This article explores how Zero-Based Budgeting (ZBB) could streamline federal agencies, reduce inefficiencies, and enhance accountability. The U.S. Securities and Exchange Commission (SEC) serves as an illustration, showcasing how ZBB can be applied throughout government agencies to update their practices and emphasize crucial functions.
Table of Contents
I. Introduction: The Administrative State Under Scrutiny
II. The Case for Zero-Based Budgeting (ZBB)
III. Illustrating ZBB at the SEC
A. Step 1: Starting from Zero
B. Step 2: Justifying Every Expense
C. Step 3: Prioritizing Mission-Critical Functions
D. Challenges of Applying ZBB to the SEC
E. The Ripple Effect: A New Era of Accountability
IV. What Congress Can Do: Implementing ZBB Across Government Agencies
V. Appendix: 20-Step Process for Federal Agencies to Satisfy Zero-Based Budgeting (ZBB) Requirements
VI. Notes and Citations
About the author: Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.
Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.
I. Introduction: The Administrative State Under Scrutiny
The administrative state encompasses the system of federal agencies, commissions, and regulatory bodies responsible for executing government operations and upholding laws. Over the past century, this state has grown significantly, especially during periods like the New Deal and the creation of agencies such as the SEC. Initially designed to address complex social and economic challenges, the expansion of these agencies has led to concerns about inefficiency, lack of accountability, and regulatory overreach.
As the administrative state has grown, so too have the challenges it poses. Federal agencies wield significant power, often operating with little oversight, leading to concerns about bureaucratic inefficiency and regulatory capture, where agencies become too aligned with the industries they regulate. This can result in ineffective enforcement and policies prioritizing industry interests over public welfare. Additionally, the overlapping functions of different agencies have led to redundancies and inefficiencies, contributing to rising costs and a lack of coordination across the government.
For Americans, this means they may perceive their government as distant and unresponsive, burdened by numerous regulations and intricate processes. Reformers argue a substantial restructuring of the current administrative system is necessary to improve its service to the public. One proposed solution is Zero-Based Budgeting (ZBB), which forces agencies to justify every dollar they spend. By starting from a "zero base" each year, ZBB aims to cut inefficiencies, eliminate redundancies, and restore accountability to the federal government. This article will explore how ZBB could help reshape the administrative state and bring much-needed reform to its operations.
II. The Case for Zero-Based Budgeting (ZBB)
Zero-Based Budgeting (ZBB) is an approach to budgeting where every expense for the upcoming fiscal period must be justified by each federal agency starting from scratch, instead of relying on the previous year's budget as a reference point. In this approach, no department or program automatically receives funding based on past allocations.Instead, every department starts from a "zero base," necessitating thorough justification of all expenses. This forces agencies to evaluate the necessity, cost-effectiveness, and alignment of their programs with the agency’s mission, eliminating inefficiencies and focusing resources on the most critical functions.
The implementation of ZBB across the federal government could fundamentally change how agencies manage their resources. Under traditional budgeting methods, many agencies experience incremental increases in their budget year after year, without a thorough re-examination of whether their programs are still necessary or effective. ZBB directly addresses this problem by requiring each program to justify its existence on an annual basis. This encourages agencies to review their entire portfolio of programs and eliminate outdated, redundant, or low-performing initiatives.
Additionally, ZBB fosters more strategic decision-making within agencies. By necessitating departments to assess and prioritize their programs, resources can be reallocated from less crucial activities to projects providing the most value to the public. This process also promotes greater transparency, as agencies must clearly articulate the purpose of their spending and how it contributes to their overall mission.
ZBB also enables the federal government to identify overlapping functions between different agencies. For instance, multiple agencies may conduct similar research, offer comparable services, or regulate overlapping industries. By using ZBB, the government can better coordinate efforts, eliminate redundancy, and consolidate functions where appropriate. Moreover, ZBB adds an extra level of external supervision by involving entities such as the Office of Management and Budget (OMB) and Special Inspector Generals (SIGs), ensuring agencies adhere to their ZBB strategies and identify and remove any unnecessary expenditures.
