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GG 17
Create Budget Incentives for State Agencies


State agencies often spend the remainder of their budgets at the end of each fiscal year simply to avoid losing the money and undergoing budget reductions in the next appropriations cycle. Some governments, however, have changed their budgeting processes to discourage this practice, allowing agencies to carry forward some or all of their remaining funds into the next fiscal year. Texas should adopt a program that allows agencies to retain a portion of any remaining general revenue they have in their budgets at the end of each fiscal year.


Texas’ current budgeting process can encourage state agencies to waste money. Agencies fear the “use it or lose it” phenomenon. If they don’t use all of their appropriations by the end of the fiscal year, the remaining funds “lapse”—they must be returned to the fund from which they were appropriated. Furthermore, lapsed funds may lead the Legislature to conclude that these agencies have more funding than they need, and reduce their subsequent budgets accordingly.

This pattern encourages agencies to spend their remaining appropriations at the end of each fiscal year simply to avoid future budget cuts. An analysis of state agency spending from fiscal year 1998 to fiscal year 2002 showed a significant increase in spending during August, the last month of the fiscal year. Agency spending increased an average of 57 percent from July to August. The next largest fluctuation was a 15 percent decrease from October to November (Exhibit 1).

Exhibit 1
Average Percent Change in Agency Spending from the Previous Month
Fiscal Years 1998-2002

Source: Comptroller of Public Accounts.

In response to these concerns, some U.S. jurisdictions have adopted alternative budgeting processes. To give agency managers more discretion over their spending, the number of line items in a budget are reduced or eliminated altogether, and departments are allowed to carry over a portion or all of their savings to the next fiscal year. In this manner, agencies that can generate savings are not penalized by having their budgets reduced in the following year.

One such jurisdiction, Visalia, California, used this method to save millions of dollars at a time when other California cities were enduring a fiscal crisis.[1] Another city, Sandy, Oregon, carries over about 15 percent of its budget each year.[2]

In 1997, Washington state adopted a savings incentive program to promote agency efficiency and support its public schools. At the end of each fiscal year, agencies may keep half of their unspent general revenue funds, except funds related to caseloads in entitlement programs or enrollment in higher education institutions, as “incentive” savings. The other half of the general revenue savings, as well as the funds related to caseloads and enrollment, are placed in an education savings account that supports public school construction, school technology and higher education. From 1997 to 2001, Washington state saved $207.6 million through this incentive program, with $22.1 million allocated to agencies and $185.5 million going to the education savings account (Exhibit 2).[3]

Exhibit 2
Allocations from the Washington Savings Incentive Program

Fiscal Year Allocations to Agencies ($M) Education Savings Account ($M) Total ($M)
1997 $ 7.2 $ 54.5 $ 61.7
1998 $ 3.8 $ 38.4 $ 42.2
1999 $ 4.9 $ 50.3 $ 55.2
2000 $ 2.2 $ 23.1 $ 25.3
2001 $ 4.0 $ 19.2 $ 23.2
Total $ 22.1 $ 185.5 $ 207.6
Source: State of Washington, Office of Financial Management..

Washington state agencies are allowed to spend their incentive savings on any one-time expenditure that will improve the quality, efficiency and effectiveness of its customer service. The funds may not be used to create new or expanded services. Incentive savings do not lapse and may be carried forward indefinitely. Agencies have spent these funds on employee training, technology improvements, improved work processes, employee incentives and the development of performance measures (Exhibit 3).

Exhibit 3
Selected Washington State
Incentive Savings Expenditures

Expenditure Category Example
Employee Training
  • Governor's office provided staff training to improve customer service skills and expand expertise in child welfare issues.
  • Public Employment Relations Commission provided a hearing examiner training course on conducting adjudicative hearings/proceedings.
  • Department of Social and Health Service trained 75 employees to lead and facilitate quality improvement teams.
Technology Improvements
  • Senate upgraded outdated computers.
  • Office of Financial Management upgraded the fire protection system in its computer room.
  • Newborn Screening Program replaced outdated equipment with automated equipment to perform and track over 300,000 tests each year.
Improved Work Processes
  • Office of the Family and Children's Ombudsman produced a report on the foster care system and how it might be improved.
  • Secretary of State produced a state primary voter's pamphlet with information on all candidates running in a primary.
  • Department of Veterans Affairs purchased voice recognition equipment to eliminate the transcription step in documenting resident evaluation and treatment in medical records.
Employee Incentives
  • Department of Agriculture provided recognition awards for employees who participated in process improvement teams.
  • Commission on Asian Pacific American Affairs gave employee recognition awards.
  • Department of Ecology provided van pool subsidies for 50 employees who commute to remote offices.
Performance Measures
  • Department of Labor funded a marketing campaign to increase apprenticeships by 5 percent.
  • Department of Social and Health Service funded planning and program development to build scholarship support for a high school.
  • Community and Technical College System participated in a U.S. Department of Education demonstration for student financial aid.

