Activity-Based Budgeting @ UW: An Early Glimpse

Activity-Based Budgeting @ UW: An Early Glimpse

PUBLICATION DATE: October 14 2009 with addenda; AUTHOR: Bruce Balick, Chair of the Faculty Senate

What is ABB?: Activity-Based Budgeting (ABB) is a clearly defined process for directing funds used for instruction to the departments and programs who deliver instruction to students. At the core of the ABB model is a simple and predictable quantitative prescription (formula) for the allocation of most of these funds from the Provost to the colleges and schools of instruction. Other instructional funds that lie outside of the ABB model are used for a variety of necessary services, such as libraries and police, and for supporting strategic investments and incentives that enhance and complement our mission, as determined by the Administration and the Regents.

Following the money: The sources UW's instructional revenue (sometimes "funds") consist of tuition, state appropriations, and in much smaller measures, indirect cost return from grants, and endowment income. These revenues collect in the Provost's office each year and are then distributed to deans and other support units. The Senate Committee on Planning and Budgeting advises the Provost on the best ways in which to use revenue for academic purposes. The bulk of the funds go into colleges where deans and department heads redirect it into the salaries of faculty, lecturers, and support staff who enable instruction. Deans establish their funding priorities in consultation with their College Councils consisting of elected faculty members. (ABB models are not generally used for this more granular process, and most faculty will not be aware that ABB is part of the UW funding scheme.)

Formulating high-level budgets: A “budget system” describes the entire method by which instructional funds are allocated. For example, “incremental change” is a budget system where allocation decisions are made at the margins of the previous budget. A budget model such as ABB is narrower. It describes how some fraction of the instructional funds are allocated according to some sort of prescription. (ABB is just one of many types of possible budget models.)

How ABB works -- the short version: The ABB funding flow is largely based on recent instructional activities. The ABB prescription normally allocates funds on the basis of activity metrics, such as enrollment, credit hours of instruction, and college majors averaged over the most recent 2-3 years. ABB models occasionally undergo periodic minor revisions to correct for unforeseen stresses and strains produced by the mechanistic flow of funds. The modified formula is often phased in gradually to avert disruption.

What's coming to UW?: At the time of this writing (October 2009) a possible ABB model for UW is in early development and a long way from adoption. As presently envisaged for UW, the ABB model applies only to the funding of instruction on the Seattle campus. The initial focus is on undergraduate instruction, though its extension to graduate and professional programs is not unlikely before the design is complete.

The boundaries of ABB: All funds used for athletics, medical services, professional and graduate programs, and all activities at UWT and UWB lie within other dedicated, “fenced” budgets that are managed separately from undergraduate instruction at Seattle. Additionally, ABB does not directly affect the allocation of faculty positions. These -- including open positions -- are expected to remain within colleges just as they do at present, though ABB may well impact the flow of central funds that support them. Also, ICR will continue to reside in the same colleges or schools where the funds are generated.

Note that ABB is not a way of rewarding good performance since such performance measures have proven elusive. Most colleges that adopted performance-based models have since dropped them.

ABB elsewhere: There are many variations of ABB models in use at other large universities. In most implementations, ABB is used solely to control between half and two-thirds of the flow of funds from the central administration to colleges and schools for the direct support of instruction within these units. Consider the example of U Michigan. Their ABB formula for undergraduate support is based on student credit hours taught (50%) and student enrollment (50%) in a college. Different formulas are used for graduate programs.

However, Michigan Rn't us. Their instructional revenue for undergraduates is 66% tuition, 22% state funds, and 12% ICR and other small sources. (At UW tuition and state support are about equal.) Tuition rates at UM are set by the Regents, not the Legislature. In-state tuition in the first two years is $11,600 per annum, which rises by 13% to $13,100 in the third year. Our rates tuition are far lower and don't automatically increase as a student approaches graduation. Their balance of in-state and out-of-state students is 40%-60% -- vastly different than ours: 25%-75%. Also, the tuition rate changes from one major to another (according to the cost of instructional delivery for such activities and labs and studios). Departments at UM are charged directly for all use of classrooms, teaching labs, office space and utilities.

