Alternative Budgeting Approaches
To: Board of Regents
From: Richard A. Crofts, Commissioner
Date: April 17, 2002
Subject: Alternative Budgeting Approaches
The purpose of this memo is to outline for you a list of alternative approaches according to which all or some of the money appropriated to the university system could be allocated to the campuses. As we discuss university system budgeting, it is important to keep in mind two different aspects of system budgeting: (1) how the State decides how much funding to appropriate to the university system; and (2) how the Board of Regents (in this case) decides how to distribute the money to the campus and agencies.
The focus of this memo is on the second of those two aspects. However, we believe that we should be proposing to the Governor and the Legislature that it is time for a funding study for the Montana University System. The last such study occurred in the late 1980s.
Most States in the country fund their university systems on a model that is to a significant degree enrollment-driven, and most university systems distribute money to their campuses on a similar basis (with some variations in which money is distributed in some other means). The other most popular model is a base plus inflationary adjustment. In good times for the State s economy the base is secure and there are reasonably good increases for inflationary adjustments. In bad times for the State s economy, little if anything is provided for inflation and on occasion the university system faces base reductions.
There have been a few occasions when States have experimented with radically different models, but none of those approaches have thus far demonstrated much staying power. Enrollment and the State s ability to pay tend to return to a position where they loom large over the budgeting process.
You will hear at the April 24th meeting a presentation on what we call the cost of education allocation model by which the Montana University System currently distributes money from the State to the campuses. Unlike some states, we do not distribute tuition dollars through the model. We characterize our model as one that is significantly driven by enrollment, but also seeks equity as a goal. It addresses equity by : (1) providing the same core funding to all campuses regardless of size; (2) taking into account the array and expensiveness of academic programs at a given campus; (3) taking into account the relative size of each campus and economies of scale that apply. It should also be noted that dollars follow student enrollment very quickly; instead of funding lagging based on historical enrollments, campuses are funded based on projected enrollments for a given year and then their budgets are adjusted (usually downward) if those enrollments do not materialize.
The Board of Regents has on several occasions asked for ideas about ways to allocate funds to the campuses outside of the cost of education allocation model and ways for the Regents to be more involved in budget decisions. I have provided some examples from other states below. However, before moving to a discussion of other specific alternatives, I would suggest that the Board spend some time discussing what are the goals or objectives it hopes to achieve through a budget/allocation process - - funding student enrollment, equitable distribution of resources, support for strategic initiatives or investments, etc. Because the Office of the Commissioner is heavily invested in the current allocation model and process, we recommend that an outside consultant be used to assist the Board in discussing its objectives.
Here are some brief methods and examples of how the Board of Regents might decide to distribute resources to the campuses in whole or in part using different approaches:
- Take dollars off the top of the appropriation and reserve them for special initiatives of the Board of Regents. For example, if the Regents wished to create a unified and integrated library for all of the campuses, it could take the money for planning and implementing such a project off the top of the appropriation and distribute the rest according to a cost of education style allocation model.
- Fund performance. The Board of Regents could establish goals and objectives for the campuses and provide funding when it was documented that those goals and objectives had been achieved. Goals and objectives and accountability measures would have to be developed and approved for each campus. South Carolina gained some considerable notoriety and skepticism when it announced that it would allocate all of the dollars it received from the State to the campuses based on their performance on some 32 performance indicators. They did manage to redistribute a few dollars, but the notion of allocating all dollars in that fashion has been abandoned. Tennessee led the nation in the establishment of a performance funding approach. Every year each campus had its budget reduced by 5% and depending on its score on the various performance measures could regain through performance the money it had lost through the budget reduction.
- Incentive funding. The Board of Regents could establish pools of money as rewards for campuses achieving Regents goals and let the campuses compete for those funds. These funds could be for the development of new programs, services to assist the Montana economy, etc.
- Allocate dollars to the campuses for specific purposes and require accountability at the end of the reporting period; budget adjustments would follow if the accountability measures were not met. This approach would be an expansion of what has been done in the last two years by establishing targets or guidelines for expenditures in certain areas of the budget.
- Format budgets and budget requests according to the strategic plan of the Board of Regents and the campuses.
- Hold budget hearings and allocate dollars to the campuses based upon the results of those budget hears.
As a final observation, these kinds of ideas work better as a mechanism to distribute funding increases when the university system s base budgets are reasonably well-funded.
I look forward to our discussions.