Columbia University Medical Center

1. Columbia University Medical Center Training Certification Program For Senior Financial Administrators - Session 2 Session 2 - Budgeting

2. Session 2: Fundamentals of Budgeting Part 1: Budgeting Basics Part 2: Types of Budgets Part 3: Overview: CUMC Integrated Planning Approach Part 4: Developing Budgeting Metrics Part 5: Multi-year Financial Planning Part 6: Capital Planning and Budgeting Part 7: Capital Assets and Depreciation Session 2 - Budgeting

3. Agenda Session 2 - Budgeting

4. Session Objectives • Understand budgets and why they are so important • Provide an overview of types of budgets • Understand key roles and responsibilities in the budget process • Understand “all funds” budgeting • Understand how individual budget submissions rollup to overall at CUMC and University level • Understand how budgeting performance metrics relate to the annual budget • Understand strategic, long-term planning • Understand the methodology for planning and budgeting of capital • Understand how assets are capitalized and depreciated Session 2 - Budgeting

5. Part 1 Budgeting Basics Session 2 - Budgeting

6. Historical CUMC Perspective • The Budget process at CUMC was fragmented and inconsistent • Each School had its own internal budget process • Budgeting system was not linked to financial statements • Budget was not included in FAS at the account level • Need for better financial monitoring of all funds • Difficult to see the consolidated CUMC financial picture Session 2 - Budgeting

7. Current CUMC Perspective • Implementation across University of all funds budgeting started in FY03/04 • Budgeting tool allowed departments to build a “bottom up” all funds budget, beginning at the (ten digit) account level • The budget tool allowed direct import of budget information into the FAS system • All funds budgeting provides better monitoring of results and available resources • Both unrestricted and restricted accounts are budgeted • Evolving process Session 2 - Budgeting

8. What is a Budget? • A budget is a plan for projecting the achievement of an organization’s goals • It is a plan of action for receiving and spending money within a specific period of time • Budgets record the realistic goals and objectives of the organization. • Expectations for achieving goals are based on past experience, current information and assumptions about the future • Serves as a tool to ensure that financial exposure of the organization are anticipated Session 2 - Budgeting

9. Why Is It Important? Session 2 - Budgeting

10. What Resources Drive the Program? • Number and type of students • Number of procedures • Payor mix • Managed care plans • Health insurance plans • Medicare • Medicaid • Self Pay • Indigent • Philanthropic Activities • Space Session 2 - Budgeting

11. What Resources Drive the Program? (cont’d) • Sponsored Research Mix • Government NIH awards • Government NSF awards • Government DOD contracts • Government training awards • Foundation awards • State grants and contracts • F&A Cost Recovery • Innovative “cutting edge” programs vs. traditional ones • Seasonality • Cyclical - cash coming in Session 2 - Budgeting

12. Best Practices: Overall Framework • Strategic Planning • Vision for the Future • Strategic Goals and Objectives • Programmatic initiatives • Financial / Tactical Plan • Financial Plan of action for achieving goals • Profit & Loss/ Cash Flow Impact of investing in new recruits, facilities, equipment, I/T, etc. • Departmental Business Plans (Programmatic & Financial Goals) • Accountability • Performance vs. Goals • Strategic & financial goals • Dept -> Division -> Investigator • Faculty Compensation Plan • Resource Re-allocation • Internal Funds • Space • Annual Budget: • Operationalize strategy through the annual budget process • Setting priorities when aligning resources to achieve goals • Mission-based / All Funds Budget • Performance Management • Measurable Goals • Key Performance Indicators • Balanced Scorecards • Accuracy– Systems/ Data Management Session 2 - Budgeting

13. Part 2 • Types of Budgets • Unrestricted Fund • Incremental • Zero-Base • Mission Base Session 2 - Budgeting

14. Unrestricted Fund Budgeting • Unrestricted Income 1-XXXXX • ICR • Tuition and fees • State aid • Unrestricted Expenses 2-XXXXX • Deans’ central funds • Academic program / Departmental administration • Operation of Central Administration support • University common costs • Debt service • All other funds not budgeted and loosely monitored Session 2 - Budgeting

15. Incremental Budget Process • Analysis of various market driven indices • Market basket Higher Education (HECPI) • Research index • Utilities • Gas, electric, oil • Compensation benchmarks • Faculty • Technical staff • These indices were applied to prior year base-line budget • New program initiatives were added • Remove nonrecurring items Session 2 - Budgeting

16. Zero-Base Budget Process • Reassess resource allocations to programs / departments / centers • Define the basic needs of resources to perform the program or department services • Evaluation of each incremental element or cost of operation • Position by position • Service by service • Each incremental resource unit is justified to mission and service delivery Session 2 - Budgeting

17. Mission Based Budgeting • What is it comprised of? • Instruction • Student instruction • Graduate research training • Resident training • Patient Care • Clinical activities • Hospital activities • Research • Sponsored research • Institutionally funded research Session 2 - Budgeting

18. Mission Based Planning and Analysis • Before MBB costing, department results were presented as follows: Session 2 - Budgeting

