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General Fund Budget Review: A Study of Perceptions, Study notes of Financial Management

An unabridged study of perceptions of the General Fund Budget Review at the University of Michigan. The study was conducted from May through October 2005 by a study team consisting of Special Counsel to the Provost Ken Kohrs and Doctorate Student Staney DeGraff from the Center for the Study of Higher and Postsecondary Education at the School of Education. a glossary of frequently used terms and definitions, significant findings summary, eleven core issues, data collection and research methodology, figures, tables, and appendices.

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The University of Michigan
General Fund Budget Review: A Study of Perceptions
Unabridged
Authorized by the Office of the Provost
May through October 2005
Study Team:
Ken Kohrs
Special Counsel to the Provost
Staney DeGraff
Doctorate Student
Center for the Study of Higher and Postsecondary Education
School of Education
Guided by:
Budget Review Oversight Group
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The University of Michigan

General Fund Budget Review: A Study of Perceptions

Unabridged

Authorized by the Office of the Provost

May through October 2005

Study Team:

Ken Kohrs

Special Counsel to the Provost

Staney DeGraff

Doctorate Student

Center for the Study of Higher and Postsecondary Education

School of Education

Guided by:

Budget Review Oversight Group

The University of Michigan

General Fund Budget Review

The University of Michigan

General Fund Budget Review

The University of Michigan General Fund Budget Review

Section 1: Foreword

The General Fund Budget Review was sponsored by the Office of the Provost and Executive Vice President for Academic Affairs to assess viewpoints in the University community regarding the effectiveness, strengths and weaknesses of the University Budget (UB) model and system. The present budget model, an evolution of the Responsibility Centered Management (RCM) model, was first implemented in 1999 and has been refined and modified, but still retains the concept of activity-based budgeting.

Accordingly, this report is about perceptions and may or may not reflect verifiable facts. This does not diminish the importance of the responses illustrated in this report since they may represent prevalent viewpoints, regardless of any inaccuracy.

Two different but comparable sets of interview questions were developed to accommodate both activity and non-activity based units. They were created with the assistance of the Provost’s Office and reviewed by the faculty and staff members in the Budget Oversight and Review Group (BROG). Throughout the study period, the study team has been advised by and has had discussions with the BROG members. However, the study team is solely responsible for producing this report and for any mistakes that may have occurred.

During the months of May to August 2005, the study team interviewed 64 groups comprised of 111 people representing various constituencies in the University community. The interviews normally lasted between 1 to 1 ½ hours. Eleven core issues emerged from the interview results and guided the analysis and preparation of this report. In addition, there are five significant findings and eight common themes that surfaced from those core issues, as highlighted in this report.

Appendices in the latter half of this report contain supporting data, research methodology, and the result of statistical analysis, as referenced where applicable.

The University of Michigan General Fund Budget Review

Section 2: Acknowledgements

The General Fund Budget study team would like to express its utmost appreciation to the following individuals and groups for their significant support and contributions:

Paul N. Courant, Provost and Executive Vice President for Academic Affairs Marilyn G. Knepp, Associate Vice President for University Budget, Planning, and Administration Philip J. Hanlon, Associate Provost for Academic and Budgetary Affairs Glenna L. Schweitzer, Assistant Provost and Director, Office of Budget and Planning

for their support and guidance in initiating the study, providing information to the study team, and for organizing and enabling access to individuals and groups across campus and former officials outside the campus.

The Budget Review and Oversight Group (BROG) who guided the study team throughout the study and provided feedback and constructive ideas:

Anthony H. Francis, Chairperson, Associate Dean, College of Literature, Science, and Arts Antony E. Burger, Director, Financial Analysis, Office of Vice President of Finance and Chief Financial Officer Frank J. Cianciola, Senior Associate Vice President for Student Affairs Eric L. Dey, Executive Associate Dean, School of Education William R. Elger, Executive Director Administration and Chief Financial Officer, Medical School Nathan Eriksen, Chief Administrative Officer, School of Information Marvin G. Parnes, Associate Vice President for Research and Executive Director for Division of Research Development and Administration Judith A. Pitney, Executive Director, Resource Planning and Management, College of Engineering

The Office of Budget and Planning staff members

for the individual and group support, including the use of office and facilities, and the time and effort spent in providing critical information with regard to the UB model and system, for enduring endless and sometimes senseless questions, and for creating a very positive environment conducive to this project.

