Budget Model Development

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Third Report of the Budget Model Development Committee

Mar. 23, 2006

Print version of this report

Word doc: 9 pages
Excel charts: Current budget model | Alternative model 1 | Alternative model 2

Introduction

The Budget Model Development Committee (BMDC) released its second report on January 31, 2006. Since that time the committee hosted two university-wide open forums and met with several groups to discuss the report. Several members of the university community also sent written comments which are posted with brief responses on the Budget Model Development web site. The feedback received during the last six weeks has proved very helpful and confirmed the most important issues and challenges that must be addressed prior to proceeding with a new approach to budgeting at Iowa State.

Several people commented on the difficulty of considering an alternate budget model without understanding the university's current approach. This report includes a description and diagram to illustrate the university's present budget model, one that has been in use for several decades.

There was also a suggestion that the committee should provide more than one alternative for consideration. This report includes Alternate Budget Model 1 and Alternate Budget Model 2. While these two alternate models share some features, they also include distinct methodological differences.

The committee originally intended for this third report to include a refined version of the budget model presented in the second report including preliminary formulas. The need to continue conceptual level discussions and settle out on larger methodological issues precluded this intent.

The primary aim of this report is to:

summarize issues and challenges that must be addressed prior to proceeding with a new approach to budgeting,
present the current budget model in contrast with two alternative models with the hope that the ensuing dialogue points to a budget model concept that makes sense for Iowa State, one that can subsequently be detailed and tested, and
recommend changes to the timeline for developing and implementing a new budget model.

The university signed a contract with John Curry and Jim Kemp of Huron Consulting Group who will:

serve as a sounding board for the committee,
share lessons learned from other universities,
critique alternative models under consideration,
develop a handful of scenarios to be used for testing alternative models under consideration,
comment on the readiness of the university's information systems, and
recommend a high-level implementation plan.

Curry and Kemp have a great deal of experience with alternative budget methods in higher education, have worked with many research universities, and are currently working on projects for the Indiana University and Harvard University.

The BMDC continues to invite dialogue with and feedback from the university community via forums, meetings, and the committee's e-mail address. budgetmodel@iastate.edu

The Budget Model Development web site provides wide access to the committee's work and to feedback received from the university community. http://www.iastate.edu/~budgetmodel/

Key Issues and Challenges

Feedback confirmed the following list of issues and challenges that must be resolved prior to implementing a new budget model at Iowa State University.

1. Interdisciplinary Activity: Support current and encourage new interdisciplinary collaborations particularly for research programs that include investigators from more than one college and that involve a center and/or institute, and for interdisciplinary degree programs that span more than one college.

2. Collegiality: Enact processes to safeguard cross-college cooperation and collegiality, and prevent decisions that are not in the best long-term interest of the university

3. Curricular Review: Acknowledge that a new budget model will very likely require modifications to the processes used for reviewing curricular and courses changes so that both evolve in ways that are in the best long-term interest of the university.

4. Quality: Include mechanisms that explicitly focus efforts on continually increasing academic/research quality and that avert short-term decisions to maximize the bottom line.

5. Graduate Tuition: Study alternative methods of distributing graduate tuition and increasing the number of terminal degrees awarded.

6. Indirect Cost Recovery: Reexamine the distribution of indirect cost recovery so that it flows to units responsible for carrying out the work and for direct and indirect expenses associated with each research contract/grant.

7. State Appropriations: Develop a clear and defensible approach to distributing state appropriations both in the initial year of the budget model and in subsequent years as amounts appropriated by the Iowa Legislature change.

8. Distance Education: Study and refine the approach to distributing tuition revenue generated by distance and continuing education courses.

9. Payments for Services: Develop a detailed list of services that units will be responsible for purchasing and the basis of charging for those services.

10. Service Levels: Consider different groups of services, e.g., "common good services" paid for off-the-top, "metered services" with charges based on actual consumption or a consumption proxy, and "open market services" where units can use on-campus or off-campus vendors.

