Slide 1: Budget Principles How is this for a bold look? Hopefully this bold and bright red design will help to keep you awake and focused on some of the most important big picture budgeting principles. This is Jim Austin and I will be leading you through this presentation. Slide 2: Student Learning Outcomes There are only two SLOs for this brief presentation. They are to know my version of the big six budgeting principles and to be aware that every district will have additional considerations and principles. Slide 3: The Big Six Budgeting Principles in Every District This is my list of the Big Six budgeting principles in every district. In reality every chief business officer in the community college world would have a slightly different version of this list, but I think they would all look pretty similar to my list. In addition to some version of a Big Six list each district s budgeting process will be shaped by local factors such as its governance culture, relative political strengths of the various constituencies, and, of course, personalities of the players. In the rest of this lesson we are going to go through each of the six principles. Let s get started. Slide 4: Accreditation Standards It is impossible to over emphasize the importance of the influence the AACJC has asserted into the budgeting processes over the last several years. Just look at Compton losing its accreditation and the on-going and high profile situation in San Francisco. The primary AACJC standard in terms of budgeting is Standard III, Resources, and in particular the sub-standard III.D, Financial Resources, but there are other standards that also have huge impacts on the budgeting process. For example, Standard I, Institutional Mission and Effectiveness dictates that the budget development process must be inclusive, collegial and continuous. Let me read excerpts from two sections of Standard I to illustrate my point. First, from I.A.4: The institution s mission is central to institutional planning and decision making. In terms of the budgeting process that standard means that the institution must be able to demonstrate that all budgeting priorities and decisions are tied back to the district s mission and the related goals and objectives. Also from Standard I, I.B.2 to be precise, there is a blockbuster of a requirement that, The institution sets goals to improve its effectiveness consistent with it stated purposes. and that The institution articulates its goals and states the objectives in measurable terms. In other words, the budgeting process must have measurable performance indicators that will be used on a continuous and on-going basis to evaluate the effectiveness of the budget allocations. Finally, in terms of an inclusive and collegial process, Standard IV, Leadership and Governance, sub-section IV.2.a requires that Faculty and administrators have a substantive and clearly defined role in institutional governance and exercise a substantial voice in institutional policies, planning, and budget that relates to their area of expertise. To recap the major takeaway for 1
this discussion, the budgeting process is shaped by many areas of the AACJC standards, not just Standard III. Now let s briefly discuss each of the requirements listed on this slide. In terms of process, as I mentioned above, it must be inclusive, collegial and include a continuous evaluation of allocations against the mission and goals of the institution. When you think of the budget process, think of a flow around a circle, not down a straight line. I ll talk more about the realistic estimation of revenues in the next slide. When talking about reserves and balances it is important to understand the difference between the two terms. Balance refers to the unspent funds at the end of the fiscal year. Within that balance will be uncommitted, committed and reserve funds. AACJC requires that there be reserves for known future commitments and for unforeseen contingencies. Although California statues and codes do not require a minimum contingency reserve for community colleges, the AACJC considers 5% of budgeted unrestricted general fund expenditures to be the minimum for the contingency reserve. To me the requirement to fund on-going commitments with on-going revenue sources seems like a no-brainer, but you would be surprised how often we find districts that don t do it. A current example of that type of situation is when a district negotiates a raise that is predicated on its level of income including the EPA (Education Protection Act) funding, which is not ongoing. It is really critical that one-time funds are never used to fund on-going expenditures. In some cases a district simply can t establish a funded reserve for a major future commitment. In some cases the AACJC standards allow for that as long as there is a plan in place to fund the future commitment. The most common example of that relates to the OPEBs, the Other Post Retirement Benefits liability of a district. Several years ago GASB, which stands for the Governmental Accounting Standards Board, issued a requirement that districts use actuarial projections to establish the cost to fund the future non-pension benefits to be provided to all retired and active employees. Primarily OBEBs are medical insurance premiums. GASB did not require that the huge future liability be funded, just that it be calculated and that the liability and plan to fund that liability be clearly stated within the audited financial statements. AACJC simply requires that a district comply with the GASB requirements. Let s move on to the next of the Big Six budgeting factors. Slide 5: Realistic Estimation of Potential Revenue The easiest way for a district to produce a balanced budget is to over-estimate its revenues. Remember that in the California community college world a district s revenues are not really firm until at least a year after the district s budgeting process starts, so all through the fiscal year the revenues are only estimates. As we discussed in a previous lesson, there are many internal and external influences on a district s revenues. Due to that uncertainly the tendency of the CBOs is to budget revenues very conservatively, but that is counter balanced by the need to provide as much funding as possible to serve the needs of the students and pursue the 2
