Resource Allocation in Higher Education

Institutions of higher education–be they large public universities or small private colleges–are not homogeneous organizations. Because of differing missions, goals, programs, histories, traditions, laws, and explicit procedures, they obtain and expend revenues, or financial resources, in myriad ways. Therefore, there is no universal model about the best way to allocate financial resources within higher education. Nevertheless, there is general consensus within the U. S. higher education community about the meaning of certain terms pertaining to resource allocation, as well as a general consensus about certain methods and processes for channeling financial resources into specific programs and projects.

Budgetary Concepts and Terms

For the layperson, the terms budget and allocation are often confused. Although the two terms are certainly related, and often synonymous, there are differences that one should be aware of in order to gain an appreciation of the resource allocation process.

Broadly interpreted, the term budget represents both an institution's revenue sources and its expenditures. For public institutions, this side of the coin is usually comprised of legislative appropriations; tuition based on the number of credit hours and level of courses taken; contracts and grants–which comprise revenues received from external sources for research and certain types of off-campus program development; auxiliary operations–which refer to on-campus operations that are self-supporting, for-profit enterprises (such as the campus bookstore, cafeteria, and laundry); and local funds. Local funds, particularly within public universities, refer to those revenue sources not kept within the state treasury, but within local banks. Local funds may be comprised of fees and assessments charged against students for the support of campus-wide student activities, intercollegiate athletics revenues, concessions, and financial aid monies.

Taken together, these revenue sources make up an institution's operating budget. They represent the totality of monies required to finance the institution's normal and recurring expenses (its core operations). However, this is not the complete picture, for the operating budget does not include fundraising revenues, which are monies donated to the institution by private donors, usually for specific purposes (such as endowed academic chairs, athletic scholarships, or a new academic program that is acceptable to the institution and a priority of the donor). Although fund-raising revenues have become ever more critical for institutional operations, they are rarely considered part of the traditional operating budget.

Expenditures represent the most common understanding of the term budget. In this sense, the budget formally represents the institution's strategic priorities and associated costs. That is, the budget is a detailed plan for expending revenues for various institutional purposes. Moreover, these purposes are, or should be, focused on long-term strategic imperatives that parallel and support the accomplishment of the institution's most critical needs and aspirations.

Traditionally, expenditures for the operating budget fall into certain main categories that apply to both public and private institutions. Certainly, the largest slice of the budget pie is earmarked for instruction and research (I & R)–the core activities of any college or university. At Florida State University, for example, approximately 70 percent of the operating budget is designated for I & R purposes. Other large slices of the budget pie include administrative support services, such as centralized computing and accounting services; student services, such as the registrar's office and financial aid; plant operations and maintenance, including grounds, building services, and utilities; and libraries.

Expenditures from the operating budget are generally unrestricted. That is, there is some flexibility in allocating resources within and between the various categories that make up the operating budget. However, there are also restricted budgets, both within and external to the operating budget. Restricted means just that–monies can only be expended for strict, narrowly defined purposes. For example, within I & R, a public university could receive a restricted legislative appropriation to fund a Title IX (gender equity) program. Likewise, restricted budgets outside the operating budget may include monies earmarked for sponsored research or financial aid monies received from external sources, such as the federal government.

For most core operations, whether financed by unrestricted or restricted budget expenditures, one should be aware of exactly how the monies are earmarked within the major expenditure categories. Generally, the monies fall into three main activities: (1) salaries and benefits, which are certainly the most costly activities; (2) capital outlay, which refers to major purchases of expensive equipment, such as computer systems; and (3) expense items, which include less expensive items and continuing costs such as office furniture, service contracts, expendable supplies, and travel.

One critical budgetary category that is not considered a part of the traditional operating budget is fixed capital outlay, which comprises the monies earmarked for major construction and renovation projects. The auxiliary budget, also kept separate from the core, concerns the receipt and expenditure of monies obtained from revenue producing campus enterprises (e.g., a bookstore). Institutions with medical schools and teaching hospitals often have separate budgets for these purposes.

Some institutions have service-center budgets, which refers to certain centralized services such as photography, printing, and copying. These services are not financed by operating budget expenditures. Rather, units under the umbrella of the service-center budget are reimbursed for their services by charging operating budgetary units, which, in turn, pay the service-center unit from operating budget expenditures, usually from the expense category.

Allocation Concepts and Terms

For the purpose of understanding the differences (and nuances) between the concepts of budget and allocation, one could say that the formal budget is the architecture (or basic plan per category) of how monies will be expended. Allocation, however, refers to the actual funneling of dollars to various units within an institution. In some instances, allocation flows will exactly mimic the expenditure categories. However, were this always the case, the descriptive analysis of budgets and allocations would end here. Rather, allocations often do (and should) have an element of flexibility built within them to reflect changing environmental conditions–including both internal and external environments, such as political circumstances, economic exigencies, and the strategic direction of the institution.

