In a widely cited article; Aaron Wildavsky offered an
answer to the question of "why the traditional budget
Entiepreneurd Budgeting: An
Emerging Reform?
Dan A. Cothran, Northern Arizona University
What influence has entrepreneurial budgeting had on
budget reform? Dan Cothran examines three neiw
approaches to budgeting that use decentralization in
an effort to stimulate entrepreneurial behavior by public
administrators. One method is used by some local gov-
ernments in the United States, the second is used by the
national governments of several industrial democracies,
and the third isproposed as a way to improve U.S.
defense budgeting. Afer toppolicy makers have estab-
lished their overall control through broad guidelines,
states the author, the new methods decentralize actual
management decisions much as a market does by pro-
viding agency managers with incentives to be both effi-
cient and effective. In addition, the new methods aim
to make administrators more accountable for the results
of their decisions by monitoring actual performance
more than in thepast.
Public Administration Review + Septernber/October 1993, Vol. 53, No. 5
lasts" (1978). He argued that despite all the efforts to
reform budgeting in the past few decades, it has
remained essentially incremental and line-item.
Although this may be true, efforts to reform budgeting
occur with such regularity that the question could easily
be turned around: Why are attacks on traditional bud-
geting so persistent? Some shortcomings must exist in
budgeting for reforms to be proposed so regularly.
Although none of these efforts, such as performance,
program, or zero-base budgeting, entirely supplanted
incremental line-item budgeting, elements of these
reforms endure in the budgeting process of many gov-
ernments. Now a new challenge to traditional budget-
ing has appeared.
The process of government budgeting has changed
significantly in the 20th century, beginning with the
introduction of executive budgeting in the 1920s. Since
the 1 9 5 0 ~a ~relatively major reform has been proposed
about once each decade in an effort to overcome some
of the perceived deficiencies of incremental line-item
budgeting-performance budgeting in the 1 9 5 0 ~pro- ~
gram budgeting in the 1 9 6 0 ~and ~ zero-base budgeting
in the 1970s. In the 1 9 8 0 ~there
~ was a growth of what
might be called "automatic control budgeting" in which
voters and policy makers tried to impose statutorily
prescribed formulas on revenues and expenditures, the
most notable examples being Proposition 13-type laws,
Gram-Rudman-Hollings, and the movement for a fed-
eral balanced budget amendment to the Constitution.1
In the 1990s, another type of budgetary reform is being
proposed-entrepreneurial budgeting. In this article, I
examine three examples of this type of budgeting. One
is used by some local U.S. governments, another by the
national governments of several industrial democracies,
and the third is proposed as a way to improve defense
budgeting in the United States. This article asks
whether these methods have any qualities in common,
why they are being proposed, and how likely they are
to last. As disparate as they appear, they are remark-
ably similar in fundamental ways. Although they go by
various names, all of these methods might be character-
ized as entrepreneurial budgeting because of their
emphasis on decentralization and incentives.
Entrepreneurial Budgeting: Three
Examples
Expenditure Control Budgeting2
One observer claims that since 1977, U.S. "cities have been
experimenting with and slowly developing a new system for
public budgeting" (Gaebler Group, 1988, p. I), which has been
called entrepreneurial budgeting, expenditure control budget-
ing, profit sharing, and various other things. Unlike tradition-
al budgeting where policy makers wait for departments to
make their requests, in this approach the city council begins
by setting expenditure limits. This part of the budgetary pro-
cess is very much top-down, rather than bottom-up as is often
the case under traditional budgeting. The expenditure limits
are frequently expressed by a formula, such as holding the
increase in total spending to 7 percent over the current year.
The council's budget plan is quite brief, perhaps no more than
two pages, in contrast to the huge line-item document with
which most city councils have traditionally struggled. The
idea is to get the top policy makers to focus on the big pic-
ture, not the details. In doing this, the council tries to deter-
mine what citizens want their city government to do. From
this information and their own preferences, the council mem-
bers set the,overall policy direction for the city. They may, for
example, decide that the citizens are particularly concerned
about the conditions of roads, and hence the city council may
increase the road budget by 12 percent, rather than only 7
percent. The council then monitors the performance of the
city government to ensure that policy goals are being met. It
does not, however, get caught up in detailed scrutiny of line-
item spending. In this way, the council, and to an extent the
city manager, move away from micro-management and toward
greater attention to broad policy questions. Governments that
use this approach clearly are motivated by the constraints that
voters have put on revenues since the late 1970s.
At the same time, the operating departments are given
more discretion. Within the bounds of the centrally deter-
mined expenditure limits, each department is free to use funds
as its professional managers think best (subject to the usual
constraints of legality and political prudence, of course). For
example, they are free to move money from salaries to sup-
plies if they think that will allow their department to pursue its
mission more effectively. In addition, the city manager main-
tains a contingency fund for the entire government, so that
individual departments do not need to maintain such funds.
Perhaps the most significant change in this approach is
what happens to funds left over at the end of the fiscal year.
Instead of a year-end spending spree motivated by the "use it
or lose it" rule, departments are allowed to carry over a signifi-
cant portion of their unspent authority, usually 30 to 50 per-
cent, but in some cases 100 percent. This form of "profit shar-
ing" is seen by many as the most important departure from the
traditional budget. Along with the general increase in discre-
tion over the use of funds, it is supposed to improve both
management and morale by giving more discretion to those
who actually administer the program. The more decentralized
approach gives line managers the flexibility to manage their
resources in more creative ways and to respond to changing
conditions. In that way, it allegedly departs from the rigidity
446
I Basing their actions on o~aniratbnaltheory!
I
policy m a h h o p that operating
managen will exhibitgreaterproductiuity in return
for the greaterfreedom.
frequently attributed to government bureaucracy and moves
toward the flexibility often associated with private enterprise.
That is why it is sometimes called entrepreneurial budgeting.
Basing their actions on organizational theory, policy mak-
ers hope that operating managers will exhibit greater produc-
tivity in return for the greater freedom. Carl Bellone examined
four cities in California that used decentralized budgeting. He
writes: "Instead of the department heads in each city submit-
ting a detailed budget request which is then negotiated item
by item with the city manager ...each department is given a pot
of money .... The department head is then free to spend the
money allocated in the way that he or she feels is best."
Bellone concludes, "This budgetary freedom fosters creativity
and innovation" (1988, p. 84).
One of the earliest local governments to use the approach
was the city of Fairfield, California. The city manager intro-
duced the system after Proposition 13 devastated the city bud-
get in 1978. It is a departure from the traditional way of build-
ing budgets from the bottom up, in which departments start
with their expenditure levels for the current year and then try
to increase that as much as possible for the following year,
meanwhile quickly spending any balance left over at the end
of the fiscal year. In expenditure control budgeting, the
Farfield city council examines a twopage budget proposal that
highlights broad categories of spending. Department heads
are, in effect, given block grants that demonstrate considerable
trust in their judgment about the use of money and that allow a
high level of autonomy in managing their departments. Any
unspent balance at the end of the fiscal year is retained by the
departments, so that managers have an incentive to save
unspent funds for higher priority items in the new fiscal year,
rather than spend the funds immediately for lower priority
items. Under this system, however, the city council and city
manager will expect evidence of achievement by the various
programs. In fact, by reducing the amount of time that they
spend examining detailed line-items, they will have more time
to monitor actual program performance. This approach greatly
simplifies budget preparation, as departments are generally
given a lump-sum allocation based on the prior year's budget
plus an increment for inflation and for the increase in popula-
tion.3 In 1982, the Fairfield city manager received the
International City Managers Association ward for Outstanding
Management Innovation for the new approach. Fairfield ofi-
cials believe that the approach saved the city almost $5 million
over a period of 8 years (Cal-Tm News, June 1, 1987, p. 10).
Fairfield was still using this decentralized approach to budget-
ing in 1792, 13 years after its introduction. City officials
believed that the system was more efficient than traditional
line-item budgeting in that it made managers more responsible,
reduced inter-departmental conflict at budget time, and encour-
aged thrift and efficiency in operations.
Public Adrmnhtration Review + September/October 193, Vol. 53, No. 5