Eric L. Dey, Executive Associate Dean, School of Education

for his invaluable assistance and consultation in the quantitative analysis of the data.

Karen M. Staller, Assistant Professor of Social Work, School of Social Work

for her invaluable assistance and consultation in developing a qualitative analysis approach.

The 111 individuals in 64 groups who willingly gave up their time to talk to the study team, provided invaluable insights and expressed candid emotions and responses.

Budget Type Activity : Units that are able to generate revenue from their operations as a direct function of their teaching, research, and service mission. Their budget model is an activity-based model: developed to recognize changes in activity. All but one school are activity units. Non-Activity : Units that do not generate sufficient revenue to fund a considerable portion of their operations and thus depend heavily on the allocated General Funds. They do not directly conduct teaching or research, but provide valuable and critical resources to support those activities. Their budget is developed without specific formula attributions based on changes in activity. They are funded as deemed appropriate to fulfill their mission.

Discriminating Characteristics

All interviews are categorized based on a number of discriminating characteristics that best describe respondents. These categories are utilized to determine possible relationships between responses and different types of respondents. Discriminating characteristics used are budget type, unit type, General Fund budget, General Fund % of Total Funds, Total Funds budget, respondents’ positions, and budget/model understanding. See these specific terms for more details. General Fund Budget (GF)

The operating funds where attributed revenues and costs directly relate to the University’s academic mission. Its revenues include state appropriation, tuition and fees, indirect cost recovery, interest income, application fee, and General Fund Supplement. Its costs include financial aid, facilities, and taxes. We use 2003- figures in our analysis.

General Funds as percent of Total Funds budget (GF%)

The allocated General Fund budget for the year 2003-2004 divided by the Total Funds budget for the same year.

General Fund Supplement (GFS)

A part of the General Fund budget that represents an additional funding distributed to units outside their attributed costs and revenues, to supplement their operations. GFS for each unit reflects the historical funding level for that unit and additions and subtractions that follow from the Provost’s policies and decisions. It is through General Fund Supplement that the Provost can exert his influence and shape the University’s strategy and priorities.

Hold-harmless Refers to the policy that the Provost will compensate related units for technical or programmatic changes that affect them through no fault of their own. Hold-harmless policy is designed to preserve equity and ensure that any unit is not disadvantaged when changes occur. For example, when tuition attribution was changed to a 25/ split, the Provost’s Office made a budget adjustments to all units affected by this change. Office of Budget and Planning (OBP)

An organization reporting to the Office of the Provost that is responsible for gathering information, conducting institutional research and analyses, developing the University’s budget model, providing support, and communicating the annual budgets to the units.

One-time Requests A funding request submitted by units to the Provost to support certain initiatives or issues. As the name suggests, one-time funding usually refer to a non-continuing funding and often functions as seed funding, where the Provost helps the units to jumpstart certain initiatives and gives time to the units to develop self-funding for those initiatives. One-time funding can reflect a multi-year commitment from the Provost. One-time requests can be submitted at any time in the academic year and used for various purposes, such as PFIP (Provost’s Faculty Initiatives Program), strategic initiatives, or emergency funding. Process Refers to an organized approach to accomplish a stated goal, such as a budget process, decision process, or collaborative process.

Reserves The carry forward balance of funds that is retained by units. Reserves can be built by adding yearly net income (revenues minus expenses) and can diminish with yearly net loss. Reserves are fungible. Some are saved for a specific purpose and some have a more general purpose.

Respondent Generic term used to represent a participant or a group of participants interviewed in this study. Each interview session is considered as one respondent unit, regardless of the number of participants in each interview. Where views differ within the interview, alternate views are recorded.

Respondent’s positions Each interview is categorized into one of five types of employment positions within the University: Deans and/or Staff. All but one Dean participated in this study. This category also includes the deans’ staff such as Associate Deans and budget administrators. The study team interviewed members of all schools and colleges. Executive Officers. Six out of eight Executive Officers participated in this study. Executive Officers’ Senior Staff. Operating personnel directly reporting to the Executive Officers. Directors and/or Staff. This category includes operating personnel responsible for administrative or service units across campus and also for academic units with specialized research or academic functions. Ex-Officials. Ex-official respondents in this study include selected former University’s executives who played a major role in previous administrations with regard to the activity-based budgeting system. They also provide historical perspective regarding prior budget systems and the development of the current system.