11. College / Department Interface: Acknowledge the need for college deans to discuss and reach some conclusions about how resources provided to each college will be distributed among its departments.

12. Current Approach: Describe and diagram the university's current budget method to facilitate understanding of alternative models.

13. Alternative Model: Develop more than one alternative budget model for discussion and consideration.

14. Align Revenues, Expenses, and Responsibilities: Reinforce the basic principle that revenue generating units should receive that revenue to carry out instructional/research/outreach responsibilities including expenses associated with space, utilities, business functions, etc. that support the unit's work.

15. Institutional Fund: Provide more detail on the role and use of the institutional fund.

16. Carryover: Continue to reinforce the importance of carryover authority for the successful functioning of the alternate budget models.

17. Data and System Readiness: Continue to evaluate data and system readiness and make changes necessary for implementing a new budget model.

Budget Model Presently In Use

Description

Iowa State University's primary method of budgeting is currently "incremental budgeting" with some funding for new initiatives. For each new fiscal year budget, a budget unit's starting point is its previous year's base budget. On the first diagram, this base is represented by the two boxes labeled "Budget Base."

Each unit assumes that its previous fiscal year budget will be incremented -- increased when revenues increase and decreased when revenues decrease. Incremental change is represented by the boxes labeled "Annual Change." Thus, each unit's budget is the product of history and incremental change. Presently, there are no explicit links between a unit's responsibilities and its budget nor are there regular adjustments to general fund budgets as unit responsibilities increase or decrease.

The main form of incrementally increasing budgets is new funding for salary increases -- each unit's salary funds are increased by the percentage specified in the university's salary policy and used for awarding differential, performance-based salary increases to the unit's faculty and staff. Once a salary policy is determined, funds are distributed systematically to individual budget units.

Additional funding requests for unavoidable cost increases and new, strategic initiatives are solicited by the president from the vice presidents. These funding requests are reviewed by the vice presidents who consult with their advisory groups, and budget officers, as well as by the President's Advisory Committee on Budget Priorities and Planning. The president takes all of this advice and makes final decisions on funding requests and the university's salary policy in counsel with the vice presidents. Funds approved for individual funding requests are directed to the appropriate vice president who is responsible for ensuring that they are used according to plan.

During years of revenue decreases, the president assigns budget reduction targets to each vice president who is responsible for generating a budget reduction plan for all the units in their respective area.

It is important to note that tuition, state appropriations, and indirect cost recovery dollars lose their identity in the university's present approach to budgeting -- they are mingled in the general fund budget. While the total amount collected from each revenue stream is always known, the university does not attempt to use tuition dollars to fund some activities and state appropriated dollars for other activities. Revenues are used collectively to fund the mission of the university. It is also important to note that some special appropriation units, auxiliary units, and units that bring other forms of revenue into the university are assessed an administrative fee for the purpose of recovering part of the cost of facilities and business services that support those operations.

Reflection

A number of the responses to the second report of the BMDC suggested that the perceived problems with our existing budget model were overstated and could be remedied by relatively minor changes in current policies and practices. One suggested approach would be to retain highly centralized budget decision-making with some attempt on the part of the President and Provost to reward entrepreneurial behavior through the centralized budget allocation process.

The BMDC continues to believe that fundamental changes in our budget process are needed. In particular the Committee believes that creating a more direct link between revenue generation and resource allocation will more accurately reflect the current and future economic environment in which the university operates. Presently, it is extraordinarily difficult to move resources among units to address enrollment growth or declines. Existing budgeting practices focus almost exclusively on state appropriated budget units with very little attention to revenue generated by auxiliaries, grants and contracts, and other revenue sources that now constitute almost half of the university's annual revenue. State appropriations have declined from nearly 40% of annual revenues in 2000 to less than 29% of total revenues today. The long term outlook for higher education in Iowa and in most of the nation suggests that state appropriations cannot be relied upon to adequately fund the infrastructure of the university, provide additional resources for units that are growing and, at the same time, protect resource allocations to units that are experiencing declining enrollment. It seems clear that the future will involve increasing dependence on self-generated revenues and the university's budget process needs to reflect this reality.

