2014 Planning & Budgeting Forum

Transcription

1 2014 Planning & Budgeting Forum The Accounting of RCM September 23, 2014 Denver, CO

2 Conference Session Speakers Name Title Contact Details Andrew L. Laws Managing Director (session facilitator) Huron Consulting Group (312) Bryan J. Elmore Craig W. Woody Director, Budget Services Vice Chancellor, Business and Financial Affairs Auburn University (334) University of Denver (303)

3 Discussion Topics Responsibility Center Management (RCM) Budget Redesign Experiences Auburn University ( Transitional Perspective) University of Denver ( Mature Perspective) Redesign Topics of Interest for Controllers 3

4 Budget Redesign Context An Inside Higher Ed Survey reported that over 20% of all institutions and 25% of doctoral institutions implemented changes in the 36-months following the onset of the Great Recession (1) Great Recession Source: Inside Higher Ed Survey of College & University Business Officers; Huron Consulting Group benchmarking 4

5 Available Resources Publications Curry, et. al: Responsibility Center Management, A Guide to Balancing Academic Entrepreneurship with Fiscal Responsibility (2013) Goldstein: A Guide to College and University Budgeting, Foundations for Institutional Effectiveness (2012) Priest, et. al: Incentive-Based Budgeting Systems in Public Universities (2002) Whalen: Responsibility Center Budgeting: An approach to decentralized management for institutions of higher education (1991) Presentations SACUBO Annual Meeting University of Virginia NACUBO Budget Forum: Drexel University University of Kentucky Texas Tech University NACUBO Annual Meeting University of California, Davis Iowa State University 5

6 Session Objectives Expand on existing resources by adding a controller s perspective Specific Objectives: Identify common accounting implications Help participants better understand key topics of consideration to share on their campuses Share how other institutions have addressed selected issues 6

7 Incentive-Based Budgeting (RCM)

8 Overview of Budgeting Models Common Budgeting Models 1 Incremental Budgeting Formula Funding Performance Funding Incentive-Based (RCM) Centrally driven Current budget acts as base Increments (decrements) adjust the base Focus is on expenses Used by 60% of institutions Used by 79% of public doctoral institutions Unit-based model Focus on providing equitable funding Unit are input-based Annual fluctuations are driven primarily by the quantity Used by 26% of institutions Used by 45% of public doctoral institutions Unit-based model Focus on rewarding mission delivery Unit rates are output based Annual fluctuations are driven primarily by changing production Used by 20% of institutions Used by 26% of public doctoral institutions Focus on academic units Devolves revenue ownership Allocates costs to revenue generating units Utilizes a centrally managed subvention pool Used by 14% of institutions Used by 21% of public doctoral institutions (1) Adoption rates from the 2011 Inside Higher Education Survey of College and University Business Officers; Percentages do not add to 100% due to hybrid budgeting models 8

9 Incentive-Based Budgeting Spectrum Contemporary RCM Higher degree of central control Incentive-Based Budget Model Iterations Traditional RCM Some centralized control Each Tub on its Own Bottom (ETOB) Extremely de-centralized model Local units keep a majority of their revenue but pay a higher subvention tax Through increased tax revenue, central administration has greater ability to subsidize colleges and fund strategic initiatives Higher tax rates, typically between 15 and 20% (in addition to indirect cost rates) Most commonly implemented since 2005 Local units keep most of the revenue they generate, but give up some to a central pool through a subvention tax paid Taxes generated can be used by the central administration to subsidize colleges and fund strategic initiatives Tax rates are generally less than 10% (in addition to indirect cost rates) Most frequently implemented from 1990 to 2004 Academic units essentially operate as their own financial entities Very little central strategic control Under-performing units must cut costs or generate more revenue to cover any losses incurred Few U.S. institutions use this extreme iteration 9

10 Illustrative University Funds Flow 10

11 Illustrative RCM Funds Flow 11

12 A perspective of undergoing a redesign initiative.

13 Auburn University Institution Overview FY13 Operating Expenditures: $885.7 million Number of Colleges: 12 Number of Students: 29,960 University Designations Carnegie Classification Current Budget Model: Time in Budget Model Redesign: Public Land, Sea & Space Grant High research Hybrid (mostly incremental) 19 months 13

14 Auburn University Implementation Overview Auburn University began a budget model redesign initiative in January Auburn has completed a preliminary pro forma model, stakeholder outreach and consensus building, and infrastructure development. It is currently in a review process by the Faculty Senate. The model development support team has included the Provost and representatives from the Budget Office, Controller s Office, Office of Institutional Research, Facilities, and Student Financial Services. 14

