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?.
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…
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.
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.
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.
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 huge advances.
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.
Examples of units that are centrally funded
(not subject to formula):
General Counsel’s Office
Deans retain authority to allocate $ to Departments on whatever basis they choose.
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
2. Student Fees
Attributed according to tuition shares
3. Indirect Cost Recovery
Attributed to unit where G&C direct expenditures occur
Attributed to unit whose account balance earned the interest
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.
Direct operating costs billed to units that occupy space.
B. Maintenance, custodial, grounds, refuse/recycling, etc.
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.
“…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.
[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.”
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.
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.
Very Short Term:
None, because units will be held harmless.
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.
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.