ABB has become popular among Michigan administrators and at several peer institutions. We are told that ABB has been a great leap forward over earlier budgeting models for its transparency and predictability. Details of their ABB model and its implementation issues along with a ten-year review are online at http://www.provost.umich.edu/budgeting/ub_model.html.

UW's present funding system -- incremental change: Most people agree that the present system--incremental budgeting-- is a leftover from simpler days when instructional allocations remained essentially the same from year to year with a few changes here and there as budgets rose and fell, or as critical opportunities arose on an ad hoc basis.

Why change it?: Incremental budgeting has slowly evolved into a ponderous, opaque process which assures continuity (i.e., makes programmatic change difficult.) What we do next year is based largely on whatever we've been doing. As time mounts we lose sight of the rationale of the entire budget. It is impossible to say for sure whether our funds are being used wisely or purposefully. The Legislature has been frustrated by our inability to account for the impact of their funds. The day may come when students and their parents also ask for more transparent accountability. The present system won't readily provide it.

In other words, the old model is not ideal despite its apparent successful outcomes over the years. At this point ABB is assumed to be the best of several alternative revenue allocation schemes under consideration. One plus of ABB is that it helps to inform budget decisions by making clear how much bang is produced for the buck based on hard data. ABB shines the light on inefficient or ineffective instructional processes and provides deans and departments with predictable incentives to optimize their units' performance in the long term. Ineffective processes are those whose activity metrics are low (e.g. relatively low enrollment per cost, few student credit hours, etc.. Note that if these metrics are low this simply raises a flag, the result of which might be additional investment or a recognition that some courses or majors are simply require more funding per student than others.)

ABB and budget cuts: ABB is not a tool designed to deal with abrupt budget cuts. However, consideration of ABB at UW is an indirect result of revenue turbulence of the 2009-11 biennium as UW found itself unable to understand clearly how to best exploit its use of available instructional funds. This triggered the realization that incremental budget procedures were not a solid planning basis for the future.

Designing an ABB model for UW: The process of designing an ABB program is still in its infancy at UW. ABB programs elsewhere are now being examined for their applicability, pros, cons, and impacts if implemented here. The discussion is shared among a faculty-administration task force/steering committee and the Senate Committee on Planning & Budgeting (SCPB: David Lovell, Chair). In the next few months smaller working groups will be established to look more carefully at implementation plans and impacts. Among many other things, a method of detecting abuse of the model (e.g., large but very easy courses, grade inflation), the unplanned and unproductive competition among units, and the management of inter-college collaborations and degree programs will need to be considered. Also, planning for a smooth transition is of paramount importance.

As it is slowly phased in, ABB will bring gradual change to our academic program, and hopefully the benefits will dominate. Even so, there may be risks and unintended consequences. The potential academic impacts of ABB must be assessed once the nuts and bolts of he ABB model are being assembled. How will the system be monitored and regulated? Will college-to-college salary inequities grow? Will ABB abet grade inflation, dumbing the major, discourage interdisciplinary collaborations and co-taught courses, and general balkanization of the university? Will colleges without undergraduate programs start them simply to attain funding? We are told that these impacts have not materialized elsewhere. We also need to assure that there are continued pressures to maintain academic quality even though these lie outside of the ABB formula.

Role of the Senate: The Faculty Senate will play a vigilant role throughout the process. Among its functions may be to assure quality faculty representation on planning groups, to participate in setting high-level goals and requirements, to conduct a thorough critical review as the program's design converges, and to develop a plan to monitor the post-implemenetation impacts of ABB by the Administration. It is thinkable that changes to the code may be needed; if so we will be as proactive as possible.

Where can you find updates?: Official updates will appear periodically at the web page of the Office of Planning and Budgeting, http://www.washington.edu/admin/pb/home/. The first report of the ABB Working Group (October 2009) is found at:

http://www.uw.edu/admin/pb/home/pdf/abb/ABB-Working-Group-Report_10-06-09.pdf . I will also write occasional status reports here in the Senate Char's blog.