This budgeting method offers the potential for significant cost savings across the federal government, while also improving the effectiveness and accountability of federal programs. Implementing ZBB requires a fundamental shift in how agencies think about their operations, but its benefits in fostering fiscal discipline and eliminating inefficiencies make it a powerful tool for modernizing the federal budget process.
III. Illustrating ZBB at the SEC
(This section is an illustrative example showing how Zero-Based Budgeting (ZBB) could be implemented at a federal agency like the SEC. People's names are fictional, and the departments and their functions are summarized from publicly available information.)
In this section, we will use the Securities and Exchange Commission (SEC) as a case study to demonstrate how ZBB might be applied in practice. The example seeks to illustrate the process and challenges that can arise when implementing Zero-Based Budgeting (ZBB) within a real agency setting.
A. Step 1: Starting from Zero
Kerry Kensler, the chair of the SEC, knew this process would be difficult. His agency had weathered decades of financial crises, regulatory overhauls, and market evolution. The SEC had developed many new offices to respond to emerging challenges, but not all were still relevant. The Zero-Based Budgeting process required every department to begin from scratch, demonstrating its worth in order to validate its budget.
Kensler called a meeting of his division heads to discuss the new budgeting rules. "This is going to be a major shift," he said, addressing the room. "Every program, every initiative—whether it's 30 years old or brand new—needs to be justified. And if something is already being done by another agency, we will need to eliminate the overlap. The days of automatic budget increases are over." He also emphasized to them their proposals would undergo independent review by the OMB and the Special Inspector General, increasing the pressure to justify every dollar.
Some division heads were nervous, while others saw this as an opportunity to prove the value of their work. The Division of Enforcement, tasked with investigating and prosecuting securities fraud, was confident in its ability to demonstrate the critical role it played in protecting investors. Nevertheless, certain departments, particularly those engaged in outdated, specialized regulations rendered obsolete by advancements in technology, encountered a sense of unpredictability.
B. Step 2: Justifying Every Expense
The SEC's leadership began the task of reviewing the budget, division by division. One of the first areas of concern was the Division of Corporation Finance, which oversees corporate disclosures of important information to the investing public. Over the years, certain disclosures had become standardized, and the division needed to justify whether its expansive structure still aligned with its original mission. Kensler and his team questioned whether more could be done to streamline these reviews, particularly in light of technological advancements.
Meanwhile, the Division of Trading and Markets, responsible for regulating securities market participants like broker-dealers and exchanges, faced similar scrutiny. The rise of algorithmic trading and decentralized finance (DeFi) platforms had drastically changed the landscape of market regulation. The division was tasked with justifying whether its traditional methods of oversight were still relevant or whether new regulatory approaches were needed.
Another critical division, the Division of Investment Management, which oversees investment companies and advisers, also faced budgetary scrutiny. With the rise of fintech and robo-advisors, the division needed to re-evaluate how it could regulate these newer market players while maintaining oversight of traditional asset managers.
The Division of Examinations (formerly the Office of Compliance Inspections and Examinations (OCIE)), which conducts examinations of entities under SEC jurisdiction, had been flagged for potentially overlapping with external auditors, particularly in areas where compliance checks could be redundant. During the ZBB review, the division justified its role by highlighting how its examinations had uncovered significant non-compliance in specific cases, but some of its functions were recommended for consolidation with external bodies like the Public Company Accounting Oversight Board (PCAOB).
At the same time, Kensler focused on areas where funding was essential. The Division of Enforcement made a compelling case for expanding its resources. Due to the increasing complexity of financial crimes, particularly with the emergence of cryptocurrency and digital trading platforms, the Enforcement Division advocated for investing in advanced investigative tools and cybersecurity professionals to enhance detection capabilities. This instance clearly demonstrated how ZBB not only reduced expenses but also enabled Kensler to redistribute funds to enhance investor protection and uphold market integrity.
C. Step 3: Prioritizing Mission-Critical Functions
Once the individual divisions had justified their expenses, the next step in the ZBB process was to prioritize mission-critical functions. Kensler and his leadership team were tasked with evaluating which of the SEC's core functions were absolutely necessary to fulfill the agency's mission and which were ancillary or outdated.
