THE FY79 ZBB PROCESS IN EPA

Summary and Assessment

Prepared for theAssistant Administrator for Planning and Management

U.S. Environmental Protection Agency

Donald E. Shay, Jr.Peter T.A. BowerGraeme M. Taylor

Management Analysis Center, Inc.

September 14, 1977

THE FY79 ZBB PROCESS IN EPA

On April 19, 1977, the Office of Management and Budget (OMB) issued Bulletin77-9, providing guidelines for the zero-base budgeting process to be used by allFederal agencies in developing their budget requests for FY79. The purpose ofthis paper is to describe how one agency, the Environmental Protection Agency(EPA), responded to the challenge of implementing this new system. The paper isin two parts, the first describing the EPA process, and the second evaluating itssuccess.

I. THE EPA ZBB PROCESS

Zero-base budgeting (ZBB) is an approach to planning and management that dealswith the total budget request, not just increases or decreases from the previousyear's "base" as in more traditional "incremental" budgeting. ZBB offersmanagers a tool to consider different possible spending levels for each activityand to shift funds from lower to higher priority areas.

The process commonly encompasses the following steps:

Identification of "decison units"o

o;

iAnalysis of decison units and the formulation of "decision packfiges"(called "decision unit levels" in EPA)

Ranking all decision packages in priority order 1Preparation of the formal budget request The decision units ar thelowest-level programs or organizations for which budgets are in*iallyprepared. The manager of a decision unit performs two kinds ofanalysis. First, the manager reexamines the purposes, act ivit ies andoperations of the decision unit to see if improvements can be made.Next, the manager segments the decison unit's activities into a series ofdecision packages. The first package contains those activiti s, orportions of activities, deemed highest priority. The second pa kagecontains the next most important items, and so on. The costs and"outputs" of each package are then determined.

o

o

The third basic element of ZBB is ranking, the process in which higher levelmanagers establish a priority list of all decision packages from all decison unitswhich report to them. This priority list is then reviewed in light of the le el offunding available to the organization. Packages which can be funded withi theavailable total are included in the organization's budget; those which fall" elowthe line" are dropped. *

*For a more detailed discussion of ZBB in the Federal Government se "AnIntroduction to Zero-Base Budgeting" by Graeme M. Taylor, The Burea crat,Spring, 1977.

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EPA BACKGROUND

EPA was established as an independent Agency in December 1970 by combining anumber of components from five departments and agencies. Today the Agency isorganized along functional lines with six Program Offices: Office ofEnforcement; Office of Air and Waste Management; Office of Water andHazardous Materials; Office of Research and Development; Office of Planningand Management, and a newly created organization, the Office of ToxicSubstances. Each of these Program Offices is directed by an AssistantAdministrator. EPA has made a concerted effort to decentralize its operationsby assigning major responsibility for carrying out EPA programs to 10 RegionalOffices. The Agency currently employs 10,150 people and has an operatingbudget (exclusive of construction grants) of $848 million.

EARLY HISTORY OF ZBB IN EPA

ZBB is not new to EPA. In 1975, the Agency began to evaluate the process in aseries of pilot studies. The first ZBB effort within the Agency was conducted bythe Management Information and Data Systems Division. It focussed on the ADPfund, a $15 million computer timesharing account. A consulting firm,Management Analysis Center, Inc. (MAC), with considerable prior experience inassisting organizations adopt ZBB, was contracted to design the process, trainthe participants and assist with the implementation. This initial effort wasjudged a success; lower level managers never before involved in budgeting had anopportunity to make budgetary recommendations, and a modest amount ofreallocation within and between headquarters programs and regions wasachieved.

Other components of EPA subsequently experimented with ZBB, including theOffice of Administration, a portion of the Office of Research and Development,and the Office of Water Planning and Standards. One organization, the Office ofPesticides Programs, was so impressed with the value of the process that itdecided to use ZBB for its own internal operational planning, beginning in FY77.That Office today has one of the most sophisticated ZBB processes extant.