Recent stdiesofbudgeting in s a w 1 industrial
h e c r a c k s indicate that a number of national
savings, on a descending scale. A department can keep 100
percent of the first 25 percent of savings end a lesser percent-
age of any saving above that level. Westminster officials
believe that this provides an incentive for departments to save
and to avoid the year-end spending spree.5

gommenis are struggling toward a common method A similar modified approach is used by the San Diego cam-
pus of the University of California. In contrast with the highly
centralized budgetary process at most of the other UC cam-
that one author calls "budgetingfor resulis." puses, UCSD allocates by line-item but then gives greater dis-
cretion to program directors over the use of the funds. For
Dade County, Florida, has used a slmdar approach. Faced example, deans and department chairs are given "the flexibili-
with a loss of federal revenue-sharing funds in fiscal year 1986- ty to move funds more freely between line items than in the
87 and constrained by its property tax limit, the county faced .more centralized past." In addition, limitations on carrying
revenue growth of less than 1 percent for the next fiscal year. forward unexpended funds have been relaxed somewhat, sub-
That meant an across-the-board cut of about 20 percent for all ject to state-imposed restrictions. However, the university has
departments from the normal expected budget for the follow- no ability to transfer funds from the operating to the capital
ing year. At that point, the county instituted a budgetary budget, as the two are funded from different sources.6 This
approach that it called "profit sharing," in which each depart- points up a restriction that a state agency might face that a city
ment was allowed greater autonomy in managing its funds, government might not. For a state agency, the decision to use
and could retain most of a year-end balance. County officials the fuller version of decentralized budgeting would have to be
believe that the increased efficiency that resulted from the new made at the state capitol.
approach saved or generated $11 million. Like Fairfield, Dade
County also received a public administration award for its use
of the new method (Dade County News, February 8, 1988).
Budgeting for Results
Recent studies of budgeting in several industrial democra-
The city of Chandler, Arizona, has also used expenditure
cies indicate that a number of national governments are strug-
control budgeting in recent years. In Chandler, the base budget
gling toward a common method that one author calls "budget-
is adjusted annually for population growth and inflation to pro-
duce a current services budget. Department managers are ing for results." Allen Schick (1990) looked at national
budgeting in Australia, Canada, Denmark, Sweden, and
given maximum autonomy in managing their budgets, including
Britain, and from the richness of his descriptive detail, one can
carrying forward any unspent funds. Managers are expected to
pursue efficiencies that will generate savings that can be used extract several qualities that virtually all of the governmental
for future years' programs. Program managers generally are efforts have in common. In one form or another, each gov-
responsible for providing the funds to meet service levels that ernment is trying to achieve central control of total spending,
decentralization of authority to departments in the use of the
cannot be covered by the automatic annual adjustments for
funds, and enhanced accountability for results.
population and inflation. Unexpected demands on de~artmental
budgets can be handled by 'contingency fund traisfers that In response to the fiscal stress and cutbacks of the 1970s
require approval by the city manager and city council. and 1980s, the British government launched its "financial man-
Chandler city officials believe that the new way of budgeting agement initiatives" in 1982. Under this system, the cabinet
has motivated program managers to pay greater attention to pri- decides overall spending limits with Treasury advice, but then
orities and results. The city manager said that the new the Treasury loosens its control somewhat more than in the
approach saved the city over $2 million in fiscal year 1986-87.4 past, giving departments more discretion over how to use the
- -

