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The big audit.

A hard-nosed Texan engaged in one of the biggest performance reviews ever in state government came up with ideas for pruning the Texas budget. Now he's showing the federal government how to do it.

Know this about the performance review of Texas state agencies that Comptroller John Sharp carried out in 1991, now being echoed in Washington: It doesn't sound pretty.

Right after Bill Clinton was elected president, Sharp, at Clinton's request, sent him a confidential memo outlining how the audit should be conducted. It concluded with this paragraph:

"This performance review will not work if it's seen as an exercise in compromise. It must take on sacred cows and bloated bureaucracies to convince everyone of its seriousness. It must do away with useless expenses and unproductive jobs. There must be a body count, a specific number of programs eliminated and teeth on the sidewalk. Jobs have to go, programs have to go and perhaps more importantly, enemies have to be publicly challenged and fought within the bureaucracy."

Whew. That doesn't exactly sound like "open covenants, openly arrived at," supposedly the watchword of democratic government. But Texas' hard-nosed tax collector, who spent eight years in the Texas House and Senate, told the Clinton administration that that's the only way an effective review can be done.

President Clinton has responded by setting up the national performance review, putting Vice President Al Gore in charge. "Our goal is to make the entire federal government both less expensive and more efficient," Clinton said in announcing the package in March.

He and Gore have borrowed Sharp's organizational and cost-cutting guru Billy Hamilton to help set up the federal audit. Hamilton, whose organizational genius Sharp credits with making the Texas performance review work, will assist federal auditors, who are working 18-hour days out of a "war room" in the White House to try to get the national review done by this fall.

New U.S. Senator Bob Krueger, the Texas Democrat who was appointed as an interim senator when Lloyd Bentsen became Clinton's secretary of the treasury, also got into the act. He sponsored legislation that authorized the federal performance review. (It is probably no coincidence that the man running his campaign to win the remainder of Bentsen's term was Greg Hartman, Sharp's top political aide, who was loaned to the Krueger election effort.)

Sharp notes that the team of auditors he assembled for the 1991 Texas audit came up with more than $4 billion of proposed savings with 1,000 recommendations in 195 areas of government. A federal audit could save the nation hundreds of billions of dollars, Sharp said.

The Texas performance review of 1991, and its sequel in 1993, are perhaps the biggest examples in the states of the new attitude toward "reinventing government." That attitude, preached as gospel by its scribe, Boston-based writer David Osborne, is spreading to all levels of government. His book, Reinventing Government, co-authored with Ted Gaebler, former city manager of Visalia, Calif., has become something of a bible for those seeking new ways for governments to operate.

Osborne and Gaebler preach measuring outputs from governments rather than inputs. They point out that traditional centralized systems respond to rising crime rates by giving more money to the police. "If they continue to fail, we give them even more," they write. "In public housing, we reward failure: Under federal funding formulas, the better a local housing authority performs, the less money it gets from HUD.

"Our tendency to reward failure has literally crippled our efforts to help the poor. Most of the money we spend on the poor--welfare, food stamps, Medicaid, public housing, housing vouchers, child care vouchers--rewards failure, because it goes only to those who remain poor."

The Clinton administration's interest in emulating the Texas performance review comes after officials from two or three dozen states have already been in touch with Sharp's office for some instructions on how they can do the same thing. But Clinton himself already had more than an inkling about the idea of measuring outputs rather than inputs. He wrote the foreword for Osborne's 1988 book, Laboratories of Democracy, that focused on new, imaginative programs going on in the states. One of the key chapters in the book focused on Clinton's efforts to improve education in Arkansas--including testing teachers and offering school choice options to public school students long before these were in vogue.

Sharp says that some of the innovations he championed are borrowed from Clinton. Sharp had hired Osborne as a consultant to his department shortly after taking office in 1991.

The idea for the Texas performance review was spawned while Sharp was running for comptroller in 1990, and while he was still serving on the oil-and-gas-regulating Texas Railroad Commission after his tenure in the Legislature. Sharp said the original idea came from his predecessor, the comptroller for 16 years, Bob Bullock, who was running for lieutenant governor. They began discussing the notion before either took his new post.

The Legislative Budget Board, which sifts through agency spending and needs for the 18 months before the regular biennial legislative session, had determined that there was a $3.6 billion gap between the state revenues available for the 1992-93 spending period and what it would cost to maintain state services.

Sharp and Bullock decided it was time for a big audit of Texas government--not agency by agency, as in the sunset process, but a BIG audit--the whole works. They wanted to find the overlaps and the gaps, and analyze what functions needed to be improved, dropped, blended, separated. With the cooperation of then-Speaker Gib Lewis, the Legislature authorized the Texas performance review.