19. Mission Based Planning and Analysis • Now, department results can be viewed as... Session 2 - Budgeting

20. Discussion Participant Examples: Use of Budget at Other Institutions What Worked and What Didn’t? Session 2 - Budgeting

21. BREAK Session 2 - Budgeting

22. Part 3 Overview: CUMC Integrated Planning Approach Session 2 - Budgeting

23. Budget Cycle, Process, and Timeframe Budget Development Budget Review, Approval and Implementation Budget Planning Budget Monitoring, Tracking and Adjustments Analysis of Final Results Session 2 - Budgeting

24. Budget Roles and Responsibilities Session 2 - Budgeting

25. CUMC Overall Budget Construction • University budget arranged by “sector” in three-level hierarchy • Top level: Morningside, Medical Center, University Central Administration • Morningside and Medical Center include: • 100% tuition revenue • Gift and endowment income • Grants and contracts generated by schools • Departments and faculties • Financial aid • University Central Administration includes: • Central administrative offices • Insurance and utilities • Auxiliaries and Institutional Real Estate • Athletics, libraries fees, work-study • Income from unrestricted endowment Session 2 - Budgeting

26. CUMC Overall Budget Construction- FY04 School Revenues - “every tub on its own bottom” Session 2 - Budgeting

27. CUMC Overall Budget Construction CUMC Operating Budget Highlights Direct Revenue Budget • Tuition and fees (5%) • Endowment and gifts (7%) • Sponsored grants and contracts (42%) • Faculty practice (32%) • Affiliated institutions (NYPH, St. Luke’s, Harlem Hospital) (11%) • Licensing and patent revenue (1%) • Miscellaneous revenues (2%) Direct Expense Budget • Instruction and educational administration including NYPH (36%) • Faculty practice plan (29%) • Direct research expenses (22%) • Maintenance of plant and debt service (6%) • Other (7%) P&S financial performance is the primary driver of CUMC’s overall finances (82%) Session 2 - Budgeting

28. CUMC’s Budget Methodology • All funds are budgeted • All accounts, both unrestricted and restricted, are budgeted at the ten digit level • This includes both general ledger and subsidiary ledger accounts • Proxy accounts are used to estimate prospective grant revenue • Accounts are aggregated into management units (MU’s) • Management units are aggregated into departmental budget submissions (BU’s) • Departmental chairs, program directors, institute chairs are accountable for budget submission • Budget submissions are aggregated into schools • Schools are aggregated into CUMC budget submission • CUMC budget is one of the three sectors that comprise the Columbia University budget • CU budget is approved by the Trustees of Columbia University • Operating Budgets should reflect revenues and expenses in a 12-month period which increase or reduce Current Funds Session 2 - Budgeting

29. CUMC Overall Budget Construction Statement of Activities (Revenue/Expense statement) COB: Consolidated Operating Budget • Summarizes all of the activity of the organization for the entire period. • Depicts how the resources of the organization are used in providing programs or services in order to meet its mission • Revenues (Sources) • Expenses (Uses) • Reported by natural or functional groupings • Reports revenue and expenses at gross amount and surplus and deficit at net amount Session 2 - Budgeting

30. CUMC Overall Budget Construction Consolidated Operating Budget: • Includes all activities and accounting transactions that affect the sector’s “change in net assets to support current operations” • Affected by: • Direct revenues and expenses (practice revenues, sponsored projects revenue, employee compensation) • Indirect sources and uses (internal allocations of cost and revenue) • Non-operating activities (transfers of operating funds to and from long-term assets) • The net of all three categories results in a change in current assets Session 2 - Budgeting

31. CUMC Overall Budget Construction Example of the COB • Direct Revenue and Support XXXX • Operating Transfers and Indirect Sources XXXX Grand Total Sources XXXX • Direct Expenses XXXX • Operating Transfers Out & Indirect Uses XXXX Grand Total Uses XXXX • Transfer From/To Non Operating Funds XXXX Net Change in Current Fund Balance XXXX Session 2 - Budgeting

32. CUMC Overall Budget Construction Principal Budget Assumptions A number of assumptions about the external economic environment and policy decisions are implicit in the budget process, including: • Tuition and Fees • Each school proposes its own tuition and fee rates in its budget proposal (subject to trustee approval) • Enrollment • Approximately 4% of CUMC’s total revenue comes from tuition and fees • The 2004-05 tuition revenue budget depends upon total enrollment of 2900 full time equivalent students • CUMC accounts for 11% of University’s tuition revenue Session 2 - Budgeting

33. CUMC Overall Budget Construction • Principal Budget Assumptions (continued) • Sponsored Research Volume • Consist of two components • Direct research funding that is highly restricted to specific projects • F&A recovery (ICR) which is calculated based upon federal cost allocation methodologies • Once received, F&A recovery is unrestricted as to its use • In total, sponsored projects almost equal to faculty practice • F&A recovery was approximately $100 million • Research (funding from all sources direct and indirect) represents 1/3 of CUMC’s overall budget Session 2 - Budgeting

