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Budgeting Issues


Author(s): William Gardiner

This chapter is current as of November 11, 2009

Introduction


To understand the magnitude of issues facing those who are responsible for preparing a facilities management department budget in the 21st century, we must take a moment and reflect on the changes that have roiled the waters of higher education in the past.

Several factors have combined to contribute to an era of reduced funding resulting in reductions in staffing, new working environments, and uncertainty about the future. Together, these factors have made budgeting even more difficult.

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The Rising Cost of Education


Deferred Maintenance

In the mid-1980s the public began to hear about the impact of deferred maintenance on college campuses. For example, an article in the July 21, 1987, edition of USA Today1 cited a study conducted on 213 college campuses by New York architect David Helpern that found that 52 percent of the colleges surveyed described new construction as being "extremely urgent." At least 50 percent of the colleges in the survey placed  "necessity for repairs" in the same category. These repairs were classified as "deferred maintenance."

In recent years few colleges have been exempt from the need to allocate large sums to correct deferred maintenance deficiencies brought on in large part by the college's refusal to acknowledge and recognize in years past the importance and value of their physical assets. The value of a college's facilities often exceeds the value of the college's endowment. Setting aside sufficient funds to address deferred maintenance limits the funds available for other budget needs.

"The Lattice and the Ratchet"

The June 1990 issue of Policy Perspectives,2 a publication issued under the Pew Higher Education Research Program, sponsored by The Pew Charitable Trusts, contained an article entitled "The Lattice and the Ratchet." The article, written by a broad cross-section of leaders of higher education, attempted to describe the reasons why the cost of education was skyrocketing and what might be done to develop a "framework of redesign."

The Administrative Lattice

The Policy Perspectives article attributed a portion of the higher cost of education to the "administrative lattice," described as the growth in the administrative functions of colleges during the preceding decade. Data cited in the report indicated that administrative positions at colleges and universities grew by more than 60 percent between 1975 and 1985. This was ten times the rate of growth of faculty during the same period.

This growth in administration was attributed to three factors: administrative entrepreneurism, governmental regulations, and consensus management. These three factors combined to produce brisk increases in the cost of the administration of colleges, which in turn largely contributed to the rapidly rising costs of education.

Administrative Entrepreneurism

Creative, conscientious administrators had expanded their organizations to perform more tasks and improve services provided to students, faculty, and the college or university administration. Examples include adding staff to better manage financial resources of the college or university and adding departments for computer information systems.

In other words, administrators wanted to do their jobs well. As Derek Bok, president of Harvard University, said at the time, he came to admire the college administration's effort to provide the very best administrative services. However, this excellence carried a huge price tag. Some of the growth in administration occurred as a direct result of functions no longer performed by faculty as part of their normal work routine.

Governmental Regulations

Increased regulation under new federal and state legislation required the addition of administrative staff to properly address the complex requirements of numerous new laws. The Occupational Safety and Health Administration (OSHA), the Environmental Protection Agency (EPA), the Americans with Disabilities Act of 1992 (ADA), and the Equal Employment Opportunity Commission (EEOC) all added extensive reporting requirements in addition to often requiring physical changes to facilities. Although these regulations have been of considerable benefit in the process of correcting deficiencies, they have added significant costs to facilities operating budgets.

Consensus Management

Colleges and universities typically have operated on the basis of consensus management. Committees decide most major and many minor issues. However, this era also has seen increasing involvement in the decision-making process on the part of boards of trustees, legislators, and others. Delays and the need for increased staff to meet the increased demands for accountability have been evident.

The Academic Ratchet

As the article also explained, members of the faculty were some of the principal beneficiaries of the growth in administration. Concepts that had marked the traditional role of the faculty were changing rapidly. As the role of faculty changed, it had a ratcheting effect, that is, it kept increasing the buildup of the administrative functions of a college or university.

The academic effects on growth have been attributed to academic tasks, professional pursuits, and personal pursuits.

