These minutes reflect
discussion and debate at a meeting of a committee of the
Notes
Senate Committee on Finance and Planning
488 Children's Rehab
[Note: these
are notes from a discussion with John Curry, a consultant on Responsibility
Center Management, Executive Vice President at MIT, who visited to discuss the
University's budget model, currently labeled Incentives for Managed Growth. Some of the members of the Senate Committee
on Finance and Planning joined Professor Curry for a discussion. Professors
-- There
should be scheduled reviews of a university's financial system.
--
-- There
are two bottom lines for any university:
first is quality, second is financial.
Quality means how good you are—the quality achieved for the money
involved. If a university does not talk
more about this, it is doing something wrong; nothing in RCM begets
quality. But using RCM can help get
ahead in terms of quality (a university can understand its revenues and seize
opportunities). The faculty hold
ultimate authority on campus; what often is missing is a faculty understanding
of finances and the consequences of decisions (e.g., smaller classes means a
decline in tuition income, and at places where funds are held centrally, a
decision in one unit to decrease class size has effects on other parts of the
university).
-- There
is a
-- RCM
can unleash entrepreneurialism, but without strong central leadership to guide
the institution towards its goals, the whole will be increasingly less. Strong schools in these circumstances may not
benefit the institution. RCM needs
strong deans and a strong central administration. With strong deans and a weak central
administration, there is the danger of centrifugal force tearing the
institution apart. With a weak dean and
strong central administration, the dean will be unable to work with the
faculty.
-- Space
is perhaps the university's biggest investment and is treated as a free good
until a unit needs more. The institution
probably has under-used space while spending money on new buildings, but it
could probably solve some space problems with musical chairs and using space
more efficiently. Space costs should be
allocated to units.
-- Organizations
should be decentralized in proportion to their size and complexity (no one is
smart enough to run a place like this).
Often authority is not devolved and decisions can be made at central
levels without realizing their effects.
-- One
thing that plagues RCM systems is that they may be losing the whole and the
commons. The problem of the commons is
usually solved by taxes on the units.
The University has many commons:
shared physical places outside departments/units, information
technology, quality of student life outside instructional settings. Leaders must hold them as values and find
ways to fund them or centrifugal forces will overcome them.
-- With
respect to strong departments: in RCM,
financial information should be broadly distributed by the dean. If that does not happen, the dean has missed
the point. The strong provost/dean model
is the same at the college level; there should be a strong dean/chair, and the
benefits of RCM are lost if information is not shared.
-- (A
question about support for interdisciplinary work under RCM) Disciplines are often the barrier to
interdisciplinary research. The first
barrier is not who earns the money, it's "what's in it for me?" The perception is that RCM is a
barrier to interdisciplinary research, but in fact clarity about who has what
can help rather than hinder. One
possibility is to treat funding for interdisciplinary research as venture
capital; the central administration might provide start-up funding. (Dr. Kvavik, host to the meeting, noted that
former President Yudof put an enormous amount of money into interdisciplinary
activities; this is a question of leadership priorities.)
-- (A
question about the definition of strong leaders) Strong means strength as a faculty member in
research and teaching, strength of personality, and once an organization reaches
a certain size, strength in the management staff (e.g., professional financial
officers).
-- (A
question: Something the faculty must buy
into: allocation of costs as well as
revenues, which the University does not now do)
A hole in the University of Minnesota system is that it does not
allocate some central costs, especially space.
It could trade dollars for square feet.
The costs are known (utilities, maintenance, operations); the data are
not perfect but are pretty accurate. If
a unit is in a bad or old building, allocate actual costs to the unit so that
the system starts out neutral. Then
there will be incentives to turn off lights, etc., and to get rid of unused
space. The administration can broker use
of space, and it will cost a lot less to reconfigure space for new use
than to build new space. There might be
three categories of space: wet/clean
labs, an in between category, and office space.
Each has identified costs, and a small percentage of the costs could be
allocated to create a pool to renovate space or add new space to supplement
state funds. Allocating space costs
provide an opportunity to calculate space consequences of increased activities
(e.g., to increase research will require more space; a unit can ask if it can
afford the space and how it might pay for it—which might be through local
funding, money from the provost, or fund-raising).
-- Some
market mechanism is better than none; any ability to trade will lead to a
better allocation system. It is more
important that there be a mechanism than that an institution have the right
mechanism.
