Resources Allocation, Management and Planning - FAQs
Approximately a year ago WKU selected Huron Consulting to guide us through developing a new university budget model. Resource Allocation and Management Planning (RAMP) is a budget tool to assist WKU to make more informed decisions in the allocation of resources. The FAQs reflect Huron’s experience from many institutions’ budget model processes and WKU institutional-specific tailoring of the new model.
WKU has a new strategic plan for the next decade. Our budgeting process results in a one year fiscal plan and the model will provide support for the priorities established in the strategic plan. The RAMP model has been an inclusive process by which we developed a new approach to budgeting that promotes, incents, and develops processes for moving resources to support strategic priorities (e.g., improved student retention and graduation). The model includes a component that reflects the state’s performance funding metrics, as well.
It's important to note that the RAMP model does not just explain how to allocate resources, but considers how campus units should operate differently (i.e., the integration of academic planning and financial management, thinking in holistic terms (all funds budgeting), and considering the financial implications of each academic decision).
WKU currently employs incremental budgeting, in which units’ “base budgets” are based on historical budget authority and are adjusted in increments/decrements on an annual basis. The new RAMP model utilizes a more sophisticated form of resource allocation, which is called incentive-based budgeting. This new type of budgeting better aligns resources with the institutions strategic priorities and enhances transparency to optimize planning and better decision-making. Key benefits of incentive-based budget models are as follows:
Allocation of Revenue – Incentive-base budget models, such as RAMP include the allocation of revenues from central administration to colleges. These revenues include, but are not limited to, tuition and fee revenues, state appropriations, direct research revenue, F&A revenues, and gift revenues.
Allocation of Costs – Optimal decision-making requires that the full costs of activities be understood and not just the direct costs. This means that a primary unit’s (colleges and auxiliary units) use of central support services, which are needed to support the institution, need to be accounted for as well. As such, central support costs are allocated to primary units based on activity-level metrics, which change as a unit grows or contracts. This enhances the understanding of how indirect costs such as support units contribute to university operations and enables planners to estimate full marginal costs of proposed initiatives.
Examples of support units include philanthropy, public affairs, facilities management, information technology, and human resources.
Use of Central Funding Pools – Utilizing a participation fee (tax) on select revenues allows for resources to be collected and deployed by academic and administrative leadership for strategic initiatives, which benefits the whole of the institution. Allocations from central sources to primary units that generate insufficient revenues to cover direct and indirect costs are called “subventions,” and are used to offset the costs of mission-critical units.
Participation fee is 13 percent of total undergraduate tuition, total graduate tuition, DELO tuition and total allocable state appropriations.
Financial Accountability – In exchange for decision-making at a more decentralized level, the system requires more decentralized responsibility and is intended to reward strong fiscal performance. Examples include college-based enrollment growth and growth in facilities and administrative (F&A) cost recovery from grants and contracts.
Financial accountability is a means, not an end in universities, and annual budget plans must still be reviewed and approved by university leaders.
In the first year of implementation, when a “hold harmless” principle typically applies, the participation rate must be set at a level that is high enough to at least generate enough dollars within the subvention fund to cover the operating deficits of any primary unit (i.e. academic units and auxiliaries). In this first year, primary units with an operating loss receive subvention to reach a net zero bottom line.
Most universities set the participation rate high enough to cover the anticipated operating losses and to provide a relatively small pool of dollars that can be used to fund other University-wide strategic priorities that align with the University’s mission. In the initial FY17 version of the model, nearly all of the strategic funding was used for subvention with a marginal flexible pool for other strategic priorities. The hope is that as the University grows, less of the central funding mechanism will be needed for subvention leaving a larger portion of flexible dollars to be invested in other strategic initiatives.
A strategic priorities fund may be funded with carry forward funds until the model generates a large enough subvention fund to cover projected operating losses and a university-wide strategic mission enhancement fund.
Organizational complexity and change management capacity vary across institutions, so implementation approaches and timeframes will vary as well. Some institutions adopt an incentive-based model in as little as eighteen months, while others struggle with implementation for as long as five years. After reviewing numerous case studies, Huron found that the average time for implementation was 2.6 years.
Huron recommends that the implementation timeline include a parallel process, often for one year, to provide time for units to adapt their thinking to the new model and to position themselves for success in the new financial environment. Regardless of the exact timeframe, universities should use a phased approach that includes close coordination between academic and administrative leadership, strong communication of the changes, and a focus on milestones and timelines.
