After more than two years of planning, the University is putting its revamped internal financial model into practice.
The new budgeting model is a variant of a practice known as responsibility center management. The model decentralizes financial decision making. It gives deans more authority to allocate funds where they see fit. After all, the thinking goes, these academic leaders know their schools (or, in financial lingo, “responsibility centers”) best.
The goal is for various schools and departments to become self-sufficient. Ideally, the College — or any other “unit” — would be able to cover its costs with the money it brings in from tuition dollars and other sources. In a decentralized budgeting model, individual academic units are responsible for the costs they produce, and they take in the revenues that they attract.
The model also tracks tuition dollars, giving more money to departments that teach more students. More money goes toward areas of the University that are experiencing growth.
The University began planning for the new financial model in May 2011. If the allocation method succeeds, it will be one of the hallmarks of University President Teresa Sullivan’s tenure.
A trend toward decentralized financial management is well under way at American colleges and universities. Many institutions have turned to responsibility center management to streamline decision making and reduce inefficiencies. Such schools as Harvard, Duke, the University of Michigan and the University of California at Los Angeles have implemented decentralized budgeting models in the last 15 years or so.
The budgeting system stands a good chance of modernizing the way University leaders make financial decisions. By giving leaders of individual academic units more power over spending, the model cuts out middlemen. A lean, flexible budgeting system puts deans and other officials in a good position to adapt to financial challenges without clawing through red tape.
The model also helps identify what resources various units use. By making resource use more transparent, the model introduces incentives to press down unnecessary spending. For example, charging utilities expenses to individual schools helps motivate that school to reduce costs.
The revised system promises to create a leaner budget. But for all its sleekness, it comes with some hidden costs — some of which aren’t financial.
The Board of Visitors Friday approved a revised mission statement for the University. One of the statement’s three central tenets was “unwavering support of a collaborative, diverse community.” The University is a community, all bound together, the statement suggests — if one part falls, so does the rest of it.
Yet while Board members in the Rotunda mused on the value of community, the University was putting in motion a financial model predicated not on community but on atomization. The new financial model insists that individual academic units pay their own way.
Some departments will subsidize others under the new model. Requiring all units to be self-sufficient is unrealistic. Nonetheless, the decentralized model makes units compete for tuition dollars. In some ways, having schools and departments vie to attract students — and thus their tuition dollars — is a good thing. But enrollment in classes, majors or schools aligns imperfectly with how good those classes, majors or schools are.
The University officials implementing the new model estimate that 25 percent of a student’s tuition dollars will go toward the student’s school of enrollment (e.g. the College or the Commerce School) and 75 percent will be distributed according to the courses the student signs up for. At first blush, it seems like this division is skewed. The model attempts to provide incentives for academic leaders to cut costs. But what sort of incentives does it promote with regard to course offerings? The financial model thinks of students as shoppers. A department or school that designs a course that appeals to more students will draw in more money. But students don’t always sign up for courses for the purest of reasons. A class known as a “gut” might attract more students, and thus more dollars. This could spur departments to offer more gut courses in an attempt to balance their checkbooks.
By tracking a proposed 75 percent of tuition dollars to course enrollments, the University risks decentralizing too far — by inadvertently putting fiscal decisions in the hands of students surfing Rate My Professors.
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