Stick A Fork In “Challenges For Change.” It’s Done.

The reformation of state bureaucracies, Shumlin said then, would allow Vermont to trim $38 million from its fiscal-year 2011 general fund without disruption to the programs and services administered by government agencies.

On Tuesday, however, in what has become a moment of vindication for some opponents of the legislation, Shumlin said Challenges wouldn’t meet its savings targets after all.

“While Challenges for Change was a well-intentioned initiative,” Shumlin said during his budget address, “we simply cannot budget … savings that may not likely be realized, and I won’t.”

The new governor’s concession, many surmised, sounded the death knell for an initiative borne out of the revenue crises of the Great Recession. And indeed, mention of “Challenges for Change” by name — which had called for $72 million in total savings in fiscal years 2011 and 2012 — is noticeably absent from the Shumlin Administration’s budgetary nomenclature.

But administration officials, including Shumlin himself, say the Challenges legacy lives on. And while “Challenges for Change” may be dead, they say, the concept it embodied will continue to figure heavily in the state’s budget-making process.

“The effort to make government more effective, and deliver services to taxpayers more efficiently, is alive and well and will flourish in this administration,” Shumlin said Thursday.

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Challenges for Change, the product of a $200,000 contract with the out-of-state consulting firm Public Strategies Group, sought to redefine the way state government goes about reducing its budget. Rather than using an axe to make the budget fit the revenue available to pay for it, Challenges proponents said, government can change the way it does business in a way that trims expenditures without impacting programs.

Lawmakers used a number of terms to sell the idea, including “performance-based budgeting” and “outcomes-based budgeting.”

“I think it is really important that people understand the reason we are doing this is that we need to change the way government works,” Sen. Diane Snelling, the Republican credited with spearheading the Challenges legislation, said last year.

The problem, Challenges opponents say, is that it never really worked.

The legislation has certainly fallen short of its goal. Of the $38 million in Challenges savings originally budgeted for fiscal year 2011, according to Finance Commissioner Jim Reardon (who served in the same position under Gov. James Douglas), he has to date secured only $14 million. That figure includes $6 million in education-related reductions (booked as Challenges savings, questionably some say, when school boards came in with lower-than-expected budgets last year), meaning that Challenges savings in general government amount to only $8 million thus far.

“It was a big disappointment and a failure,” Sen. Vince Illuzzi, the Republican chairman of the Senate Committee on Economic Development said last week. “We would have saved time and money if we had simply trimmed all departments’ budgets by 2 to 3 percent.”

Reardon said he’s “reasonably confident” the Challenges initiative will result in an additional $12 million in savings before the end of fiscal year 2011, which ends June 30. That would bring total Challenges savings, including education, to $26 million — still $12 million short of its $38 million goal. The Douglas and Shumlin administrations have used one-time money and more traditional cuts to make up the difference.

If Reardon doesn’t realize the $12 million in additional savings, Vermont would end the year in the red. And Shumlin last Tuesday jettisoned the fiscal-year 2012 Challenges targets altogether, saying he has no confidence that government can produce those savings. His decision to do so increased the shortfall in the next year’s general fund by $26 million.

“It was smoke and mirrors. That phrase has been used way too much to describe it, but it’s true,” Rep. Patti Komline, last year’s House minority leader, said last week.

The idea never took hold among House Republicans last year, who voted en masse against the measure despite entreaties from the Republican governor to lend their support.

The flowery “outcomes” language used to describe the Challenges process, Komline said, was an attempt to re-brand the state’s fiscal crisis as a happy moment of opportunity.

“The concept was that if you use the word ‘outcome’ enough you can somehow save $38 million. But it takes more than just throwing out catchphrases,” Komline said.

Komline said the Legislature used the Challenges legislation to pass a deficit budget that “made $38 million in so-called reductions without ever saying how they were going to do it.”

“They just said, ‘OK, we’re going to somehow save $38 million, so we can all feel good about this budget,’” Komline said. “But really it was an excuse to avoid making the cuts that needed to be made to actually balance the budget.”

Shumlin’s admission that Vermont won’t meet Challenges targets, Komline said, confirmed her initial assessment.

“It was a dismal failure,” she said.

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Administration officials say Challenges is a work in progress, and that its usefulness will be more widely appreciated once the concept takes a stronger foothold in government.