15 Auburn University Illustrative Challenge #1: Reconciliation to Audited Statement Goal Model revenue and expense totals needed to tie out to the audited financial statement. Challenge All financial statement data needed to be included in the model while still reconciling to the audited financial statement. Resolution Reviewed and discussed year-end accrual entries, elimination entries, reclassification entries, and asset capitalization/depreciation to ensure it was handled appropriately. 15

16 Auburn University Illustrative Challenge #2: Chart of Accounts Alignment Goal The model should accurately reflect expense and revenue activity in the divisions and units where it occurred. Challenge The chart of accounts for select divisions did not align with the main campus chart of accounts. In the initial model development stage, this caused a misalignment of how expenses were classified and posted to select organizational units. Resolution It was necessary to conduct a deep review of the chart of accounts for select divisions and correct the points of misalignment to ensure consistency in reporting in future years. 16

17 Auburn University Illustrative Challenge #3: Revenue Tracking Goal The model needed to differentiate between sources of tuition and fee revenue to ensure appropriate allocation methodologies could be used. Challenge Tuition and fees are tracked in detail in a separate system, but are only distinguished by residency status in the general ledger. Resolution Crosswalks were developed so that tuition and fees could be devolved to the appropriate level of detail. The Controller s Office is now investigating the development of a reporting function that will automate the process in future years. 17

18 A perspective from years under a RCM model.

19 University of Denver Institution Overview FY13 Operating Expenditures $382.2 million Number of Colleges 11 Number of Students University Designations Carnegie Classification Current Budget Model Time in Current Model 11,500-plus Private High research Incentive-Based / RCM Hybrid 25 Years 19

20 University of Denver Implementation Overview The University of Denver implemented its current budget model in the early 1990 s. Each revenue-generating unit and all cost centers are separate responsibility centers with the ability to carryover revenues over budget and expenses under budget. Total operating unrestricted net assets are $102 million with $34.0 million belonging to decentralized units and $34.9 belonging to central reserves. 20

21 University of Denver Illustrative Challenge #1: Scope of Funds Management Goal Successful model implementation was dependent on budget officer s skill sets being aligned to support the new budget development process. Challenge Budget officer skill sets (to include full understanding of different fund types) varied across different units. Resolution Implemented model started with unrestricted revenues and expenses, adding the effect of release of temporarily restricted funds about 5 years after implementation; Additionally, DU s model tracks all sponsored project revenue and expense as a separate responsibility center owned by the Vice President for Research. 21

22 University of Denver Illustrative Challenge #2:?? Goal To design an incentive system that rewards enrollment growth and effective management of expense authority where budgeting and accounting are aligned with the University s structure for decision making and authority. Challenge Units tended to hold back all reasonably predicted enrollment growth to ensure that deficits were avoided, thus setting up relatively large tuition variations at yearend. Resolution As enrollment levels plateaued to more desirable levels, potential shortfalls (which we ve had) resulted in establishing an enrollment stabilization reserve which units cannot appropriate for spending. 22

23 Additional Questions/Topics

24 Additional Questions/Topics 1. What is the scope of funds? 2. How does revenue tracking change? 3. How does expense tracking change? 4. What are the cost allocation assumptions? 5. How are recharges handled? 6. How is deferred maintenance handled? 7. How are fund balances incorporated? 8. How do reporting expectations change? 9. How are taxes used to generate central funds? 10. Do funds flow in real-time? 24

25 (1) Scope of Funds Decentralized budgets are generally managed on an all-funds, cash operating basis. The all-funds approach routinely includes general, direct and indirect research, auxiliary, and gift funds Assumes that optimal decisions cannot be made unless all resources are considered Revenue focus through attempt to de-color money Accrual entries and other financial reporting adjustments are still necessary for external reporting Foundations are typically excluded 25

26 Scope of Funds Illustrative College XYZ Current Designated Restricted Sponsored Total Reve nues Student Fees $ 3,213,294 $ 177,155 $ - $ - $ 3,390,449 Net Undergraduate Tuition 77,760, ,760,104 Net Graduate Tuition 6,872, ,872,270 DeL Tuition 3,874, ,874,246 Other Tuition - 3,447, ,447,890 Student Tuition and Fees 95,914,528 3,625, ,539,573 Federal Grants and Contracts ,948,437 7,948,437 State Grants and Contracts , ,085 Other Grants and Contracts , ,390 Grants and Contracts Overhead 2,408,463 Revenue from affiliates - 13, ,206 Private gifts 5,000 N/A 198,697 N/A 203,697 Endow ment income , ,058 Investment income Other income - 91, ,205 Total Revenues 95,919,528 3,729, ,755 9,276, ,043,188 Revised Budget Focus Traditional Budget Focus Expenses Faculty Salaries $ 22,912,087 $ 1,733,828 $ 194,809 $ 1,258,249 $ 26,098,973 Non-Faculty Salaries 3,922,872 1,427, ,651 1,360,506 6,887,455 Student Salaries 3,177, ,962 36, ,152 4,216,971 Other Salaries 3, ,383 Fringe Benefits 7,243, ,656 97, ,442 8,857,131 Compensation Total 37,259,237 4,094, ,455 4,204,349 46,063,913 General Expenses 2,209, , ,609 4,108,702 7,004,586 Expense Recovery 15,789 (167,347) (10,075) (521,078) (682,712) Patient Care Activities ,607 2,698 Purchased Services 120, ,707 9, ,834 1,176,737 Tuition Remission & Restricted Scholarships 2,097,883 36, , ,628 2,623,056 Debt Service 2,752, ,752,730 Rent Payment - Tenet 190, ,868 Transfers 379,659 (379,659) Adjustments (1,224) Total Expenses 45,026,191 4,365, ,754 9,030,042 59,130,652 Unit Margin Before A&S Allocations $ 50,893,337 $ (636,628) $ 1 $ 246,140 $ 52,912,536 26