The city of Westminster, Colorado, uses what it calls a modi- money. Within limits, each department is free to use the
fied decentralized approach to budgeting. The city council resources in the ways its managers believe will be most effi-
appropriates by line-item but then gives department managers cient and effective. For example, in 1988, the Treasury
considerable discretion to move funds from one line-item to replaced central manpower ceilings for departments with
another. In a theoretical sense, one could argue that line-item overall financial limits on administrative costs; now each
and decentralized budgeting are incompatible in that line-item department can decide on its mix of personnel and equip-
is a method of centralized control. But the relationship ment, as long as the total cost does not exceed the specified
between centralization and decentralization can be seen as a limit. However, that enhanced discretion is accompanied by
continuum, not a sharp dichotomy. The use of line-items, but increased accountability for results. In collaboration with the
with greater latitude than in the past, allows policy makers to Treasury, each department is expected to develop measures of
grant more discretion while simultaneously retaining a comfort- performance and, in fact, a recent government White Paper
able vestige of central control in case they want to reassert that listed over 1,800output and performance measures.
control later. (Knowing that you have a way to retreat can make In 1979, the Canadian federal government took a major
you more willing to advance.) Westminster has found that giv- step toward giving high-level policy makers greater control
ing department heads the ability to transfer between line items over total spending and priorities with the introduction of
provides greater flexibility for them to acquire capital equip what came to be known as "envelope budgeting." Programs
ment, to hire temporary employees, and generally to allocate were collected into broad policy sectors, or envelopes, such as
resources efficiently throughout the year. At year's end, the defense, social development, and economic development.
city council also allows departments to retain some of their The cabinet then decided on the allocation of funds to the