Source: Washington Office of Financial Management..

The key to all such programs is to reward rather than punish agencies for greater efficiency. While this may seem obvious, at least one recent example suggests that the lesson is not thoroughly understood. South Carolina’s legislature allowed agency executives to carry forward any unspent funds from fiscal 2001 to fiscal 2002, allowing them to treat their budgets as a two-year budget rather than a single-year budget. This move allowed state agencies to carry forward $46 million into 2002. When the state faced a deficit of $133 million in fiscal 2002, however, the legislature chose to use the money agencies had saved to help reduce the deficit, effectively eliminating the agencies’ incentive to seek greater efficiencies.[4]

Texas Productivity Bonus Program

Texas had a Productivity Bonus Program (PBP) from 1992 until it was abolished through Sunset legislation in 1999. PBP was an incentive program intended to encourage employees working in teams or agencies as a whole to develop plans to reduce agency costs without affecting service quality.

Agencies submitted these productivity plans to the Productivity Bonus Commission, later renamed the Texas Incentive and Productivity Commission (TIPC). The commission traced savings based on the plans and split them among the originating fund (37.5 percent), TIPC (25 percent), the agency (18.75 percent) and eligible employees (18.75 percent).[5] The program saved more than $50 million before its abolition. Of that total, however, $38 million was generated in the first year. Participation declined sharply thereafter, and savings in each of the program’s last three years amounted to less than $1 million annually.[6]

The decline of participation in PBP can be attributed to a number of issues. Agencies received a relatively small portion of the savings they achieved, for instance, and the difficulty of the savings transfer process (which involved considerable paperwork and multiple transfers between the agency and the Comptroller’s office) discouraged some from participating.[7] Moreover, it should be noted that 67 percent of the savings reported to PBP were attributable to delayed hiring rather than increased efficiencies or creative ideas for saving money.


Create a savings incentive program for state agencies.

State agencies should be appropriated half of any general revenue they are able to save in the course of a fiscal year, up to 1 percent of their general revenue funding. For example, an agency that receives $20 million in general revenue and saves $500,000 would be eligible to receive $200,000 rather than $250,000. This requirement would help prevent agencies that receive unexpected windfalls from keeping savings not due to agency efficiencies.

The remaining funds would lapse to the General Revenue Fund as they do now. Other types of funds, such as general revenue-dedicated and federal funds, would not be considered for this program.

Agencies should be allowed to spend their incentive savings on any one-time activity or expense that does not create new or expanded services or require ongoing funding at a later date. This would give agencies adequate flexibility in using their funds and provide them with an incentive to become more efficient.

Fiscal Impact

The fiscal impact of this recommendation would depend upon future events and cannot be estimated. Over the past five years, individual Texas state agencies have lapsed up to a total of $300 million to the General Revenue Fund (excluding the Texas Education Agency’s appropriation for the Foundation School Program).


[1]David Osborne and Ted Gaebler, Reinventing Government (Reading, Massachusetts: Addison-Wesley Publishing Company, 1992), p. 4.

[2]E-mail from Scott Lazenby, city manager, Sandy, Oregon, October 23, 2001.

[3]Office of Financial Management, State of Washington, Savings Incentive Account during Fiscal Year 2000: Report of Expenditures (Olympia, Washington, December 1999), Exhibit 1,

[4]Robert D. Behn, “Punishing Efficiency,” (September 3, 2001),

[5]Sunset Advisory Commission, Texas Incentive and Productivity Commission Staff Report (Austin, Texas, 1998), p.7.

[6]Sunset Advisory Commission, Texas Incentive and Productivity Commission Staff Report, p. 9.

[7]Sunset Advisory Commission, Texas Incentive and Productivity Commission Staff Report, p. 10.