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Activity Based BudgetingPaul HopkinsOctober 7, 2009

Why discuss activity based budgeting (ABB)?

How does ABB differ from our current system?

Is ABB all-or-none?

What is experience of other academic institutions?

What is the status of ABB at the UW at this time?

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Why Discuss ABB?1. The Provost is the chief financial officer.

2. The Vice Provost of Planning and Budgeting(Paul Jenny, who advises the Provost onfinancial matters) is eager to explore the

possibility of ABB at the UW.3. A Working Group appointed by the Provost,

led by Paul Jenny will release a report urgingthat an ABB model be developed for UW, and

that it influence resource allocation forFY2011.

It might actually happen

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ABB vs. Incremental Budgeting

What we have now:Incremental Budgeting: New annual budgetderives from incremental adjustment to previous

years budget.Example: FY2010 budgets for the schools andcolleges originated from varying percentage

changes to FY2009 budgets, based upon

arguments made by unit leaders.Budgeting by whining. Some believe the evolutionof budgets with time is not well correlated tochanges (up or down) in activity level.

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ABB vs. Incremental Budgeting

Activity Based Budgeting:Aligns sources ofrevenue (e.g. tuition or indirect costs) with theactivities they are intended to support.

A portion of the annual budget foracademic unitsderives from a formula that allocates resourcesbased upon the recent activity of the unit.

Annual budget forservice units (also calledcommon goods, such as library, police, grounds,advising) provided by central allocation or feespaid by user academic units.

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Oversimplified Example of ABB:

The College of Calligraphy produced 100,000SCH during FY2010.

The institution will allocate $100/SCH to allacademic units for FY2011.

Formulaic portion of College of Calligraphybudget for FY2011 is 100,000SCH X $100/SCH= $10,000,000.

This may be supplemented by a non-formulaic

General Fund Supplement. College of Calligraphy covers ALL costs from

their total budget (Faculty, Staff, TA salaries,utilities, lab supplies, etc.).

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Oversimplified How?

Measure of activity could include other metrics(SCH, majors, degrees, Nobel Prizes, grant andcontract activity)

Allocations may be taxed to yield a centralresource pool, distributed as General FundSupplements.

Some costs may continue to be paid centrally

(fringe benefits? utilities?)

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Its not All or None

ABB is only a partial departure from incrementalbudgeting, because it sets budgets by acombination of formula and arbitrarily determinedincrement.

The existence of the general fund supplementallows the transition from pure incremental to ABBbudgeting to occur in a revenue-neutral fashion.

Units are held harmless initially.

But budgets would evolve differently under ABBthan under incremental system.

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The University of Michigan has a decade of experience with ABB.

What can we learn from their experience?

Source: http://www.provost.umich.edu/budgeting/ub_model.html

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ABB at Michigan:

1997-98 Value Centered Management (VCM)

1998-present University Budget Model (UB Model)

Notes: At Michigan, about 1/3 of the coreinstructional budget is state-provided and 2/3 is

tuition derived. Michigan has full tuition-settingauthority.

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UB System =

UB Model + General Fund Supplement

Formulaic Discretionary

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Not all Michigan unit budgets are activity based

Examples of units that are centrally funded(not subject to formula):

Libraries

Museums

Police

Admissions

General Counsels Office

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UB System sends $ from Provost toSchools/Colleges

Deans retain authority to allocate$ to Departments onwhatever basis theychoose.

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UB Model allots the lions share of

revenue to revenue-generating units.

Primary revenue sources are tuition,

student fees, and grant and contract ICR.

Who generates tuition?

Does generator of tuition incur costs thattuition presumably is intended to pay?

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Revenues, and where they go

1. Tuition

1997-02 100% unit of enrollment

2002-08 75% unit of enrollment25% unit of instruction

2008-09 50% unit of enrollment50% unit of instruction

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Revenues, and where they go

2. Student Fees

Attributed according to tuition shares

3. Indirect Cost RecoveryAttributed to unit where G&C directexpenditures occur

4. Interest

Attributed to unit whose account balanceearned the interest

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Costs, and who pays them

1. Financial Aid

Centrally funded student financial aid billed inproportion to size of tuition allocation, not on basis of

where students who received aid were enrolled orinstructed.