Entrepreneurial Budgeting: An Emerging Refonn? 447

envelopes in an effort to gain enhanced control over both
total spending and relative sectoral shares. Within their broad
allocations, officials were granted some discretion to move
funds around. Because funds for new initiatives generally had
to be found within a sector's or program's overall allocation,
managers had an incentive to delete unproductive activities so
that funds could be made available for the new initiatives
(McCaffery, 1784). In envelope budgeting, however, the
emphasis was on sectoral allocation by the cabinet, rather
than on decentralization of management and accountability for
results. Perhaps for that reason, in 1986 the Canadian govern-
ment introduced a more decentralized budgeting system called
"Increased Ministerial Authority and Accountability" (IMAA).
Although the cabinet decides on the overall budget and on the
allocation for various broad categories, such as defense and
health, departments have more "discretion over many adminis-
trative matters previously requiring central approval" (Schick,
1770, p. 27). For example, departments now have broader
authority over the reallocation of resources without Treasury
or cabinet approval. They can reallocate funds from one pro-
gram to another and can carry some unused funds into the
next fiscal year. In exchange for the enhanced discretion,
however, IMAA requires greater accountability for results.
"Memoranda of Understanding" are negotiated between the
Treasury Board and the departments. These are virtually con-
tractual relationships by which the departments receive greater
stability of resources and greater discretion in the use of those
resources in exchange for an agreement to achieve certain lev-
of performance. The departmen' set forth 'pecific
objectives in hierarchical order and indicate how they will be
measured and monitored. The Treasury Board recognizes that
quantitative measures are not always feasible, and it also sug-
gests that departments should be selective in reporting those
indicators that ministers would find the most useful in &crib-
ing the accomplishments of each program. Nonetheless,
despite those brakes, there is an unmistakable move toward
greater accountability for results.
Australia has followed a similar pattern. After decades of
highly centralized financial control in government, a 1784
White Paper on budget reform recommended greater decen-
tralization of managerial decision making and enhanced
accountability by departments. This quotation from an
A~Straliangovernment study could ~h-iosthave come from a
discussion of entrepreneurial budgeting in one of the U.S.
cities mentioned above: "More devolution of responsibility to
agencies and, within them to line managers, ~ ~ c x - Ito
- I ~be the
greatest incentive that can be provided for improved manage-
ment performance ....[Butl increased responsibility has to be
matched with increased accountability" (Schick, 1770, p. 27).
Tl~eAustralian government has done this in three ways--the
collapse of 21 line items into two, decentralization of resource
management within each department, and development of an
evaluation capacity within each department.
Like most of the other governments mentioned, Denmark
has been motivated partly by fiscal limitations. In recent years,
the government has cut the funds available to agencies, and so
it is making a special effort to increase productivity as a way to
avoid cutting services too starkly. To encourage greater prc-
ductivity, the Danish government allows agencies to keep any
savings that result from increases in productivity that exceed
448
A MajOrgoai of &centralization is to encourage the
deveoopment $a new administratiz culture in which
pogram managmseetheiro~ectiueas~'mum
achieuement with the available resources, ratherthan
asaquidng the largestpossiblebudgetfor their
programs and then spending all they get.
target levels. ~n one of the most dramatic innovations in bud-
geting in the world, it also has experimented with allowing the
employees themselves to retain some of the savings resulting
from unusually high productivity gains. The Ministry of
Finance has also tried to spur productivity by lending money to
agencies for the acquisition of new technology and by allow-
ing agencies to carry forward some unspent funds if they are
used for projects that will improve productivity.
New Zealand has also adopted a budget system that
emphasizes achievement of objectives, rather than close moni-
toring of line-item expenditures. This was part of a broad
move away from traditional government provision of services
and toward a in which many functions
were either privatized or made relatively independent of gov-
ernment control, numerous economic activities were &regu-
lated and the traditional civil service rules were loosened
(Scot; al., 1770).
In all of these countries, a major goal of decentralization is
to encourage the development of a new administrative culture
in which program managers See their objective as maximum
achievement with the available resources, rather than as
acquiring the largest possible budget for their programs and
then spending all they get. However, further research is need-
ed to determine if have been into managers,
Budgeting at the Pentagon
Recent proposals for reforming defense budgeting bear
striking resemblances to the two approaches discussed above.
In the five decades since it was created, the Defense
Department has undergone two major changes in the way
resources are allocated. In the Defense Reorganization Act of
1758, President Eisenhower and Congress uied to refom mili-
tary structure by increasing the authority of the Office of the
Secretary of Defense and reorganizing the combat commands
along regional lines. In a passage that sounds like the justifi-
cation for expenditure control budgeting in Fairfield,
California, one author says:
Eisenhower wanted to decentralize operational author-
ity and responsibility to mission and theater comrnan-
ders, because he believed that the combatant com-
manders were potentially best situated and motivated
to plan operations and to determine the size and com-
position of forces required to accomplish their
assigned combat missions, as well as to carry them out
(Thompson, 1991, p. 55).
public Adrmnistration Review .
September/Oaober 1993,Vol. 53, NO. 5
 However, the reform did not have the intended result of would have the authority to allocate funds to the combatant
increasing combat readiness, primarily because combatant commands, rather than to the uniformed senices. That would
commanders had to accept the military units the services be the centralized aspect of their scheme. From that point,
chose to supply, and the uniformed services retained full decision making would be more decentralized than it is now.
administrative control over those forces. Therefore, because The combatant commanders would use their funds to pur-
decentralization occurred in form only, the Eisenhower chase personnel and equipment from training and support
reforms merely made a very complex bureaucracy even more commands and to lease facilities and weapons systems from
complex. the private sector. Purchasing and leasing would be carried
out in a set of markets that would operate much as a private
A similar development occurred during the McNamara
economy does. Combatant commanders would bid for sup-
years. PPBS was instituted in the Defense Department by
plies and personnel; suppliers would sell their wares to the
Secretary Robert McNamara and Comptroller Charles Hitch in
highest bidder, and prices would be raised or lowered to
an effort to enhance the military's pursuit of national security
goals. Instead of organizing budgets only by inputs (e.g., per- bring demand into line with supply.
sonnel) and administrative units (e.g., the army), PPBS orga- Whether the Jones-Doyle and Gansler proposals are feasi-
nized the budget request by functions to be performed. The ble or not, their commonalities are striking. They involve cen-
system was centralized in that the goals were established by tralized priority setting, decentralized implementation, and
top-level policy makers, but it was decentralized in that lower- enhanced accountability for results. They involve some cen-
level officials were given considerable discretion in the meth- tralization in the sense of having top-level decision makers
ods that could be used to achieve the goals. McNamara said such as the President, Congress, and Joint Chiefs focus more
that he wanted to push all decisions to the lowest appropriate on policies and priorities and less on the details of micro-man-
level. In addition, the system sought to establish a clearer link agement. They involve considerable devolution of authority
between goals, performance, and rewards. Defense to line managers. Finally, they would require greater account-
comptrollers Charles Hitch and later Robert Anthony tried to ability from those line managers for the results achieved.
install "results-oriented operational budgeting." Anthony pro-
posed an accounting structure that "was firmly grounded in The timing of these proposals for defense decentralization
the principles of responsibility budgeting and accounting" may be partly a result of the fact that defense budgeting has
(Thompson 1991, p. 581.7 actually become more centralized in recent years. Defense
analyst J. Ronald Fox of the Harvard Business School believes
Although PPBS was probably more successful in the that Congress asserted greater control of the weapons acquisi-
Defense Department than in most federal agencies, many of tions process and other aspects of the defense budget after
the reforms of the McNamara period did not become fully 1970 for a series of reasons, including Vietnam, Watergate, the
operational even in Defense, partly because of the Vietnam growth of congressional staff, cost overruns, and spectacular
conflict. Various authors, however, argue that the essential incidents such as the $600 ashtray. Thus Congress saw micro-
elements of the Eisenhower-McNamara reforms should still be management "as a necessary and natural response to the
pursued. Jacques Gansler, for example, wants Congress to Defense Department's failure to manage its own affairs" (Fox,
concern itself with large policy questions such as foreign poli- 1988, p. 85).
cy goals, strategic choices, and the allocation of resources to
broad military missions. He would "restructure the budget
process so that Congress will be forced to vote on 'top-line'
dollars for the various 'mission areas' rather than on the details Common Qualities
of specific programs and projects that are clearly identified
with districts and states" (Gansler, 1989, p. 120). In his pro- Proposals for budgetary reform have emerged in the 1980s
posal, Congress would restrict itself to establishing broad poli- and 1990s for local budgeting in the United States, for defense
cy guidelines. It would delegate more authority to the budgeting, and for national budgeting in other industrial
Department of Defense to choose among weapons systems, democracies. These proposals have at least three qualities in
deploy rmlitary units, and so on. Gansler would even put an common.
end to congressional apportionment of military expenditure by
state and district as wasteful and irrational. Although it may Central Control of Goals
be politically naive to think that Congress would delegate its Entrepreneurial budgeting, mission budgeting, and budget-
authority to the degree that Gansler recommends, it is enlight-ing for results all involve some centralization, usually in two
ening to see how often decentralization of decision making in ways. First, central decision makers maintain control over the
defense budgeting is proposed. Finally, Gansler calls for more total amount of spending. Different governments may mean
real evaluation to "allow decision makers to assess the outputsdifferent things by "control of the total." A local government
realized and the accomplishments achieved against the dollars may impose a total spending ceiling of $100 million for fiscal
expended" (Gansler, 1989, p. 329). year 1993, while a national government may restrict the total
Another dramatic proposal to restructure defense spending budget increase next year to, say, 7 percent. For example, in
along the lines of mission budgeting has been offered by L. R. recent years the Swedish government has tried to limit govern-
Jones and R. B. Doyle (19891, professors of financial manage- ment spending to about 60 percent of gross national product.
ment at the Naval Postgraduate School. Under their scheme, Second, central policy makers usually decide total spending
the budget authority granted by President and Congress would for broad functions, such as health, public safety, or roads. A
be general, rather than detailed. The Joint Chiefs of Staff government may decide to allocate X percent for health, Y

