Budget Approach

*DEM, DAPIR, DTL representatives as needed

Historically, UW-Madison has followed an “incremental” budget approach.  In this type of approach, all revenue flows to central campus, divisions receive base budgets, and senior leadership typically make only minor (“incremental”) adjustments to base budgets each year.

The last major review of our budget approach was conducted in 2014 to 2016.  While it was intended to better link funding to instructional and research activities, the budget model that emerged from the initiative has proven inadequate.  Under that model – an annual zero-sum reallocation between schools – it is possible (indeed common) for some schools to grow in absolute terms but nevertheless incur a budget cut because other schools are growing faster.

Given the shortcomings of incremental budgeting and the 2016 model, we have made a variety of ad hoc modifications in recent years.  These include the “bolt-on” agreements between central campus and schools to provide additional funding to accommodate undergraduate enrollment expansion.  We have also developed different budget models for non-pooled (131) programs and profession-specific graduate programs.

The shortcomings of our current approach suggested the need for another major review.  The new budget approach is intended to provide greater clarity, transparency, and uniformity across different revenue sources.

In recent years, some universities have adopted a highly decentralized budget system called Responsibility Center Management (RCM).  In its most extreme form, each school or college within the university retains all the revenue it generates but must also pay for all its direct costs and its share of overhead expenses like rent, utilities, and other costs of central services. In addition, with the revenue schools and colleges earn, they also have to handle all compensation increases. While this type of system creates strong incentives to raise revenue and control costs, it also makes schools and colleges more vulnerable to financial ups and downs and may limit the ability for university leaders to invest in campus-wide initiatives.

Given the experiences of other universities using RCM models, the executive sponsors—Provost Isbell and VCFA Cramer—have developed a “hybrid” budget approach aiming to combine the best parts of both the incremental approach and pure RCM budget models.

Under this hybrid approach, central campus will retain a portion of the revenue from tuition and overhead as well as the state general appropriation.  This will enable central campus to directly cover the costs of facilities and central services, supplement state pay plans, make discretionary allocations, fund central strategic initiatives, and help smooth variation in the formulaic allocations.

The new approach will most directly affect schools.  It particular, it will affect the funding they receive through fund 101 (base budget), fund 131 (tuition revenue), and fund 150 (overhead).

While the new approach determines how funds flow from central campus to schools, deans will determine how the new approach is implemented within schools.

Other campus divisions (beyond schools) and other funding sources (beyond funds 101, 131, and 150) will be less affected by the new approach.  Central support units will continue to receive 101 budgets determined by senior leadership.  Both major auxiliaries (fund 128) and minor auxiliaries (fund 136) will continue to pay the Centralized Services Assessment.  Gifts (fund 233) and direct expenditures on grants (funds 133 and 144) are not affected.

The new approach will not solve every problem we have.  However, it encompasses key revenue flows and provides a better foundation for further discussion of future changes.

Schools will receive 40% of net tuition revenue.  (Net tuition revenue is equal to assessed tuition minus financial aid provided centrally.)  Net tuition revenue will be allocated using two metrics: credit hours (CFI) and student headcount (PAG).  Weights will be 60% CFI and 40% PAG.

Schools with tuition surcharges (Business, Engineering, Nursing) will continue to receive 100% of these differentials.

The undergraduate tuition allocation applies to fall and spring terms.  The new budget approach does not affect the existing summer-term budget model.

The new approach will eliminate the need for ad hoc “bolt-on” funding to address enrollment growth or changes in enrollment patterns across schools.

Divisions will receive 40% of overhead (indirect costs) generated from federal and non-federal research grants.  Allocations will be based solely on overhead generated.  In contrast to the current capital exercises, we will no longer use direct research expenditures as a second metric.

We will discontinue the campus Collaborative Grant Expenditures policy.  In its place, a small proportion (10%) of the divisional share of overhead will flow to the home division of the project PI.  The remainder (90%) will continue to flow to the “spend” division(s) following current practice.

Historically, central campus has diverted a portion of 150 revenue into school 101 budgets.  Under the new approach, the implicit allocation of indirect costs on fund 101 is replaced by explicit allocation on fund 150.

It is helpful to distinguish between three different types of graduate programs:  traditional graduate programs (operating under the standard graduate tuition schedule with revenue flowing to central campus), profession-specific programs (operating under profession-specific tuition schedules), and service-based-pricing programs (operating under tier tuition with revenue flowing to programs).

Traditional graduate programs will not be included in the graduate tuition allocation.  Most traditional graduate students have tuition remitted, but central campus will continue to retain any paid tuition and tuition-remission surcharges generated by these students.  Schools will continue to receive funding for these programs through base budget.

The other two types of programs — profession-specific and service-based-pricing – will be included in the graduate tuition allocation.  Under the allocation methodology, tuition revenue for these programs will be split into “base” revenue ($670 per credit) and “additional” revenue (the remainder).  Schools receive $270 per credit (about 40% of base revenue) for instruction (based on CFI).  Schools receive 90% of additional revenue (based on PAG).

All tuition flows initially to central campus which then makes allocations to schools.  In turn, schools will decide if/how to allocate funding to departments/programs.

When the new approach is first implemented, total base funding for each school will remain the same.  The intention is for schools to be “held harmless” during the transition.  However, the composition of base funding will change.

Under the new approach, divisions will receive undergraduate and graduate tuition allocations on fund 131 and they will receive overhead allocations on funds 150 (federal grants) and 133 (non-federal grants).  To offset the new tuition allocations and the net increase in overhead allocation (relative to existing capital exercises), divisions will incur 101 base adjustments.  Thus, while total funding will not initially change, schools will receive more on some funds (131, 150, 133) and less on other funds (101).

Currently, funding from state pay plans and supplementary campus compensation exercises is allocated to schools on the basis of their fund-101 payrolls.  Under the new approach, some faculty and staff previously paid on fund 101 may be paid on funds 131 or 150.  Campus will allocate funding for state pay plans and comp exercises based on payroll on funds 101, 131, and 150.

Schools with service-based-pricing programs will receive 131 base subsidies to offset the greater share of program revenue flowing to central campus under the new approach.  These 131 subsidies will continue through time (hence they are “base” funding) but are contingent on program continuation.

Going forward (after initial implementation), allocations may rise or fall based on activity levels.  Each school’s base budget may increase or decrease for the same reasons that their current fund 101 base budget fluctuates.  Common examples include state pay plans, campus compensation exercises, and other central campus initiatives.  As we have done in the past, we may need to resort to base budget cuts when the state reduces its support, or we are adversely impacted by external factors.