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Budget Model Update

Resources Implementation Team

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Budget Model Principles/Issues

simple, transparent and encourages accountability

The overarching goal of this process will be to construct a budget model that is:

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Implementation Team Timeline

April 2006 – Update on progress. Input on basic assumptions and principles

May 2006 – Construct scenarios related to the decisions and options that will go into the building of the budget model.

End of May 2006 – Create detailed list of decisions / options related to the construction of the budget model along with associated pros and cons. Another round of open discussions.

June 2006 –Finalized list of decisions and options along with pros and cons submitted in final report.

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Summer 2006 –University leadership makes the decisions and selects options to create a draft budget model.

Fall 2006 – Draft budget model is presented for discussion. Activity taking place during the quarter is entered into the model and the results are reviewed. Necessary adjustments are made.

Winter and Spring 2007 – Activity taking place during each quarter is entered and the results are reviewed. Any necessary adjustments are made.

Summer 2007 – Planning Units begin operation under the new model.

Budget Implementation Timeline

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Areas to be Discussed

1. Linking the Budget to the Academic Plana. The Budget Model is a Tool

b. The Budget Model Supports the Academic Plan

c. Shared Governance Structure

2. Connecting the Budget to Activitiesa. Linking the Budget Model to Academic Priorities

b. Supporting University-Wide Priorities

c. As Earned or Weighted Revenue

d. Weighted Credit Hours to Reflect Differential Costs

e. Tuition Attribution – Student Credit Hours (SCH), Enrollments (majors) or Degrees

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Areas to be Discussed

3. Budget Stabilitya. Multi-Year Averagingb. No-Change Conversionc. Adjusting Over Time

4. Supporting Common Services and Needsa. Central Support Vs. Direct Supportb. Funding Research Efforts

5. Academic Support Unit Issuesa. Support Units Associated Directly with Feesb. Process for Obtaining Fundsc. Rate and Service Level Review

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1 - Linking the Budget to the Academic Plan

a. The Budget Model is a Tool

It should not make decisions.

It simply provides information about the relationship between resources and needs for those resources.

The goal is to provide decision makers with information about the resources available and the activities supported by those resources.

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b. The Budget Model Supports the Academic Plan

The budget model should be aligned with and support the priorities identified by the implementation teams.

c. Shared Governance Structure Academic oversight of the budget model. central budget committee (like BPC), curriculum oversight function (like UCC) involvement of faculty and staff Senates Dean’s advisory committees at the college level.

1 - Linking the Budget to the Academic Plan

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2 - Connecting the Budget to Activities

a. Linking the Budget Model to Academic Priorities

The budget model cannot be a substitute for decision making.

It should shed light on the relationship between resources generated by activities and the resources needed to support those activities.

Decisions will either directly follow from that relationship or will diverge from it to support academic priorities (e.g. general education) that are less connected to resource generation.

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2 - Connecting the Budget to Activities

b. Supporting University-Wide Priorities

There should be a mechanism to collect some central resources for strategic needs related to the academic plan.

This is typically generated by having all units contribute some percentage of resources or by earmarking certain central resources that cannot be easily allocated to academic units (interest income, out-of-state surcharge, etc).

This fund can support needs that are less directly connected to resource generation such as activities related to the public good.

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2 - Connecting the Budget to Activities

c. As Earned or Weighted Tuition Revenue Tuition revenue can be allocated on the basis of how it’s earned or it can be weighted by some factor or metric. “As Earned” puts the incentive to generate funds in direct line with how it is earned, which provides the most direct incentive for those earning revenue to earn more. Need to evaluate activities to make sure they are in line with academic priorities as opposed to simply being related to generating revenue.

“Weighted” begins to disconnect incentives to create more revenue. It is, however, the only way to build in factors that might be valued academically (program quality, honors programs, interdisciplinary programs, general education, type of faculty teaching, etc) but which are not directly connected to revenue generation.

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2 - Connecting the Budget to Activities

d. Weighting Credit Hours to Reflect Differential Costs

Credit hours can be weighted like subsidy to reflect differential costs.

While subsidy is earned differentially based on costs, tuition is the same regardless of program cost.

Allocating tuition based on weighted credit hours does not reflect how tuition is earned and would thus introduce a disconnection that would reduce the incentive for revenue generation.

It is therefore a tradeoff between building an equalizing factor into the model through weighting or making a specific allocation to units with costs that are higher.

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2 - Connecting the Budget to Activities

e. Tuition Attribution – Student Credit Hours (SCH), Enrollments (majors) or Degrees

SCH is used because revenue is earned by credit hours and the main cost is the offering of sections.

Using Enrollments (majors) reflects the costs associated with carrying majors (advising) and idea that students are attracted by majors.

Using enrollments could encourage units to shift credits taken by their majors to other units. Using SCH could encourage units to turn away majors in favor of doing “cheaper” service courses.

Using degrees granted could provide an incentive to retain and graduate students.