Responsibility Centered Management (RCM)

A budgeting and resource allocation system that gives units (schools, colleges, organized research units, etc.) credit for revenues generated and costs incurred. The basic principle is to treat units as “profit/cost centers.” Implementations of RCM vary in the existence or lack of interdependency of funding between units. Some implementations imply self-funding for the units and some do not.

The University of Michigan General Fund Budget Review

Section 4: Significant Findings Summary

Introduction and Approach

This section highlights the five significant findings and the common themes that emerge from them and from the eleven core issues we have identified (please see Section 5 for the 11 core issues). In reading this section, it is important for the readers to examine whether these themes and findings are inherent in the budget model and system or whether they are a result of the implementation of the budget model and system. The following common themes and significant findings need to be addressed as interrelated components, and not as independent parts, of an integral budget model and system.

Please note that the report is intentionally written in the present tense to preserve the immediacy of the issues as highlighted by the respondents.

Common Themes

These recurring themes reveal positive and negative aspects of the key elements in the budget model and system, which emerge from the interview sessions. Accordingly, these themes reflect the perceptions of the respondents, and may not be factual. The study team has attempted to present a balanced view of how each theme impacts the overall report findings. They are not listed in any order of priority.

  • Unit autonomy Autonomy has led to self-management, entrepreneurship and innovation. Accordingly, it is highly valued. There is a need, however, to find a balance between the units’ autonomy and the alignment of priorities among units and between units and the Provost.
  • Financial accountability It is crucial to keep a balance between holding units accountable for their financial performance and encouraging innovation and riskier initiatives that may not produce favorable or immediate financial returns.
  • Communication and understanding The communications and support provided by the Office of Budget and Planning and the skills of the Provost’s staff have elicited numerous praises and created a positive working relationship between the units and the Provost’s Office. However, the level of understanding of the budget model and system still varies significantly within the University community, causing some misunderstanding and confusion with regard to the budget process.
  • Model and system complexity While the model is considered rational, to many, it appears to be too complex. This perceived complexity hinders certain initiatives (such as interdisciplinary efforts), discourages some University community members from making a real effort to understand the model, and provides a justification for inexpedient decisions.
  • Strategic planning The model encourages units to prioritize their initiatives and allocate their resources strategically; both of which require a long-term outlook. However, the system places a

substantial emphasis on the incremental changes in activities from year to year and does not require a thorough examination of the existing activities.

  • General Fund Supplement Base Structure The lack of a full and continuing evaluation of the base / historical component of the General Fund Supplement creates a situation where the units’ budgets may no longer represent their current cost structures due to various exogenous variables. Some leaders who inherit the base budget from their predecessors also have an incomplete understanding of the historical element of their budget and thus question the components that make up their base budget.
  • Transparency There is a need for more clarity and openness with respect to the University’s priorities and strategy, resource allocations, and the reasons for those allocations. Since the resource allocation affirms University’s strategy and values, this transparency is invaluable for the purpose of alignment of priorities among units and the building of trust and cohesiveness of the community. The main issue here is to find the right level of transparency. While the lack of transparency breeds rumors and mistrust, excessive transparency may cause antagonism among units.
  • Incentives The model seems to highlight the operational independence of each unit and discourage interdependence and collaborations. Independent operations can lead to heterogeneity and diversity of competence, which are crucial for innovation and change. However, too much independence also generates self-serving behavior and the lack of inter-unit alignment, which hinder interdisciplinary efforts. In addition, the incentives to increase revenues and reduce costs may entice units to engage in initiatives that are incompatible with their mission or values in achieving academic excellence.

