Hers Institute 2016 Budgeting This Session Will Include a Discussion of: The Purpose of the Budgeting Process Budget Types Approaches to Budgeting The Budget Process
Why do we participate in the budget process? What is a budget? It is a FINANCIAL MAP of the institution s strategic plan -- guides an institution on its journey in pursuit of its mission. Why Budget? Detailed RESOURCE ALLOCATION PLAN to outline how the institution s resources will be utilized to achieve institutional goals. A FORECAST of the institution s financial picture at some point in the future. A CONTRACT between management and the operating units charged with carrying out plans for the institution. Used as a management tool to control or achieve ACCOUNTABILITY from budget managers.
What are the types of the budgets used by institutions? Budget Types Operating Budget Capital Projects Budget Restricted/Special Projects Budget
The most commonly known and discussed budget type. Operating Budget The budget that captures the operating revenues that are used to finance current expenses (the vast majority of revenues collected during a period are expended during that same period; unexpended revenues are used as reserves). Operating budgets capture the day to day expenses incurred by the institution to achieve its mission. EVERYONE CAN CONTROL SOME PORTION OF THIS BUDGET
The Operating Budget (Revenue Sources) Operating Budget Tuition and Fees Governmental Gifts Appropriations; Grants & Contracts (Direct & Indirect Cost) Federal, State, and Local Endowment Income Auxiliary Enterprises Patient Services Other
The Operating Budget (Expenses) Expenses are displayed using either the natural classification or functional classification (programmatic classification). Operating Budget Natural Classification expenses are identified by type versus purpose (salaries, benefits, travel and supplies). Functional (Programmatic) Classification - expenses are organized by the nature of the activity the expenses support (instruction, academic support, student support, and institutional, etc.,) Most Operating Budgets contain RESERVES for future capital work
This budget maps out the finances for construction and other acquisition plans related to a campus s physical facilities and infrastructure. Capital Projects Budget It addresses the revenues, expenses and reserves much like the operating budget. The revenue sources might include: tuition and fees; governmental appropriations; auxiliary revenues; or gifts. Additional financing considerations include the use of reserve or borrowed funds.
Capital Projects Budget Reserve funds reserve funds are funds that have been accumulated through savings or have been funded as a part of the operating budget. Institutions often specify that a certain portion of an annual operating budget be set aside to cover cost that will be incurred in future periods. Borrowed funds borrowed funds are either construction loans or long-term bonds that are used to finance the acquisition or construction of new facilities, major equipment, or infrastructure upgrades or additions. Colleges and universities typically use tax-exempt bonds to fund capital expansion.
Restricted/ Special Projects Budgets Many institutions prepare budgets focused only on restricted funds. In these instances resources are provided by external parties and carry stipulations about how the resources can be expended. Restricted budgets indicate resources and expenses for specific activities. Examples include: endowment income for scholarship or library funds; federal grant programs (Title III, Upward Bound, etc.,); externally funded research projects.
Incremental Budgeting Zero-Based Budgeting Approaches to Budgets Performance Based Budgeting Formula Budgeting Responsibility Center Budgeting Initiative Based Budgeting Hybrid Model
Using incremental budgeting each program or activity s budget is increased by a specified percentage. The theory supporting the use of incremental budgeting is that the basic aspects of programs and activities does not change significantly from year to year. Incremental Budgeting At some institutions differential factors are use for various organizational segments. For example, once a certain category of expenses has been budgeted for (salaries, utilities, debt service, etc.,) the institution may apply one percentage increase for academic units and a different increase for non-academic units. Strengths most efficient approach. It is simple to implement, more controllable, adaptable and more flexible because it does not include an emphasis on analysis. Weaknesses maintains the status quo and does not integrate the impact of planning assumptions or decisions. It does not take into consideration what is being accomplished through the base budget and it avoids the question of whether there are more optimal resource allocations. Most widely used budgeting technique.
Zero- Based Budgeting (ZBB) This budget approach assumes no budget from the prior years; instead, each year s budget begins at a base zero. Each budget unit evaluates its goals and objectives and justifies its activities in terms of the benefits of its activity and the consequences if it were not performed. A decision package is developed for each activity which includes a description of the activity, a definition of alternate levels of activity, performance measures, and the costs and benefits. Strengths the review of the decision packages provides decision makers with a better understanding of the institutional activities than the other budget techniques. Weaknesses it does not assume any budget history; it does not recognize commitments that are continuous (tenured faculty members, senior administrators); consumes an enormous amount of time and generates massive volumes of paperwork.
Primarily used by public institutions, formula based budgeting is a procedure for estimating resource requirements through the relationship between program demand and program cost. These relationships are most often expressed as mathematical formulas that can be as simple as student-faculty ratio, or as complicated as an array of cost per student credit hour by discipline for multiple levels of instruction. Formula Based Budgeting The basis for budget formulas can be historical data, projected trends, or negotiated parameters to provide desired levels of funding. Strengths the quantitative nature of most budget formulas gives them the appearance of an unbiased distribution of resources; in a stable economic environment it helps reduce uncertainty by providing a mechanism for predicting future resource needs. Weaknesses because it often focuses on historical data it can discourage new programs or revisions to existing programs; given its focus on quantitative data it can suffer from the same faults identified in incremental budgeting; they can have an unequal or even negative impact on participating institutions.
Performance Based Budgeting (PBB) Performance based budgeting places its focus on outcomes. Specific outcomes are defined in both quantitative and qualitative measures. Explicit indicators of input-output relationships or indexes relating resources to outcomes are defined. Goals are specified in terms of performance measures (desired input-output ratios). The development of performance measures typically flows from the state to the institution and frequently may not reflect an understanding of the factors influencing the measure. Strengths provides a mechanism for allocating supplemental resources when measures are achieved. Weaknesses performance measures at high levels of program aggregation are not easily linked with organization divisions and departments - the structure used to allocate resources on most campuses.