27 (2) Revenue Tracking Schools and colleges earn tuition and fee revenue through instruction and enrollment of students. The chart of accounts should allow revenue intended for specific functions or campus units to post directly to the recipients Algorithms must be created for non-specific revenues This facilitates opportunities to study margins, leading to more informed decision-making Differential fees/tuition may eventually be introduced to help offset high costs of certain disciplines 27

28 Revenue Tracking Illustrative Direct Tuition Revenue Tuition revenues for programs tracked specifically within academic units are identified within the general ledger Those revenues are directly assigned to the appropriate academic unit General Tuition Revenue The general tuition revenue pool is divided according to the proposed instruction-record split Sub-grouping allocated according to the academic unit s share of either instructed or enrolled credit hours Academic Unit Direct Tuition Revenue General Tuition Revenue 25% Record 75% Instruction Some institutions may elect not to have this division and instead allocate all tuition using only one metric or 100% as generated. 28

29 (3) Expense Tracking Limited change is needed for expense tracking, though direct allocations are generally encouraged. The chart of accounts should support detailed expense reporting needed to understand unit operations Treatment of centrally-born expenses may change: - Ex: centrally-paid fringe benefits Allocations should not create perverse incentives: - Ex: May be preferential to allocate undergraduate scholarships on an average basis to avoid any financial need biases 29

30 (4) Cost Allocations (Auburn) Administrative & Support (A&S) Unit net expenses are charged out to primary units based on select variables. Number of cost pools should be carefully considered Common allocation variables include share of direct expenses, square footage, and student headcount Number of pools and allocation variables should attempt to balance simplicity with economic reality Indirect allocations may not match existing overhead assessment rates, which generally do not reflect the full net cost of A&S unit operations 30

31 Cost Allocations Illustrative Few Number of Pools Many Simple Increases transparency Drives academic focus to revenues Provides flexibility to central administration Avoids functional witch-hunts Reduces time spent in committees Reduces perception of allocating uncontrollable costs Supports implementation buy-in Closer approximation of economic reality Provides functional accountability Connects costs and service levels Allows adjustments to balance start points 31

32 (4) Cost Allocations (Denver) Administrative & Support (A&S) Unit net expenses are not charged to primary units, but cost drivers are used in a year-end Contribution Margin Analysis. Actual charge does not get allocated as part of the budget process Approach is taken so that leaders of revenue-generating units can focus on enrollments, persistence, relevance of curriculum, etc. There is an underlying expectation that revenue generating units contribute to funding central A&S units 32

33 (5) Recharges Recharges are often in place to supplement the cost of administrative and support units. Recharges should be used when: Free nature of a good results in over-consumption Service accrues disproportionately to one group Service is deemed unwarranted, or is not in demand, by all units Service-level agreements are negotiated annually to ensure all units understand core services covered by indirect cost allocations The chart of accounts must be able to accurately track additional non-core services charged by administrative and support units 33

34 Allocation/Recharges Illustrative Illustrative Allocation: Square Footage (SQFT) Facilities square feet allocated evenly by square foot occupancy Allocated costs are net of unit revenues Illustrative allocation formula : Allocation PU n SQFT SQFTPU PU n Sum of all n Revenues SU n Expenditures SU n Primary Unit s share of square feet Support Unit s margin or (net expenditures) Allocation Formula Notes: PU = Primary Unit; SU = Support Unit For PUn, n represents each individual primary unit (academic units, centers & institutes, auxiliaries) 34

35 (6) Deferred Maintenance (Auburn) Allocation of building depreciation commonly serves as an initial proxy for deferred maintenance. Depreciation is often the only non-cash expense allocated as part of decentralized models Allocation is needed to reflect the changing expectations for space quality, which come with space charges If deferred maintenance costs are not traditionally funded, the allocation of depreciation may need to be phased-in, ensuring against the introduction of a new expense 35