ADDENDA

10/30 : Interesting Addendum from the AAUP Hotline by JW Harrington

Good question about our basic budget. The University's budget refers to the "core education budget" of $717M that excludes such things as the two hospitals, externally funded research, intercollegiate athletics, and housing. Adding all those activities yields a total annual budget of $3.1B. For FY 2010, state general fund revenues are planned to be $320.6M of that $717.7M -- a decline of 20% from the previous fiscal year. Tuition and fees are budgeted at $330.6M, an increase of 12%, and the first time that tuition/fees account for more than the state general fund. "Designated operating funds" and $11M from the university's cash reserves provide the rest of the $717.7M [for this year but not beyond -- BB] -- that total is 5% less than the "core education budget" of the previous year.

See http://www.washington.edu/admin/pb/home/pdf/regents-item-fy10.pdf

11/3: Addendum on ABB experienes at Indiana, Minnesota, and Oregon

Interviews with high-level budgetary officials from Indiana, Oregon, and Minnesota -- each of them using some variant of ABB for disbursing instructional funds -- show similar outcomes to the experiences at U Michigan. Most of their ABB program shave ten or more years of experience. All are based on a formula consisting of student credit hours and college enrollment numbers. Each of the budget officers emphasize that the quality of instruction has not suffered, and that the annual budget discussions with deans focus more than ever on strategic issues. There is no evidence that regular faculty are directly affected by the ABB models,, and that department chairs are not under pressure to increase course enrollments at any cost. Several new and popular courses have been introduced in departments as an indirect consequence of ABB.

11/3: Addendum on "2y2d", ABB, and their relationship

The Provost has initiated two major planning efforts: Two Years to Two Decades (2y2d) and Activity Based Budgeting ("ABB"). Provost Wise issued this elucidation and clarification: "The 2y2d initiative is to identify those priorities and the revenue streams to fund them, and this is what we are calling a sustainable academic business plan. Accepting that we can no longer look to the state to pay for basic costs of either instruction or research/scholarship, we need to find ways to fill that gap with tuition, indirect costs, gifts, technology transfer, and other sources of revenue, and also by cutting costs. Cutting costs will involve both efficiencies and shifts in the funding of activities. How will we set those priorities? How can we increase revenues and cut costs? What will this mean for how we conduct our business in the future? Further, how do we do all of this and remain, or even further our position as a preeminent research university 20 years hence? These are 2y2d questions…. As a budgeting model, ABB does not and should not address University priorities. Those are set elsewhere, and an effective budget model facilitates their implementation." --memo from Provost Phyllis Wise 3 November 2009.

11/13: Addendum: The UW Office of Planning & Budgeting has established and will update a web page for local ABB documents:

http://www.washington.edu/admin/pb/home/opb-abb.htm

11/13: Addendum on ABB at other comparable universities:

Indiana: http://www.washington.edu/admin/pb/home/pdf/abb/Indiana-Univ-ABB-Presentation_Oct-2009.pdf

Michigan: http://www.washington.edu/admin/pb/home/pdf/abb/U_of_Michigan_September_2009.pdf

http://www.provost.umich.edu/budgeting/ub_model.htm

Minnesota: http://www.washington.edu/admin/pb/home/pdf/abb/Univ-of-Minnesota-Budget-Model-Overview_Nov-2009.pdf

House and Senate Budget Proposals

Dear Colleagues:

The injurious budget proposals put forward by the Senate and the House Ways and Means Committees call upon us to act effectively to protect our university and our values. This letter suggests some resources.

Useful information can be found in two new documents on the Planning and Budgeting website, http://www.washington.edu/admin/pb/home/, under Planning and Budgeting Briefs:

. Initial House and Senate Chair Budgets for 2009-11 Operating Budgets;
. Tuition Increase Mitigation Chart

Most of you know that academic units were asked to model cuts in their state-funded budgets at 8%, 10%, and 12% levels (each school's proposals can be found on the Planning & Budgeting website). To understand the effect of the Senate and House proposals on educational programs, we need to look at budget figures in annual terms, adding to the drastically reduced state allocations the portion (just over 40%) of our educational budget funded by tuition. While the Vice Provost's Office will soon provide more reliable calculations, the Senate's budget appears to place us in the 12% range; the House budget might deepen the cuts by another 4% or so.

