As 2023 rolls into the second half of the spring semester, most institutions are preparing for the end of their current financial year. As has been the case for the past three years especially, there are growing financial pressures which continue to mount against colleges and universities: institutional budget cuts, shrinking state appropriations, four-year campus enrollment declines—even HEERF will soon be depleted. There’s never been a more imperative time for institutions to explore budget modeling.
What are budget models in higher education?
Budget models in higher education are the structured methods institutions use to fund their strategic initiatives, as well as the prioritization of how those funds are allocated. They provide a framework for you to manage your institution’s finances, strategize, and ensure your institution is meeting their goals in alignment with their mission.
Why are budget models important in higher education?
Budget models are important in higher education because they play a vital role in how colleges and universities carry out their missions. These methods can have direct implications on the short-term and long-term financial health of an institution. Deciding who has control of budget allocation, as well as the means through which those effected can impact financial measures goes a long way toward institutional structure. The degree of autonomy versus heteronomy becomes an important factor for colleges and universities.
What are the two different types of budget models?
The two different types of budget models are a centralized budget model and decentralized budget model. The top factor in defining these differences is how "centralized" or "decentralized" the financial decision-making process is.
However, there is no “one-size-fits-all” approach, so institutions must weigh the benefits and drawbacks to their strategic priorities and goals when deciding where they land on the budget model spectrum.
Centralized budget model
A centralized budget model (for example, an Incremental Budget Model) is a narrow approach where funds are distributed and allocated by a smaller, consolidated group of leaders.
A notable benefit is that greater concentration of oversight for resources can prevent duplication of efforts across the institution and increase efficiency. Additionally, this approach yields an increased probability for consistent year-to-year funding of units and overall stability.
An important drawback can be the lack of transparency into decision-making. Also, units are less incentivized to explore and identify alternate sources of revenue. Another crucial liability of this approach is the potential for a decline in service quality among centralized administrative functions, creating an environment where units outside of the smaller, consolidated leaders do not feel they are receiving adequate support or input.
Decentralized budget model
A decentralized budget model (for example, a Responsibility Center Management Budget Model) is a more broad approach where individual units are responsible for generating and accounting for their own revenue.
A notable benefit is increased transparency into the institution’s financial decision-making. Additionally, this approach incentivizes individual revenue-generating units to seek out new and innovative return sources or ways to operate more efficiently within their current amounts.
An important drawback, if not handled appropriately, is the heightened complexity which managing this approach requires. This difficulty can lead to inefficiencies, including duplication of effort. Another potential downside could be the creation of internal competition amongst academic units for students.
How have budget models impacted higher education?
Budget models are not new to the world of higher education. Institutions have used them over the years to track financial metrics like tuition and spending across units to determine their yearly funding allocation. However, today’s institutions are facing new challenges which means they need to explore alternative models for managing their budgets. Two of the most relevant—and pressing—factors for this are achieving strategic initiatives and addressing mounting financial pressures.
For example, in 2015 Temple University moved to an RCM (Responsibility Center Management) budget model—which leans toward the decentralized side of the budget model continuum—with two main goals. Temple wanted to increase financial transparency and accountability for sustainability across the institution. Additionally, the institution wanted to incentivize units to plan even more strategically and align their resources with key priorities. In a similar vein, in 2022 the University of Arizona transitioned from an RCM model to an Activity Informed Budgeting model (a flexible model that can be either centralized or decentralized in execution). Their goal is to increase transparency and help the institution navigate complex challenges and opportunities within the higher ed landscape after the pandemic. Other HelioCampus Benchmarking Consortium members, including Rutgers and Kent State, have adopted RCM budget models to achieve similar goals.
Alternatively, other institutions, such as Boston University and Vanderbilt University, have adopted more centralized budget models with the goal of promoting student mobility within the schools and colleges at their respective institutions. Their reasoning is that with a centralized model, schools and colleges aren’t penalized (or rewarded) if students move from one to another within their institution. With this disincentive removed or minimized, in theory, departments can focus on collaboration and supporting students as they explore versus fighting to keep them.
Ultimately, most institutions will use a combination of centralized and decentralized budget modeling practices to achieve their goals. The key is to take what works for your institution and leave what doesn’t.
Get Ready to Find the Right Budget Model for Your Institution
Now is a perfect time to explore your institution’s current budget model. If you’re unsure which model is going to help you achieve your strategic initiatives, read more about how to determine which budget model is the right fit for you.