The BMDC feels that a budget mechanism that more automatically moves resources among units to reflect enrollment shifts, changes in research activity, and changes in consumption of services with the ability to manage revenue fluctuations through the accumulation of carryover reserves has the potential to better position Iowa State to deal with this economic outlook. The BMDC also hopes and expects that a new budget model will spur generation of additional revenue. The Committee understands that there many areas important to the overall quality of the institution that do not generate revenue, thus mechanisms like carryover reserves and the institutional fund will be needed to fund a wide range of initiatives that support the university's mission and help carry out its vision of being "the best at advancing land-grant ideals and putting science and technology to work."

Diagram of Budget Model Presently in Use -- Revenue Flow (See Excel file.)

Alternative Budget Models

Two different approaches to distributing revenues and expenses are represented in the alternative budget models that follow. Each is submitted for review and discussion with the goal of closing in on a conceptual approach that will be detailed and tested. The goals, measures of success, and principles included in the second report and reproduced below will continue to guide the BMDC's work and shape its recommendations.

Academic Goals

The primary purpose of the new budget model is to serve as a tool that will help Iowa State University more effectively accomplish its mission, reach its vision of being "the best at advancing the land-grant ideals and putting science and technology to work," and address strategic plan priorities -- Undergraduate, Professional, and Graduate Education; Research; Economic Impact; Iowa Life, and University Life -- with excellence through innovation and continuous improvement. It is particularly important that the new budget model reinforce an environment favorable for interdisciplinary collaborations that have proven so important to advancing the university.

Measures of Success

The new budget model will be considered successful if:

The general quality of the university's academic programs increases,
Measurable progress is made on the university's strategic plan,
Undergraduate and professional student enrollment targets are met and tuition revenues are maximized,
The number of graduate students earning terminal degrees increases and graduate tuition revenues are maximized,
Revenues from sponsored funding and indirect cost recovery increases,
The president and provost have adequate resources to affect strategic change and reward quality, and
Support and services are provided in an increasingly efficient and cost effective manner.

General Principles

The budget model has been designed to:

Link revenue distribution to the responsibilities and performance of major academic and administrative units,
Distribute revenues and costs in a manner that is transparent, easy to understand, and informed by data,
Increase flexibility, enable multi-year budget planning through some form of carryover authority, and enable simulation of future budget years,
Distribute the cost of providing central administrative support and services to units that utilize and benefit from the support and services,
Work effectively during years of revenue growth and revenue decline both for the university and for major academic and administrative units, and
Hold formulas for distributing revenues and expenses stable for a defined period of time, e.g., 3 to 5 years, before changes are considered and then only after a careful evaluation process.

Alternative Budget Model 1

Concept

Alternative Budget Model 1 is a refinement of the model included in the second report. This model is built on the following eight premises.

Tuition, sponsored funding, and indirect cost recovery revenues flow entirely to the colleges, centers, institutes, and/or units that generate those revenues.
State appropriations to the general university are divided among colleges to support the educational, research, outreach, and economic development missions of the university.
Special federal and state appropriations are allocated to the special appropriation units as directed by law.
All sponsored funding is directed to cover the direct costs of fulfilling the terms of contracts and grants.
Each auxiliary unit receives all of the revenue it generates to fulfill its mission and meet its obligations.
Each revenue generating unit is responsible for employee salary costs as well as supplies and equipment costs necessary to carry out its mission.
Each revenue generating unit is also responsible for other costs incurred to carry out its mission, e.g. utilities, facility maintenance, business services, information technology services, and student services.
Each college participates with a portion of its revenues in supporting general university leadership, including the institutional fund, and the Library.