Patrick Flood, deputy secretary of human services under Douglas and Shumlin, said Corrections is a prime example of where Challenges worked.

Under the auspices of the Challenges legislation, Flood said last week, the Department of Corrections undertook a broad effort to reduce the number of nonviolent offenders in Vermont prisons.

“We agreed during the Challenges for Change debate last year to work with development-service and mental-health agencies to get people out of prison when appropriate, because we had a number of them who were just stuck there because of disabilities,” Flood said. “Yeah, they broke the law. But instead of a lifetime behind bars, they can be in the community getting mental-health services and case management. They’re doing a lot better than they were in the correctional system, and we’re spending less money on them.”

The effort in Corrections, according to Reardon, has so far produced $3.3 million in savings in fiscal year 2011.

Flood said ongoing initiatives, many of which Reardon is counting on to fill the $12 million gap in his Challenges target, haven’t produced savings yet, but will soon.

“It’s taken longer than we maybe expected — there was some optimism about the time frame,” Flood said. “It will come, we’re just not saving as much money as quickly as predicted.”

And that’s one reason Challenges has gotten such a bad rap, Flood said.

“I think maybe to a lot of (legislators) it was oversold,” Flood said. “But it’s a new way of doing business at this agency and maybe across state government. It doesn’t matter what you call it and it doesn’t need a name. It really is just a way of doing business that I believe we’ve embraced.”

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Tom Evslin, who served as the Douglas Administration’s point man on Challenges, said Challenges has produced some notable successes. He points to Challenges-led innovations at the Department of Forests, Parks and Recreation, where new flexibility around park entrance fees and marketing allowed the department simultaneously to increase revenue, reduce dependence on general-fund dollars and improve infrastructure.

There are also areas where Challenges failed, Evslin said. If he could do it over again, Evslin said, he would have started the process earlier and tried to secure more universal buy-in from legislators and advocates.

“I think all of us, the administration and legislative leadership, were probably too optimistic about how quickly we could bring along the rest of the executive branch, the rest of the Legislature and the many, many other groups that have influence on Vermont government,” Evslin said. “We were working under the spur of necessity, so I don’t think we could have slowed down, but if somehow we’d had enough foresight to begin earlier it would have been easier.”

Tom Pelham, finance commissioner under Howard Dean and deputy finance commissioner under Douglas, said performance-based budgeting isn’t a new phenomenon. During the Dean Administration, Pelham said he secured statutory language that enabled the performance-based approach.

“Following that change in law we began in a minimal kind of way to try to restructure the budget process around performance-based budgeting, where measures were established to determine whether goals were being achieved and whether they could be measured in a financial context,” Pelham said.

Pelham though said the process was hijacked by special interests whose arguments for state support were undermined by the new system.

“Lo and behold what happened is that kind of analytical approach is not well received by people comfortable with or used to or well-served by the political approach, where you have a lobbyist, you work to have advocates and beneficiaries call legislators, you work with news media to get sympathetic stories,” Pelham said.

Jack Hoffman, with the Public Assets Institute, a Montpelier think-tank that touts the power of government programs to improve the lives of residents, said Vermont no longer has the analytical infrastructure needed to make an outcomes-based budgeting process work.

“That’s what sort of dawned on everybody. We have this new idea where we judge the value of programs based on the outcomes they produce. But everybody is asking questions like, ‘how are we going to measure this?’” Hoffman said. “I think state government has lost its ability to measure how well it’s doing its job.”

Hoffman said he’s supportive of the concept behind Challenges. But without an effective measurement system, he said, “what started out as a good idea really just turned into another vehicle for making the kind of budget cuts Douglas had been making in previous years.”

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Shumlin may not be calling it Challenges for Change, but his fiscal-year 2012 budget proposal, according to Reardon, includes $10 million in human-services reductions that will be delivered under Challenges-style innovations. Those reductions include about $500,000 by redirecting patients toward lower-cost pharmaceutical options, and another $7.2 million out of additional reforms in Corrections.

And the Legislature’s Government Accountability Committee in November issued a report in which it indicated its intentions to “continue the Challenges process and extend outcome-based budgeting to the entire state budget.”

Reardon said Challenges, in concept at least, won’t disappear. But instead of being its own separate program, he said, the administration will fold the process into its normal budgeting process.