institution s mission statement. Especially since the forecasting of revenues is as much art as science, it is critically important that the process for the projections is transparent, and that each year be viewed in the context of multi-year trend history and projections. At the very least the revenue projections should be for three years, but five is even better. Now let s discuss enrollment management. Slide 6: Enrollment Management The subject of enrollment management is an entire term-long class in itself! By enrollment management I am referring to the holistic process of developing the schedule of classes and assigning instructors to those classes in the most cost effective manner that serves the needs of the students and maximizes the income to the institution. Wow, isn t that a mouthful! To truly achieve that holistic goal the instructional, student services and business divisions all must work closely together, and the labor negotiators must strive to not tie the scheduling hands of the institution. The fiscal division will estimate the number of FTES that needs to be generated to maximize the FTES funding, the student services division, especially the counselors, must chimein concerning continuation, completion and transfer needs, and then the instructional division needs to pull that all together within the framework of the faculty collective bargaining agreements. The districts that do the best job with enrollment management have sophisticated quantitative programs that historically tract for all class sections the fill rates, completion rates, efficiency ratios and other data in order to meet the revenue-generation and students needs in the most cost effective basis. It is important for you to understand that the academic schedule is the single biggest driver of any district s operational expenditures. Again, we could spend an entire term on this subject, but we need to move on. Slide 7: Fifty Percent Law Like it or not, the 50% Law is a law, the law isn t going to go away in my lifetime, it must be obeyed, and there are serious financial and political penalties if a district fails to comply with the law. This slide give you the highlights of the 50% Law. In terms of budgeting, the budget simply must be built to comply with the law, period. Virtually every resource allocation decision in the unrestricted general fund must be made in the context of how it will impact the 50% Law. The vast majority of districts are barely above the 50% line, and, ironically, the districts that are the most above it seem to be in financial trouble and have accreditation issues. Fiscally, if a district fails to meet the 50% requirement the chancellor s office is required to reduce the apportionment base funding to the district by the amount of the deficit ouch! The 50% Law is a controversial and complex subject, and we could spend a lot more time discussing it, but we need to move on to the next of the Big Six principles. Before we move on let me caution you not to confuse the 50% Law with its mandated penalties with the toothless 75/25 full-time to part-time goal that was in Proposition 98. &5/25 is only a goal and bares no relationship to the 50% Law. Slide 8: Full Time Faculty Obligation (FON) 3
This is another legal requirement related to faculty staffing that has serious financial penalties for non-compliance. This is another controversial subject for a host of reasons including how the original base FONs were set for the districts. But, again, it is the law, there are serious financial teeth to the law, and so the budgeting process simply must ensure that the FON is met. As with the 50% Law, if a district misses its FON the chancellor s office is required to reduce the base apportionment to the district. In this case the base apportionment is reduced by about $60,000 times the deficit number of FTEF (Full Time Equivalent Faculty). The FON has a significant impact on a district s budget because the reality is that it is much less expensive to teach a class with an adjunct teacher than with a full-time tenured teacher. In one district I recently worked with district-wide the average cost to teach a class section with an adjunct was $3,000 but $10,000 with a tenured teacher. So, all other things being equal between two districts, if one district has a lower FON it will be able to offered more classes to generate more revenue-earning FTES for the same amount of instructional dollars. But going back to the bottom line on this slide, don t miss your FON! Again, do not confuse the FON with its mandated penalties with the 75/25 goal that came from Proposition 98. Slide 9: Collective Bargaining After the scheduling of classes the collective bargaining agreements have the most impact on a district s expenses. Let s take a look at some of the major district costs that are set in the collective bargaining agreements. Compensation includes both salaries and benefits. In terms of salaries, there is usually a step & column matrix for every approved position description in a district. The vertical axis (steps) of the matrix is number of years worked. The horizontal axis (columns) is the professional advancement level. For academic employees the columns would include Masters, Masters plus x postgraduate credits, and doctorate. The number of steps and columns are bargained, as is the dollar amount in each step/column box. Compensation also includes specified amounts for all sorts of additional work above the basic assignments. Unions push hard for such extra pay but district administrations push to have the work included within the compensation for the primary assignment. Compensation also includes benefits what types of health & welfare benefits will be provided and at what cost, how many paid sick days, etc. With the rapidly increasing cost of medical care many districts have capped the amount of cost per employee, and increased co-pays in an effort to somewhat contain the cost of the health & welfare programs. Faculty load is a huge cost factor in a district. Load refers to what a faculty member must do within the assigned work week. In the very simplest terms the load defines the number of student contact hours that must be taught in a week, or the number of counseling hours that must be worked. For the teachers the higher the load, the more hours of contact there is and the less instructors it takes to teach the same number of students. All other things being equal, 4
the higher the loads the less expensive it is to teach the same number of students. Load also applies to counselors, librarians and any other academic employees in the bargaining unit. Faculty working conditions include many potentially high cost situations such as sabbaticals, professional development, offices, evaluation process and much, much more. Non-academic employees, primarily the classified employees also have bargaining agreements that establish their work weeks, number of vacation days, health & welfare benefits and other working conditions. As I mentioned in a previous lesson, collective bargaining constituencies strongly advocate for optimistic revenue projections to fund better compensation for their members. In some districts this has led to the use of short-term, one-time funding to bail out compensation agreements that are unstainable from on-going resources. Depending upon the composition of the board and who funded the election campaigns, the unions push for aggressive revenue can be a very powerful influence on the district s revenue projections. In sum, after the district sets it academic schedule, the collective bargaining agreements will determine how expensive it is to staff that level of instruction and provide the necessary support services. Slide 10: Other Budgeting Considerations As I have said frequently, every district is different and every district has its unique budgeting considerations, powerful constituents, organizational history, demographics, personalities I could go on and on. Having tried to stress the uniqueness of the districts, I think the Big Six principles still apply to every district, but you always have to be aware of every district s uniqueness Slide 11: Review of the SLOs Let s re-visit the simple SLOs for this lesson. Can you recall my six budgeting principles, and does it make sense to you that every district will also have its unique set of considerations, too? Slide 12: The End This is the end of this lesson. 5