Decision Process

The President of the university will make the final decisions on

how state appropriations to the general university will be allocated to each college,
on the rates charged for services (utilities and facility maintenance, business, information technology, and student),
on the participation rate -- the amount of each college's budget that will support general university leadership, including the institutional fund, and the university Library, and
on the use of the institutional fund.

The President will establish advisory councils to provide advice and recommendations regarding participation and service rates, and on the use of the institutional fund.

A key function of one of the advisory councils will be to review the budgets and activities of university leadership including the use of the institutional fund and the Library in order to make informed recommendations on the portion of each college's budget that will support these areas. This advisory council will also provide advice on the use of the institutional fund. The advisory committee will include administrators, faculty, staff, and student leaders, representatives of the revenue generating units, and key budget officers.

Other councils will review services provided on a charge-back basis in order to make informed recommendations on rate levels for those services. These councils will also include administrators, faculty, staff, and student leaders, service "consumers," service "providers," and key budget officers

The Provost and Faculty Senate will be responsible for shaping curricular and course review processes that ensure changes advance the quality of the university's degree programs and are in the best interest of students.

Revenues

Undergraduate Tuition. At least 15% (Board of Regents requirement) of undergraduate tuition revenue will be directed to the Office of Student Financial Aid to be used for student financial aid. Presently, 20.5% of undergraduate tuition revenue is devoted to financial aid. After that adjustment is made, 75% of each student's tuition will be directed pro rata (based on student credit hours) to the colleges in which the student is taking courses. The final 25% of a student's tuition will be directed to the college in which the student is enrolled. Deans of colleges that jointly administer interdisciplinary departments/degree programs will, as they do today, develop agreements for directing a portion of tuition revenues to support these programs.

Graduate Tuition. Because graduate education relies on a significant amount of a faculty adviser's time, 75% of each graduate student's tuition will be directed to the college in which the graduate student is enrolled and the remaining 25% directed pro rata (based on student credit hours) to the colleges in which the student is taking courses (excluding 599's and 699's). Since all revenue from graduate tuition will be distributed to the colleges, the responsibility for supporting graduate students will also reside with the colleges.

The importance of maintaining and strengthening intercollegiate, interdisciplinary degree programs has been clearly articulated. A method is being developed that aligns graduate tuition revenue with the costs of those programs and that incents colleges, including the Graduate College which provides central leadership and support for these programs, to support current and develop new interdisciplinary programs that are consistent with the university's mission.

Doctor of Veterinary Medicine Tuition. A portion of DVM tuition will be devoted to financial aid. The remainder will be divided with 75% going to the College of Veterinary Medicine and 25% directed pro rata (based on student credit hours) to the colleges in which the student is taking courses.

Distance and Continuing Education Tuition. More discussions are needed to best determine how to direct tuition revenue from distance and continuing education courses. While the basic principle of aligning revenues, expenses, and responsibilities applies, there are many details still under discussion.

Revenue from Indirect Cost Recovery. The importance of supporting and encouraging interdisciplinary activity is clear and the specific methodology for distributing revenue from indirect cost recovery will work toward that goal. The method used to distribute indirect cost revenue will continue to direct 15% to the contract/grant investigators. The balance of indirect cost recovery revenue will be aligned with the costs associated with contracts/grants and to provide the Vice Provost for Research with seed funding for new research and economic development initiatives.

State Appropriations. Each college will receive a portion of the General University's state appropriation. Tuition and indirect cost revenues generated by the college will be augmented with state appropriations to cover all of the college's expenses, which with this new model will include salaries, supplies and equipment, the participation fee, and service costs directly attributable to the college.

College Expenses (salaries, supplies/equipment, services, participation)
-College Revenues (tuition, indirect cost recovery)
= College Portion of State Appropriation

Expenditures

Salaries, Supplies & Equipment. All units, including colleges, will continue to responsible for funding the direct costs of their activities. This concept is retained from the current budget model.

