It's Your Money. Spend It.

Tight times have led many colleges to centralize budget decisions, but U.Va. moves in opposite direction, hoping departmental control over costs will spur creativity.

October 27, 2011

The University of Virginia announced Tuesday that it is moving toward a decentralized internal finance model that vests responsibility for revenues and expenses with individual schools and colleges rather than the university as a whole, a move designed to drive deans to find additional revenue streams and operate their units more efficiently.

The model – commonly called Responsibility Center Management, Revenue Responsibility Management, or Activity-Based Budgeting – is a system in which individual units such as schools or colleges keep most of the money they bring in, but must also pay whatever expenses they incur. Ideally, administrators say, the system will drive schools and colleges, as well as individual faculty members, to create new majors, courses, and research programs that attract students, tuition revenue, and grants, which the schools will then get to keep and reinvest. It will also -- they hope -- drive them to better use space, grow class sizes where possible and advisable, and cut down on overhead, since savings on expenditures will be kept by the unit generating the savings.

“The new financial model will empower individual academic units to be innovative, effective and collaborative, because incentives will be built into the system to encourage and reward such work,” said John Simon, Virginia’s executive vice president and provost, in a Q&A on the university’s website.

The recession has led many colleges and universities to centralize financial decision-making, putting institutional needs and priorities ahead of individual schools' goals. Many have also argued that decentralized administration leads to duplicated services and wasted money. But a handful of institutions – primarily large research universities – already operate under a model similar to the one being adopted at Virginia, and the model could gain traction among public research universities as states continue to cut appropriations, since it promotes increasing enrollments and revenues, said John R. Curry, managing director of Huron Consulting Group. “It happens a lot at public institutions when they’re seeing state appropriations decline,” he said. “They need more people focusing on revenue generation.”

While Virginia has not finalized exactly what its model will look like, other institutions that have adopted the structure provide examples of the pitfalls of such a shift, as well as some of the benefits and drawbacks of the system.

In their announcement about the change, Virginia administrators said they are adopting the model for several reasons. State laws restructuring higher education in Virginia have freed up the university to change how it finances university operations. At the same time, state appropriations have declined as a share of the university’s budget, and declined on a per-student basis since 2008, so the institution has been driven to grow other sources of revenue.

Administrators at both the University of New Hampshire and Kent State University, which adopted similar systems in 2000 and 2009 respectively, said declining state appropriations were a major driver behind the switch to the responsibility-center model.

While all institutions have been hit by the economic downturn, Virginia is not under the same sort of financial pressures that other public universities face. State funding has been a small share of the university’s revenue for decades. In 2010, the university’s endowment was almost $4.5 billion, as large as those at some Ivy League institutions. Still, administrators said, the recession has affected them and has driven them to be more budget-conscious.

Virginia administrators also said they want to be more transparent in exactly what the university is spending its money on in hopes of generating financial support. “To achieve our goals and earn the trust of those from whom we seek support (donors, the Commonwealth, federal sponsors, parents), our budget needs to be data-driven and transparent to all stakeholders,” they said in the Q&A.

The primary model for budgeting at most research institutions is to collect revenue, particularly from undergraduate tuition and state appropriations, into one general fund that is then divvied up among schools and colleges, typically based on how much the unit received in the previous year. The theory is that such an approach assures a focus on institution-wide objectives, and effectively requires wealthier professional schools to subsidize parts of the institution less likely to attract big donors or grants. But under such a system, deans have little financial incentive to attract new students or use space efficiently.

Under the Responsibility Center Management model, schools and colleges get the tuition revenue for each seat in a classroom and/or each major in a college or school. Other sources of revenue, such as charitable giving, research grants, investment income, and indirect cost recoveries, are also filtered back to the originating college or school. Costs, such as faculty salaries, operations and maintenance of buildings, and utilities are then charged to each school. Central administration takes some off the top to fund central operations, and services such as information technology and student affairs tend to charge colleges on a per-student or per-person basis to cover their operations.

At most institutions, the formula does not work out perfectly because the cost of educating students in different colleges varies dramatically, so institutions reallocate money gained through enrollment in schools with a surplus to those with deficits. For example, it typically costs a university more to educate an undergraduate majoring in engineering than one majoring in a liberal arts program, because the engineering student tends to have more work in labs and it is not as easy to create large lecture classes. Art students, such as musicians studying in a conservatory model, are also expensive to educate since faculty members tend to provide individualized instruction.

David Proulx, assistant vice president of financial planning and budgeting at the University of New Hampshire, said the engineering departments get a higher dollar value back for each student in a class than liberal arts departments. But he said incentives are in place to encourage both to be more efficient. Since funds are totaled at the school or college level, rather than the departmental level, costs can be spread out. Stanley T. Wearden, dean of Kent State’s College of Communication and Information, said his unit has managed to maintain small classes, an accreditation standard in some departments, by combining large lecture classes in order to free up resources for the smaller ones.

Administrators at both New Hampshire and Kent State said they put protections in place during the first few years of the new system so that no one department did saw a significant surplus or shortage.

Virginia’s timeline states that the new model will be in place for the 2013-14 fiscal year. Before then, administrators will work with deans and faculty to determine how costs and revenues will be measured and allocated.

Robert Kemp, a business professor at Virginia and chairman of the university’s Faculty Senate, said faculty members at Virginia are generally enthusiastic about the change, particularly because it gives professors more say in the budget process. “It’s not that there isn’t some apprehension and uncertainty about the change,” he said. “But I think we’re encouraged that faculty are now empowered to make decisions about what to do with the budget. The inclusiveness is very exciting to us."

Proulx said devolving the budget process has increased knowledge among faculty members and students about what exactly the process entails and how their actions are affecting a division's bottom line.

At both New Hampshire and Kent State, adopting the new budgeting process drove colleges and the institution as a whole to cater more toward student demand. At New Hampshire, the College of Health and Human Services went from offering four sections of American Sign Language to offering 10 sections of the course. As a whole, Kent State, by updating its curriculum to make it more appealing to students, grew enrollment by 22 percent.

A major issue raised by the change is the potential for individual schools to adopt their own administrative services, doubling up on what other units or the central administration is already doing. When management consultants looked at university budgets in 2008 and 2009, they found that decentralized administrative operations such as information technology, purchasing, and human resources were costing institutions millions of dollars.

That can be avoided, Curry said. If a school or college decides to adopt a service that is already provided at the institutional level, administrators can continue to charge the school for the shared service. By communicating what the bill entails, they can encourage the use of collective services.

Administrators at Kent State University said collaboration and frequent communication between administrators in different schools and colleges and the central administration have been the keys to keeping costs down.

A system that gives deans more budgetary authority also asks for a greater administrative commitment for middle management. They have to have a greater understanding of costs and revenue streams, which some academics might not be familiar with before entering such positions. Wearden said his job is more budget-oriented than it would have been under the old financial system.

“It requires a strong center and strong schools,” Curry said. “If you have a weak center and strong schools, a university can lose the capacity to act when it needs to. If you have a strong center and weak deans, it typically will not create dynamism and entrepreneurship that it’s designed to produce."


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