Entrepreneurial Budgeting: An Emerging Reform? 449


percent for income maintenance, and so on. The central con-
trol of totals and priorities is a salient characteristic of, and no
doubt one of the major motivations for, these reform propos-
als.
Decentralization of Means
At the same time that budgeting remains or even becomes
more centralized in the above ways, it is also decentralized in
important ways. Once the overall total and the allocation to
broad functions have been decided by central policy makers,
program managers are then given considerably more discre-
tion over how they spend their money. Government man-
agers are treated more like business managers. They might be
given more discretion to move money around among line
items, such as from salaries to supplies, or to move money
from operations to capital spending. In addition, they might
be allowed to carry over a significant portion of a year-end
surplus to the next fiscal year. The literature on
entrepreneurial budgeting says that many local governments
allow program managers to carry over about 30 .to 50 percent
of their year-end "surplus" to the new fiscal year in order to
avoid the "waste" of the surplus in a year-end spending spree.
Therefore, both the chief executive and the program managers
supposedly benefit from the increased flexibility-the chief
executive by contending with less waste and the program
manager by enjoying greater discretion.
I"
latest trend!in budgeting contain
elernenk @the earlier r g o m .
performance budgeting, functional categories from program
budgeting, negotiation of objectives from management by
objectives, and ranking of objectives from zero-base budget-
ing. But there are some differences between the old reforms
and the latest ones. The latter are generally simpler, more
streamlined, and require less paperwork and analysis. They
involve more discretion by line managers than did the earlier
reforms, and there is a much greater emphasis on accountabil-
ity than under the older formats. Finally, the recent reforms
are motivated by a desire to change fundamentally the culture
of public management by turning bureaucrats into
entrepreneurs. Previous budgetary reforms pursued legality,
efficiency, and effectiveness. The present wave of budgetary
reform aims to stimulate motivbion. The new approaches
incorporate most of the goals of the previous reforms, but
they seek to achieve them through decentralized incentives
that give program managers greater authority to combine
resources as they think best but that hold the managers
accountable for the results. These two qualities are virtually a
definition of entrepreneurship.

Accountability for Results Reasons For Decentralization

of course, higher-level decision makers ask something in TO the extent that these proposals and reforms constitute a
return for the increased discretion that they give to lower-level
trend, what accounts for itl It appears that two factors are
officials. Primarily, they want greater evidence of Program particularly important: fiscal stress and the perceived
achievement, particularly efficiency. Often an almost contrac- decentralization.
of
tual agreement is negotiated between the central budget office
and the operating departments in which each department lists It is a common observation that governments throughout
and ranks its objectives, specifies indicators for measuring the the world were faced with a more difficult fiscal problem in
achievement of those objectives, and quantifies the indicators the 1970s and 1980s than in the 1950s and 1960s. This fiscal
as far as ~ossible. problem was a result of the combination of increased demand
for public services and growing taxpayer resistance to higher
Paradoxically, these new approaches all call for additional taxes, a situation that has been called the "scissors crisis" in
centralization and decentralization at the same time. At first
public finance (Tarschys, 1983). People in the industrial
glance, these two qualities might appear to be incompatible,
democracies wanted more and more government services, but
but, in fact, organizations often centralize in order to decen-
they were not always willing to pay higher taxes to fund those
tralize (Perrow, 1977). Once those at the top are confident
services. Resistance to higher taxes began at the local level in
that their goals will be pursued by those below, they are more
the United States at least as early as the 1960s, as bond issues
willing to give those subordinates greater discretion to decide
and tax overrides began to fail with greater frequency. Then
on the methods to employ. To be effective, such devolution
the big bang came in 1978 with Proposition 13 in California,
of authority must be accompanied by a clear specification of
followed by similar measures in other states. The slowdown
goals, authority, and responsibilities. Decentralization requires
in economic growth after 1970 exacerbated the problem. This
prior clarification of the purpose of each administrative unit,
fiscal stress prompted adaptive behavior by governments,
procedures for setting objectives and for monitoring and
including more privatization, contracting out, increased user
rewarding performance, and a control structure that links each
fees, and an array of other devices either to make government
unit to the goals of the organization as a whole. That is, provision of services more efficient or to shift the burden for
incentives are specified in advance in order to entice members
to behave in ways consistent with the goals of the larger orga- the financing of those services. Virtually every account of the
decentralized approach to budgeting at the local level men-
nization. Thus devolution comes at a price, namely some
assurance that the units will efficiently pursue the goals of the tions fiscal stress as a major reason for its adoption (for exam-
larger organization. Hence centralization and decentralization ple, Osborne and Gaebler, 1992, pp. 2, 119-120). The fiscal
can go together.8 stress brought on by the combination of slower economic
growth, taxpayer resistance, and ever-increasing demand for
Clearly, the latest trends in budgeting contain elements of public services is also given as a major reason for the move to
the earlier reforms. They contain performance measures from budgeting for results by industrialized countries (Schick, 1990,

