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Activity Based Budgeting Paul Hopkins October 7, 2009

Activity Based Budgeting Paul Hopkins October 7, 2009. Why discuss activity based budgeting (ABB)? How does ABB differ from our current system? Is ABB all-or-none? What is experience of other academic institutions? What is the status of ABB at the UW at this time?. Why Discuss ABB?.

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Activity Based Budgeting Paul Hopkins October 7, 2009

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  1. Activity Based BudgetingPaul HopkinsOctober 7, 2009 • Why discuss activity based budgeting (ABB)? • How does ABB differ from our current system? • Is ABB all-or-none? • What is experience of other academic institutions? • What is the status of ABB at the UW at this time?

  2. Why Discuss ABB? The Provost is the chief financial officer. The Vice Provost of Planning and Budgeting (Paul Jenny, who advises the Provost on financial matters) is eager to explore the possibility of ABB at the UW. A Working Group appointed by the Provost, led by Paul Jenny will release a report urging that an ABB model be developed for UW, and that it influence resource allocation for FY2011. It might actually happen…

  3. ABB vs. Incremental BudgetingWhat we have now: Incremental Budgeting: New annual budget derives from incremental adjustment to previous year’s budget. Example: FY2010 budgets for the schools and colleges originated from varying percentage changes to FY2009 budgets, based upon arguments made by unit leaders. Budgeting by whining. Some believe the evolution of budgets with time is not well correlated to changes (up or down) in activity level.

  4. ABB vs. Incremental Budgeting Activity Based Budgeting: Aligns sources of revenue (e.g. tuition or indirect costs) with the activities they are intended to support. A portion of the annual budget for academic units derives from a formula that allocates resources based upon the recent activity of the unit. Annual budget for service units (also called “common goods”, such as library, police, grounds, advising…) provided by central allocation or fees paid by user academic units.

  5. Oversimplified Example of ABB: • The College of Calligraphy produced 100,000 SCH during FY2010. • The institution will allocate $100/SCH to all academic units for FY2011. • Formulaic portion of College of Calligraphy budget for FY2011 is 100,000 SCH X $100/SCH = $10,000,000. • This may be supplemented by a non-formulaic “General Fund Supplement”. • College of Calligraphy covers ALL costs from their total budget (Faculty, Staff, TA salaries, utilities, lab supplies, etc.).

  6. Oversimplified How? • Measure of activity could include other metrics (SCH, majors, degrees, Nobel Prizes, grant and contract activity…) • Allocations may be taxed to yield a central resource pool, distributed as General Fund Supplements. • Some costs may continue to be paid centrally (fringe benefits? utilities?)

  7. It’s not “All or None” ABB is only a partial departure from incremental budgeting, because it sets budgets by a combination of formula and arbitrarily determined increment. The existence of the general fund supplement allows the transition from pure incremental to ABB budgeting to occur in a revenue-neutral fashion. Units are “held harmless” initially. But budgets would evolve differently under ABB than under incremental system.

  8. It’s Not New Several public institutions have adopted variants of ABB. These include Michigan, Indiana, Toronto. There is a limited literature describing their experiences. Others are in various stages of planning or implementation, including Oregon, Minnesota, Arizona. No disasters. No huge advances.

  9. The University of Michigan has a decade of experience with ABB.What can we learn from their experience? Source: http://www.provost.umich.edu/budgeting/ub_model.html

  10. ABB at Michigan: 1997-98 Value Centered Management (VCM) 1998-present University Budget Model (UB Model) Notes: At Michigan, about 1/3 of the core instructional budget is state-provided and 2/3 is tuition derived. Michigan has full tuition-setting authority.

  11. UB System = UB Model + General Fund Supplement Formulaic Discretionary

  12. Not all Michigan unit budgets are activity based Examples of units that are centrally funded (not subject to formula): Libraries Museums Police Admissions General Counsel’s Office

  13. UB System sends $ from Provost to Schools/Colleges Deans retain authority to allocate $ to Departments on whatever basis they choose.

  14. UB Model allots “the lion’s share” of revenue to revenue-generating units. • Primary revenue sources are tuition, student fees, and grant and contract ICR. • Who “generates” tuition? • Does generator of tuition incur costs that tuition presumably is intended to pay?