Many states measure certain aspects of performance in their budget systems, but only Texas decided to put every aspect of state government to performance-based tests.

In Massachusetts, legislators in 1992 turned down a massive performance-based budget proposal, though they did fund two small pilot projects. The state's budget officials plan to propose another broad plan for FY 1994. South Carolina lawmakers tried unsuccessfully in the mid-1980s to institute performance-based budgeting, but plan to try again.

Sharp was made the head of the Texas performance-based auditing effort. He assembled a group of 104 auditors from a variety of state agencies. They worked in teams, but the only people who had access to all of the reports they were turning in were Sharp and two of his top employees.

They completed the audit in four months. Meanwhile, legislative leaders and new Governor Ann Richards agreed to put off final consideration of an appropriations bill until after the performance audits could be completed.

Three weeks after Texas' 140-day biennial session adjourned, Sharp came forth with the report. It said the state could save $5.2 billion from its $60 billion-plus biennial budget through the savings mechanisms outlined in the package.

Many of them were one-time savings, achieved by shifting costs incurred in one biennium to the next. But many of them were structural, aimed at making the most of the state's tax money by trimming expenses wherever possible--and even adding some spending in a few areas, like more sophisticated computer systems for some agencies.

Sharp said later that the special session to write the budget and implement the performance review was critical in making much of the study become a reality. It provided a 30-day blitzkrieg that did not allow special-interest lobbyists time to muster their forces to pick the package apart.

That speed, coupled with the earlier secrecy, allowed much of the review package to become reality, Sharp said. His project was so secret that none of the auditors who participated in it knew about the entire package until it came out. He even required badges for admission to the floor in the office building where auditors worked.

"Individual teams do not need to know where the 'big picture' stands, since the more people who have the full document, the greater the chance of leaks," Sharp said in his memo to Clinton. "Our fiscal impact charts were handled in a consolidated form by only three people--the comptroller, the deputy comptroller and one staff member."

"I understand open government," Sharp said in an interview a few weeks ago. "The problem is as soon as the special interest groups figure out what you're working on, they're going to start killing it before you've had a chance to start advocating it. You've got to give them a short period of time to |try to~ kill all of your stuff.

"One of the reasons our stuff didn't just get killed the first time was that there weren't enough lobbyists to go around in a 30-day special session. Literally every lobbyist in this town was hired to kill some part of it. If they'd had a 60-day special session, they probably could have got it all."

The review brought mixed results, though certainly better than what might have happened without it. The $5.2 billion suggested savings included $4 billion in general revenue and an additional $1.3 billion in federal funds and other categories. About two-thirds of the recommendations were adopted for $3.4 billion in savings.

Even so, and even though many Republican legislators voted for aspects of the package, state GOP Executive Director Karen Parfitt Hughes dismissed it as "more public relations than substance in terms of results." She said state spending was on a dramatic rise, rather than decline.

State Treasurer Kay Bailey Hutchison, a Republican who contested Krueger in the May 1 special election for the U.S. Senate seat, said American taxpayers should closely study the Texas performance review before buying off on the national one. She charged that the Texas plan contains "more accounting tricks and money-shuffling gimmicks" than cuts of government waste.

"I'm strongly in favor of any serious effort to cut unnecessary government spending," Hutchison commented as Clinton was announcing the national review in early March. "The danger here is that an artful sales job may mislead taxpayers into wrongly thinking that government is tightening its belt."

The 1993 recommendations for $4.5 billion in savings drew some additional fire, even though the hard-eyed budget-master, Lieutenant Governor Bullock, incorporated $2.2 billion of them in the Senate's proposed spending package. One of the state's largest and most influential newspapers, The Houston Chronicle, referred to them in an editorial as "smoke and money" bookkeeping tricks. The Chronicle and other critics said that many of the savings were only a temporary illusion of cost-cutting gained by pushing expenditures into a later spending biennium and accelerating some tax collections.

"For example, about $659 million would be gained for the coming biennium by postponing one monthly payment of state aid to public school districts just into the start of the 1996-97 biennium in September 1995," the Chronicle observed.

"Another $157.2 million would be picked up by starting a new system of giving colleges their general revenue appropriations in monthly installments and delaying one of the installments until September 1995.

"And $283.3 million would be gained by delaying the June, July and August 1995 disbursements of motor fuels taxes until September.

"Another favorite gimmick is speeding up tax collections by advancing due dates. Sharp proposed--and Bullock embraced--a plan to gain $215.1 million for the next biennium by having merchants send in half of their August sales tax collections in August rather than, as usual, in September.

"The worst aspect of this creative bookkeeping is that it amounts to borrowing from future budgets. Because of it, the 1995 Legislature will have less revenue available to meet appropriation demands and will be under greater pressure to pass a tax bill."

