Since the 1980s, college tuition and fees have risen nearly twice as fast as inflation. That fact might lead some to believe tuition funds are the driving force behind budgets for higher education institutions, but that’s false. Tuition costs only cover about 20% for public institutions and 32% of college costs for private nonprofit schools. Private for-profit higher education institutions fare better, however, tuition costs only cover 91% of the total college costs.
Higher education institutions have always struggled to balance income and expenses. In recent times, our unstable economy and COVID-19 have exacerbated problems further. Despite what’s generating the financial challenges, higher education boards are accountable for the institution’s financial health.
Higher education budgeting models are rarely pure and simplistic. More often, boards opt for a hybrid model that offers a range of ways to allocate funds for different sources of revenue and expenses. Whichever budgeting model your board chooses, it forms the basis for making high-stakes decisions.
To that end, we’re providing a comprehensive guide to higher education budgeting models for your review.
Understanding Higher Education Budgeting
Budgeting for higher education institutions provides a way for boards to align their resources with their priorities. A budget brings all the institution’s income and expenses into a central place to give the board the full scope of revenue and spending.
Higher education budgeting models outline how institutions organize their costs and revenues. A budget highlights an institution’s ambitions and exposes its limitations. What’s more budgeting also enables boards to calculate overhead and apportion funds for expenses responsibly.
Various higher education models have a few things in common. At the same time, some very important things separate them. Regardless of the budgeting model or models a college or university chooses, it’s essential to align the budgeting model with its mission.
The following six budgeting models in higher education provide an overview of the various ways of managing the higher education institution budget.
Six Higher Education Budgeting Models
With the centralized budgeting model, upper-level administrators have the decision-making power. It’s common for boards to use centralized budgeting along with decentralized budgeting.
One of the benefits of a centralized budgeting system is it’s easier for boards to address difficult financial circumstances. It’s a good system for managing known costs for necessary expenses. An example of this would be using the budget to control costs for purchasing computer equipment, software, printers, etc. which are known expenses. The downside to centralized budgeting is that some departments may be less motivated to generate revenue via grants and other revenues to cover some of their own expenses.
Colleges and universities that use a performance-based budgeting model award funds based on performance. This type of budget outlines how the institution allocates day-to-day tasks and activities. The plan describes how those same activities should generate specific outcomes, as well as what the expected outcomes need to be to receive funding. The benefit to this model is its transparency. Yet, some boards may give it a thumbs down because it requires them to spend a good deal of time reviewing performance measures.
Incremental budgeting is a traditional college budgeting model where the board bases budget proposals and allocations on the figures from the previous year. The board only allocates revenue from new sources. When budget cuts are imminent, board committees typically recommend making budget cuts across all departments. Many boards like the incremental budgeting model because it’s stable and easy to implement. Due to its predictability, it’s a good choice for boards that like to plan for future year budgets. If there’s a downside to incremental budgeting, it can be hard for boards to know where costs are coming from and how those costs contribute to revenue and value creation.
A zero-based budgeting model is much like it sounds. Before planning the new budget, the board wipes away the previous year’s budget. Every year, all departments make a bid for their funding needs and they’re required to justify their expenses. One of the biggest positives of a zero-based budget is that it helps the board to control unnecessary costs. University departments have to be intentional about their spending and prevent waste as much as possible. On a negative note, zero-based budgets take a lot of time to prepare, and they can be too unwieldy for some boards.
With activity-based budgets, the goal is for boards to get the greatest return on revenue for the institution. This model works to separate some of the indirect costs from direct costs. Indirect costs refer to basic higher education activities such as library services, educational technology, advising, etc. This approach can make it difficult to allocate for general activities such as security, disability services, etc. On a positive note, activity-based budgeting enables boards to strategically align resources to their overall objectives. The negative aspect of the activity-based budgeting model is it requires input from campus leaders and constituents, and it takes up a significant amount of the board’s time and resources. These issues make it less attractive for some boards than other budgeting models.
Responsibility Center Management
In some ways, Responsibility Center Management (RCM) more closely resembles a management philosophy rather than a budgeting strategy. By design, this model promotes academic achievement within an institution. The budget is designed to support that goal. This model gives operational authority to various divisions, schools, or other units within an institution and charges them with prioritizing their academic goals. Each unit receives its own income and tuition, enabling it to compete for student enrollment. Also, each unit is required to pay its own expenses and contribute a portion of its income to the university’s general operating expenses.
The board distributes government support for each unit. Since each unit has to be proactively involved in budgeting, some advocates of this model believe that it motivates deans to hunt down new sources of revenue which helps the institution overall.
Just as students struggle to manage college expenses, higher education institutions struggle with how to budget for the best outcomes for students. In a nutshell, the right budgeting model is mission-focused and helps higher education institutions reach their goals.
BoardEffect’s board management system is a valuable tool for managing all higher education institution board activities including the budget. BoardEffect provides a secure platform for budgeting committee work and board approvals. Board members can access all documents and communications related to the budget and all other board business using their secure login credentials. It’s an efficient board management solution for higher education boards and nonprofits.