Thus, before OMB issued its ZBB directive, EPA already had a considerableamount of experience with ZBB as an internal management tool, and planned touse the process even more extensively throughout the Agency. The incentive forEPA to apply ZBB Agency-wide sprang in large part from increasing programworkload and a number of new programs manadated by Congress, resulting inincreased pressures on scarce positions and dollars. The Toxic Substancesprogram, for example, needed to expand rapidly to meet responsibilities newlycreated by the Toxic Substances Control Act of 1976. The Office of PesticidesPrograms, far behind in its commitment to reregister pesticides, claimed a needfor 600 additional positions. The Office of Water Supply argued for 200additional positions to fulfill its obligation to ensure safe drinking water.

It was clear that the additional positions that would probably be requested forFY79 would far exceed the number the Agency expected to obtain. A mechanismwas, therefore, needed to identify how these position demands could be metwithout emasculating current programs. EPA recognized that ZBB itself would

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not reduce the pressure for additional positions, but the process would ensurethat, within whatever resource ceiling the Agency had to operate, positionswould be allocated to those programs where the environmental benefits would begreatest.

FY79 ZBB

EPA began to prepare for the FY79 ZBB process two months before OMB issedits directive. The Program Analysis Divison (PAD), within the Office ofAdministration, was assigned responsibility for guiding the implementation ofZBB within the Agency. PAD began by reviewing the various prior ZBB effortswithin EPA to evaluate their experiences in adopting the process.

Convinced that such a major change in the Agency's method of budgetingrequired expert assistance, PAD contracted with MAC to help design the process,train managers, and to assist in the actual implementation.

Early in the process, the Administrator sent a memorandum to all Agencymanagers underlining his strong support of ZBB and outlining a variety ofplanning and management issues that he wished to see addressed in the course ofplanning and budget preparation. This was to provide a useful stimulus at variousstages in the process.

PAD realized the importance of involving the Program Offices early in theprocess, and began discussions with them in early April concerning the budgetstructure and ZBB procedures. After a number of these sessions it was concludedthat the best approach, given the time constraint, was to develop the decisionunits at a fairly high level of aggregation, resulting in about 100 decision unitsfor the entire Agency. Each Program Office was encouraged to do more detailedZBB analysis internally, down to much lower levels in the organization, and inseveral cases this was done.

The decision units, for the most part, were based on program subactivities, in theexisting budget structure, such as Water Supply Criteria and Standards, WaterSupply Enforcement, and Water Supply Research. An important reason for theuse of subactivities was that the Agency's reporting and control systems werestructured along these lines, thus eliminating the need for extensive crosswalkingprior to budget execution.

Table 1 summarizes EPA's FY 79 decision unit structure. Thirteen "media" wereutilized. These consisted of nine major program areas -- Water Quality, WaterSupply, Pesticides, Air Quality, Solid Waste, Radiation, Noise, Toxic Substancesand Energy; and four support programs -- Interdisciplinary Research, ScientificActivities Overseas, Buildings and Facilities, and Management and Support. EachOffice's decision units were grouped according to the media whose objective theysupported. For example, as shown in Table 1, the Office of Research andDevelopement had a total of 33 decision units, six of which "belonged" to theWater Quality program, three to Water Supply, and so on. From a mediaperspective, the Water Quality program, for example, was thus composed of 21decison units, three from the Office of Enforcement, 12 from the Office ofWater and Hazardous Materials, and six from the Offlce of Research andDevelopment.