In this phase, the SEC leadership identified key areas, such as enforcement and corporate disclosures, as essential to investor protection. On the contrary, they discovered some functions, such as monitoring particular niche markets, could be reduced or combined with other regulatory entities. By prioritizing the sectors where the SEC made the most significant difference, resources were reallocated from less important tasks to projects directly improving market transparency and fairness.
D. Challenges of Applying ZBB to the SEC
Implementing ZBB across the SEC was not without its challenges. The bureaucratic resistance was palpable, as many career regulators feared losing influence or seeing their departments downsized. Long-established programs, integral to the SEC's regulatory framework for many years, were compelled to justify their significance in a swiftly evolving financial landscape.
Additionally, the time and resource-intensive nature of ZBB created significant strain. Every division had to compile detailed justifications, requiring months of research and evaluation. The process also revealed some areas where the SEC’s reliance on historical budgetary decisions had allowed inefficiencies to grow unchecked. For example, certain technology initiatives had been funded year after year without any assessment of their actual effectiveness.
Despite these challenges, the ZBB process created an unprecedented level of transparency. Congress and the public now had a clearer view of how the SEC was using taxpayer dollars, and the agency itself was forced to become more introspective about its true priorities. The comparisons to other agencies like the PCAOB and MSRB, along with the oversight by the OMB and the Special IG, helped highlight areas where the SEC could consolidate functions, reducing duplication and saving taxpayer dollars.
E. The Ripple Effect: A New Era of Accountability
The successful implementation of ZBB at the SEC set the stage for broader reform across the administrative state. Other agencies, from the Environmental Protection Agency (EPA) to the Department of Energy (DOE), began adopting ZBB to ensure their budgets aligned with their core missions. ZBB has been instrumental in revealing inefficiencies, removing redundant programs, and allocating funds to projects truly benefiting the public.
At the SEC, the benefits were clear. The agency not only saved millions by discontinuing outdated programs but also redirected funds into crucial areas, enhancing market safety and transparency.The procedure reinstated confidence in the SEC among the public, proving the ability of even a sizable and influential organization to evolve and enhance its transparency.
IV. What Congress Can Do: Implementing ZBB Across Government Agencies
The example of the Securities and Exchange Commission (SEC) offers a clear demonstration of how Zero-Based Budgeting (ZBB) could work in practice, but the responsibility to reduce inefficiency in the federal government lies with Congress. Congress plays a crucial role in expanding ZBB implementation throughout all government agencies, guaranteeing a more streamlined and effective operation of the administrative state. Here are specific steps Congress can take to implement ZBB across the federal bureaucracy:
1. Legislation Mandating ZBB Implementation: Congress has the ability to enact a thorough budget reform act mandating federal agencies to implement Zero-Based Budgeting. This legislation would direct agencies to justify every line item in their budget, starting from a "zero base" each year. By making ZBB a legal requirement, agencies would be held accountable for identifying inefficiencies, eliminating redundant programs, and prioritizing essential functions.
2. OMB and Special IG Oversight: Congress could establish additional layers of oversight by enhancing the role of the Office of Management and Budget (OMB) and creating a Special Inspector General (SIG) to audit agencies’ ZBB proposals. These independent entities would review each agency's budget to verify compliance with ZBB principles, ensuring all expenses are justified and eliminating any duplication with other agencies. This external oversight would increase transparency and prevent agencies from manipulating the process.
3. Pilot Programs for High-Impact Agencies: Congress could identify a select number of high-impact agencies to pilot ZBB reforms. Agencies such as the Department of Defense (DoD), Department of Health and Human Services (HHS), and the Internal Revenue Service (IRS), which have been criticized for inefficiency and budgetary bloat, could be ideal candidates for early ZBB implementation. These pilots would demonstrate the benefits of ZBB on a broader scale, paving the way for adoption across the entire federal government.
4. Reporting Requirements: Congress could require agencies to report their ZBB results annually, detailing how funds were reallocated, programs were consolidated or eliminated, and efficiency gains were achieved. This would provide a public record of success or failure in implementing ZBB, holding agencies accountable for following through on reform efforts.
5. Incentivizing Agency Leadership: Congress could also incentivize federal agency leaders to embrace ZBB reforms by offering performance-based incentives. By tying budgetary efficiency to rewards such as bonuses or promotions for agency heads, Congress could create a culture where reducing inefficiency and waste is recognized and valued.
