Make decentralized budgeting serve your central mission

With the continuing budget crunch in higher education, more institutions are turning to revenue and cost allocation to encourage deans to use their resources more responsibly. But while decentralized budgeting elements can incentivize growth and cost savings, institutions run the risk of pushing deans to focus only on their own profits and losses, to the detriment of institution-wide strategic goals.

However, institutions can tweak their budget models to tip the scales in their favor—in other words, you can maintain growth and cost saving incentives while also focusing campus partners on institution-wide priorities.

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Institutions can use their budget model to reinforce strategic goals (e.g., student success, research growth, new program development) by first incenting their desired outcomes (e.g., increased graduation rates) with allocation algorithms and then directing seed funding towards initiatives that support those strategic goals.

These two efforts together produce a virtuous cycle: units receive funds to make targeted changes and then get rewarded for their improvement.

Two ways to make decentralized budgeting support your central mission

Part 1: Allocate revenue by major, credit, and success

The University of California, Riverside built incentives for student success, one of their strategic goals, into their revenue allocation formula.

UC Riverside's Tuition Revenue Allocation Formula

UC Riverside's Tuition Revenue Allocation Formula 

UC Riverside allocates 60% of tuition revenue by student credit hour production, 20% by majors, and 20% by two student success metrics. The first 10% is tied to first-year retention and the second to four-year graduation rates. Both metrics are based on improvement from the previous year rather than the absolute rate. This way units only receive funds if they improve, and all units, regardless of starting point, are on equal footing.

Typical with revenue allocation formulas, academic leaders sometimes have to take into account special circumstances or correct perverse incentives. For example, understanding that student major changes might negatively affect units’ first-year retention rates, UC Riverside made sure to remove these students from the allocation formula.

Part 2: Leverage seed funding for student success

The University of Maryland, College Park utilizes the second element of the virtuous cycle, seed funding, to support their student success efforts.

UMD's seed funding process

To incent their units to redesign low-completion courses and improve DFW rates, the University of Maryland leveraged strategic reserves to offer matching funds up to $20,000 for course redesign. Units used the funds to create flipped classrooms and develop active-learning modules.

As a result, DFW rates decreased by 7%. Two to three years later, the university still offered 100% of the redesigned courses. Moreover, they ultimately saw $1.8 million in savings from section reduction and less reliance on adjunct instructors.

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Optimizing Institutional Budget Models

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