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Marginal Cost of Performance

Background

The Budget and Performance Integration initiative proposes to use performance information to improve management of the federal Government, demonstrate program results, and enhance annual budget requests. OMB has established a roadmap for doing this:

• Focus agencies on their missions by limiting strategic goals and objectives and supporting annual performance goals;
• Encourage senior managers to use performance and financial data to manage their programs;
• Link agency employees’ appraisals to agency mission, goals, and outcome;
• Use program evaluations (PART) to assess the effectiveness of Federal programs; and
• Report the full cost of achieving performance goals and the marginal cost of changing performance goals.

DOT has already achieved the first four objectives and intends to develop a method for determining the marginal cost of performance by July 1, 2004.

Issue

To get to green on the OMB PMA scorecard, DOT must be able to identify the marginal cost of performance.

In other words, how much additional funding will DOT agencies require to move to the next level of performance?

To do this, a Department should:

• Have a fully-functioning cost accounting system;
• Know the cost of its outputs;
• Tie the cost of outputs to intermediate and agency outcomes; and
• Determine how multiple agency outcomes will affect Departmental strategic objectives.

All DOT modes have implemented DELPHI, but it will be several years before cost-accounting data systems are fully mature and include historical data that will allow DOT managers to integrate performance and accounting data. In the meantime, DOT must be able to tie resources to results.

Proposal

DOT, therefore, has decided to focus during the FY 06 budget cycle on the linkage between funding and agency level outcomes and outputs and draw a comparison between the marginal benefits and the marginal cost associated with additional funds or reduced funding as recommended in section 51.2 of OMB circular A-11. To accomplish this, the DOT Operating Administrations (OAs) will be requested to provide the following in their FY 2006 budgets:

• Current services funding;
• Requested increase or decrease to funding;
• Associated agency-level performance measure for the activity in question;
• Baseline performance targets associated with the current services funding;
• New targets associated with changes in funding; and
• Discussion of how agency level results contribute to DOT level outcomes.

This will be an interim step in tying resources to results until cost accounting data is more widely available throughout the Department. This approach does the following:

• Introduces a new conceptual framework for budget-building;
• Builds a more visible logic model showing the tie between agency funding and Departmental outcomes;
• Requires more rigorous target-setting methods from the Operating Administrations; and
• Helps the OAs articulate more clearly the impact of funding changes.

Summary

The model presented in this proposal draws a comparison at the level of agency outcomes between the marginal benefits and the estimated marginal cost associated with additional funds or reduced funding, setting the stage for the use of cost accounting data in developing performance budgets in the future and further development of marginal cost estimates.