6. Reevaluating Long-Standing Programs: One of the main advantages of ZBB is prompting agencies to evaluate longstanding programs that have not undergone thorough assessments in many years. Congress can leverage ZBB to reevaluate the relevance of these traditional programs and determine if their funding can be decreased or redirected towards more pressing needs.
The implementation of Zero-Based Budgeting (ZBB) across federal agencies, as illustrated by the SEC example, shows how this budgeting method can streamline operations, eliminate inefficiencies, and prioritize mission-critical functions. By requiring each agency to justify every expense, ZBB promotes accountability and transparency. With Congress playing a crucial role in mandating and overseeing this process, ZBB offers a pathway to reduce waste and improve government performance. By implementing Zero-Based Budgeting (ZBB), the federal government can guarantee that taxpayer funds are utilized effectively, providing advantages for both the public and the agencies involved.
V. Appendix: 20-Step Process for Federal Agencies to Satisfy Zero-Based Budgeting (ZBB) Requirements
This appendix outlines a step-by-step process a federal agency must follow to comply with Zero-Based Budgeting (ZBB) requirements. The process addresses selecting an agency to participate, reviewing redundancies within the agency and across other federal agencies, justifying all expenses, and ensuring oversight and change management for civil servants impacted by ZBB outcomes.
I. Selection of Agencies for ZBB Participation
1. Initiate Government-Wide Selection: Congress or the Office of Management and Budget (OMB) selects federal agencies to undergo ZBB based on budget size, perceived inefficiencies, or public need for reform.
2. Agency Notification: The selected agency is notified of ZBB participation, and leadership is briefed on the requirements, timelines, and expectations.
II. Establish a ZBB Task Force
3. Internal Task Force Creation: The agency forms a task force composed of department heads, financial officers, and change management experts. This group oversees the ZBB process and acts as the primary point of contact with external auditors and oversight bodies.
4. Engage External Oversight Groups: The agency's task force works with the OMB and the Special Inspector General (IG) to ensure compliance with ZBB procedures and audits throughout the process.
III. Preliminary Assessment and Goal Setting
5. Define Core Mission Objectives: The agency conducts an internal review to define its core mission, ensuring all programs and expenditures align with this mission. Leadership must clearly articulate the agency’s fundamental role and responsibilities.
6. Set ZBB Objectives: The task force establishes key objectives for the ZBB process, such as reducing redundant programs, improving resource allocation, and achieving cost savings while maintaining mission effectiveness.
IV. Comprehensive Review of Existing Programs and Functions
7. Program Inventory and Review: Each department within the agency creates a detailed inventory of all ongoing programs, initiatives, and functions. Each program must provide its objectives, historical budget, and key performance metrics.
8. Redundancy Assessment (Internal): The task force identifies overlaps within the agency. Programs performing similar tasks across different departments are flagged for consolidation or elimination.
9. Redundancy Assessment (External): The agency collaborates with other federal bodies, such as the OMB and external auditors, to identify overlaps with other federal agencies. Programs replicating functions performed by other agencies, such as the SEC and PCAOB, may be consolidated or eliminated.
V. Justification of All Expenses
10. Zero-Based Justification Process: Departments start with a zero base and must justify every expense, whether personnel, operational costs, or programs. Each justification should include:
o Purpose and goals of the expenditure.
o Alignment with the agency’s core mission.
o Performance metrics and outcomes.
o Comparison with similar expenditures in other agencies (if applicable).
11. Cost-Benefit Analysis: Departments perform cost-benefit analyses for each program or expense, comparing the cost to the benefit delivered to the public. Programs with low cost-effectiveness are targeted for reduction or elimination.
12. Budget Drafting: Based on the justifications, departments prepare zero-based budget proposals, prioritizing mission-critical expenses while trimming unnecessary or redundant costs.
VI. External Review and Oversight
13. OMB Review and Initial Audit: The agency submits its draft budget proposals to the OMB for initial review. OMB auditors assess whether the proposals meet ZBB requirements and flag areas for further scrutiny.