Academic Tasks

Clearly the role of the faculty at many colleges and universities has changed from one of all-purpose teacher, advisor, counselor, and job placement specialist to one of teacher-researcher/consultant. The other, more traditional duties were dropped, as in many cases they had become too complex, requiring a disproportionate amount of the faculty's time.

Currently colleges have full-time staff available to counsel students about financial aid, career services, job placement, health services, and so forth. Although there is no question these services benefit the student, they add significantly to the college budget.

Professional Pursuits

According to the article, today's faculty want to teach their specialty at a time when it is most convenient for themselves. They prefer to teach one subject and do not want to teach more hours than any other member of their department. As a result, class hours are condensed to the middle of the day, increasing the demand for teaching space, which results in a need for additional buildings. Unwarranted as they might be, the new buildings add to the budget crisis.

Personal Pursuits

More faculty than ever before are pursuing individual research projects and performing consulting services. These pursuits take them away from the classroom and reduce the time available to teach and counsel students. In fact, research has become such a major part of some institutions' normal modus operandi that they could not exist without the revenues resulting from that research.

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Framework for Redesign

In the article the panel suggested that "change will not come easily, or even purposefully, as long as higher education as an industry perceives itself to require neither greater efficiency nor a heightened sense of accountability. Absent a commitment to redesign, colleges and universities will likely presume that the process of incremental growth can be reversed, leading to decremental and largely across-the-board budget reductions." 

The article went on to describe several measures that might be undertaken by the faculty and the administration to rein in costs. Among them were the following:

  • Administrative growth. First, one must ask where and why has there been administrative growth in the organization during the preceding 5 to 10 years. Each position must be identified and examined to see if it is still justified.
  • Simplify procedures. Review and analyze all of the procedures and processes that have become the everyday way of life on the campus, and either simplify or eliminate those that are no longer warranted.
  • Redefine administrative organizations. Examine the organizational structure of the administrative function and redefine the authority and tasks to be performed.
  • Focus on faculty. The article suggested several ways in which faculty structure could be simplified, but because this manual is focused on the management of facilities, we will leave a discussion of these recommendations for another time and place.

Continued Pressures

As the 1990s began, there was continued growing dissatisfaction over the cost of education on the part of students, parents, trustees, and state and federal administrators. The press was alert to the issue.

A Call for Change

In the August 7, 1991, issue of USA Today,3 Charles Sykes, whose book, Hollow Men: Politics and Corruption in Higher Education, was cited as the source of comments on the "decay of the university education system" (not just the decay of its buildings), called colleges and universities "vast empires of waste."

"American higher education doesn't need more money," he wrote. "[I]t needs better values, better priorities, and it needs to provide better quality." He went on to cite high salaries for faculty "stars," poor curricula, and the need for better administrators ("University management is an oxymoron . . ."), better leadership at the top, and better teachers. This is harsh criticism, but is it warranted? Perhaps.

The Squeeze

In the same issue of USA Today,4 there appeared another article citing James B. Appleberry, then president of the American Association of State Colleges and Universities and former president of Northern Michigan University. Speaking about the cutbacks in state funding to college and university budgets, Appleberry stated that "states are indeed hemorrhaging in red" as a result of the recession then facing the country. He noted that the lack of funding was causing "faculty layoffs, it's causing reduction in purchasing and keeping up to date with technology and purchasing, and it is having an impact on our ability to deliver quality education to the students."

Financial Prospects for Higher Education

In an article from Policy Perspectives,5 Robert H. Atwell, then president of the American Council on Education, said, "higher education is in its most dire financial condition since World War II." He cited states' revenue shortfalls, declining federal funds, reduced appreciation of endowment holdings, and the uncertainty of continued full enrollment as factors contributing to his prediction that he did "not think things will get better until sometime after the year 2010."

The Corporate Model

At the same time that colleges and universities were waking up to their crisis, business corporations began their efforts to "downsize," "rightsize," and make themselves more profitable. "Lean and mean" became the hallmark of firms who wanted to do business in the global environment of the 1990s.