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3 - Budget Stability

a. Multi-year averaging

Averaging credit hour production over several years can help smooth swings in the budget so units can have time to adjust to changes.Conversely, when a unit is growing, the benefits of that growth will be lagged because of the averaging.

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3 - Budget Stability

b. No-Change Conversion

The conversion gives each unit the same budget it would have had under the “old” budget model. Units will receive an adjustment that increases or decreases their budget from where the revenue/cost comparison puts them to get them back to their current total budget.

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How a No-Change Conversion Works

Current Budget System (simplified)

Total Tuition Income $1,900,000

Central Services $500,000University Wide Priorities $100,000

Facilites Budget $200,000

Academic BudgetsCollege A (Salaries / 3-9s) $350,000College B (Salaries / 3-9s) $750,000

Total $1,100,000

Total Expenses $1,900,000

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How a No-Change Conversion Works

New Budget Model - No Change Conversion

College A College B TotalCredit Hours 50,000 100,000 150,000 % of Total 33% 67%

Tutition Revenue $633,333 $1,266,667 $1,900,000

Central Services 26% $166,667 $333,333 $500,000University Wide Priorities 5% $33,333 $66,667 $100,000

College Budget (Salaries / 3-9s) $350,000 $750,000 $1,100,000

Space (Square Feet) 25,000 100,000 125,000 20% 80%

Facilities Assessment* $40,000 $160,000 $200,000

Total Resource Needs $590,000 $1,310,000 $1,900,000

No-Change Adjustment $43,333 ($43,333)

* Note how a support unit like facilities maintains the same budget as before

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3 - Budget Stability

c. Adjusting Over Time After the No-Change Conversion, the adjustment can remain fixed going forward, meaning that it never grows or shrinks over time as the unit moves forward and the revenue and costs change. This creates less incentive for units to try to address the difference between revenue and cost. Alternatively, adjustments could decrease over time creating an incentive to increase revenue or bring costs down. The potential problem is that the ability to influence revenues and costs varies by unit. This may require that the adjustment become a permanent addition to the budget of some units.

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4 - Supporting Common Services and Needs

a. Central support vs. Direct support Services connected directly to unit activities provides an incentive for managing the use of those services. If the goal is for units to consciously manage a resource (such as space) or if there are services that are limited to very specific activities in only some units (such as research support), support costs would be directly allocated to the units. Services that are not easily connected to activity or are not really under control of the units, can be handled with a central support approach. For example, to discourage units from accepting students based on their financial aid status, financial aid services would be allocated via a central support approach to spread the cost across units.

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4 - Supporting Common Services and Needs

b. Funding Research Efforts

Overhead funds generated by research could be allocated to the academic units doing the research or to a central research operation for strategic investment. Or a mixture of the approaches could be used. Allocating it all to the units maximizes the incentive to generate research funds. In addition, overhead funds may need to be allocated to areas where overhead costs like space are located. Keeping some funds centrally provides mechanisms for moving in new strategic directions and for funding research activity that might be less directly related to revenue generation.

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5 – Academic Support Unit Issues

a. Support Units Associated Directly with Fees

Some units or services can be directly associated with specific fees such as the general fee or technology fees. Some functions could be covered entirely by fees while others might be supported partially by fees. When a function is tied entirely to a fee, any additional resources the function needs over time would require increasing the fee.

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5 - Academic Support Unit Issues

b. Process for Obtaining Funds

As is currently the case, support units will not have large sources of revenue and will depend on funding from a central allocation.

There needs to be a process to allow a support unit budget to change. There will always be pressure from academic units to keep support costs down while maximizing services provided.

In general, the linking of support unit budgets to a central tax creates a relationship in which support units get more budget as academic units succeed and grow. It also limits administrative growth in the same way since support unit growth is linked to academic growth.

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5 - Academic Support Unit Issues

c. Rate and Service Level Review

A process for reviewing the level and quality of service provided by support units will be needed.

Service agreements can assist with setting expectations.

Units requiring more service can provide additional funding to obtain those services.

When support units want to increase rates, there is a review or negotiation with the academic units or a central committee.

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Comparison Schools

Three comparison schools were selected because they had very different approaches to this conversion to an activity-based budget. They were not selected because they were considered to be peer schools or similar to Ohio University but rather to provide a spectrum of approaches with corresponding philosophical underpinnings so we could look at a wide range of possibilities when selecting the right approach for OU.

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Comparison Schools

Ohio State University (OSU) because it has the same subsidy system as we do and because it represents a school that did rebasing as well as a conversion to a new budget model. OSU also allocated tuition on the basis of student credit hours (SCH).

University of Michigan (UM) because it began by using the Indiana model of allocating revenue and costs under an extremely complex accounting model (Indiana Model) and then shifted to the simpler “tax” system. UM also allocated tuition on the basis of a mixture of head count and SCH and has experimented with different proportions including 100% on SCH It also utilizes a differential tuition structure.

University of New Hampshire (UNH) because it allocates tuition based on a weighted SCH system. UNH has also just completed a five-year review of its entire system.