450 Public Adminkbation Review r September/October 1993,Vol. 53,No. 5

 are based explicitly on that literature. Citing William
The computem'zationofaccounting has made it Niskanen, Robert Anthony, Frederick Mosher, and other schol-
ars of organization, Thompson (1991) emphasizes the irnpor-
tance of a clear definition of purpose, devolution of decision
possible for central bLu&et offies to exercise greater making about means, and close accountability through
responsibility budgeting and accounting. Indeed, he argues
cmhd control w the Aetails of$mdirg thanpreuhsly. that: "It has been demonstrated to the satisfaction of most stu-
dents of management that the effectiveness of large, complex
pp. 26, 29, 30). The cutbacks that are impending in the 1990s organizations improves when authority is delegated down into
are also given by Thompson and other analysts as a reason for the organization along with responsibility" (p. 53). Although
reviving and refining the proposals for decentralization of the explicitness of the relationship between organization liter-
defense budgeting (Thompson, 1991, p. 64). If the decentral- ature and the decision to propose decentralized budgeting
ized approach has not attracted more support within the fed- varies by individual, most of the participants seem to be aware
eral government to this point, perhaps it is partly because, of the connection.
unlike localities, the federal government can run a deficit and This is not to say that the trend described above has been
hence does not face the same fiscal discipline as do local gov- universal. Robert D. Lee's (1991) study of developments in
ernments. state budgeting over the past 20 years suggests that two of the
One adaptation to fiscal stress was for policy makers to three qualities discussed above have become more prominent
take greater control of total spending in order to retard incre- at the state level, but not necessarily the third. He found that
mental budget growth at the same time that they gave pro- state policy makers and central budget officers had increased
gram managers greater discretion in the detailed use of the their control of goals and limits. Compared to 1970, they are
funds. In fact, to the extent that they get a firmer grip on total now more apt to specify priorities and dollar ceilings and to
amounts, policy makers are often willing to grant greater dis- provide other forms of policy guidance in telling agencies
cretion. They hope that the decentralization and more inten- how to prepare their budget requests. This is consistent with
sive accountability will lead to greater efficiency and effective- our point about the centralization of goals. Likewise, they are
ness with the funds available. It is not an accident that these now far more likely to require agencies to provide measures
techniques emerged soon after the beginning of the taxpayer of productivity and effectiveness either in their budget
revolt in the late 1970s. requests or in subsequent documents. The proportion of state
governments that required such data rose dramatically from
A second source of the budget reforms is the accumulating about 25 percent in 1970 to about 90 percent in 1990. This is
body of knowledge on the virtues of decentralized organiza- consistent with our point about the movement toward greater
tion. The literature on organizations suggests a model of accountability of agencies for achieving results with the funds
behavior something like this: If policy makers want an organi- that they receive.
zation to pursue the policy-makers' goals efficiently, they
should clearly specify the goals, and perhaps even involve However, the computerization of accounting has made it
subordinates in the setting of those goals. They should then possible for central budget offices to exercise greater central
create a structure of incentives that will motivate subordinates control over the details of spending than previously. Lee
to pursue those goals but give them a high degree of autono- found that the proportion of states in which the central budget
my in the choice of methods. In a mutually reinforcing way, office exercised control over the transfer of funds from one
this will allow workers to exercise their creativity, which will major object of expenditure to another (such as from supplies
give them more satisfaction, thereby making them more pro- to personnel) rose slightly from 59 percent in 1970 to 72 per-
ductive, and allow them to generate better solutions to the cent in 1990, and the number of budget offices that exercised
problems that they face because they are closer to the prob- control over transfer of funds from one minor object to anoth-
lem and probably have better information about it. At the er (e.g., from office supplies to painting) rose from 10 to 20
same time, the delegation of authority will leave those at the percent. While these figures run against any alleged trend
top more time to think about goals and to monitor perfor- toward decentralization of the means of administration, they
mance. are perhaps not very large increases in actual control in light
of the greater capacity for control provided by the computeri-
The recent reforms of budgeting appear to be firmly zation of accounting. It can, therefore, be said that-with the
grounded in the research on decentralization. The local man- exception mentioned here-state governments have also
agers emphasize incentives, participation, creativity, and other moved in the same direction as the local and national govern-
qualities that the research mentions as alleged virtues of ments.
decentralized management. Likewise, the budget leaders in
the other industrial democracies base the recent reforms on
organization theory. Although Schick does not explicitly
address the question of the intellectual foundations of the lat- Conclusion
est reforms, it is clear that the reforms are an outgrowth of This article has examined an approach to budgeting that
research on organization theory, and specifically on an analy- uses decentralized incentives as a way to stimulate
sis of the virtues of decentralization. Because the proposals entrepreneurial behavior by public administrators. After top
for mission budgeting at the Pentagon are made by scholars policy makers have established their overall control through
who are familiar with the literature on organization theory and broad guidelines, the new methods decentralize decision mak-
institutional economics, it is not surprising that their arguments ing by providing agency managers with incentives to be both

Entrepreneurial Budgeting: An Emerging Reform? 451

efficient and effective. In addition, the new methods aim to
make administrators more accountable for the results of their
decisions by monitoring actual performance more than in the
IThe k r e e to zuh, the e ~ r refom
b w e