Skeptics think the fund-juggling is simply a means for Democratic office-holders, like Richards and Bullock, to postpone the need for a tax increase until safely after the 1994 elections. There is considerable suspicion the case will then be made for Texas to finally join those states with a personal income tax. Bullock came out for an income tax in 1991, but dropped the idea after he received minimal support. Richards and Sharp have consistently said they do not think Texans are ready for an income tax.

Sharp openly admits that much of the performance reviews involve one-time bookkeeping savings.

But other cost-saving suggestions are for things like creating a central personnel services system to standardize employment applications and share information among state agencies; using empty state hospital beds for low-risk prisoners in need of alcohol and drug abuse treatment; turning public school facilities into full-service community centers that provide primary health care, after-school recreation programs, child care and such other programs as night classes for working adults; and starting a central wellness program for state agencies.

Sharp said a critical element to passing a good portion of the performance review both in 1991 and 1993 was the presence of what he called an "enforcer." Along with Texas' requirement for a balanced budget, the special session Richards called in 1991 provided the enforcer.

In 1993, the enforcer was the fact that Governor Richards, Lieutenant Governor Bullock and new House Speaker James "Pete" Laney agreed that the state would meet its obligations without raising taxes. Laney's predecessor, Lewis, had joined Richards and Bullock in July 1992 in a letter to state agencies, putting them on notice of the leaders' attitude.

"Agencies should prepare to get by with less money than they are spending today," the trio wrote. "While Texas state government will have more money to spend in the 1994-95 biennium than what was budgeted for 1992-93, that growth will fall far short of paying for a traditional 'current services' budget. Lawsuits, court orders, unfunded federal mandates and constitutionally restricted funds continue to fuel spiraling demands on our limited state funds." They asked agencies to prioritize their needs, and said budgeting decisions could require agencies to be downsized and some services eliminated.

That meant that cost-cutting and streamlining were critical--which drew backers to Sharp's new version.

Sharp said that the national performance review may use something akin to the structure used for closing military bases or the North American Free Trade Agreement's fast track: Present the recommendations as a complete package and require lawmakers to vote the entire package up or down. Otherwise, Sharp warned, it will be picked apart.

The audit process in Texas involved state employees at all levels, held public hearings around the state and even provided an 800 number where people could call in with anonymous tips on how things could be done better.

People who work in state government, both as auditors and as those who are on the job day to day, are critical to the performance audit's success, Sharp said. He said officials in Florida had found the same to be true.

"The really good ideas at the bottom of an agency never get to the top because of either jealousy or it messes with somebody's fiefdom or they don't want to admit that one of their employees had a good idea and they didn't," Sharp said. "And so it gets stifled and never moves. The General Motors syndrome."

He said the success of an 800 number that was installed in connection with the project surprised him. It produced almost 4,000 calls within a month.

While many were complaining about superiors, "some of them were really good," Sharp said. He said government labor unions were particularly helpful. "Once we convinced them that we really wanted to use their recommendations, their ideas, those labor unions really came up with bunches and bunches of stuff--as long as they knew it was going to be anonymous, and that it wasn't just going to be sitting there and somebody was going to do something about it."

But the air of crisis--the prospective budget shortfall, the short time frame, the balanced-budget requirement and growing anger in the state (and the country) over the notion that government simply doesn't work, set the stage for a prairie fire of agency cleansing and consolidation.

Sharp also said it was critical to focus on some of the really bad actors in government. He set up a Silver Snout award to be given periodically to the agency or bureaucrats that he thought were most egregiously guilty of misspending the taxpayers' money. The first one went to the state's teacher retirement system, which was spending a considerable amount of money on cushy and unnecessary perks for the people who invested the teachers' money.

"The main ingredient in these performance reviews is turning on the light," Sharp said. "You have so many stupid things that go on in government that once enough people find out about it, they'll demand change and be supportive."

Sharp thinks it's very good that someone as high-profile, tough, experienced and well-connected as Vice President Gore heads up the national performance review by himself--not a committee.

"It is critical to appoint a single person as director, rather than a commission," Sharp wrote Clinton last November. "Otherwise, two of the most critical factors needed to succeed--speed and secrecy--will be impossible to attain. In addition, you need the novelty of a single director to break the image of this work as 'just another commission full of prominent suits that will accomplish nothing.'"

Sharp holds out high hopes for the federal effort. Already calls are coming in on the 800 numbers about wasted money--such as an Air Force pilot in a western state who said he and his cohorts fly in circles around the base at the end of the fiscal year to use up their fuel allotment so they'll get as much money for fuel the next year.

"I think the fact that he's named Gore as the head guy ensures a high priority," Sharp said. "Gore's a good choice. That keeps it real high profile."