36 (6) Deferred Maintenance (Denver) DU instituted a Deferred Maintenance Framework that centrally funds deferred maintenance costs for systems, shell, and core infrastructure. Requires units to fund their own program space renovations through resources they control Central administration and benefiting unit jointly fund buildings; this is a capital exp. decision always evaluated as a one off; each project has a different formula If long-term debt is incurred, principal and interest costs are allocated to the unit in the Budget Development process and in the Contribution Margin Analysis 36

37 (7) Fund Balances Colleges are allowed to carry-forward funds balances and must accrue liabilities for negative bottom lines. Fund balances should be incorporated into annual budget conversations Build up of local fund balances is encouraged and should be considered substitutes for central resources Capital budgets should be integrated with both operating budgets and plans for fund balances Policies are used to elaborate on items like favorable revenue variations and changes in leadership 37

38 (8) Reporting Expectations Increased accountability typically creates a need for more frequent, timely, detailed, and accurate reporting. Unit-level budget-to-actuals reports should be produced regularly to track budget performance Deans may need department-level financial details to effectively manage and forecast budget performance Demand increases for clean, useful, and easy-to-access financial and non-financial (e.g. credit hours, enrollment, square footage) data, potentially requiring new systems to facilitate access 38

39 (9) Taxation (Auburn) Central revenues are often generated through revenue taxes on college-level funds. Tax receipts create central funds known as a subvention fund Taxes should draw upon a diverse portfolio of revenues, while acknowledging taxation restrictions The tax rate and size of the subvention fund should be large enough to enable leadership to steer the University and provide neutral starting points at implementation 39

40 Taxation Illustrative Commonly Taxed Revenues Undergraduate Tuition Graduate and Professional Tuition Program and Course Fees General State Appropriations Indirect Cost Recovery (F&A Distribution) Investment Income Sales and Services Auxiliary Enterprises Other Revenue Commonly Excluded Revenues Grants and Contracts Direct State Appropriations Gifts and Private Support Mandatory Student Fees Endowment Earned Income Distribution Pass-through monies (e.g. Pell Grants) 40

41 (9) Taxation (Denver) DU considered and rejected taxation as it was viewed as a distraction from design of curriculum, fund raising, and admission efforts by revenue generating units. Allocation of costs typically borne through a tax system are calculated in a formal step-down method at the end of the year, shared with the Board and all division heads in the annual Contribution Margin Analysis. Resources necessary to pursue centrally funded initiatives are typically funded within the budgeted Operating Margin of $15 million plus smaller new initiative funds managed by the Provost and Vice Chancellor for Business and Finance. 41

42 (10) Timing Decisions must be made with regard to the timing of revenue and expense allocations. Some institutions opt for the allocation of revenues in real-time, to maximize rewards, while others implement smoothing rules Administrative cost allocations are typically based on budgeted expenses and historical consumption proxies (drivers) 42

43 Timing Illustrative Considerations How quickly should leadership behavior changes be rewarded? Should drivers include projections as part of multi-year averages? Should end of year adjustments be made to more accurately portray economic reality? Should drivers be updated from budget process planning at the beginning of fiscal year operations? 43

44 Concluding Thoughts

45 Impact on Decision Making Incentive-based models have the potential to change institutions by changing the culture of decision making. President s Executive Council: remove luxury of all things to all people by forcing difficult decisions President, Provost, and VP for Finance and Operations: force clarity regarding priorities and strategic initiatives Deans: know the full-cost of activities (academic programs, research, etc.) and prioritize them through cross-subsidies between their revenue generating activities and their mission-driven activities Administrative Units: connect service levels and resource levels Department Chairs and Faculty Members: see how activities drive funding for their respective units 45

46 Controller s Office Controllers serve in key leadership and accountability roles as the models are developed and implemented. Controllers should be consulted from the start of the model development phase to ensure an accurate scope of funds is considered Controllers routinely serve on budget steering committees to help set and review annual budgets and budget performance The Controller s Office reports on budget-to-actuals performance and helps school business officers develop more accurate projections 46

47 Review of Discussion Items Topic Scope of Funds Revenue Tracking Reporting Expectations Timing Cost Allocations Deferred Maintenance Fund Balances Taxes Expense Tracking Recharges Impact of Change High High High High Moderate Moderate Moderate Moderate Low Low 47

48 Concluding Thoughts 1. Institutional strategy must drive budget model, do not let budget model drive strategy. 2. Must balance simplicity with economic reality. 3. Some chart of accounts updates may be needed to accurately capture and account for revenue generation. 4. Budget models are often managed via Microsoft Excel, with no impact to general ledger reporting / accounting. 5. Decentralized models promote accountability, which requires enhanced tools and may have material impacts for management reporting. 48