How do university budgets (really) work?
Financial crises, budget models, and how decisions are made
The University of Arizona is staring down a $117 million budget deficit. The university overestimated the amount of cash it had on hand and was making strategic investments in athletics and in purchasing an online, for-profit college. As a public institution, the senior administration has been called out by the Arizona Governor and by university faculty.
I was impressed to see the UA president Robert Robbins take responsibility for the mismanagement: “First of all, I think you all know we have some serious financial issues. And I want you to know that I take full responsibility for that. It happened while I was here. And I also take full responsibility for helping lead and chart a pathway forward for us to get to better financial health of the university”.
The budget crisis at UA is particularly bad, but the crisis extends far beyond UA. There are many institutions of higher education (see here, here, and here for some recent coverage) experiencing a budget crisis. Lingering effects of the COVID-19 pandemic, inflation, and decreases in enrollment have combined to endanger institutions of higher education. In 2023 alone, more than a dozen (mostly small) institutions closed their doors. As evidenced by the UA story, even large, public institutions are struggling.
I've observed that many of my academic colleagues are relatively uninformed about the intricacies of their institution's budgetary workings. This lack of awareness is perhaps unsurprising considering that most academics are trained in specific fields, often disconnected from financial matters. However, I argue that it is crucial for academics to comprehend their university's budget for three compelling reasons.
Firstly, a university's budget serves as a reflection of its overall and long-term health. Understanding the financial landscape provides valuable insights into the institution's priorities, challenges, and prospects.
Secondly, in a shared governance model, faculty members play a pivotal role in holding senior administration accountable for budgetary decisions. Awareness of budgetary processes empowers faculty to actively participate in discussions surrounding resource allocation and financial planning.
Thirdly, and particularly pertinent to faculty, the values of an institution are embedded within its budget. Consider the scenario where a faculty member aims to propose a new initiative focused on enhancing the writing skills of first-year undergraduate students. To successfully develop such a program, it is essential to grasp how decisions are made within the university, with a primary focus on understanding the budgetary process.
As President Joe Biden has quipped on numerous occasions, "Don't tell me what you value. Show me your budget, and I'll tell you what you value." This statement underscores the profound impact of budgetary decisions on shaping the priorities and values of an institution. Therefore, for academics seeking to advocate for initiatives aligned with their values, a comprehensive understanding of the university's budgetary landscape is an invaluable asset.
Understanding the inner workings of university budgets is essential, yet the intricacies can be surprising for those unfamiliar with the process. The construction and implementation of budgets vary significantly among institutions, contingent upon factors such as the type of institution (R1 versus community college), its private or public status, and the overall size of the university. Broadly speaking, though, university budgets can be built in one of six ways.
Incremental Budgeting: Small changes are made each year based on the previous year’s budget to reflect inflation, changes in enrollment, or salary increases.
Zero-Based Budgeting: The budget goes to zero each year and each financial unit (e.g., department, center) has to rebuild and justify a new budget.
Activity-Based Budgeting: Dollars are distributed to the units or activities that are the most profitable.
Responsibility Center Management: Revenue is distributed to departments or colleges based on some set of criteria (e.g., the previous year’s number of students). These individual units are responsible for using the resources in whatever way they think is best.
Centralized Budgeting: The senior administration doles out resources to individual units after collecting all revenue into a single pool.
Performance-Based Budgeting: Similar to activity-based budgeting, a budget based on performance goes beyond simply revenue potential. Instead, a unit sets objectives and is rewarded for meeting those objectives, even if the objectives are not focused on revenue.
Different budget models in universities come with distinct advantages and drawbacks. Centralized budgets, for instance, enable institutions to quickly adapt their priorities, but they also concentrate decision-making power in the hands of a select few. On the other hand, Responsibility Center Management empowers unit leaders, though it may foster competition among units.
It is common for universities to adopt a hybrid budget model, incorporating elements from various structures. For instance, a university might allocate a percentage of its revenue to a centralized budget center, while the remaining funds operate within a performance-based budget model directly linked to a cost center.
Consider the earlier example of initiating a program to enhance first-year students' writing skills. In a university with a centralized budget, the budgetary process is likely more influenced by external factors such as university rankings and government funding. Convincing officials in this scenario may involve demonstrating how improved writing skills contribute to metrics like student retention that are used by external groups. In an activity-based budgeting system where revenue hinges on student credit hours, departments may have strong incentives to mandate specific courses offered by their department. However, in a performance-based budgeting model that is less focused on revenue generation, building new objectives that focus on enhancing first-year student writing may be more advantageous.
I encourage readers to explore their own university's budget model. Some universities excel at transparency in budget processes (UC Davis is a good example). In cases where the budget model is not clear, faculty should ask questions of their department and college leaders. A solid understanding of the budget's mechanics provides a clearer path to effecting meaningful change within your institution.