The Case for a New University Budgeting Approach

The Current Approach and Its Disadvantages

Ohio University has traditionally used incremental budgeting. In incremental budgeting, a unit’s historical budget is the basis for subsequent budget development. Only new monies are allocated; budget cuts are taken as a percentage of the historical budget and are usually across-the-board. There is limited reallocation across units. At Ohio University, while there has been some reallocation within planning units, there is limited reallocation across planning units. Incremental budgeting is the approach that has been followed most often in universities, in part because it is easily implemented, provides budget stability, allows units to plan beyond one year with some certainty, and tends to shield institutions from what can become rancorous budget battles.

In periods of increasing funding, a university can continue to achieve its goals using incremental budgeting, because there is enough money to accomplish most activities. In the face of declining funding, universities have begun to regard incremental budgeting as an inadequate strategy. Incremental budgets reflect past assumptions and priorities, and often do not reflect current needs. And, with little or no new monies from student fees or state subsidy coming in, the only significant source of funds for new initiatives is the reallocation of existing resources. Ideally, increased efficiency allows this to occur without the erosion of services. The incremental budgeting approach of across-the-board reductions that take a fixed percentage of dollars from each unit does not generate adequate resources to support changed needs or new initiatives, nor does it enable a university to redirect its resources toward strategic priorities.

Disadvantages of the traditional incremental budgeting approach include:

·  While academic authority is fairly decentralized, authority for financial planning, execution, and control are vested in executive management

·  Resources are allocated by executive management and are not necessarily directly connected to academic decisions

·  Movement of resources within the budget becomes a political process

·  No incentives for improvement (cost reduction or revenue enhancement).

·  No encouragement of a shared sense of responsibility

·  Administrators dispense massive numbers of small favors through a black box process

·  Mystery and mistrust surrounding finances – lack of transparency

·  “Use it or lose it” mentality

The centralized, incremental approach to budgeting simply does not work well in situations requiring flexible, creative responses to financial problems. It tends to favor the status quo with dwindling resources, a situation which pleases no-one.

Instead, the budgeting system and financial management practices should encourage the generation of new resources and the efficient use of current resources, all the while allowing sound programmatic trade-offs consistent with an overarching University mission. Ironically, due to the shrinking proportional contribution of State appropriations to our budget, the portion of budget revenue over which the University has more control is growing. In addition, the lean financial condition of the University makes it imperative that our resources and programs are better aligned for the future. The time had arrived to consider a budgeting system to achieve that goal.

Advantages of the New Budget Modeling Tool

·  By understanding the relationship between revenue generation and cost, the university can maximize resources within established quality constraints. By maximizing revenue while meeting quality expectations, more resources will be available for investing in both additional revenue generation and in academic priorities that enhance quality without necessarily generating more revenue.

·  The new budget modeling tool creates transparency where academic units are in a position to rationally compete for resources and discuss the appropriate balance between academic and non-academic resource allocation. In the current system there is no basis for reallocating resources other than guesswork or politics so allocation devolves into a non-strategic, across-the-board process that avoids major conflict but satisfies no one.

·  The current incremental system is highly political with administrators put in a position of handing out favors based on very little information as opposed to academic units being able to make rational arguments based on metrics. Without this information, reallocation among units, particularly between academic and academic support units, is very unlikely.

·  Decisions about resource allocation can involve the academic units where there is a better understanding about the relationship between revenue generation and quality and the authority to make changes to influence this relationship exists. Under the current system, budget decisions are implemented at the central level where the understanding of the relationship between revenue generation and quality is more diffuse and the ability to implement changes to influence this relationship is limited.

Concerns with a New Budget System / Concerns with the Current Incremental System
Units chasing financial gains may resort to using low paid contingent faculty or graduate students, increasing section sizes, and reducing the selection of classes / Units that grow in students or credit hours do not receive additional resources and must resort to using low paid contingent faculty or graduate students, increasing section sizes, and reducing the selection of classes.
Credit hour production becomes a currency leading units to try to maximize it regardless of the impact on quality. / Incremental budgeting does not value credit hour production. Units can increase or decrease credit hour production drastically with no change in their budget. The lack of reallocation of resources linked to credit hour changes creates an imbalance of resources across academic units.
Faculty time and workload are not related to the budget creating the perverse incentive to proliferate course releases and reduce section sizes and otherwise divert time from teaching.
Does not inherently value scholarship / Incremental budgeting also does not value scholarship. A unit can drastically increase or decrease its scholarship and its incremental budget will not change.
Curriculum driven by student interest might encourage units to consider course popularity over rigor, curriculum poaching and grade inflation. / Curriculum driven by faculty interest. There is no incentive to consider student needs which then places no financial value on advising, course availability, or on-time graduation. Deficiencies in these areas lead to actual financial consequences related to retention and decreased success challenge subsidy.
Focuses the attention of decision makers on the lowest cost, rather than the highest quality of education without regard to quantity / Decision makers have little or no information about the resources needed to implement the highest quality education. In fact, the incremental system does not connect the activities of academic units to revenue generation which creates the temptation to divert resources to non-academic areas since academic units cannot directly demonstrate the financial value of their activities.
Encourages the pursuit of only financial gain at the expense of quality creating a race to the bottom / Encourages an across the board mentality towards resource allocation and budget reductions. This uniform application of resources with no regard for quality differences promotes a race to mediocrity by equally starving high and low quality program of resources.
Formula-driven: The budget model will drive decisions / At the top level, decisions are still made in an attempt to maximize revenues but with very little information. While formulas will be used to construct a model, the model does not make decisions. Just as today, people will have to make judgments and tradeoffs and the model will simply give them more information rather than less – it is simply a tool.

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