The Use of Zero-Based Budgeting in Higher Education

Transcription

1 UNIVERSITY LEADERSHIP COUNCIL The Use of Zero-Based Budgeting in Higher Education Custom Research Brief August 19, 2009 RESEARCH ASSOCIATE Aashna Kircher RESEARCH DIRECTOR Christine Enyeart TABLE OF CONTENTS I. Research Methodology II. Executive Overview III. Examples and Implementation Considerations THE ADVISORY BOARD COMPANY WASHINGTON, D.C.

2 I. RESEARCH METHODOLOGY Project Challenge: A member university approached the Council with the following questions: Which universities (if any) have adopted zero-based budgeting? For those institutions that have adopted the system, How did they convert to it? Which portions of the budget operate according to the system? What are practices for successfully using the budget system? What are the pitfalls/difficulties of making zero-based budgeting work at institutions of higher education? Are there any institutions that have adopted zero-based budgeting and then reversed back to a more traditional model? If there are other states that mandate zero-based budgeting, have there been institutions that have been granted exemptions? If so, how? Sources: Education Advisory Board s internal research library The Chronicle of Higher Education Educational Resources Information Center (ERIC) Meisinger, Richard J. and Leroy W. Dubeck. College and University Budgeting: An Introduction for Faculty and Academic Administrators. Washington, D.C.: National Association of College and University Business Officers (NACUBO), Morgan, Anthony W. Resource Allocation Reforms: Marginal Utility Analysis and Zero-Based Budgeting in Higher Education. Higher Education Review (1978): Smart, John C., ed. Higher Education: Handbook of Theory and Research, Vol. XIX. The Netherlands: Kluwer Academic Publishers (2004). Research Parameters: The Council contacted universities that were identified through secondary research sources as having experience with zero-based budgeting The Advisory Board Company 2

3 I. RESEARCH METHODOLOGY (CONT.) A Guide to the Universities Profiled in this Brief Institution Geographic Location Classification Approximate Enrollment (total/undergraduate) Fall 2007 University A Midwest Research Universities (high research activity) 16,000 / 14,600 University B South Research Universities (very high research activity) 33,800 / 25,300 University C Midwest Research Universities (very high research activity) 13,400 / 7,300 Source: National Center for Education Statistics 2009 The Advisory Board Company 3

4 II. EXECUTIVE OVERVIEW Introduction: In the face of recent economic challenges, states are considering various alternative budget models and requirements to facilitate budgetary transparency and accountability, as well as efficient use of public resources. Zero-based budgeting is one such alternative budget model that has been considered for use in higher education. Under zero-based budgeting, an organization assumes a base budget of zero dollars each cycle and must justify each program and dollar requested, rather than justifying only those new funds that exceed the prior year s budget base (as is the case with traditional incremental budgeting). 1 Because zero-based budgeting is focused on outcomes and results, it is a rational and objective approach to budgeting that can incent administrators to find cost-effective ways to improve operations. In addition, the preparation of decision packages (which include a description of the activity, performance measures, and costs and benefits) involved in the zero-based budgeting process provides helpful insight into different units, programs and activities. 2 However, the most obvious disadvantage of zero-base budgeting..., is that is does not recognize that some commitments are truly continuing ones, such as faculty tenure contracts. 3 Furthermore, although decision packages are quite helpful, they require a great deal of time and generate a great deal of paperwork. Finally, administrators who implement a zero-based budgeting model must account for the fact that the validity and reliability of criteria used to rank decision packages will vary with the individual who prepares the decision package. 4 As a result of these inherent limitations, zero-based budgeting has not been widely implemented in higher education. The following brief examines zero-based budgeting in the context of several universities that have implemented a modified version of this budget model. 1 Morgan 1977, Smart 2004, Meisinger and Dubeck 1984, Smart 2004, The Advisory Board Company 4

5 II. EXECUTIVE OVERVIEW (CONT.) Key Observations: Historically, very few institutions of higher education have adopted zero-based budget models for the university budget in any capacity. Institutions that have adopted zero-based budgeting models have done so only in a limited and modified form. Contacts suggest that, because 80 percent of most universities budgets are dedicated to salaries for ongoing faculty lines, a broad-scale implementation of zero-based budgeting does not make sense for most, if not all, higher education institutions. Because salary costs under faculty contracts carry over from year to year, a zero-based budgeting model that calls for the reevaluation of every budget line item is impractical and fails to best address university budgeting needs. The Council was able to find only a few institutions that have implemented zero-based budgeting; even in these cases, the institutions have used zero-based budgeting only for a few centralized accounts where budgets tend to fluctuate from year to year (as a result of adding or discontinuing programs). For example, at University A, the areas that use the zerobased budgeting system include: outside legal counsel, the continuing education office, some insurance coverage policies, some human resource initiatives (e.g., job enrichment program, employee health and fitness program), and student health services. Two institutions that purport to operate under a zero-based budget model often still maintain base rollover costs, and only have to justify items outside of these base costs (in effect, zero-based budgeting only applies to the line-items outside of the base budget). Although the state mandated zero-based budgeting for land-grant institutions for 15 years, contacts at University B indicate that the state did not expect academic institutions to move to a fully zeroed-out model and informally accepted that certain research costs would roll over from year-to-year. After 15 years of mandating zero-based budgeting in theory (if not completely in practice), the state where University B is located moved to a prioritized program budget model, which is structurally similar to zero-based budgeting, but focuses more explicitly on accountability and results The Advisory Board Company 5