34. CUMC Overall Budget Construction Principal Budget Assumptions (continued) • Endowment Investment Returns • The University's endowment spending rule aims to distribute 5.0% of the previous year’s beginning market value. • By this measure, the 2004-05 base spending rate will be 5.1% • Spending Rule:Driven by investment results and external market conditions • Regulates the annual amounts made available from the endowment for support of University operations • Balances current needs against the preservation of the purchasing power of the merged investment pool Session 2 - Budgeting

35. CUMC Overall Budget Construction Principal Budget Assumptions (continued) • Medical Faculty Practice Plans • Represents 37% ($383 million) of activity • 18 clinical departments • Patient volume, payor mix, collection rate, etc • Other Budget Assumptions • Patent income • Gifts • Affiliation agreements • Miscellaneous revenue • Miscellaneous expenses • Financial aid, utilities, rent, common costs • New / Expanded Programs Session 2 - Budgeting

36. CUMC Overall Budget Construction Statistical Background: CUMC Total – June 2004 Session 2 - Budgeting

37. CUMC Overall Budget Construction Risks: Physicians and Surgeons • P&S is vulnerable to several budget issues in 2004-05, notably: • The level of indirect cost recovery • The ability to collect projected patient receipts • The ability of operating units to absorb the costs of the new assessments • To achieve budgeted central administrative cost savings • Risks are mitigated by: • Fundraising and development potential • Improvements as a result of better financial management policies and practice • New research opportunities Session 2 - Budgeting

38. Part 4 Developing Budgeting Metrics Session 2 - Budgeting

39. Goals and Objectives • Metrics can be viewed at the Department, Division and individual physician level • Budget expectations must be communicated and understood at the Department, Division and individual faculty level in order to establish a sense of accountability at each level. • Practice productivity expectations should be communicated, both revenue and expense, with emphasis on patient volume and payor mix estimates. Session 2 - Budgeting

40. Planning Assumptions Estimated Grant Increase from Current Faculty • What effect will the future federal budget deficits have on the increase of the NIH appropriation? • What is CUMC’s expectation of its market share of the NIH budget? • Are there different assumptions for increases by the various research mix categories? • NIH grants • PHS training grants • Clinical research Session 2 - Budgeting

41. Planning Assumptions Session 2 - Budgeting

42. Performance Metrics Variance Reporting: Department / Account Drill Down Approach • Where is the variance occurring? • Department • Division • Faculty • Is it a revenue variance? • Volume • Payor Mix • Collection Effectiveness • Is it an expense variance? • Head count • Salaries, including overtime • OTPS • Is it a profitability variance? • Average revenue per procedure compared to average cost Session 2 - Budgeting

43. Clinical Example • Typical revenue performance metrics include: • Revenue per FTE MD • Volume indicator • Procedure Codes • Relative Value Units • Average revenue per procedure • Measure of collection effectiveness: • Days in Accounts Receivable or • “Bracket Creep”: increase in % of receivable in older buckets • What is the mix of inpatient, procedural and office services? • What is your payor mix and average payment rates? • Typical Expense Metrics include: • Non-MD salary expense as a % of revenue • All non-MD expense as a % of revenue • Average cost per procedure Session 2 - Budgeting

44. Discussion • CUMC Financial Scorecard • What are the key outcomes that evidence a successful MU / BU? • What fiscal / administrative metrics would you place on a school or departmental scorecard? Session 2 - Budgeting

45. CUMC Financial Scorecard: A Draft Proposal • Change in Net Assets (COB) • Reserve Summary • Revenue Summary • Tuition • Patent Income • Practice Revenue • Sponsored Funding • Direct & MTDC spending • F&A (ICR) • Training, research, service, financial aid • Pipeline activity (applications, success rate, new & expired grants) Session 2 - Budgeting

46. CUMC Financial Scorecard: A Draft Proposal • Expense Summary • Utilities • Faculty and Additional compensation • Major equipment • Unallowables • Overdrafts • Number of overdrafts, $, Ledger • Recurring overdrafts • Affiliates • $ Receivables • $ Payables Session 2 - Budgeting

47. CUMC Financial Scorecard: A Draft Proposal • Employee • Headcount • Vacant positions • Attendance performance • Effort report verification • Financial Aid • Number, $, eligible candidates • Number of appeals • $ Contingency balance • Payroll suspense • Unpaid vendor invoices • Number, $ aged Session 2 - Budgeting

48. BREAK Session 2 - Budgeting

49. Part 5 Multi-year Financial Planning Session 2 - Budgeting

50. Key Strategic Questions: What is the current competitive position of the enterprise? What are the current clinical and educational initiatives? What types of bio-medical research should the organization be undertaking in 5 years? in 10 years? In 15 years? Over the next 5 to 10 years, how much cash will be required to finance the investments? What will be the impact of potential funding needs for: new program development? new technology? strategic affiliations / shared services? increased working capital requirements? operating cash reserves? Planning For Strategic Initiatives • How should the organization leverage its assets to fund capital requirements? • What is the extent of current cross-subsidization from patient care to teaching and research? • What is the organization’s marginal research revenue? - How is it measured? • How should the financial model calculate F&A? (MTDC?) • What are the non-federal revenue assumptions? • What is the magnitude of the fund raising campaign needed to support the organization’s enterprise? Session 2 - Budgeting