TABLE 1

EPA DECISIO~~IUNITSBY ()FFICE ANI) MEDIA

MEDIA -OFFICE WATER WATER SOLID INTER· MGT &

QUALITY SUPPLY PEST. AIR WASTE RAD. NOISE TOXIC ENERGY DISC. SAO B&F SUPPT. TOTAL

-STAFF 1 2 7 10

-OE 3- 1 1 3 1 1 1 1 12

-OWHM 12 4 3 1 20

OA'JiM 7 4 2 3 1 17

OTS 3 1 4

ORO 6 3 2 5 1 1 4 4 5 1 1 33

TOTAL 21 8 6 15 6 3 4 8 4 6 1 2 12 96

TABLE 2

EPA ZBB PROCESS -- FY79

Completion Date

0 Office of Planning and Management issuesZBB instructions May 9

0 Media Task Groups formed - develop programguidelines May 15

0 Program Offices develop decision unit levels May/June

0 Assistant Administrators rank decision levels June 15

0 Regional input June 21

0 Media Task Groups rank decision unit levels June 24-

0 Assistant Administrators and RegionalAdministrators review and comment July 22

0 Media Task Groups - revise ranking August 3

0 Intermedia Task Group ranking August 11

0 Assistant Administrators and RegionalAdministrators review and comment August 29

0 Final decisions by Administrator September 8

0 EPA FY79 budget to OMB September 15

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This "matrix" approach to grouping decision units was the framework withinwhich EPA conducted its ZBB process. Thirteen media task groups wereestablished, one for each medium. Each media task group, ranging in size fromsix to ten people, consisted of representatives from the Program Offices involvedin the medium, as well as representatives from PAD and the Regions. Table 2summarizes the major steps and timetable of EPA's FY79 ZBB process.

One of the first responsibilities of each media task group was to develop programguidelines for all EPA components contributing to the common program goal.For example, the Air Quality Program, which has as its overall goal theimprovement of the Nation's air quality, is carried out by a number of EPAProgram Offices, as indicated in Table 1. The responsibility of the Air Qualitymedia task group, with representives from the Office of Enforcement, the Officeof Research and Development, the Office of Air and Waste Management, PAD,and two Regional Offices, was to develop a strategy for the air medium,including program guidance for each of the contributing Offices. This kind ofcohesive, integrated planning assured that the various components used the sameassumptions and guidelines in their ZBB analysis. and also that they followed acommon approach to defining levels in related decision units.

Each Program Office was responsible for the ZBB analysis of its decision units.Using the common assumptions and guidelines developed by the media taskgroups, the decision unit managers defined decision unit objectives for FY79,examined alternative operating methods, and evaluated different levels ofservice and cost. Each decision unit had to have at least three levels: less than75% of current resources, the current resource level, and an increased level, ifrequested. Two other levels were encouraged, one approximating 90% of currentresources, and one, for those programs requesting significant resource increases,at 110%, between the optimal level and the current level. Percentage figureswere used only as guidelines by the decision unit managers; where anotherapproach to developing different levels was more logical that approach was used.Decision units which had more than 300 positions were advised to developadditional levels, in order to provide higher level management with more fundingflexibility.

The decision unit levels were formulated throughout the Agency by the linemanagers responsible for the program subactivities, thus ensuring not only middlelevel management participation, but also a commitment to the plans outlined.PAD personnel acted in an advisory role, assisting managers with processproblems, ensuring meaningful output definitions and overall quality. At thesame time they coordinated the media task group meetings and raised issues theybelieved had been omitted or required further analysis.

Following the decision unit analysis each Program Office performed two rankings-- the first on a media basis, ranking levels from all decision units within thatOffice contributing to a given medium, the second an inter media ranking, inwhich decision unit levels for all media within the Program Office were rankedagainst one another. These internal Program Office rankings served twopurposes. First, they established each Office's priorities within a given mediumand, second, they established for internal purposes media priorities within theOffice.

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The inter-Office ranking process commenced with preliminary media rankingsperformed by the media task groups, based on the detailed ZBB analysis andratings developed by the Program Offices and advisory input submitted by eachRegional Office. These media rankings, together with a brief analysis of theirprogram implications, were given to senior management at headquarters and inthe Regions for review and comment. The media task groups then reconvenedfor a final media ranking. This step resulted in thirteen media ranking tables,one for each medium, which reflected line managers' resource allocationpriori ties.