The model itself is a metrics-based tool that is meant to be more responsive and transparent by identifying the revenues generated by WKU’s colleges and to the costs incurred to earn those revenues. Its methodologies are intended to reward colleges that effectively balance the costs of delivering student programs with the revenues (primarily tuition and state appropriations) realized from curriculum delivery and student support. A component of the distribution of state appropriation aligns with the State’s Performance Funding metrics. The primary mechanism for this balance is assignment of direct and indirect costs associated with instruction to the revenues “earned” through student credit hour production.
Student success metrics like retention, persistence, and graduation indirectly influence the model through the sustainment of student credit hours. As part of the annual and multi-year budget processes, colleges will develop target retention, persistence, and graduation rates as part of their analysis of their capabilities for student credit hour production in the current year. These targets are validated by specialists in Institutional Research Office and are set for the year. Colleges, departments, and even programs are held accountable to their annual targets. A policy of retained margins when units exceed annual targets incentivizes deans, chairs, faculty, and staff to invest in activities that promote student retention, and addresses units/programs where performance does not meet expectations.
What is described here is in concept. Some aspects of the model will be implemented on different timelines based on availability of data analytics and planning tools and changes in processes such as DELO allocations to colleges.
Carry forward funds are often defined as unexpended balances at the end of the fiscal year. Universities that employ incentive-based models typically allow for a substantial portion of carry forward of unrestricted funds to be retained by the primary units that generated the funds. As a general rule, Huron recommends that units be permitted to carry forward a significant portion of unrestricted funds to promote efficient spending of earned revenues. Further, Huron recommends that carry forward funds should generally not be used to make an ongoing funding obligation (e.g. funding positions), but rather to maintain a reserve fund for revenue stabilization, or to plan for relatively large expenditures in the coming years, such as facility renovation or major equipment purchases.
WKU will put in place a new Carry Forward Policy for FY 2020-21 for distribution of balances from the fiscal year ended June 30, 2020. The first priority for carry forward allocations will be addressing any structural imbalance in the approved budget.
The cost and revenue consumption metrics that are used to allocate central support
unit costs and allocable revenue, will be based on actual data from one-year in arrears.
However, based on the timing of the budgeting process and when data become
s available, the data will be two-years in arrears at the time the fiscal year begins.
Utilizing actual data from one-year in arrears provides real metrics to provide the
highest degree of accuracy for allocating costs and revenues. Furthermore, when the
budget model is fully implemented, utilizing prior year data protects the primary
units from sudden revenue decreases and cost increases in the current fiscal year,
which will allow for consistency and improve financial planning.
Central Services and Administration includes Finance and Administration, General Counsel, Human Resources, Office of the President, and Public Affairs. The total expenditures of these units are allocated across all primary units. The allocation driver for these indirect costs is prior year actual total direct expenditures-primary units.
Academic and Admin. Student Affairs includes Provost, Academic Affairs, Enrollment Management, Honors College, Institutional Research, Admin. Enrollment and Student Experience, and Study Abroad. The total expenditures of these units are allocated across academic units. The allocation driver for these indirect costs is total student full time equivalent primary units.
Facilities indirect cost includes Facilities Management and Campus Services. The total expenditures of these units are allocated across primary units (excluding Housing). The allocation metric for these indirect costs is net assignable square footage – primary units.
Information Technology total expenditures are allocated across all primary units. The allocation metric for these indirect costs is total headcount (student and employee)-primary units.
University Libraries total expenditures are allocated across all academic units. The allocation driver for these indirect costs is student and faculty full time equivalent.
Philanthropy and Alumni Engagement total expenditures are allocated across all academic units and Athletics. The allocation driver for these indirect costs is prior year actual total direct expenditures-academic units and Athletics.
Graduate School total expenditures are allocated across academic units (excluding DELO). The allocation driver for these indirect costs is total graduate student headcount – primary units.
Research total expenditures are allocated across academic units (excluding DELO) and other business services. The allocation driver for these indirect costs is prior year actuals grants and contracts-primary units.
Regional Campuses total expenditures are allocated across academic units (excluding DELO). The allocation driver for these indirect costs is regional campuses credit hours by faculty – academic units.
Universities with incentive-based models typically use a committee structure, with college-level representation, to evaluate each support unit’s proposed budget as part of the annual budget cycle. This process may include a review of the support unit’s mission, goals, programs, policies, activities, and service level demands. At universities with more mature incentive-based models, a committee may review benchmarking data to evaluate performance, and often promotes the use of service level agreements between primary units and select support units.
