Budgeting

1. Budgeting Camy Broeker Associate Vice Chancellor Finance IUPUI CACUBO Winter Workshop, February 19, 2014

2. Agenda for Session • What is budgeting and why is it important? • Academic planning • Budget development • Primary architectures of budgeting • Major sources of revenues • Major components of expenditures • Forecasting and ownership • Capital budgets – integration with operational budgets • Budget cuts CACUBO Winter Workshop, February 19, 2014

3. What are Budgets? • Plans: expectations of deliverables expressed in financial terms • Allocation of Resources - Revenues spent to achieve specific purpose • Commitments: • Enrollments • Research funds • Services • Faculty/Employees • Capital – Systems, Buildings, Equipment • Controls • Mechanisms to authorize revenues and expenditures CACUBO Winter Workshop, February 19, 2014

4. What are Budgets? • Budgets are fiduciary enablers: assurances to boards of trustees and/or state authorities that revenues and expenditures will be kept in balance • Performance measurement • Expected deliverables – academic or administrative CACUBO Winter Workshop, February 19, 2014

5. Academic Planning • More diverse faculty • Sometimes different faculty for emerging academic field • More diverse student body • More facilities or upgraded facilities • Increased reputation and quality CACUBO Winter Workshop, February 19, 2014

6. Academic Planning • Plans should become strategic • Could be constrained by resources • Prioritization will be important • Plans can influence revenues • Shift to focus on research • Quality initiative can decrease enrollment • Reallocation of expenditure budgets to achieve academic priorities CACUBO Winter Workshop, February 19, 2014

7. Academic Planning • Planning and budgeting should be dynamic • Budgets enable plans • Both are a snapshot in time • Both must be adaptable to change • Plans can and should influence budget • Unfortunately, budget can influence plans CACUBO Winter Workshop, February 19, 2014

8. Budget Development • Operating budgets • Forecast of revenues and expenses • For an operating period – typically 1 year • Authorizes spending • Basis for performance measurements • Capital budgets • Major outlays • Longer timeframes CACUBO Winter Workshop, February 19, 2014

9. Budget Models • Incremental Budgeting • Annual awarding of increments to prior year budget • Presupposition that the priorities remain the same • Adjustments should be made to refine to ensure prioritization CACUBO Winter Workshop, February 19, 2014

10. Budget Models • Zero-based Budgeting • Start at $0 and build up based on needs • The overall package of all activities represents the budget • Requires priority ranking of the activities • Puts everything up for grabs • Zero-based budgeting is rare in practice • It assumes courage to implement fundamental changes CACUBO Winter Workshop, February 19, 2014

11. Budget Development • Begins with estimating annual revenues • Identifying spending priorities • Examine programs funded in prior years • Propose increases (decreases) for upcoming year • Ends with balancing expenditures to expected revenues CACUBO Winter Workshop, February 19, 2014

12. Budget Development - Revenues • Tuition Revenue • Enrollments • Freshmen • Upper Class (Retention and Transfers) • Setting tuition price • Undergraduate rates tend to be set at institutional level • Public schools: • have state restraints • have instate and out of state student considerations • might have caps on increases CACUBO Winter Workshop, February 19, 2014

13. Budget Development – Revenues • Student fees other than tuition • Special fees related to a program • Fees directly associated with a class, i.e. lab fees • At many schools these fees are controlled by the school • Can be directly allocated to the program/school • Are significant at many institutions CACUBO Winter Workshop, February 19, 2014

14. Budget Development – Revenues • Gifts • Include to the extent gifts provide support to operations • Capital campaigns – less predictable • Have to match restricted gifts with uses • Some gifts are controlled by specific schools, departments and even faculty members • Requires coordination between multiple people CACUBO Winter Workshop, February 19, 2014

15. Budget Development – Revenues • Endowment • Contingent on restrictions, realized endowment returns and earnings can be available for budget support • Endowment spending rate usually established and monitored by institution • Schools might have policy on appropriate use for operations CACUBO Winter Workshop, February 19, 2014

16. Budget Development – Revenues • Investment Income • Generated from short and long term investments • Modeling the cash flow is important – think about what has recently happened with the economy • Research Dollars • Indirect cost revenue • Freeing up of unrestricted dollars • Budgets are done at proposal stage • Other • Sales and services • Conferences and seminars (plus expenditures) • Clinical income (internal or private practice plans) • Rents CACUBO Winter Workshop, February 19, 2014