Based on these media ranking tables a group consisting of senior staffrepresentatives from each Program Office, chaired by PAD, developed a "straw"preliminary Agency-wide intermedia ranking. As with the media rankings thispreliminary staff ranking saved a considerable amount of top management timeby enabling them to concentrate their attention on the critical funding areas.Simultaneously, the Assistant Administrators held several general strategymeetings on a media by media basis, in order to increase their familiarity witheach other's program areas and to develop a better understanding of thebackground to unresolved ranking issues. Armed with the preliminary ranking,the Assistant Administrators and a representative Regional Administrator thenmade a final Agency ranking in a series of meetings, with time for furtheranalysis spaced between each meeting. This ranking table was presented to theAdministrator who made final Agency-wide budgetary decisions over a period of10 days, in order to provide Program Offices with an opportunity to respond tothe Administrator's comments and questions.

II. AN ASSESSMENTOF THE EPA ZBB PROCESS

President Carter's memorandum of February 14, 1977 directing theimplementation of zero-base budgeting procedures by Executive Departmentsand Agencies outlined four objectives:

o Focus the budget process on a comprehensive analysis of objectives andneeds.

o Combine planning and budgeting into a single process.

o Cause managers to evaluate in detail the cost-effectiveness of theiroperations.

o Expand management participation in planning and budgeting at all levelsof the Federal Government.

The ZBB process, as implemented by EPA, clearly achieved these objectives.EPA made effective use of ZBB as a management tool by implementing thesystem conscientiously and, more importantly, by making planning and budgetingdecisions in the spirit of ZBB, rather than simplistically invoking the mechanicsof the system.

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There are a number of reasons why the EPA process was succesful. An importantfactor accounting for the comparatively smooth implementation of ZBB was theearly involvement of the Program Offices in the design phase of the process.The design emphasized the meshing of planning and budgeting by requiringcoordination of the Program Offices in the media task groups. This approachprovided an opportunity for middle level managers from different Offices towork together in developing common planning assumptions so that the resultingdecision unit levels prepared on Program Office lines would logically dovetailwith one another within a media context. Input from Regional Office ZBBanalysis was also factored into these interdisciplinary media groups, all of whichhad regional representatives.

An oft cited requirement for successful ZBB is strong support from the chiefexecutive. This certainly was one of the reasons for ZBB success in EPA. TheAdministrator made clear his interest in using ZBB as an effective tool formanaging the Agency, and provided early guidance on issues he wished to seeaddressed during the budgeting process.

The prioritization of objectives and needs was crystallized by the use of agency-wide ranking criteria, emphasizing the human health effects of the differentprogram objectives, while considering a wide range of other criteria, rangingfrom the need for increased delegation to the States to the necessity of ensuringa nucleus of anticipatory environmental research and development.

The awareness on the part of EPA of the resource constraints imposed on theAgency ensured a high degree of explicit questioning of the cost/benefit ratios ofmany decision levels. In response to the Administrator's guidance memorandum,many alternative means of meeting program objectives were evaluated. Oneexample is the proposal to contract with the Corps of Engineers to perform sometasks related to the Construction Grants Program.

The decisionmaking and ranking process followed a well thoughtout andincreasingly refined progression, involving managers at several levels in theorganization. Decision unit levels were ranked first by the Program Office, thenin media rankings and finally in inter media rankings. Each of these ran kingsinvolved a successive prioritization of, and in many cases changes in; the decisionunit levels by increasingly senior managers. This continuous chain of ranking upthrough the Agency provided lower level managers with an opportunity tobecome involved in budget recommendations, at the same time preserving finaldecisionmaking authority for senior management.

The usefulness of any new management tool is best evaluated by reviewingwhether different decisions were made, rather than the same decisions beingmade differently. One lllustration that different decisions were indeed made isprovided by an examination of position allocation by appropriation and by mediaat two possible position ceiling, as shown in Tables 3 and 4.

