Ad Hoc Budget Committee Report

• “To consider what impact the new budget model is having on areas of importance to the faculty and staff, including interdisciplinary teaching and research, cost of services and infrastructure support”
• “To ensure that appropriate feedback mechanisms are in place so that colleges, the Central Administration, and the two Senate committees are regularly informed about the effects of the new budget model”

What is the budget model?

Revenue and expenses apart from state allocations

• All revenue earned by an RRC stays in the RRC. The revenue sources are:
  • All tuition and fees, subject to agreements between colleges on how tuition is shared when students in one college enroll in a course in another college.
  • All indirect cost recovery (ICR) funds
  • Direct costs from grants
  • Other sources of revenue include state specials, internal service organization income, gifts, private practice income, investment income, endowment income, sales, admission fees, and possibly others.
• All RRC expenses are paid by the RRC. These include:
  • Expenses that RRCs paid under the “old” budget model including salaries, fringe benefits, student aid, supplies and other items. The list of expenses does not include the “IRS” assessment from the old model as this has been abolished.
  • Many expenses previously paid centrally “off the top” are now paid by RRCs. These expenses are grouped into nine cost pools:
    • Facilities – Operations & Maintenance
    • Utilities
    • Debt & Leases
    • Office of Information Technology
    • Administrative Service Units
    • Research
    • Libraries
    • Student Services
    • General Purpose Classrooms

Centrally allocated state funds

• No RRC has revenue greater than or equal to its expenses. The imbalance is addressed with State funds that are allocated to RRCs based on priorities determined by Central Administration, after consultation with the RRCs.

Findings

• Incomplete information. Most faculty do not understand that the budget model is intended to determine RRC budgets, but it is silent on how RRCs allocate funds to smaller units. While the revenues and expenses of an RRC apart from state allocations are easy to determine, the allocations from Central Administration to RRCs are not formulaic and may or may not correspond to RRC or departmental priorities.
• Inadequate funding. The main problem with University budgeting is that it is trying to do too much with much too little money. Lack of funding is not the fault of this or any other budget model.
• Internal reallocation. Internal reallocation of RRC funds is a regular component of the budget process. Reallocation is intended to reflect the goals and priorities of the University, but how the priorities are set and how the reallocation process is determined have not always been clearly stated. As a result, in a number of cases internal reallocations have caused anxiety and misunderstanding in RRCs and departments. The deans and department chairs we interviewed mentioned many perceived negative consequences of reallocation, including faculty salary increases viewed as unfunded mandates; difficulty in securing funds for faculty start up packages; potential decline of core departments; difficulty in retaining senior faculty; decline in funding for graduate education, and the use of scarce resources for interdisciplinary initiatives that may not reflect RRC priorities.

Distribution of State Funds to RRCs

1. No RRC at the University has sufficient revenue to have a balanced budget without money from the State appropriation. After an extensive period of consultation, Central Administration allocates State money to RRCs. To the greatest extent possible this process has to be open for inspection by interested faculty and administrators.
   
   This aspect of the budget process is viewed with skepticism and concern by many of those we consulted, in part because allocations may not agree with priorities set by departments and Deans. While complete elimination of these difficulties may not be possible, they may be reduced by increasing the information available to faculty and Deans about RRC priorities, University priorities, how decisions are made, and who makes them.
   
   One means of increasing information availability on the new budget model suggested to us, would be for the Office of the VP Finance or the Provost and VP for the Academic Health Center to establish a Q&A section of the Budget Office webpage. At this site, budget and compact funding questions could be directed, the question researched and a response posted that would make the information available to the entire University community. Questions not suitable for broad dissemination could be handled directly with the person or group asking the question and not posted.
   
2. Budget allocations from the State are based on priorities determined by Central Administration, but based on our interviews, it is not clear if these priorities are set with input from the RRCs or if the rationale for setting the priorities is clearly communicated. With the explicit goal of the University to become one of the top three Public Research Universities, the committee was quite surprised the Vice President for Research is neither an integral part of the budgeting process nor directly involved in the discussions with the RRCs which determine the distribution of the state funds.

Cost pools

3. A frequent complaint we heard was that the costs from the cost pools are allocated to RRCs without any input from the RRCs. While this may have been necessary in the first year of the new budget model, each of the cost pools could now work to establish a mechanism, perhaps through advisory committees, that would help set budget priorities and establish equitable methods for distributing expenses.
   
4. Since RRCs operate with very limited budgets and thus cannot be expected to support cost pools that are ineffective or too expensive, the committee was surprised the RRCs did not have a mechanism to influence their charges or services. It appears the RRCs must pay their cost pool bill without the ability to establish quality standards, require a response to their needs, or demand a response to complaints.
   
5. In 2006-07, RRCs faced budget decreases shortly before the beginning of the academic year, but RRCs were not permitted proportional decreases in their cost pool allocations. Thus RRCs cut funding to academic programs, while the cost pools appeared to be protected. This seems to us to be contrary to the stated goals of the University.
   
6. Small variations in departmental revenue can be devastating to departments that are committed to cover their fixed cost pool allocations. RRCs seem to be the appropriate unit to bear the risk of paying cost pool allocations rather than passing charges onto departments or other units.

Retention of savings

7. One purpose of the budget model is to provide units with incentives to use resources more effectively and save money, for example by building appropriately sized buildings, saving on administrative matters like payroll processing, or reduction in utility use. There are not, however, mechanisms to insure that RRCs can keep their savings, and assurances that these will not be offset by decreased allocations of state funds.
   
8. There does not appear to be a means to insure that RRCs will not be punished for protecting activities that promote the aspirational goals of the University, even at the expense of higher costs. For example, the sharing of tuition for co-teaching arrangements when one or more instructors are from an outside RRC seems to be difficult to negotiate. In addition, not all cost savings are desirable. For example, a college’s costs can be reduced by increasing class sizes, increasing the use of adjunct faculty, or teaching more undergraduate courses and fewer graduate courses; none of these are likely to improve measures of the University’s success in its mission.

Reserves

9. Reserves are necessary for the long-range stability of RRCs. Some reserves are encumbered, for example in a faculty member’s research account, others are for particular purposes, such as start up funds for a new hire or to cover unexpected short falls due to unexpected events. Reserves of these types should not be considered by Central Administration as possible sources for reallocation of funds.
   

Interdisciplinary research and centers

10. The new budget model describes how Central Administration allocates funds to RRCs, but it does not address how RRCs allocate money to their constituents, which include both departments and centers that are completely housed within one RRC, or centers that may span several RRCs. Consequently, the new budget model appears to have no formal impact on the operation of interdisciplinary centers or interdisciplinary research. According to our discussions, these activities are generally funded based on ad hoc agreements between RRCs on how centers are to be supported. To say that the new budget model has no effect on interdisciplinary research would be naïve; to say that it has a predictable effect common to all or many interdisciplinary efforts is equally naïve.
    

Final Note

• Dan Dahlberg, School of Physics and Astronomy
• Paul Johnson, Department of Information and Decision Sciences
• Tom Klein (Chair), Minnesota Council on Economic Education, Department of Applied Economics
• Justin Revenaugh, Department of Geology and Geophysics
• Sandy Weisberg, School of Statistics
• Aks Zaheer, Department of Strategic Management and Organization