As faculty, we are better positioned than anyone to understand just how devastating such cuts would be to our programs, and in particular to objectives that legislators value: broad access to higher educational opportunities, and equipping graduates with skills to support our state's knowledge-dependent economy. The following are examples of likely
consequences:

. Loss of x sections of basic writing, with y students each, sharply reducing
opportunities for students to learn required workplace skills and complete their
programs;
. Loss of x sections of chemistry (physics, math, etc.), cutting back severely the core
preparation for high-demand areas such as science, technology, engineering, and
mathematics.

You may wish to share your understanding of such effects with policymakers.
If so, please consult our Faculty Legislative Representative's website:
http://legrep.blogspot.com/ .

Negotiations among policymakers are now at a critical stage, and the range of options is narrowing. Substantial raises in resident undergraduate tuition rates now seem the most realistic way to mitigate damage to our educational mission. Among other considerations, allowing the UW to raise more funds through tuition does not reduce funding available for other public goods such as housing, health care, and basic subsistence which have also been severely slashed in these budget proposals. We are not alone in suffering the pain of injured institutions, nor do we stand alone in keeping alive the hope of a brighter future.

David Lovell, Chair
Faculty Senate

Faculty Salary Policy

In a previous message, I described the work of a committee to re-evaluate Executive Order #64, which requires that all meritorious faculty receive an annual 2% pay increase. Attached to this message are two drafts of a new Executive Order. The first was issued by the President on February 18th for review and comment. The second is a revised draft, suggested by the joint committee to re-evaluate EO #64, after the first draft was reviewed by the Senate Executive Committee in its February 23rd meeting.

Review of the new Executive Order is scheduled for the Senate meeting this Thursday. We expect the Senate will also be asked to vote on a Class C Resolution stating some principles and expressing support for a temporary suspension of policies requiring a general merit pay increase. Discussion so far has revealed principled differences among members of the faculty on the wisdom of suspending EO #64 as well as on what stance the Senate should take. It is more important than ever that you discuss these issues with your colleagues so you can effectively represent the values and interests of faculty. Let me express three hopes.

First, please think through the issues, taking advantage of available sources of information. These are the rough dimensions of the problem we face:

--The Governor's proposed budget calls for a cut of $60 million annually in our core educational budget;

--Recent budget projections have led to proposals to cut our budget by half again as much;

--Because approximately 75% of our core educational budget consists of personnel, we may lose between 400 and 800 instructional and administrative staff;

--Schools and colleges are being asked to model cuts ranging from 8 % to 12%, with the higher range sounding more realistic based on recent estimates. Administrative units are being asked to model higher percentage cuts.

--The cost of a 2% general merit increase is roughly $6 million.

Putting these numbers together may help faculty judge the merits of the proposals before us. More detailed sources of information include the website maintained by the Vice Provost for Planning and Budgeting, presenting summaries of the proposed cuts and their rationale at each school and college, at http://www.washington.edu/admin/pb/home/uw-bgt-process.htm; the blogs of the Senate chair and especially the faculty's legislative representative, on the Senate website http://www.washington.edu/faculty/facsen/ ; and the website of the Office of State Relations, providing updates on discussions in Olympia, at http://depts.washington.edu/staterel/wordpress/ .

Second, please bear in mind that we have a right and responsibility to participate in discussions of budget priorities in our departments and schools as well as at the Senate Committee on Planning and Budgeting. As you may infer from the above estimates, decisions about priorities at the level of schools and colleges are far more consequential in financial and program terms than the general pay increase; it is the status of shared governance that makes the pay increase discussion especially significant.

Finally, please think about these matters in broader terms than the relationship between the faculty and the administration. I have views that differ from those of administrators on some questions, and many of us have differences among ourselves; but other key participants in this conversation include the legislature, the Board of Regents, the citizenry, and our own colleagues and staff who are vulnerable to losing their jobs. For these reasons, we have a duty to proceed wisely and fairly within the constraints of the faculty code and state law.

David Lovell, Ph.D.
Chair, Faculty Senate

Budget Process as of February, 09

It is understandable that the severity of our current financial situation would lead many faculty and staff to wonder what kind of measures are being considered and what role is played by the Senate and other instruments of shared governance in decision-making.  While planning at the school and college level is by far the most important part of this painful process, at least in its early stages, several more general issues have come up. I’d like to address three issues here:

·         Participation in decision-making in schools and colleges;

·         Furloughs, salary reductions, and layoffs;

·         The Faculty Code and annual 2% minimum raises.

