programmatic. The first involves people, materials and facilities and is controlled through the line budget which governments have traditionally used. The second redefines people, materials and facilities into activities or functions, and the zero-base budget is only the most exhaustive and probing of the varioius functional budgets that have been developed.The third level regroups operating inputs and functions into programs which represent final goods or services (outputs) and which must be analyzed through a program budget. The operating or line budget is the most basic in an operation like the government. The functional (or zero-base) budget is also useful, particularly as a tool to gain better financial and operating control of individual agencies or units. But for an entity as large as the federal government, the most important funding decisions are made on the institutional or policy level, and this requires a program budget above all. The first imperative for a president intent on gaining control over the federal bureaucracy must be to identify and define underlying programs in budgetary terms, and to reduce them schematically to a level of detail which offers a significant policy choice. The goal should be to maximize policy options so that the very best decisions can be made governing where funds should be directed, and in what quantity, and only secondarily to review functional allocations to ensure maximum efficiency.
In fairness to Peter Pyhrr, it should be emphasized that he recognizes the role of policy and program planning in providing a framework for the functional planning techniques of zero-base budgeting. However, he identifies program planning with a formularized and restrictive process known as Planning, Programming, and Budgeting (PPB) which was developed in the Defense Department during the '60s and which has proven largely ineffective outside the Pentagon. In addition, Pyhrr assumes zero-base budgeting may be integrated with program planning without significantly altering the process as developed in Georgia, and there are good reasons to doubt this. In the first place, functional analysis of the type represented by zero-base budgeting should be undertaken by program rather than by organizational unit, although the two must be cross-referenced. And, in the second place, zero-base budgeting should be instituted from the top down rather than the bottom up, on a selective rather than exhaustive basis, using a simplified methodology, and involving far fewer active participants. ZBB as practiced in Georgia would simply overwhelm the capabilities of the federal government without providing a commensurate return. Combined with program planning, however, and modified in scope and method, it could provide significant dividends.
Beyond such considerations, discussions of planning and budgeting systems always arrive at the same terminal point. To paraphrase Pyhrr: can such systems survive and make a contribution in a world based on precedent, political considerations, and subjective judgments? The answer is always in doubt. Nevertheless, the preconditions for success are sufficiently clear: the system must be simple, easily understood, programmatic in orientation, based on and integrated with the resource allocation process, and, above all, backed by a mayor, a governor, or a president with the political will to make it work.