Common Theme Positive Negative

Unit autonomy Promotes self-management and entrepreneurship

Lack of alignment between the units and the Provost

Financial accountability Promotes better unit management and responsibility

Impedes innovation due to the emphasis on financial returns

Communication and understanding

Good support from the Provost’s Office when needed

Large variation in understanding

Model and system complexity Rational model Deemed too complex by some participants and difficult to master

Strategic Planning Encourages prioritizations and strategic allocation of resources

Emphasizes short-term outlook and incremental changes in activities

continued on the next page

Strengths

  1. Agreement on many positive outcomes of the UB model and system
  2. Proper incentives to effectively manage operations
  3. Appropriate emphasis on financial accountability
  4. Clear revenue and cost attributions
  5. Excellent support from the Provost’s Office and OBP
  6. Rational model which allows for differentiated but appropriate level of funding for each unit

Weaknesses

  1. Too much emphasis on short-term planning
  2. Disincentive for interdisciplinary efforts and innovative initiatives
  3. Tuition attribution that is too complex to facilitate meaningful forecasting
  4. Perceived complexity of the model in general due to varying levels of understanding
  5. Lack of connection between the tax rates / formulaic cost attributions and the real cost structure
  6. Limited connection between the units’ financial system and that of the University, which leads to data discrepancies and perceived complexity of the UB model
  7. Wide variance of budget understanding which compromise the effectiveness of the incentives
  8. Lack of discussions of total fund budget

Observations

  1. Possible improvements in annual budget conferences
  2. Incorporation of performance indicators or matrices in the budget allocation consideration
  3. Clarification of hold-harmless strategy and the development of guidelines for one-time requests
  4. Reevaluation of formulas, datasets and systems use to derive revenue and cost attributions and the development of managerial tools to lessen complexity
  5. Greater transparency of the usage of taxes and the reevaluation and readjustment of attribution formulas for a more accurate representation of the current real costs
  6. Development of customized educational programs in management skills and financial system

Threats

  1. The need for strong and highly competent leaders in both academic and management at all levels who will make difficult, but necessary decisions to achieve excellence
  2. A match of skills between unit leaders and their budgetary staff is essential to ensure the unit’s financial success
  3. Possible impression of a concealment of the political nature of the budget system, which can compromise model integrity and trust in the system
  4. Possible rifts between units and hindrance to innovation caused by high attention to performance indicators

Strengths There are six important strengths of the present model and system:

  1. The respondents generally agree on the most important positive outcomes achieved by the UB model and system. As further discussed in Section 5.1, the most frequently stated outcomes are: a. Unit autonomy and resources to achieve unit goals b. Financial accountability

c. Strategic resource allocation

  1. Many respondents believe that the budget model provides the appropriate incentives for the unit leaders to intelligently manage their units by understanding their revenue and cost structures, prioritizing the use of resources, and planning for new initiatives.
  2. Most respondents assert that financial accountability is sufficiently emphasized and effective. This financial accountability encourages unit autonomy and decision making at the unit level.
  3. Cost and revenue formula or calculated attributions are generally clear. Tuition attribution, however, is deemed too complex or unpredictable to be a useful forecasting tool.
  4. The respondents who have had some experience in seeking clarification regarding the attributions and/or the budget process from the Provost’s Office and the Office of Budget and Planning give favorable comments with respect to the support they have received.
  5. An activity-based model is also considered to be more rational and less political than an incremental model. In addition, it allows a differentiation of funding levels among units. Accordingly, the allocated funding is customized to the specific needs of each unit.

Weaknesses There are eight broad categories of issues frequently cited by the respondents:

  1. A large number of respondents voice their concerns that the present budget system has come to put too much emphasis on short-term operational planning to the detriment of strategic discussion and long-term planning. In this context, strategic long-term planning refers to a multi-year strategy development and management, which includes and encompasses much more than a multi-year financial projection. There are two components to the issue of strategic planning: a. There may be some miscommunication or unclear expectations with regard to the budget creation process, in which long-term strategic planning is assumed to serve as a blueprint for the budget, but not explicitly required. b. There is a perception that the UB model and system focus on incremental changes in activities and budget instead of on all existing activities and the total budget (with a full examination of the General Fund Supplement base budget). Some respondents mention that this perception is partly due to discussions that center on incremental activities and not on the existing ones.
  2. The majority of respondents believe that neither the model nor the system sufficiently encourages interdisciplinary efforts and riskier but innovative initiatives. There is a contention whether the system truly hinders interdisciplinary efforts or whether it is in fact flexible enough to allow interdisciplinary efforts. A part of this disagreement stems from the fact that selected respondents differentiate the budget model from the budget system, while others do not. Regardless of this difference in opinion, there is a general agreement that the current budget model or the implementation of the system does not satisfactorily promote interdisciplinary efforts. Please see Section 5.3 for more detail.
  1. Enhance the annual budget conferences by facilitating a better communication of goals, a greater clarity of commitments, and a sharper focus on critical issues. In addition, the budget discussion may be extended to include a review of the units’ total funds and their financial management as a whole. These changes would increase the units’ satisfaction with the system, enhance alignment of priorities and cultivate a meaningful long-term relationship between all parties involved.
  2. Establish a stronger / visible relationship between the unit’s financial performance (as well as specific indicators, stretch goals / targets, and matrices) and resource allocation. These indicators or matrices may be customized to each unit to reflect its strategy and mission. Creating a stronger link between the units’ financial performance and their budget allocation would reaffirm the unit’s sense of accomplishment, deepen the impact of incentives and sharpen the unit’s focus on excellence.
  3. Clarify technical processes such as the hold-harmless strategy and establish guidelines for the process and purpose of one-time requests to improve their effectiveness and further foster unit innovation and strategic orientation.
  4. Lessen the perceived complexity of the cost and revenue attributions by reevaluating the formulas, datasets and systems needed to derive those attributions. One possible consideration is the tuition attribution. A customized tool (software) to model various scenarios for forecasting and strategy formulation would greatly enhance the management of the units and foster long-term strategic outlook.
  5. The reevaluation of cost attributions is also important to ensure that the attributions reflect the units’ real costs. In addition, a greater transparency of the usage of taxes, in the forms of services rendered to the units, and the allocation of funds at the institutional level would promote a better understanding, establish trust, and cultivate a more effective decision making process.
  6. Develop a more formalized and highly targeted managerial and budget educational program to enhance understanding and further lessen the perceived complexity. This program should be developed to not only improve the participants’ understanding of the budget model and system, but more importantly, to enhance the business management skills of unit leaders, which includes much more than financial management. The budget understanding and managerial skills are critical elements in enhancing the effectiveness of the budget model and the units’ performance. In addition, there may be an opportunity to provide more advisory and managerial, but non-financial, support for the smaller units in managing their operations, should they need it.

Threats The findings that can most easily be construed as threats are common among all organizations, and not unique to the University of Michigan.

  1. The respondents assert that the model and system work well with strong leaders (both in terms of academic accomplishments and managerial skills) at all levels: the Provost, deans, executives, and directors. These leaders need to understand the budget process and must be willing to make difficult decisions. Conversely, leaders who do not expend an effort to understand the system or who are unwilling to make difficult choices threaten system integrity.
  1. A less than optimal match of skills between the unit leaders and their (budgetary) staff could result in an ineffectual management of their units. This issue is particularly important when there is a change in the leadership position.
  2. The model may mask the political reality of the budget system. Since the Provost has discretion relative to funding allocations, certain units may appear to have unfair advantage and receive more favorable treatments and funding. This perception may be curtailed by increasing the level of transparency of the allocation decisions and thus, establishing a deeper trust in the system.
  3. The incorporation of performance indicators in the process of budget allocation may create rifts and further impede collaboration and innovation if they are not suitably balanced with other criteria or do not include specific stretch goals concerning collaboration. In addition, while an increased transparency of the budget allocation decision will engender more trust in the system and in other units, excessive transparency may cause or escalate antagonism between units. Moreover, some units may be tempted to engage in initiatives that are less innovative and add little value to their academic missions when they see that Provost funds other units’ initiatives in the corresponding topic.

II. General Agreement on the Goals of UB Model and System

There is general agreement on the suitability of the goals (Table 2). However, some respondents take offense to the lack of certain elements or the wordings of the goals. Others deem the goals too broad and uninspiring.

Strengths

  1. General agreement on the goals
  2. Meaningfulness and appropriateness of the goals

Weaknesses

  1. Lack of awareness of the goals
  2. Perception of stratification among units
  3. Lack of specificity to the University’s mission and ambiguity of some wordings and intents
  4. Missing goals

Observations

  1. Collaborative and inclusive process to generate suitable goals
  2. Clear communication of goals to the University community

Threats

  1. Possible imbalance between generality and specificity of goals which may unfairly favor certain units

Strengths

  1. When the goals are clearly defined, openly communicated and well understood, they can bring about effectual management and effective practices. There is a general agreement regarding the goals of the UB model and system.
  2. Most respondents find the goals meaningful and appropriate.

Weaknesses

  1. A significant number of respondents have minimal awareness of the goals prior to the interview session.