 

Budget Cutting Plans in Schools and Colleges.  The initial decisions and plans for coping with the current predicament have been developed within each school and college, in response to the Provost’s request to model cuts at the 8%, 10% and 12% levels and describe their effects and the rationale for the choices.  In this process, we reminded the Deans and the elected faculty council chairs of the provisions of the Faculty Code that the faculty councils shall advise the Deans on budgetary decisions.  We have met with faculty council chairs to monitor this process and will be requesting their review of the plans proposed by the Deans.  Please understand that we have many weeks to go before the budget is completed, and that it's worthwhile to keep pushing for what you think is important.

 

Furloughs, Salary Reductions, and layoffs of faculty.  The Faculty Code is clear that the UW cannot impose furloughs, salary reductions, layoffs of tenure-track faculty (including Assistant Professors), or dismissal of other non-tenure-track faculty before their contracts expire, unless a financial emergency is declared.  This the UW is loath to do for a number of reasons, including an immediate drop in our bond ratings and long-term damage to our reputation and ability to recruit faculty.  The circumstances under which declaring a financial emergency would be considered are part of the discussion agenda at the Senate Committee on Planning and Budgeting. 

·         If the President wishes to declare a financial emergency, the Chair of the Faculty Senate will preside over a financial emergency committee which is required to come to a determination on the need for such a declaration before the Regents can make the declaration. 

·         As in most faculty governance procedures, the Senate has no veto power but it is a required part of the process. 

The rules and procedures for declaring a financial emergency can be found at http://www.washington.edu/faculty/facsenate/handbook/02-02-26.html#anchor26-31

 

Provisions for an annual 2% pay increase.  In 2002, the administration failed include a minimum pay increase for meritorious faculty in its budget, although this provision is part of an Executive Order (#64) negotiated between administrators and faculty senate leadership, and the Executive Order is incorporated into the salary policy portion of the Faculty Code.  As most of us know, Duane Storti won a summary judgment, and a settlement was later reached requiring the UW to raise salaries and make partial restitution for past salary deficits. 

 

·         The court acknowledged that the Executive Order allows for a re-evaluation when funding is tight;

·         The court held, however, that without such a re-evaluation, the contractual agreement between the UW and its faculty did not allow the administration simply to withhold the stipulated salary increase for fiscal reasons;

·         The court hypothesized that such a re-evaluation would involve both faculty and administration but did not declare what form a re-evaluation should take.

 

Nevertheless, if the legislature passes a bill stating that there will be no general raises for state employees, it will supersede the faculty code and the executive order with the 2% stipulation.  Meanwhile, our concern has been to maintain the commitment to predictable salary increases along with other principles embodied in the salary policy.  At the same time, however, we have detected very little interest on the part of the faculty to push for a 2% increase this year; many of us believe it would almost surely come at the expense of additional layoffs of lecturers, teaching assistants, and staff, would likely cause the legislature to decrease further the funds available to the university, and would constitute a strategic blunder in faculty relations with the legislature, which have been improving over the last few years.

 

The Senate leaders raised the issue with the President and Provost.  Then, after consultation with the Advisory Council on Faculty Code and Regulations and the Senate chair’s cabinet, I as Senate Chair appointed faculty representatives and the President appointed administrators to a joint committee to re-evaluate Executive Order #64.  These are the members of the committee:

·         David Lovell, Senate Chair          Provost Phyllis Wise

·         Bruce Balick, Senate Vice Chair     Vice-Provost Doug Wadden

·         Lea Vaughn, School of Law           Vice-Provost Cheryl Cameron

·         Gerry Philipsen, Dept of Communication   

 

The committee’s re-evaluation has resulted in a new executive order, temporarily suspending the 2% provision but leaving the principles and priorities of the salary policy otherwise intact.  The order expires at the end of the 2009-11 biennium.  The wording of this order was reviewed by the joint faculty-administration committee.  The new order will be reviewed by the Senate Executive Committee on February 23, and by the full Senate on March 12, before it is issued by the President.