2. Space

Direct operating costs billed to units that occupy space.A. Utilities

B. Maintenance, custodial, grounds, refuse/recycling, etc.

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Costs, and who pays them

3. Taxes

A. General Tax (25%).Tax on expenditures other thanG&C.

B. University Participation (2%). Cost to use Michiganname (!).

C. Research Tax (11%). Billed based on G&Cexpenditures.

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UB System =

UB Model + General Fund SupplementFormulaic Discretionary

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General Fund Supplement

Discretionary allocation above and beyond the

allocation calculated by formula.

Used at UM and elsewhere to

A. Subsidize units that would not survive based upon

formulaic allocation.B. Offset budget changes that would otherwise

result from introduction of ABB or changes in theformula.

most important of all components

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The General Fund Supplement

at UM can be negative

[So they take some back.]

some activity-based units have far more

capacity to capture the necessary resources to fundtheir activities through the revenue streams that

flow to them through formulaic calculations and

thus do not need a positive GFS.

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Charge to the ABB Working Group

Charge is to explore an ABB approach:First ,develop a comprehensive list of issues that need to beaddressed in reframing our budget model to one that moretransparently aligns revenue generation with the activitiesassociated with the revenue.

Second, develop an implementation schedule that includessignificant changes to our budget model effective in Fiscal Year2010-11.

Finally, [create] a list of the data points necessary to implementany proposed changes to the budget model.

Evaluation of whether such a model would fit our

goals and culture is not in the charge.Development of a model is not in the charge.

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What Has the Working Group

Accomplished?Identified/discussed in broad terms many issuesand how they might be addressed.

Arranged visits to UW for personnel fromUniversity of Michigan (Sept.28) and Minnesota(TBA) with ABB experience.

Created a report summarizing problems with

current system (lack of transparency, lack ofresponse to shifting activity levels), some goals fora new system, and recommending that a largergroup explore a specific model.

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What might happen?

1. Deans might be assured that centrally providedinstructional budget would not decline for somefixed time. Fundamental impact of ABB would beits influence on distribution ofNEW funds.

2. Deans might cover expanded list of costs (salaryincreases, fringe benefits, utilities, anddesign/construction costs).

3.All expenditures would be taxed by Provost, whowould use these funds to pay for common goods,new initiatives, etc.Tax rates could vary byexpenditure type (instruction, research, capital).

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4. Tuition and fees would follow students.

State funds might continue to be distributedincrementally.

Indirect costs would follow the school/collegein which direct expenditures occur; perhaps a

larger fraction would be distributed. Endowment proceeds would continue to

benefit current units, but expenditures would betaxed.* (*They already are, tax rate 1%/6% =17%)

Course fees would continue to go to units inwhich they are generated, but expenditureswould be taxed.

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Predicted Impact on A&S:

Very Short Term:None, because units will be held harmless.

LongerTerm:

Multi-decade trend is falling inflation-adjustedinvestment by states and rising tuition. Linkingtuition revenue to college budget will make itharder for rising tuition paid by A&S students tosubsidize instructional costs in otherschools/colleges.

Departments with high per-student costs willexperience pressure to reduce costs.

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Special Bonus Slide!

Why Do I Support FurtherExploration of ABB? Charges to individuals (tuition) should be linked to the

cost of their education. If there are tuition-based cross-subsidies (philosophy student subsidizing an engineeringstudent), they should be controlled and quantified.

Our ability to explain to our constituencies (students,public, legislature, even our faculty!) how we use ourcurrent budget would be improved.

Current system responds slowly if at all to activity level

changes.

It is hard to believe that pure incremental budgeting couldbe superior to a system that quantifies, even imperfectly,activity levels.