Inside Iowa State

June 1, 2005

Budget leaders consider alternative models for allocating funds

by Anne Krapfl

Start fresh with a completely different budget system in a couple years or find ways to improve the shortcomings in the university's current budget model? That was the question discussed -- in a surprisingly lively way -- at a symposium last week.

About 65 campus people gathered May 26 to talk about a new -- or possibly just tweaked -- budget model for Iowa State. The group was summoned by the Budget Model Study Group, six administrators appointed by President Gregory Geoffroy to investigate alternative models and make a recommendation to him. The symposium was led by Larry Goldstein, president of the Virginia-based consulting firm, Campus Strategies. A certified public accountant, he spent 20 years in higher education financial administration.

In the next few weeks, Goldstein will send the study group a report that summarizes the budget symposium and a proposal for the type of budget model Iowa State should consider. Goldstein said his report would identify desirable components in a budget model (based on outcomes from symposium activities) and contain positives to pursue as well as things to watch out for.

Based on their own work and the information in Goldstein's report, the study group will present a recommendation to Geoffroy.

Geoffroy, who attended the symposium, said the impetus for the study group was four years of cuts in state funding and enrollment drops that reflect Midwest student demographics. He said he hopes Iowa State could have a budget model that:

• Provides very strong incentives to units to align their priorities with ISU's new strategic plan.
• Allows for longer-term planning (as much as three to five years out) than the current year-to-year structure, which is driven mostly by the state funding cycle.
• Meets the expectations of the Board of Regents, State of Iowa.

A model - and an alternative

Iowa State's current budget is a kind of incremental block budgeting (or, in years when there are no new revenues, decremental budgeting). As the name implies, expected new revenues are distributed to programs or activities more or less uniformly or as a percentage of the previous year's allocation. Recently, Iowa State has supplemented this model with internal reallocations to fund strategic initiatives and high priorities.

There are a range of alternative models used in public higher education. The model that received attention at the symposium, and which representatives from three public universities that use it spoke to, is responsibility center management (RCM). A main premise behind RCM, in its pure form, is that each unit is responsible for the costs it produces and the revenues it receives.

An RCM model might look something like this:

• Budget units are allocated funds based on something measurable, for example, students enrolled in that unit or student credit hours offered.
• Campus services, such as space, telecommunications, custodial services and computer support charge other budget units for what those "clients" use.
• An additional tax or assessment mechanism is in place to support administrative units that can't generate revenue to support themselves. At Iowa State, a big example of this would be the library.
• Units are allowed to carry over any surplus they generate, but also are responsible in the next year for any deficits they create.

Make it work for you

Budget officials from three public universities -- New Hampshire, Indiana and Illinois -- shared their experiences with variations of RCM in the last three to eight years. They emphasized that RCM is not a cost-accounting model, but rather an incentive model for allocating revenues. The key is selecting incentives appropriate to the goals at your university, they said.

Positive aspects of responsibility-centered management include:

• "Transparent" budgets eliminate myths about who has what funds.
• It's easier to do strategic and long-term planning.
• Budgets are more predictable.
• Model provides flexibility to match revenue to changing demands for programs.
• There's increased awareness and efficiency with variables such as classroom and lab space.

The presenters also offered suggestions to experience success with an RCM model:

• Avoid complex allocation formulas (inevitably they will be simplified).
• Find ways to cluster smaller units so they are better able to financially manage changes.
• Keep the decision making as close to the affected units as possible.
• Keep curriculum decisions centralized to avoid inter-college "poaching" (for example, an engineering college wanting to offer its own foreign language classes).

What's next

Goldstein's final report is due in late June.

"Based on the general responsiveness of the participants, I suspect that Iowa State is prepared to try something new in the area of budgeting. How much of a leap they're prepared to take is yet to be determined," Goldstein said following the symposium.

An RCM-type model is not the only option, he noted.

"The primary driver for change is the lack of appropriate incentives in the current system. There seems to be support for a new system that incorporates incentives for units to stretch a little, while also respecting the challenges presented by the land-grant mission," he said.

Mark Chidister, assistant to the president for budget planning and analysis

Mike Crum, associate dean of the College of Business

Todd Holcomb, associate vice president for student affairs

Mark Kushner, dean of the College of Engineering

Johnny Pickett, associate vice president for business and finance

Ellen Rasmussen, assistant provost for budget, facilities and finance