Although most institutions do permit some flexibility within their allocation decisions, many eminent higher education leaders, such as Dr. James J. Duderstadt, the former president of the University of Michigan, have publicly noted that far too many allocation decisions have become overly mechanistic. This has become particularly true within large, public institutions, which have also publicly expressed their collective concern over the ineffective and inefficient ways that monies are allocated. In addition, the National Association of College and University Business Officers (NACUBO) has also publicly expressed concern about the deficiencies currently inherent within internal allocation systems and processes.

Before discussing normative issues concerning how such deficiencies may be corrected, one must first understand the basic processes of allocations, particularly within the unrestricted I & R category. Historically, both academic and administrative units have relied upon incremental budgeting for determining allocations. Incremental budgeting simply means that the unit will sum the dollars contained within its current (annual) salary and benefits, capital outlay, and expense activities, and then increase the sum by a percentage to cover inflation and other expected cost increases. Incremental budgeting certainly simplifies the allocation process and facilitates accounting. With limited exceptions, incremental budget requests are accepted as forwarded to the central budget authority, funds are allocated according to the three major activities, and the unit lives within the allocations. At some institutions, academic and administrative units, with approval of a central budget authority, are able to transfer a minimal percentage of funds among salaries and benefits, capital outlay, and expense–if critical exigencies so demand. Nevertheless, this type of allocation system remains basically static.

The problem with static allocation systems is that they are inherently unable to anticipate change. Duderstadt duly notes that within large public universities, legislative appropriations, in terms of real dollars, have continuously diminished since the 1970s. Diminishing public appropriations, coupled with the opportunities and threats posed by a volatile environment, limit an institution's ability to adapt. During extreme economic situations, static allocations based upon incremental budgeting could actually spell the death of a public institutions' major academic offerings.

Another allocation process, often coupled with incremental budgeting, is formula-based allocation. This can be more flexible than simple incremental budgeting, because such formulas are usually based upon total credit hours or full-time head count per academic unit. This type of allocation process rewards those academic units that are most popular with students, and therefore does provide flexibility to fund those programs that are most in demand. Conversely, if an academic program is critical to a university's mission, but does not attract large numbers of students, it is automatically punished by formula-based allocations. In short, this is a market-based allocation process. While a for-profit organization can and should allocate its resources into the maintenance and expansion of its most profitable offerings, higher education institutions are striving for both tangible and intangible successes that may not necessarily be popular among students.

Colleges and universities, recognizing the inadequacies of incremental and formula-based budgeting, have enacted certain allocation adjustments to enhance flexibility and the quality of certain programs. At one university, for example, a 1 percent flat tax was charged against the allocations to all academic units to replenish a central reserve fund and enhance certain graduate programs. However, according to a report by that university's provost, this type of allocation mechanism proved itself insufficient to meet most challenges facing the institution.

In order to meet institutional objectives, and depending upon the authority granted to an institution by its governing board or its state legislature, an institution may be required to reduce allocations in one area to cover allocation demands in another. In order to meet the salary needs of the faculty, for example, resource allocations may be significantly diminished for libraries, computing systems, or facilities maintenance.

Flat taxes and other short-term options, such as hiring adjunct faculty or downgrading positions, can only operate at the margin, however, because not enough financial resources are generated, particularly on a long-term basis, to solve problems resulting from a lack of allocation flexibility. Similarly, wholesale raiding of funds from one allocation category to fill the coffers of another, if permitted, can only serve to weaken the entire university structure over time. Whether the allocation process is incremental, formula-based, or stopgap in nature, such processes focus only upon short-term, year-to-year allocations.

In 1999, Drs. Edward Ray and William Shkurti, the provost and senior vice president for finance, respectively, at Ohio State University, succinctly stated the problems accruing to that particular institution as a result of allocation inefficiencies:

• Current practices were not supportive of the instructional mission.
• Current practices were not supportive of the research mission.
• Current practices did not provide sufficient incentives to reduce costs and/or generate additional revenues required to address academic priorities.
• Current practices did not provide sufficient accountability for the costs of individual unit decisions that impact the entire university.

Achieving Normative Consensus

The problems inherent within traditional budgetary and allocation processes indicate the need for a new approach. Notwithstanding the fact that public institutions are further hampered by legislative mandates, private institutions also face the same problems inherent within incremental and formula-based allocations.

The challenge facing higher education is to embrace new philosophies and outlooks that take a long-term, wide-ranging view of what the institution is, what it should be, and how it can move from what is to what should be.