WKU has developed a governance structure to enhance the operationalization of the new RAMP model and includes the Auxiliary/Support Unit Allocation Committee and the Executive Budget Committee which will be comprised of a diverse set of stakeholders, including deans and faculty. The Auxiliary/Support Unit Allocation Committee will be responsible for reviewing support unit budgets and service-levels and make recommendations to the Executive Budget Committee.
In the RAMP model, primary units will have a clearer picture as to what support units cost. These costs will directly impact a college’s bottom line, influencing future decisions, as the model is fully implemented. As a result, colleges tend to focus on the value of services they receive from support units, asking themselves whether they are getting a fair value for each allocated dollar. Likewise, as the support unit moves through the review process, it may gain knowledge and build tools to deliver better service at a lower cost. Additionally, support units will be better positioned to articulate the value of its services to the primary units, and how a change in funding – whether an increase or a decrease -- will impact service levels.
Central unit expenses are a complex union of mandatory and discretionary costs. Fiscal performance accountability is set during the budget process to establish financial targets based on data-informed revenue to improved transparency to the primary units. The annual budget setting process begins by determining the annual budgeted expenses for the central unit, which are then in turn allocated to the primary units in accordance with the allocation metrics. The budgeted expenses are kept constant throughout the year, which allows for consistency and predictability to enhance strategic cost planning for the primary units.
The first significant change in the budget process will be the establishment of two new committees – the Auxiliary/Support Allocation Committee (ASAC) and the Executive Budget Committee (EBC). ASAC will be responsible for sending budget recommendations for all budgetary units (excluding the colleges and DELO) to EBC. EBC will receive these recommendations, along with the Provost requests for funding the individual Colleges and DELO. EBC will submit its budget recommendation to the President. These two committees will meet jointly with the Huron consultant in late November to review and discuss committee responsibilities.
EXECUTIVE BUDGET COMMITTEE (chair to be elected)
Associate Vice President, Academic Budgets and Administration
Faculty representatives (2)
President’s Cabinet Representative
Strategic Plan Implementation Committee Representative (nonvoting)
Roles and Charges: Reviews recommendations from the Provost regarding Academic Unit budget requests; reviews recommendations from the Auxiliary/Support Unit Allocations Committee; recommends strategic funding priorities; recommends comprehensive budget; reviews and provides policy/guidance on budget model management; conducts outreach across university on resource allocation priorities.
Auxiliary/Support Unit Allocation Committee (chair to be elected)
Chief Financial Officer (nonvoting)
College deans (5)
Faculty representatives (2)
Dean of Libraries (nonvoting)
Assistant Vice President for Business Services (nonvoting)
Roles and Charges: Reviews the auxiliary and support units’ budget proposals, including strategic objectives, service level demands, and workforce plans; examines benchmark data and performance metrics to evaluate service level effectiveness and efficiency; offers suggestions for performance improvement for support units; promotes development of service level agreements; submits an executive summary of the unified auxiliary and support unit budget recommendations to the Executive Budget Committee.
There may be a concern among the WKU deans that any positive budget-to-actuals variance would result in an equal decrease to subvention in the following year. University leadership recognizes the importance of creating strong incentives, which is why the level to which a primary unit is subvented is based on qualitative metrics and is not a purely quantitative component of the model.
It is important to note that there will be no dollar-for-dollar deduction in subvention in relation to positive margins and/or prior year carry forwards. While it is expected that the degree to which subvention occurs will generally decrease over time, this change is not based on a formula, but data-informed, strategic decisions. As such, an increase in revenues would not necessarily result in a formulaic and corresponding decrease to subvention. Ultimately, the degree to which a college is subvented is neither inevitable nor constant over time. In order to create year-over-year consistency to improve financial planning, colleges usually work with the Provost and key governance committees to develop rolling 3-year guidance on strategic funding, which will be revisited annually during the budget authorization discussions in response to revised fiscal year planning assumptions.
The goal of subvention is to make it explicit in university decision-making, and to the extent possible ensure that subvention leads to the best institutional and student outcomes. It is important to note that some primary units will always need subvention and that is not indicative of poor management, but a reflection of the inherent pedagogical nature of the unit. The goal is to have transparent conversations within the budget setting process to ensure strategic planning.
The university’s Carry Forward Policy will be revised to take into account the distribution of surpluses generated in the previous fiscal year and the need for reserve balances to hedge changes in enrollment and multi-year planning for capital expenditures.
Huron recommends allowing the model to be fully implemented and in place for several years before going through a review process. It is important to remember that RAMP is a budget tool and not the budget.