I
past. The goal is to motivate -managers to behave more in
harmony with the purposes of the overall organization and to
rgected may haue been o-ted. A r m t study
lessen the "suboptimization" that often characterizes public
programs. Ultimately, a goal is to change the culture of public IhdiCatedthata m a j o v o f m u n i C z ( p a l g o ~ ~ ~

I
management.
If it is true, as Wildavsky (1978) has argued, that the tradi- continue to use most ofthe toots created in recentyears
tional budget has lasted because it is workable and because it
fulfills various functions for policy makers, it is also true that .forincreain~e f f ~ k y ~
the traditional budget has persistently come under attack.10
esced in the cuts because they were given greater discretion in
The fact that reforms are so regularly tried (about one each
the use of the remaining funds). The alleged savings may be
decade since the 1950s) suggests that something was wrong
real, but further research is needed to test the claims. A relat-
with traditional budgeting. Although budgetary reforms are
ed problem is that the available descriptions of the reforms
often oversold and do not perform up to their advance billing,
generally do not provide data in forms that allow a clear cal-
they almost always leave their mark. In fact, the degree to
culation of the magnitude of the savings even if we could
which the earlier reforms were rejected may have been over-
agree on the meaning of the term. For example, in addition
stated. A recent study indicated that a majority of municipal
to being told that a city's departments spent $6 million less
governments continue to use most of the tools created in
than they were appropriated, we need to know how many
recent years for increasing efficiency. For example, 75 percent
use performance monitoring, 70 percent still use program bud- years are covered by this figure, what the total budgeted
amounts were (so percentage savings can be calculated), and
geting at least to some degree, and over 30 percent even use
so on. Moreover, the fact that entrepreneurial budgeting at
elements of zero-base budgeting (Poister and Streib, 1989).
the local level has been used mainly by relatively small gov-
Moreover, the decentralized approach is in harmony with the
ernments raises the question of its applicability to larger cities
near consensus in management theory today-that a certain
and states. However, the fact that several national govern-
kind of decentralized organization can be efficient, account-
ments are using a simiiar approach takes some of the thrust
able, and satisfying to workers. For these reasons, it seems
out of this criticism. Logically, entrepreneurial budgeting
likely that this emerging trend will have a lasting effect on
should be even more appropriate for large and complex orga-
budgeting, even if it does not transform the budgetary process
as much as its advocates hope. nizations than for small and simple ones precisely because, in
decentralizing the middle step (implementation), it makes the
However, a number of cautions should be noted. first and,third steps (goal setting and monitoring) more man-
Proposed reforms have almost always followed a pattern ageable for policy makers. Moreover, if this approach to bud-
characterized by initial enthusiasm and subsequent disap- geting is well grounded in organization theory, it should stand
pointment, for at least two reasons. First, the reforms are a good chance of being relatively successful. However,
often difficult to put into practice. Entrepreneurial budgeting enthusiasts should keep in mind the checkered history of
is similar in various ways to performance budgeting, pro- those earlier reforms.
gram budgeting, management by objectives, and zero-base
budgeting. For example, it requires measures of perfor- In addition there is the question of whether decentraliza-
mance and outcomes that are not always easy to construct tion is actually dangerous. Theodore Lowi (1979) is con-
for government programs. However, entrepreneurial budget- cerned about the proclivity of policy makers in the United
ing is simpler than the earlier reforms, and, in fact, that is States to delegate too much vague authority to administrators
one of its attractions for policy makers. In addition, consid- and to interest groups without clear indication of what they
erable progress has been made in the construction of perfor- are authorized to do. With regard to the enormous delegation
mance measures, and it is possible that evaluation of pro- of authority granted by federal statutes since the 1930s, Lowi
grams can be done better today than in earlier decades. In warned that "Delegation of power ...turned out to be ...a gift of
any case, Lee's (1991) study of state budget developments sovereignty to private satrapies" (also M c C O M ~1967).
~ ~ , It is
shows that far more governments are conducting efficiency conceivable that entrepreneurial budgeting might beguile poli-
and effectiveness studies today than 20 years ago (also see cy makers into abdicating responsibility to bureaucrats for the
Osborne and Gaebler, 1992; and Hatry et al., 1990). making of public policy. Even if they grant more discretion to
administrators, policy makers must still decide on relative pri-
A second reason for eventual disappointment is that orities, specify &ha; they want accomplished with the fuAds,
reforms sometimes fail to make any substantive difference in and develop measures of the results. In short, policy makers
resource allocation or program performance. In this regard, must be careful that in delegating more authority to adminis-
many of the claims by local governments of greater efficiency trators to decide how to pursue goals, they do not inadvertent-
and effectiveness from decentralized budgeting so far are ly delegate decisions about what goals to pursue. However,
vague and difficult to assess. Managers claim "savings" of vari- as Lowi points out, it is possible to delegate authority in ways
ous amounts, but it is seldom clear what they mean. They are that do not relinquish authority. A strong and clear rule has
truly savings only if efficiency is enhanced or if the new both centralizing and decentralizing effects; it centralizes
method allowed cuts that otherwise were not feasible to make authority in the hands of policy makers but decentralizes the
(for example, managers and their interest group clients acqui- implementation within clear guidelines for the use of the