Participation Costs. A portion of each college's revenues (tuition, indirect cost recovery and state appropriation) will be directed to support the costs for university leadership, including the institutional fund, and the Library.

Service Costs. The cost of utilities and facility maintenance, business services, information technology services, and student services will be charged to all units, including the colleges, using methodologies still being developed.

Institutional Fund. The President, with the advice and counsel of the university leadership group and an advisory council, will make expenditures from this fund to support institutional priorities as expressed in the strategic plan and to recognize advances in quality and performance.

Diagram of Alternative Budget Model 1 -- Revenue Flow (See Excel file.)

Alternative Budget Model 2

Concept

Alternative Budget Model 2 includes several different concepts for distributing revenues described in the nine premises and diagram that follow.

Most tuition revenue is directed to the colleges that generate that revenue. A portion of tuition revenue is directed to support university leadership, student financial aid, the institutional fund, and a set of common good services. Once that portion is removed, the remainder of tuition revenue will be distributed in accord with the method described below in "Tuition Revenue."
Most state appropriations to the general university are divided among colleges to support the educational, research, outreach, and economic development missions of the university. A portion of state appropriations is directed to support university leadership, the institutional fund, and a set of common good services.
Indirect cost recovery revenues flow entirely to the colleges, centers, institutes, and/or units that generate those revenues.
Special federal and state appropriations are allocated to the special appropriation units as directed by law.
All sponsored funding is directed to cover the direct costs of fulfilling the terms of contracts and grants.
Each auxiliary unit receives all of the revenue it generates to fulfill its mission and meet its obligations.
Each revenue generating unit is responsible for employee salary costs as well as supplies and equipment costs necessary to carry out its mission.
Each revenue generating unit is also responsible for other costs of services incurred to carry out its mission, e.g. utilities, facility maintenance, business services, information technology services, and student services.
University leadership funds a set of common good services that benefit the entire university community, e.g., support for employee and student e-mail accounts, information systems backbone and security, campus grounds, etc.

Decision Process

The President of the university will make final decisions on

the portion of each revenue stream directed to the colleges and the portion that will support university leadership including the institutional fund, student financial aid, and a set of common good services,
on the use of the institutional fund,
on the rates charged for services (utilities and facility maintenance, business, information technology, and student).

The President will establish councils to provide advice and recommendations regarding participation and service rates.

A key function of one of the advisory councils will be to review the budgets and activities of university leadership including the use of the institutional fund, and the Library in order to make informed recommendations on the portion of each revenue stream that will support these areas. This advisory council will also provide advice on the use of the institutional fund. The advisory committee will include administrators, faculty, staff, and student leaders, representatives of the revenue generating units, and key budget officers.

Other councils will review common good services and services provided on a charge-back basis in order to make informed recommendations on rate levels for those services. These councils will also include administrators, faculty, staff, and student leaders, service "consumers," service "providers," and key budget officers

Tuition Revenues

A portion of tuition revenue will support university leadership, student financial aid, the institutional fund, and a set of common good services. Once that portion is removed, the remainder of tuition revenue will be distributed as follows:

Graduate Tuition. Because graduate education relies on a significant amount of a faculty adviser's time, 75% of each graduate student's tuition will be directed to the college in which the graduate student is enrolled and the remaining 25% directed pro rata (based on student credit hours) to the colleges in which the student is taking courses (excluding 599's and 699's). The responsibility for supporting graduate students will also reside with the colleges.

Other Revenues

Indirect Cost Recovery. The importance of supporting and encouraging interdisciplinary activity is clear and the specific methodology for distributing revenue from indirect cost recovery will work toward that goal. The method used to distribute indirect cost revenue will continue to direct 15% to the contract/grant investigators. The balance of indirect cost recovery revenue will be aligned with the costs associated with contracts/grants and to provide the Vice Provost for Research with seed funding for new research and economic development initiatives.