Responsibility Center Budgeting (RCB) Every Tub On Its Bottom Also know as cost center budgeting, profit center budgeting, revenue responsibility budgeting, is the technique where units manage the revenues that they generate. Rather than a central focus on budgetary control, the emphasis shifts to program performance. Under RCB, schools and colleges and other organizational units become revenue centers, cost centers, or a combination of the two. Based on the activity occurring within the unit, all revenue that it generates are assigned to it, including tuition & fees, research grants and contracts, gifts, and endowment income. Strengths this technique helps communicate the message that academic decisions have financial consequences. Weaknesses this technique is accused of focusing too much attention on the bottom line versus academic quality or other priorities; a lack of coherence between planning and budgeting may evolve as a result of unit autonomy; may encourage competition/duplication between schools; institutional priorities may be ignored; difficulty in developing formula for assigning central costs.
This technique is considered a structural approach to the establishment of a resource pool for funding new initiatives or enhancing higher-priority activities. Initiative Based Budgeting (IBB) IBB provides the side benefit of assuring that units conduct a review of the existing activities to make certain that they remain productive. Example: an institution may require that all units reduce their base budgets by 2% to fund a pool. Once funded there are many ways to reallocate the savings but most include a proposal process. All units seeking to obtain funds from the pool are required to submit a proposal identifying the proposed activities, the institutional priority that the activities satisfy, and the amount requested. It is important to note that IBB is not a technique that can be practiced indefinitely.
This approach combines several of the methodologies we ve discussed in order to take advantage of strengths and minimize weaknesses. For example, Hybrid Model Incremental base budget, with new resources allocated using performance, formula, or initiative models. Responsibility centered budget, with a significant tax to be re-allocated on an initiative model. Zero-based budget for 1/3 of units each year so that every 3 years every unit is subject to this practice. For 2/3 of units not using zero-based budget in a given year, incremental model is used.
Centralized versus Decentralized Budgeting The Budget Process The Budget Cycle Factors Affecting the Budget Process Critical Steps in the Budget Process
Centralized vs. Decentralized Budgeting (Smaller institutions = centralized; larger institutions typically = decentralized) Practice Centralized Decentralized Budgets are estimates, subject to change President, VPs make changes Deans/ dept. heads Faculty Hiring Decisions Provost approves Dean/ dept. heads Level of Budgetary Control At object level At fund level Capital Investment Funded from central reserve Funding at school, dept. level Recruitment Packages Funded from central reserve Funding from school s reserves Contingency Reserves Held centrally Deans/dept. heads planning for contingencies Budget Reductions Decisions Pres, VPs make changes Deans/dept. heads make changes Priority Setting Centrally driven School driven Annual Giving/Fundraising Central effort Coordinated centrally, achieved in schools Faculty/Staff Positions Managed centrally Managed at dean s level Faculty/Staff Vacancy Savings Reverts centrally Retained by dean/department head Year-end Surplus/Deficit Reverts centrally Retained by dean/department head F&A/Local Funds Managed centrally Managed at dean s level
Operating Budget Cycle The Budget Cycle The operating budget cycle runs from the beginning of the initial research phase and analysis through the completion of the audited financial statements. Once the audited financial statements have been completed an analysis is typically completed to determine the accuracy of the original budget projections. Timeline: Typically 12-24 months, although the timeline can be longer for public institutions. Capital Budget Cycle Capital budget cycles are typically longer than the operating budget cycle due to the types of projects covered by these budgets. This budget cycle begins with the conception of the capital project and runs until the final product is placed into service. Timeline: It is customary for capital budgets to span multiple years (2 6 years).
Factors Affecting the Budget Process Institutional Character Mission/Goals Access Research/Teaching Stakeholder Involvement Board of Trustees Donors Government (State, Federal, Local) Legislators Students and Families Process Transparency Bureaucratic /Democratic Who is on the Team Decision Making Authority Centralized/Decentralized Trends Economic Demographic
Close-Out and Analysis of Prior Year Critical Steps in the Budget Process How did we end up? What does that mean for next year? What went well? What went wrong? Changes in the future? Future Year Planning Developing Budget Assumptions Revenue Drivers Expense Drivers Communicating Budget Guidelines Preparing the Budget Submission Budget Review and Approval Budget Implementation
Two types of research funding: Sponsored research (external funds; deliverables) Non-sponsored research (gifts and internal funds) Research Definitions Two types of research costs: Direct Costs identified specifically with a particular sponsored project, relatively easily with a high degree of accuracy. Facilities and Administrative (F&A) Costs (indirect or overhead costs) incurred for common/joint objectives, not identified readily and specifically; OMB A-21 says you must have a negotiated F&A Rate to recover indirect costs. 23
F&A (Indirect Cost) Rate F&A Costs Organized Research Base F&A Costs: Indirect Costs Related to Research Facilities Costs: Capital and Equipment, Operations and Maintenance Costs, Interest on Debt, Depreciation Administrative Costs Organized Research Base: Total Direct Research Expenses Some Costs are NOT allowed including equipment and capital expenditures, space rental costs, student benefits, etc. UMass Amherst FY11 Rate = 58% RISD FY13 Rate = 45%
F&A Revenue Distribution Varies by Institution Centralized: All F&A Revenue is retained centrally AND indirect costs are born centrally Decentralized: All F&A Revenue is distributed to research departments AND all indirect costs are allocated to research departments Hybrid: A portion of the F&A Revenue is distributed to research departments and a portion is retained centrally to cover indirect costs funded centrally