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Institutional Budgeting at Michigan
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Institutional Budgeting at Michigan

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Institutional Budgeting at Michigan Institutional Budgeting at Michigan Presentation Transcript

  • Stephen L. DesJardins Professor & Director Center for the Study of Higher and Postsecondary Education Presented to the School of Education Research Advisory Committee Luncheon November 17, 2009 The Conceptual Basis for Budgeting at the University of Michigan
  • Objectives
    • Provide overview of budgeting methods and how budgeting works in institutions of higher education
    • Discuss history & philosophy of activity-based budgeting models
    • Examine University of Michigan’s budget system and model
  • Fund Accounting
    • Method of accounting & presentation where assets & liabilities are grouped according to the purpose for which they are used
    • Display how money is spent, rather than how much profit was earned
      • For-profit orgs have one set of self-balancing accounts or a general ledger
      • Nonprofits can have more than one general ledger depending on their needs
  • Fund Accounting (cont’d)
    • Categories where we account for education & educationally-related activities
    • Primary Programs
      • Instruction and research
    • Supporting Programs
      • Academic support and student services
    • Operations & Maintenance of Plant
    • Scholarships, Fellowships
  • Difference Between Budgeting and Finance
    • Budgeting is about planning and resource allocation and is typically short run oriented
    • Finance is about management, accounting, investment, and control and is often more forward looking
  • Role of Budgets
    • Translate the organizations strategic plans into annual objectives and policy actions
    • Budgets are the institution’s formal financial plan
    • Budgets communicate institutional priorities
      • Dave Berg statement about priorities
    • They are often used as tools of control by administrators
  • Budget Systems & Models
    • Budget systems are broad and include all discretionary elements
      • Including authority and values of decision makers
      • System includes budget model
      • Should be flexible enough to override problems generated by the budget model
    • Budget model is set of rules for arranging the elements of a budget
      • Rule: ICR is allocated as revenue to unit that generates the research.
      • Rules can be changed by leadership
  • Budgeting Models
    • Zero-based budgeting
      • Need to justify budget each year
    • Incremental budgeting
      • Resource allocation based on previous period
    • Activity-based budgeting
      • Allocation decisions made based on activities that incur costs/produce revenue
      • Responsibility centered budgeting/mgmt
  • Activity-Based Budgeting
    • Managerial framework to carry out internal budgeting and financial reporting activities
    • Designed to promote broadest stewardship of the university’s financial resources
    • Primary goals to enhance capacity to generate additional revenues & encourage/reward innovation, creativity, and efficiency
  • History in IHEs
    • Created at Penn in early 70s when University was near bankrupt
    • Pres. Myerson needed to get budget under control & charged group to create new system
    • Robert Zemsky, Professor of Education, was one of originators
    • System devised to control expenses
      • Founders quickly observed that it was even stronger driver of revenue creation
  • Activity-Based Budget Principles
    • Org divided into responsibility centers
      • Revenue-generating: Schools, Resource Centers, Auxiliary Enterprises
      • Non-revenue-generating: Administrative Service Centers
    • Centers credited with revenues generated
    • Revenue-generating centers expected to:
      • Fund the direct cost of own operations
      • Cover net cost of operating Administrative Service Centers
      • Maintain internal budget balance
  • Role of “Value Theory”
    • MC = MR + EMU
      • MC is extra cost associate with increased output/activity; MR is marginal revenue & represents instrumental value
      • “ Contribution margin” (MR – MC); crass?
    • EMU is “effective marginal utility” representing the intrinsic value of output
  • Example
    • Suppose SOE wants to expand a program (EMU>0) even though MC>MR (contribution margin is negative)
      • Implies high value at the margin
    • Other high contribution margin (MR>MC) program(s) that faculty do not value as highly (EMU is -) at the margin can help fund the above program
    • Entails both positivist & normative aspects
  • Implications
    • Resource allocation depends not only on market forces but also on IHEs values
      • Dynamic tension between these
      • Value knows no bounds, but are often constrained by fiscal realities
    • Cross-subsidies reflect IHEs preferences
      • Without these there is little room for discretion
    • Efficiency matters
      • Optimizing program size/quality at lower cost results in less cross subsidization, allows for resources to be used for other purposes
  • Michigan’s “UB” Model
    • Implemented 98-99; revised often
    • Hybrid of “activity-based” models
    • Activities lead to automatic flows of resources/costs to units doing work
    • Revenue follows revenue-generating activity & units get most revenues
    • Activities create increased costs in units & indirectly to administrative areas
      • Associated costs rise as revenues increase
  • Logic of “UB”
    • Benefits/costs (sources/uses) of activities most clearly seen where undertaken
      • In “units” (schools & research units)
      • Allocation decisions best decided by them
    • Local leadership & central planners can envision budget opportunities & threats
      • Enrollment declines signal problems quickly
    • Creates incentives for RCs to innovate, yet may result in RC-centric behavior
      • Provost’s role is to prevent this
  • Role of Central Discretion
    • Maintaining central discretion helpful in recent years
    • Encouraged creation of contingency fund used to buffer mid-year rescissions in State appropriations
    • Goal: Build fund to 1% of the General Fund budget
  • Revenue Allocation
    • Revenue flows to the unit generating it
    • Tuition attribution example
      • 50/50 split for undergraduates (was 75/25)
      • 75% enrollment/25% instruction unit for grads
      • Candidates: 100% to enrollment unit
    • Res/non-res tuition avg. so units get same mix, regardless of actual enrollment mix
      • Remove incentive to admit/enroll on residency
    • Incorps differences in unit tuition rates