State Appropriations. A portion of state appropriations to the general university will be directed to support university leadership, the institutional fund, and a set of common good services. The balance of state appropriations to the general university will be distributed to colleges to augment tuition and indirect cost revenues generated by the college to cover all of the college's expenses, which in Alternative Budget Model 2 includes salaries, supplies and equipment, and service costs directly attributable to the college.

College Expenses (salaries, supplies/equipment, services)
-College Revenues (tuition, indirect cost recovery)
= College Portion of State Appropriation

Expenditures

Salaries, Supplies & Equipment. All units, including colleges, will continue to responsible for funding the "direct" costs of their activities. This concept is retained from the current budget model.

Common Good Services. Common good services are those core services that are best provided by the university's service units, which are so pervasive that metering use doesn't seem productive, and for which everyone must contribute a base level of funding. A few examples of common good services are the central IT backbone and security, e-mail services, and classroom IT support.

Service Costs. Those services not defined as common good services will be charged to campus units, including colleges. They will be grouped into one of two categories: metered services or open market services. Metered services are those that are best provided by university service providers but for which use is more variable unit to unit. For these services, colleges and university units will be required to use the on-campus provider but will be billed only for the amount of the service they use. Bill for services may be based on actual consumption monitored through some form of metering or via a proxy, e.g., building square footage or FTE employees. For open market services colleges and university units will have the latitude to use on or off campus providers for this set of services.

Diagram of Alternative Budget Model 2 -- Revenue Flow (See Excel file.)

Recommended Changes to the Timeline

The BMDC's initial charge was to complete a new budget model by this July 1, 2006, so that it could guide preparation of the university's FY 2008 budget and be fully implemented on July 1, 2007.

During the last month it has become apparent that data structures needed to support the new approach to budgeting under consideration are significantly different than those used for today's budget development process. It is also becoming increasingly clear that successful implementation will require spending significant amounts of time with the vice presidents, vice provosts, deans, directors, department chairs, and fiscal officers to familiarize them with the details of a new budget model, the data systems that will support the process, and to simulate the effect of the new model on various sectors of the university.

With these realities in mind, the BMDC recommends adding one year to the current timeline. The additional time will be used to develop and implement new data structures and information systems, carefully test and refine the model, and help the university community acclimate to this significant change in practice. Thus the new budget model would be first used to develop the FY 2009 budget with full implementation on July 1, 2008. A suggested timeline follows:

By June 30, 2006

The BMDC will complete the development of a new budget model for consideration and submit a report to the President that includes the committee's recommendations, the results of preliminary testing, an assessment of the readiness of the university's data structures and information technology systems, and an implementation plan.

Fiscal Year 2006-2007

Fall 2006

President: Initiate an all university review of proposed budget model and implementation plan.
BMDC: Prepare IT systems and generate data needed for testing, simulations, and ultimately running the new budget model.
BMDC: Work with service providers to refine data and generate initial rate recommendations.
BMDC: Familiarize the vice presidents, vice provosts, deans, directors, department chairs, and fiscal officers with the details of the new budget model.

Spring 2007

President: Approves a new budget model and implementation plan or seeks further refinements before a final decision is made.
President: If a decision is made to proceed: seek Board of Regents approval to change Iowa State's budget and reallocation reports, initiate process to secure carryover authority, and charge the Provost to work with the Faculty Senate and examine processes for reviewing curricular changes, revising them as appropriate.
BMDC: Continue budget model testing and refinement.
BMDC: Oversee the training necessary for full implementation.
Note: The FY2008 budget will be developed using the university's current budgeting process

Fiscal Year 2007-2008

Final refinements and adjustments to budget model algorithms.
Final preparation of administrators and staff for full implementation.
Develop the FY 2009 budget using the new budget model.

Fiscal Year 2008-2009

New budget model is fully operational