-- (Comment/question: Dr. Curry maintains that deficits should not
be forgiven if a dean incurs one. Does
this create incentives to increase balances and pass up opportunities?) Balances are carried forward but there could
be an incentive to increase balances.
The goal is a zero balance because the money is supposed to be spent on
faculty and students. Savings should be
reasonable. Generally RCM does not have
much effect on balances. Much funding is
held in departments, not by deans. If
all the money in balances is restricted and cannot be used to support the
infrastructure, there is a problem. If a
department chair wants money, the dean has two questions: how much will you put up and how much do I
need to put up?
-- (Comment: reserves reflect the risk dynamic of a unit more
than educational opportunities; it is easy to focus on reserves and not
opportunities.) That means the college
or department is becoming a banker, people not inclined to risky spending. If balances are too large, there is need for
a conversation because a unit is foregoing opportunities. The goal is to have a small amount of money
(from operations) as a cushion and a large endowment (usually from fund-raising). Excessive reserves from operations means a
unit is missing opportunities (this does not mean a unit might not save money
for five years for a big project).
-- (Question
about what happens if a dean or president leaves tails for a new person on the
job.) That is probably a problem no
matter the budget structure. At one
institution, the department/college receives a "profit and loss"
statement each month (revenues minus expenses) compared with the budget, with
the previous year, and with a projection of balances at the end of the
year. These statements cause units to get
used to looking at revenues and begin to understand the rules better; they
reinforce responsibilities. If a unit is
to meet a deficit, they need to know they have one (e.g., the number of
students has dropped and tuition revenues are down—the earlier the information
is provided, the better the situation can be managed).
-- (Question
about funding the commons) They need to
have powerful and credible champions (no RCM center calls for a new parking garage
and no dean calls for funds for a library or a rec center). The case must be two-fold: if the schools must pay for common goods, the
costs must be imposed on them; if the president or provost retains sufficient
funds, they can fund common goods through additional funds to the RCM
centers—or they can raise the money and charge nothing to the RCM centers.
-- (Question
whether RCM is sensitive to economic conditions) It is, but RCM might provide a better
opportunity to weather adverse circumstances because there are more
opportunities in the system to adapt. In
a centralized system, if there is a big cut, it is typically imposed across the
board. In RCM, some deans may not be a
victim of an economic cycle or may have alternative ways to generate funds or
cut costs. If there is a federal system,
the problems may be decentralized to the units.
(If enrollment declines, there is a problem in those units, initially,
and they may need help. One institution
uses a "smoothing" rule (two year averages) on tuition revenues, for
example, so that one downturn does not affect funding immediately. The first order of responsibility is in the
unit; if there is a disaster, the central administration steps in. But a bad economy usually hurts everyone to
some extent.
-- At
one institution, the dean of the medical school maintained that the liberal
arts were a cost sink and that the medical school was underwriting the liberal
arts. Once an RCM system was adopted, it
became evident that the liberal arts were underwriting the medical school
because the arts and sciences were a revenue generator.
-- With
RCM, one can answer questions about subsidies and the argument is about the
data. RCM makes it possible to
understand reasons for subsidies.
-- There
are certain principles of RCM that need to be understood (all of the following
are direct quotes from
-- the closer the decision-maker is to
the relevant information, the better the decision is likely to be
-- the degree of decentralization of an
organization should be proportional to its size and complexity
-- responsibility should be commensurate
with authority and vice versa
-- the central administration should
retain sufficient academic and fiscal leverage to ensure achievement of
institutional goals
-- clear rewards and sanctions are
required to make distribution of responsibility and authority operational, as
well as to effect their coupling
-- resource-expanding incentives are
preferable to resource-dividing rules
-- successful decentralization requires
common information systems providing local and central managers with timely and
accurate performance reports
-- outcome measures are preferable to
input (process) controls
-- achievement of academic excellence
requires that academic performance criteria be explicit and, where possible,
quantified
-- stable financial situations facilitate
good planning
-- people play better games when they own
the rules
-- Subventions
should not be ossified. And subventions
can be money—or they can be priority (e.g., in fund-raising). For example, agreement to participate in a
multi-disciplinary research project may mean that a unit gets to the top of
capital priorities. The administration
can also provide access to debt/financing.
-- (Does
RCM address life-cycle costs?)
Universities generally are bad at this.
They often replace things with gift money or state funds; they rarely
depreciate things.
--
Gary Engstrand