6 III. EXAMPLES AND IMPLEMENTATION CONSIDERATIONS Limitations of Zero-based Budgeting in Higher Education A true zero-based budget model cannot work within the higher education space... It s not practical under the parameters in which we work. - Council Interview University B Contacts assert that a true zero-based budgeting model is not practical for institutions of higher education to adopt across-the-board. Because approximately 80 percent of a typical university s budget goes toward paying salaries associated with tenure track faculty lines, universities gain little value by forcing academic departments to re-justify those costs each year. Similarly, research grants and programs to which universities dedicate another large portion of their budgets often span multiple years and thus do not warrant annual review. Overview of Zero-Based Budgeting at Contact Institutions Across the nation, a few universities have adopted modified versions of zero-based budgeting models for various portions of the university budget that warrant annual review. Utilizing Zero-Based Budgeting for a Specific Set of Accounts University A University A has implemented zero-based budgeting only for a limited subset of central accounts. Accounts subject to a zerobased budget model include: Outside legal counsel The continuing education office Some insurance coverage Some human resource initiatives (e.g., job enrichment program, employee health and fitness program) Student health services The remaining university accounts follow different budget models. The budgeting office determines which areas of the university adhere to the various budget models. Contacts at University A observe that zero-based budgeting works best in the parts of the university where programs are routinely added or discontinued. Because these areas fluctuate from year to year they merit annual re-evaluation The Advisory Board Company 6

7 III. EXAMPLES AND IMPLEMENTATION CONSIDERATIONS (CONT.) Implementing Zero-Based Budgeting Across an Entire Division with a Base-Increment Structure University C Background: The medical school at University C adopted a zero-based budgeting model for its administrative unit in the mid-1990s. Approximately $50 million is subject to the budget review board under this model. The medical school hired a consultant from Monsanto, a company that had recently implemented zerobased budgeting, to aid in the transition process. The Zero-based Budget Model: To implement zero-based budgeting, administrators examined each program and agreed on a set of activities that are critical to the school s mission and thus fall into the base budget. This base budget must be below what the institution would ever consider in reducing costs. The budget model assumes that the school reviews programs included in the base every three to five years to ensure that funding for base-level programs is still reasonable. Currently, approximately percent of funding is classified in the base. The other percent of funding applies to the incremental portion of the budget, within which each individual service is examined for costs. Contacts report large amounts of work required to value each one of these services. The incremental programs are then ranked in towers according to priorities. Contacts also stress the importance of recognizing that different supervisors may rank the incremental programs differently. In other words, the prioritization of activities varies depending on the level of administrator in the hierarchy, and administrators need to recognize these differences and make allowances for the fact that their rankings may not reflect final institutional priorities. University B Background: In the 1970 s, the state Board of Regents mandated that institutions of higher education adopt zero-based budgeting in a limited form for selected budgetary line items. The state renamed its budget model as Prioritized Program Budgeting in 2005 to focus more on accountability and results. The Zero-based Budget Model: Under the zerobased budget model, the university first defined base budget activities. Each year, the university would report annualizers (i.e., adjustments to the base for areas like salary and health insurance) and then would submit any enhancements (i.e., new or removed programs). Although the Board of Regents mandated zerobased budgeting for all of its land-grant institutions, contacts indicate that the State informally accepted the fact that the university budget could never be completely zeroed out. Thus, University B effectively adopted a modified zero-based budget model with base and incremental budgets similar to the system used by University C. The Current Prioritized Program Budget Model: Contacts observe no real difference between the previous zero-based budget model and the current Prioritized Program Budget model. The concepts that underlie both models are very similar, though some terms and small details do differ. For example, the prioritized program budgeting system requires justification of certain expenditures in even more detail than zero-based budgeting required. Additional Insights Utilization of a base-increment structure (as is the case at both University C and University B) often fosters feelings of vulnerability and low morale among those groups not included in the base budget costs. According to contacts at University C, conducting discussions with all program areas can ease tensions about zero-based budgeting. Openly discussing reasons for the budget structure can reduce anxiety and cultivate a common understanding of the purpose behind this sort of performance-focused budget system The Advisory Board Company 7

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