  15. Revenues, and where they go… • Tuition 1997-02 100% unit of enrollment 2002-08 75% unit of enrollment 25% unit of instruction 2008-09 50% unit of enrollment 50% unit of instruction

  16. Revenues, and where they go… 2. Student Fees Attributed according to tuition shares 3. Indirect Cost Recovery Attributed to unit where G&C direct expenditures occur 4. Interest Attributed to unit whose account balance earned the interest

  17. Costs, and who pays them… 1. Financial Aid Centrally funded student financial aid billed in proportion to size of tuition allocation, not on basis of where students who received aid were enrolled or instructed. 2. Space Direct operating costs billed to units that occupy space. A. Utilities B. Maintenance, custodial, grounds, refuse/recycling, etc.

  18. Costs, and who pays them… 3. Taxes A. General Tax (25%). Tax on expenditures other than G&C. B. University Participation (2%). Cost to use Michigan name (!). C. Research Tax (11%). Billed based on G&C expenditures.

  19. UB System = UB Model + General Fund Supplement Formulaic Discretionary

  20. General Fund Supplement “…most important of all components…” Discretionary allocation above and beyond the allocation calculated by formula. Used at UM and elsewhere to A. Subsidize units that would not survive based upon formulaic allocation. B. Offset budget changes that would otherwise result from introduction of ABB or changes in the formula.

  21. The General Fund Supplement at UM can be negative [So they take some back.] “…some activity-based units have far more capacity to capture the necessary resources to fund their activities through the revenue streams that flow to them through formulaic calculations and thus do not need a positive GFS.”

  22. Charge to the ABB Working Group Charge is to explore an ABB approach: “First ,…develop a comprehensive list of issues that need to be addressed in reframing our budget model to one that more transparently aligns revenue generation with the activities associated with the revenue.” “Second, … develop an implementation schedule that includes significant changes to our budget model effective in Fiscal Year 2010-11.” “Finally, [create] … a list of the data points necessary to implement any proposed changes to the budget model.” Evaluation of whether such a model would fit our goals and culture is not in the charge. Development of a model is not in the charge.

  23. What Has the Working Group Accomplished? Identified/discussed in broad terms many issues and how they might be addressed. Arranged visits to UW for personnel from University of Michigan (Sept. 28) and Minnesota (TBA) with ABB experience. Created a report summarizing problems with current system (lack of transparency, lack of response to shifting activity levels), some goals for a new system, and recommending that a larger group explore a specific model.

  24. What might happen? • Deans might be assured that centrally provided instructional budget would not decline for some fixed time. Fundamental impact of ABB would be its influence on distribution of NEW funds. • Deans might cover expanded list of costs (salary increases, fringe benefits, utilities, and design/construction costs). • All expenditures would be taxed by Provost, who would use these funds to pay for common goods, new initiatives, etc. Tax rates could vary by expenditure type (instruction, research, capital).

  25. 4. Tuition and fees would follow students. • State funds might continue to be distributed incrementally. • Indirect costs would follow the school/college in which direct expenditures occur; perhaps a larger fraction would be distributed. • Endowment proceeds would continue to benefit current units, but expenditures would be taxed.* (*They already are, tax rate 1%/6% = 17%) • Course fees would continue to go to units in which they are generated, but expenditures would be taxed.

  26. Predicted Impact on A&S: Very Short Term: None, because units will be held harmless. Longer Term: Multi-decade trend is falling inflation-adjusted investment by states and rising tuition. Linking tuition revenue to college budget will make it harder for rising tuition paid by A&S students to subsidize instructional costs in other schools/colleges. Departments with high per-student costs will experience pressure to reduce costs.

  27. Special Bonus Slide! Why Do I Support Further Exploration of ABB? Charges to individuals (tuition) should be linked to the cost of their education. If there are tuition-based cross-subsidies (philosophy student subsidizing an engineering student…), they should be controlled and quantified. Our ability to explain to our constituencies (students, public, legislature, even our faculty!) how we use our current budget would be improved. Current system responds slowly if at all to activity level changes. It is hard to believe that pure incremental budgeting could be superior to a system that quantifies, even imperfectly, activity levels.

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