And, as happened in Texas, not all of it may become law. But with any luck, enough of it will, saving taxpayers a considerable amount of money, and cutting out some of the waste, fraud and abuse that politicians have railed against for years.

Alliance Forms to Encourage Reinventing the Government

With one of the biggest proponents of "reinventing government" in the White House, it probably was inevitable that the concept would spread.

David Osborne, the writer who has become the scribe of innovative government, has formed the Alliance for Redesigning Government to do just that. Osborne said the alliance would be a focal point and clearinghouse for sharing and developing new ways to do things.

"Hundred of thousands of people--in cities, in states, in counties, even in federal bureaucracies--are working to reinvent their governments," Osborne said. "Some are trying to change their budget systems. Some are struggling to transform their own organizations. Some are working to restructure major systems, like education or job training or child welfare. Virtually all of them share one problem: They don't know where to turn for information and help."

The alliance hopes to be "a central nervous system"--to allow information-sharing about entrepreneurial government efforts through a newsletter, electronic bulletin board, referral service, conferences and magazine articles.

"People don't know who has already invented the wheel they're trying to invent, who the experts are, who the consultants are--or even where to turn for referrals," said Osborne. He hopes the alliance can help connect people and ideas.

The alliance director is Barbara Dyer. The address is 1120 G St., NW, Suite 850, Washington, D.C. 20005-3801. Telephone (202) 347-3190; fax (202) 393-0993.

Help for Others: Using the Texas Model to Cut Federal Fat

Texas Comptroller John Sharp's memo to President Clinton carries some hints for others who might want to try a performance audit.

He recommends that the audit be performed by a group of special teams, not as a staff function of an existing agency.

There must be a short time frame--he suggests no more than six months. And the reviewers should come from the government itself.

"There will inevitably be bureaucratic resistance within the agencies. That is why it is critical to create the teams from people who are involved in the government and know what to look for. There simply isn't time to bring a group of academics or a team of outside professionals up to speed on anything as complex and far-ranging as the federal government.

"The performance review group should be autonomous and charged with a broad mission: to restructure the incentives and motivations of government workers so meaningful savings can occur without cutting the level of service. Innovations like injecting competition into the bureaucracy and incentives for coming in under budget must be established.

"The auditors must look beyond one-time budget cuts to challenge the basic assumptions about federal bureaucracy and how it does what it does. The details--whether to use air blowers rather than paper towels in restrooms--will come. Too much emphasis on these details will result in another unsuccessful Grace Commission effort, which totally misses the point.

"A key to our success was to tell the auditors that they are not working to cut government spending per se--although that is a key goal. They are working to fundamentally reshape government. In short, they have a mission larger and more important than wielding a meat ax. You should use this approach with confidence that what they do will slice the bureaucracy and save money.

"The auditors should examine the government by functions, not by departments. This approach will highlight the cross-relations among the departments as well as--most importantly--overlapping duties and duplication. The same inefficiencies will bubble up time and time again during the course of the audit because they tend to exist throughout government.

"If you merely focus on a single agency (which is a temptation given the size of the agencies involved), you will miss the real problem in most governments--overlap and duplication. Examined singly, a given agency's programs may look great. It is only when put in a larger context that the waste and inefficiency become manifestly obvious. This strategy of partitioning the issue down to individual agencies or programs ('This is one of the best things the government does!') is a favored method of attack by special interests and the agencies themselves.

"One of the key things you must keep in mind in managing a project on a short time line is the necessity to target in on issues. Too many of these projects in other states are led by accountants who take the ponderous approach of formally auditing each agency, looking at each of its functions and plodding through issues that don't really save any money or accomplish the fundamental goals of restructuring government. This is the safe way to approach the task; you're sure not going to miss anything. But, to use a military analogy, this effort needs to be more like a guerilla action--fast, direct and aimed at where the results are.

"In setting up the issues docket, the staff should be guided by a broad set of principles that articulate what the president is trying to achieve. The first cut through the issues is just to form a package of ideas to work on. We used the following principles as guides to what mattered and what didn't:

"--Does it make sense? (Many things at the agency level simply don't.)

"--Does it save money?

"--Does it improve service?

"--Does it eliminate duplication or overlap?

"--Does it help employees?

"These appear simple, but if you can put together a package that articulates in each component one or more of these goals, you will have something Americans can understand."

Dave McNeely, who has covered politics in the Texas Capitol on and off since 1962, is political editor of the Austin American-Statesman.
COPYRIGHT 1993 National Conference of State Legislatures
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related articles; US national audit
Author:McNeely, Dave
Publication:State Legislatures
Date:Jun 1, 1993
Previous Article:Preservation beats progress in New York City.
Next Article:Budgeting for results.

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