      • Aligns with differential instructional costs in units
  • Cost Attribution
    • Centrally-awarded FinAid attributed based on same distribution as tuition
      • Assessments based on avg. amounts per HCE rather than actual provided to unit’s students
    • Rackham aid different for MA/PhD
      • Aid is University priority that should be supported across the campus
      • Goal: Admit students based on academic criteria, not financial circumstances
    • Units pay expenditure taxes
      • Flow to Provost to increase funds for flexible allocation
  • Space Costs
    • Central assesses utilities & plant operations
      • Plant includes maintenance, custodial, grounds & landscaping, refuse and recycling 
    • Buildings metered to charge actual costs
    • Assessed per sq. ft. occupied for grounds, maintenance, custodial, refuse/recycling
    • All assessed through accounting system
  • Taxes
    • Expenditure taxes flow to Provost
    • Source/use financial categories are used to construct the tax base
    • All taxes are levied on an adjusted expenditure base, with a two-year lag
    • Three tax types and 6 tax rates
      • UP 2%; research 11%; general 24%
  • Role in Budgeting
    • Tax revenues grow with activity
    • Provides discretionary funds for Central to make reallocations based on their priorities and values
    • Permits these choices without explicitly cutting budgets in one unit to raise them in another
    • Can be used to increase admin unit budgets too
  • GF Supplement
    • Support provided to unit beyond the net of revenues & costs
    • Some units have more capacity to capture resources & do not need a positive GFS 
    • In a unit’s budget, the GFS is where central policy decisions are reflected
    • Used to “hold harmless” when rules of model change 
  • 2005 Budget System Review
    • Interviewed > 100 deans, budget administrators, faculty & administrators
    • Autonomy needs to be balanced with alignment to university goals and priorities.
    • Balancing financial responsibility with the encouragement of risk is essential.
    • Communicating principles of budget system & model to the wider university community is important
    • Too much emphasis placed on year-to-year changes rather than taking longer view of strategic allocation of resources
  • Summary
    • Hybrid of activity-based & discretionary budget
    • Provides Provost more discretion than previous systems/models
    • Generates more variation in % changes in unit budgets than did the incremental system
    • Allows leaders to see fiscal implications of activities at unit level
      • Yet allows flexibility to determine how to adjust to fiscal circumstances in light of University's missions
    • Well designed for active Provost who is willing to reallocate resources towards the academic mission and among academic units
  • Budget Information
    • UM budget detail from OBP
      • http://sitemaker.umich.edu/obpinfo/budget
    • Budget documents
      • http://www.provost.umich.edu/budgeting/index.html
      • http://www.provost.umich.edu/budgeting/ub_model.html
  • Summary
    • IHEs budget differently than firms
    • Activity-based budgeting is relatively new phenomenon
    • Michigan’s budget model is a hybrid and current model emerged after some experimentation
    • Budget information & data is on-line for you to examine
  • Background Materials
  • Zero-Based Budgets
    • Requires that the budget be justified each year, instead of just making adjustments to the prior years budget
    • Advantages:
      • Can focus attention on the actual resources required produce outcome
      • Can be useful for shaking up a process that may have grown stale and counterproductive over time
      • Help to identify specific objectives, quantify them, & consider cost effective ways of achieving them which may lead to better resource allocation
  • Advantages of ZBB (cont’d)
    • May be astonished at expenses that should not be there
    • Facilitates participation in the budgeting process
    • May engender partnership between the finance professionals and decision makers
    • Complies with management’s directive not to blindly follow last year figure
  • Disadvantages of ZBB
    • May substantially increase time & expense of preparing budget
    • Substantial commitment by all in order to ensure you don’t make matters worse
    • Success hinges strongly on leadership that is dedicated to the task
    • Reviewer of the budget should not have a pecuniary interest in maintaining the status quoa as they will try to protect their interests.
    • Involves a lot of time so do not conduct every year; may prove impossible to manage
  • Incremental Budgets
    • Allocation of resources is based on allocations from the previous period
    • Advantages:
      • Relatively simple to use and easy to understand
      • The budget is stable and change is gradual.
      • Managers can operate their departments on a consistent basis.
      • Conflicts should be avoided if departments can be seen to be treated similarly.
      • Co-ordination between budgets is easier to achieve.
      • The impact of change can be seen quickly
  • Cons of Incremental Budgets
    • Unlike ZBB, assumes activities/methods will continue; no accounting for changing circumstances
    • Doesn’t provide incentive to develop new ideas/to innovate
    • “ Spend it or lose it mentality” so can’t reduce costs
    • Budget may no longer relate to levels of activity/type of work actually being done
    • Priority for resources may have changed since inception
    • Slack may be built in so budget easier to work to, get more power
  • What is a “Unit”?
  • Model Operational Level
    • UB model not developed to provide template to guide budgeting within schools
    • Academic leadership closest to circumstances make best decisions concerning those circumstances
    • Dean/leadership has better sense (than Provost) of budgets needed to accomplish activities undertaken
  • Budget Process @ MI
    • November–- Send request to State
    • December—University process & planning parameters defined
    • February—Budget planning documents submitted (“the request”)
    • April—Budget conferences between Provost & Executive Officer
    • June—Final allocations determined as budget development finalizes
    • July—Regents approve budget
  • Head Count Equivalent
    • HCE is derived figure used for purposes of tuition attribution. It is the headcount of students registered in given term & pursuing academic program offered by a unit. If student is registered in multiple programs, student is divided equally between the units that "own" the academic programs regardless of the number of units taken in each school/college.