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Table 3 shows that, if EPA were held to the current (FY78) number of authorizedpositions, reprogramming would result in a 10% increase in the number ofpositions allocated to the Enforcement appropriation, an 8% decrease in theResearch and Development appropriation, a 2% increase in Agency and RegionalManagement and a 2% decrease in Abatement and Control.

In media terms the reprogramming would be even more significant. As shown inTable 4, the Toxics program would receive a 50% position increase and SolidWaste a 12% increase, while positions in Radiation be cut back by 26%; Noise by25%; and Air by 5%. These major reallocations within the current EPA positionceiling clearly suggest that different decisions were in -fact made. Although inpast years EPA made modest reallocations within programs, they wereinsignificant when compared with the broad inter-program redistributionresulting from the FY79 ZBB.

The reprogramming implications would also be marked if EPA had 10,992available positions, as shown in Tables 3 and 4. The final stages of the rankingprocess involved some very difficult decisions on overall agency priorities, as astrong case was presented for reinforcing programs such as the undermannedPesticides Program which could begin to intensify the implementation of theclass standards system, or for restoring the cutbacks in the Air and WaterQuality Programs, with significant Regional impacts in the case of the latter. Itis also notable that the newer programs - Toxics, Water Supply and Solid Waste -would continue to be expanded in the event of small position increases, while theResearch and Development appropriation would return to its FY78 strength onlyin the event of an increase in excess of 800 positions for EPA in FY79.

This brief assessment must also mention some of the problems encountered andlessons learned for the future use of ZBB in the Agency. From a purely technicalpoint of view, many of the decision units were too large to allow for meaningfulanalysis of their cost/benefit at the margin. This was partially remedied bychanges in decision unit structure at different stages in the review and rankingprocess, but it is generally agreed that for FY80 decision units should be initiallydefined at a less aggregated level, perhaps building up to decision unitscomparable in size to those for FY79 in the course of the ranking process. Theinvolvement of the Regional Offices will also need more coordination in futureyears, partly due to this year's difficulties of meshing Regional and Headquartersplans in a comparatively short period at the beginning of the process.

The time demands of the process were substantial throughout the Agency. Muchof this represented learning pains, but undoubtedly it put a strain on the ProgramOffices and the Agency's analysis and evaluation staffs. Finally, the time framethis year did not allow for all the issue analysis desired, a problem compoundedby the fact that the detail surfaced in ZBB exposed more issues than usual to beanalyzed. However, overall, these problems are more than mitigated by theachievements of the Agency, and in any event are the natural consequences ofimplementing a relatively sophisticated concept in a short time.

In summary, we believe that the EPA ZBB effort can be considered remarkablysuccessful. The preparation and organization of the process was well conceived,and represented a considerable effort on the part of PAD. The fact that EPAhad had prior ZBB experience meant that EPA management had some faith in the

TABLE 3

POSITION REALLOCATIONS BY APPROPRIATION(at two selected position ceilings)

Percent Changes from FY78 Allocation

AppropriationAt 10,150Positions

At 10,992Positions

Abatement & ControlEnforcementResearch & DevelopmentAgency & Regional Management

-2%+10%-8%+2%

+10%+17%

No change+6%

TABLE 4

POSITION REALLOCATIONS BY MEDIA(at two selected position ceilings)

Percent Changes from FY78 Allocation

Media *At 10,150Positions

AirWater QualityWater SupplySolid WastePesticidesRadiationNoiseInterdisciplinaryToxic SubstancesEnergyManagement &: Support

-5.4%-2.5%+17.4%+12.1%-0.9%-26.2%-25.0%+7.7%+49.7%

No change+0.1%

At 10,992Positions

+1.6%+1.9%+34.7%+43.1%+14.1 %-16.6%-6.0%+11.7%+83.4%

No change+6.2%

,IE-Buildingand Facilicities and Scientific Activities Overseas are not shownas they contain no positions.