14. Special Inspector General (IG) Oversight: The Special IG conducts an independent audit of the agency’s proposals, focusing on compliance with ZBB principles, identification of redundancies, and justifications for all expenses. They provide recommendations for further refinement.
VII. Cross-Agency Collaboration
15. Coordination with Other Agencies: The agency engages in cross-agency discussions to ensure program consolidation, sharing of resources, or transfer of responsibilities where overlapping functions exist. This step involves formal agreements to avoid redundancy.
16. Implementation of Consolidation Plans: Based on these discussions, the agency finalizes plans to consolidate or transfer redundant programs. This could involve shifting certain regulatory functions to other agencies, as in the case of the SEC and the PCAOB.
VIII. Change Management for Civil Servants
17. Internal Communication Plan: The agency develops a communication plan to inform civil servants about the ZBB process, its impact on the agency, and how it will affect staffing and departmental structures.
18. Change Management Strategy: The task force implements a change management strategy to manage the transition for civil servants impacted by ZBB-related changes. This includes:
o Retraining opportunities for staff in consolidated or eliminated departments.
o Voluntary retirement or reassignment options.
o Transparent dialogue with employees to mitigate concerns about layoffs or structural changes.
IX. Final Budget Submission and Review
19. Final Agency Budget Proposal: After integrating feedback from the OMB, Special IG, and cross-agency discussions, the agency submits its final ZBB budget proposal to Congress or the OMB for approval.
20. Ongoing Monitoring and Reporting: The agency establishes a reporting framework to monitor the implementation of the new budget, ensuring cost-saving measures, program consolidations, and resource allocations remain aligned with ZBB principles. Ongoing collaboration with the Special IG ensures periodic audits and adjustments as necessary.
VI. Notes and Citations
McKinsey & Company. Zero-Based Budgeting: A Powerful Tool for Financial Transformation. McKinsey, 2020. (This report explains how ZBB drives cost reductions and operational efficiency across various sectors, including the public sector.)
White House Office of Management and Budget. Budget of the U.S. Government: Fiscal Year 2022. U.S. Government Publishing Office, 2022. (This document outlines the federal budgeting process and how reforms like ZBB could be implemented to increase fiscal responsibility.)
Federal Reserve Bank of St. Louis. The Growth of the Administrative State: Implications for the Economy. Economic Research, 2021. (An in-depth analysis of the expansion of federal agencies and the challenges of managing their budgets.)
Harvard Kennedy School. Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector. Osborne and Gaebler, 1992. (A foundational work on improving public sector efficiency, which aligns with ZBB's principles of accountability and budget discipline.)
Congressional Budget Office. Options for Reducing the Deficit: Fiscal Years 2021 to 2030. U.S. Congressional Budget Office, 2020. (Discusses strategies for reducing government spending, including budget reforms like ZBB.)
Brookings Institution. Streamlining Government: A Case for Budget Reforms. Brookings, 2019. (This policy paper advocates for budgetary reforms to address the inefficiencies in the administrative state.)
Heritage Foundation. Reducing Bureaucratic Bloat: A Case for Government Budget Reforms. The Heritage Foundation, 2018. (Outlines the role of budget reform in reducing government waste, aligning with ZBB principles.)
Mercatus Center. Bureaucratic Budgeting: The Case for Zero-Based Budgeting in the Federal Government. Mercatus Center at George Mason University, 2020.
(This paper makes a strong case for Zero-Based Budgeting as a solution to inefficiencies in federal agencies, focusing on eliminating redundancies and improving accountability.
Pew Research Center. Public Trust in Government: 1958-2021. Pew Research, 2021. (Provides data on public perceptions of government efficiency and accountability, supporting the need for reforms like ZBB.)
U.S. Government Accountability Office. Opportunities to Reduce Fragmentation, Overlap, and Duplication in Federal Programs. GAO Report, 2021. (A detailed report on government inefficiencies, with recommendations aligning with ZBB principles to consolidate and streamline programs.)
Harvard Business Review. How Zero-Based Budgeting Can Help Companies Weather Recession. Harvard Business Review, 2020. (Although focused on the private sector, this article discusses the effectiveness of ZBB in creating leaner, more efficient organizations, with insights applicable to government reform.)
Comentarios