Appropriate, sufficient, and equitable resource allocation processes simply can no longer be based on what worked in the past. In this sense, most colleges and universities have embraced strategic planning–a long-range, holistic examination of what the overall mission of the institution should be; in other words, a vision. To better define this vision, one must further ascertain the specific goals that should be set to accomplish the mission, and what environmental factors exist–internally and externally–that can either enhance or inhibit the accomplishment of the vision. Specific questions need to be asked, such as: What does the university plan to accomplish over the next several years? How does the university plan to accomplish its goals and objectives? What resources are needed to carry out this plan? What are the funding sources from which the institution can obtain the necessary financial support?

To best answer these questions, institutions should first examine their decision-making structures. Colleges and universities are not pyramidal, hierarchical structures ruled by an autocracy at the top that transmits decrees downward through the chain of command. Conversely, colleges and universities cannot be anarchistic organizations where decision-making is randomly conducted by individual units. The problem, thus, is to create a decision-making structure that seeks consensus through participation.

At one Eastern university, for example, allocation decisions remain the basic prerogative of university executives, such as the president, provost, vice president for finance, and the deans. Nevertheless, to reach its highest-priority strategic objectives, faculty and staff members from colleges and departments are invited to submit their own ideas on how best to achieve the institution's overall mission, long-term strategic initiatives, and specific goals–all within the context of maintaining and enhancing the quality of priority programs identified by strategic planning. Specifically, faculty and staff members are requested to review the allocation and adequacy of resources vis-à-vis the quality of programs relative to peer institutions, the centrality of programs to the university's mission, and the cost-effectiveness of programs relative to the best practices of higher education and the private sector. To facilitate and direct this endeavor, a university-wide committee, the Strategic Plan Advisory Committee (SPAC) was formed. SPAC not only identified allocation problems in detail, it helped develop a long-term, multiyear plan that will enable the university to respond to special opportunities and eventually solve the most basic and continuing allocation problems.

Similarly, at the small, private-college level, Wheaton College in Massachusetts has set up a formal group–the Budget Advisory Committee–similar to the SPAC. Wheaton's committee, consisting of faculty and staff members, reports directly to the college president, and operates with the long-term view that allocations should be treated as strategic investments, not simply as annual costs. Hence, it has determined that allocations should regularly include reallocations from lower priorities to higher priorities, and that cost savings should be actively pursued in order to increase the college's strategic flexibility.

In short, if realistic and successful allocation processes are to be developed and accepted throughout the institution, structural arrangements must be designed to facilitate the participation of stakeholders and attainment of consensus.

Once consensus on basic allocation-decision parameters is achieved, a second consideration includes the formal allocation structures and processes that might be adopted. To help identify these means, decision-makers and participants in the decision-making process should be provided with feasible and workable alternatives.

One alternative, as suggested by Duderstadt, is an institution-wide, integrated resource-allocation model he calls Responsibility Center Management. Resource-allocation decisions are shared between academic units, administrative units, and the central administration. After determining strategic priorities, this alternative allows critically-important units to keep the resources they generate, makes them responsible for meeting costs they incur, and then levies a tax on a unit's expenditures to provide a central pool of resources for supporting central operations and facilitating flexibility funding. This alternative has the potential to reduce some of the inequities and inefficiencies inherent within formulaic or incremental allocation processes.

Another alternative is substitution, or the elimination or reduction of noncritical activities to release allocations for more critical, strategically oriented activities. This alternative not only reallocates resources to those programs deemed most critical for strategic purposes, it also alerts the public and the institution's stakeholders that the college or university has taken cost effectiveness very seriously.

Other structural and process alternatives for resource allocations include: differential tuition rates based upon program popularity; using foundation allocations to replace traditional allocations; permitting the carry-over of surpluses from one year to another; and permitting the most productive research units to retain a large portion of the overhead (indirect) costs assessed against their research awards. The point is that viable and reasonable alternatives should be presented at the start of the analysis in order to preclude time being wasted.

Conclusion

Traditional budgetary and resource allocation procedures that have been utilized for decades in America's colleges and universities are rapidly losing their functionality. Indeed, reliance upon their continued use can cause irreparable damage to the system of higher education.

Budgets and resultant allocations are complicated subjects. Because of their complexity and a reliance on the fact that they worked well enough in the past, inertia exists. However, in light of the volatile higher education environment of the early twenty-first century, the increasing inequities and inefficiencies of current systems and processes, and greater demands for accountability by legislative bodies and institutional stakeholders, structures and procedures for budgeting and allocating financial resources must be re-examined. The task is not easy–the problems are complex, and consensus about what should be done is difficult to attain. Nevertheless, to ignore the problem can, and will, have a negative impact upon public and private higher education systems.