452 Public Admh&ation Review September/October 1993,Vol. 53, NO. 5

authority. Like Lowi's "juridical democracy," the proposals
described here could give policy makers more control of over-
all policy direction while delegating more of the details of
implementation to administrators. By relieving policy makers
of the burden of detailed scrutiny of the process by which
program goals are achieved, decentralized budgeting could
allow them more time to devote to the .goals themselves.
Thus entrepreneurial budgeting, and decentralized manage-
ment in general, can lead to an expansion of power, rather
than to a redistribution of power. If entrepreneurial budgeting
works as claimed, policy makers should have more of the
power that is relevant to their task and subordinates should
also have more power to do their jobs. In short, it could
enhance governmental capacity, rather than redistribute gov-
ernmental authority. Of course, unless superiors specify what
activities are acceptable, subordinates may become too "cre-
ative" in their entrepreneurship. A few years ago, for exam-
ple, California policy makers believed that the state's comrnu-
nity colleges demonstrated excessive creativity in thinking of
new ways to attract additional state funds (Cothran, 1981 and
1986).
As was m e of the earlier budget reforms, this latest one is
not likely to be the salvation of modern government as it
struggles to provide the benefits that people expect while
staying within the fiscal restraints that voters have imposed.
However, this reform may have even more effect than the oth-
ers because it actually involves less, not more, work by most
participants and it is in keeping with the findings of research
on organizational behavior in recent decades. If it fails, it
probably will not do much damage, but if it succeeds, it could
contribute to the creation of a new entrepreneurial manage-
ment culture in public administration.
The budget reforms are part of a larger managerial revolu-
tion that includes such techniques as management by objec-
tives, management information systems, performance monitor-
ing, program evaluation, total quality management, and others.
A consensus seems to be emerging among scholars of organi-
zation about what constitutes good management. For exam-
ple, in their analysis of 70 studies of the use of management by
objectives, Rodgers and Hunter (1992) found that MBO-type
processes have become more widely used in both government
and business and that they have almost always had a positive
effect on productivity when supported by top management.
What we have called entrepreneurial budgeting bears a striking
resemblance to MBO. The latter usually comprises three p r e
cessesparticipatory decision making, goal setting, and objec-
tive feedback (Rodgers and Hunter, 1992), which are very sirni-
lar to the three components of entrepreneurial budgeting. In
turn, both MBO and entrepreneurial budgeting are similar to
"total quality management," especially as modified for use in
government (Swiss, 1992).
Notes
The author thanks Fred Thompson, Glenn Phelps, Jane Juarez, and several
anonymous referees for very helpful suggestions on this article.
1. While the arrangement by decade makes a neater presentation and is
approximately correct, the actual dates are not so orderly. For example,
performance budgeting was proposed long before the 1950s, Proposition
13 was enacted in 1978, and the attempt to enact a balanced budget
amendment continued at least until its defeat in Congress in 1992.
Entrepreneurial Budgeting: An Emerging Refom?
This managerial revolution seems to be part of a larger
institutional transformation sweeping the world, a revolution
of decentralization that includes the movement for choice in
education, devolution of power to Indian tribes," contracting
out by local governments, privatization in Latin America, and
even the decommunization of Eastern Europe. A major
implication of these changes is that institutions characterized
by overly centralized decision making and lack of account-
ability for socially useful results do not work very well.
These budgetary proposals can thus be seen as manifesta-
tions of a larger institutional revolution that has occurred in
recent years. It is obvious that the "market" as a device for
allocating resources has experienced a resurgence. After
decades of movement toward centralized decision making as
a way to allocate resources, governments in the United States
and other countries are now contracting out services or pri-
vatizing public enterprises as never before. Whether one is
as enthusiastic about this trend as its most zealous advocates
(for example, Savas, 1987), the indisputable fact is that the
use of market-like incentives has enjoyed a notable revival in
recent years. Indeed, the return of largely centralized
economies back to more decentralized arrangements is one
of the great political-economic transformations of the late
20th century. Although Eastern Europe and the former Soviet
Union have received the most attention, other areas of the
world such as Latin America are also caught up in the enthu-
siasm for the market and for decentralization in general.
Mexico, for example, reduced the number of its state-owned
enterprises from about 1,200 in 1982 to about 300 by 1992.
A similar trend toward decentralized incentives can be seen
in business in the United States, where the idea of managers
and workers personally gaining some of the benefits of their
increased productivity is currently very much in favor. In
fact, some business analysts are predicting that "gainsharing"
as a way to improve productivity will become one of the
fastest growing business strategies in the country in the
1990s (Graham-Moore and Ross 1990). The trend toward
decentralized decision making and incentives is, therefore,
spread across a number of countries and institutions. In
budgeting as in political economy in general, this might be
'called the "age of incentives."
Dan A. Cothran is professor of political science at
Northern Arizona University in Flagstaff, Arizona. His
research interests include public budgeting and finance,
comparative public policies, and political democratization.
He has published articles in such journals as Public
Budgeting and Finance, Policy Studies Review, and Western
Political Quarterly. He is currently working on research on
Arizona public finance and on democratization in Mexico.
2. In addition to a survey of recent literature on budgeting, for this section I
communicated with 20 local governments that were mentioned in the lit-
erature as having instituted decentralized budgeting.
3. David Creighton, city of Fairfield, letter to author, November 8, 19%.
4. Pat Walker, city of Chandler, telephone interview with author, April 22,
1991.
5. Alan Milla; aty of Wesfminter, Colorado, lecter to author, November 26,1330.
6. Robert Brents, University of California at San Diego, letter to author,
November 20,1990.
7. Here Thompson draws upon Anthony (1962) and Anthony and Young
(1988).
8. Incentives stated in advance should not be confused with controls put in
place in advance, or ex ante. For a more elaborate discussion of ex ante
controls and when they are appropriate, see Thompson and Jones 0986).
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