17. Budget Development - Revenues • Auxiliary Enterprise Revenues • Look and feel of for profit • Gross sales revenues should cover total operating costs • Net operating income should cover debt service • Campus (cash) subsidies should be budgeted • Indirect subsidies should be understood • Like facilities, utilities, administrative costs • Financial structure is complex and should be enhanced with strong financial reporting CACUBO Winter Workshop, February 19, 2014

18. Budget Development - Expenditures • Salaries • Develop policies for annual adjustments • Turnover savings can be available for other uses • Position control • Policies related to use of salary savings and vacant positions • Benefits • Not always easy to forecast • Multiple ways of handling the charges CACUBO Winter Workshop, February 19, 2014

19. Budget Development - Expenditures • Financial Aid • Materials, Services and Supplies • Items such as paper, toner and software • Internal sales usually a contra expense (inc) • Cost of goods sold (auxiliaries) • Travel • Capital Equipment • Should capital outlays be budgeted? • Depreciation should be budgeted for auxiliaries CACUBO Winter Workshop, February 19, 2014

20. Other Budgeting Issues • What should be budgeted? Only operating (current funds)? • Should net income be budgeted? • What about use of cash – non base budget dollars? • Should revenue not intended to be used be budgeted? • Should the budget balance? CACUBO Winter Workshop, February 19, 2014

21. Ownership of Budget Variances • Governing boards should own variances • Role of: • President • Provost • CFO • Delegation to Deans and Directors • Who owns surpluses and deficits • Excessive negative variances over time CACUBO Winter Workshop, February 19, 2014

22. Budget Forecasting • Budget to actual variances with estimated projections through fiscal year • How often? • Depends on the revenue sources • Tuition and Fees known after first month • Other sources can be variable • Minimum of quarterly • Monthly at end of fiscal year • Review for internal controls and decision making with leadership CACUBO Winter Workshop, February 19, 2014

23. Capital Budgets • Require long planning lead times • Implemented over multiple budget cycles • Capital budgets should include: • Equipment • Enterprise Software • Renovations • New Facilities • Infrastructure CACUBO Winter Workshop, February 19, 2014

24. Budget Architecture • Three budget designs • Centralized unrestricted budgeting • All funds budgeting • Revenue responsibility budgeting CACUBO Winter Workshop, February 19, 2014

25. Budget Architecture • Centralized unrestricted budgeting • Central owns unrestricted revenues • Goal is to divide these revenues appropriately among the expenditure budgets of the units • Central estimates and identifies • Revenues • Expenditure inflation factors • Priorities • Discussions are exclusively on expenditures • Negotiation is the behavioral modality • Restricted endowment and gifts are off the table CACUBO Winter Workshop, February 10, 2011

26. Budget Architecture • All-funds Budgeting • Central owns unrestricted revenues • Designated and restricted gifts are on the table with unrestricted revenues • Deans strive to maximize their share of the pie • Provosts requests are against the same incremental resources • Administrative fees can play a role in funding some activities CACUBO Winter Workshop, February 10, 2011

27. Budget Architecture • Revenue Responsibility Budgeting • Based on local ownership of revenues • Tuition earned by unit stays in unit • Research recoveries stay in unit where generated • Local ownership of expenses • Facility expenses • Administrative services • Deans develop feasible revenue and expenditure budgets • Central can still play roll in establishing guidelines and priorities CACUBO Winter Workshop, February 19, 2014

28. Budget Architecture • Revenue Responsibility Budgeting, cont • Budget variances stay in the unit, whether positive or negative • Positive: allows for large multi-year projects at unit level • Negative: school’s must develop recovery plans when deficits occur • Pressures are put on keeping down administrative fees • Deans become very powerful • Forces the issue of fiscal responsibility to the school/department level CACUBO Winter Workshop, February 19, 2014

29. Budget Cuts • Fiscal year beginning cuts • Mid year cuts • Base budget vs. cash • Possibilities • Salaries • Slow down in hiring • Freezes • Reduction in force • Travel • Identification of non-mandatory services • Other deferrals CACUBO Winter Workshop, February 19, 2014

30. Budgeting Questions CACUBO Winter Workshop, February 19, 2014