These corporate efforts, although profitable to the individual companies, took their toll on company personnel. Many valued and experienced employees found themselves out of work.

Perhaps the 1990 article "The Lattice and The Ratchet," referred to earlier, was the first to sound a similar call to colleges and universities. According to the article, "What is clear is that the challenge facing higher education is no different than that facing most American enterprises. The nation's colleges and universities need to become more competitive-leaner, perhaps meaner, certainly more focused, with simpler organizations and a greater ability to make collective investments in targeted programs and projects."

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Strategy for Financial Stability


In this section we will examine the actions taken by several colleges and universities to reduce costs and develop plans and strategies to achieve financial stability.

The College of William and Mary

State support of the total budget for the College of William and Mary in Williamsburg, Virginia, fell from 70 percent in 1982'83 to 43 percent in fiscal year 1993'94. This included a decrease of 17 percent, from 60 percent in 1990'91 to 43 percent in 1993'94, in just three years. In 1994, state funding was cut an additional 11 percent.

All programs were affected, but the College, under its new president, Timothy J. Sullivan, initiated a bold and creative move to attempt to stem the tide of reductions. It appointed a new vice president for public affairs to lobby the state government for funds. The new vice president had been an advisor to two former governors. This is an example of creativity in tough budget times.

Smith College

Smith College, a women's college in Northampton, Massachusetts, with an enrollment of approximately 3,000 students, announced it would eliminate nearly 7 percent of the College's 1,250 full-time faculty and staff positions. Twenty-six of the 80 positions to be eliminated were from the facilities department. Only seven faculty positions were eliminated.

Yale University

A special committee at Yale University comprising senior academics in the Faculty of Arts and Sciences recommended that the school cut 114 faculty by attrition between 1992 and 2002. At the time, Yale's annual operating deficit had reached $8.8 million, and the university was staring at $750 million to $1 billion in deferred maintenance costs.

Yale's provost at the time, Frank Turner, said, "It is my belief and information that we will be seeing other universities undertaking similar cuts. Throughout American higher education there is a general problem of income streams growing much more slowly than expense streams" (italics added). 

Rensselaer Polytechnic Institute

Rensselaer, an engineering school in Troy, New York, established a Budget and Program Panel (BAPP) made up of students, faculty, and staff to attempt to identify budget reductions that would eliminate a $5.2 million fund deficit in 1994 (which included a $3.2 million operating budget deficit) that was expected to reach $49 million by 1998. When defining their task, the panel noted that "the challenge is not simply to cut costs, but to significantly improve the quality of the institution.''6

The panel established the following four guiding principles:

  1. Improve the student experience.
  2. Reduce the cost of doing business:
    1. Through organizational changes
    2. Through process changes
    3. Through efficiencies
  3. Reallocate programmatic resources to meet strategic goals.
  4. Allocate investments in plant and equipment more strategically.

The chairman of the panel, former provost James Meindl, stressed the need to apply strategic vision. He said, "We've always needed to allocate resources carefully but now more than ever, we have to think strategically. A policy of across-the-board cuts may bring the budget into equilibrium but it will not benefit the university as a whole''7 (italics added). 

Meindl also stressed the need for teamwork. "The only way we will be able to achieve preeminence is by working together, pooling our resources and deciding how to allocate our time and money to benefit the university as a whole."

The BAPP applied three major criteria for assessing academic departments:

  1. Strategic relevance
  2. Current academic quality and depth
  3. Cost-effectiveness

The panel gave even closer scrutiny to administrative functions focusing on

  • Opportunities for restructuring
  • Cutting costs
  • Improving efficiency
  • Redirecting resources to strategically important programs

The panel achieved its objective of meeting the $5.2 million reduction identified above. Their final report, listing the suggested actions, filled six pages of a special edition of the Review,6 the school's monthly news publication. Essentially, they realized their goal by thinking strategically, working together, and being creative.

Amherst College

Amherst College, a small but highly competitive and respected liberal arts college in Amherst, Massachusetts, recognized that it was facing financial stringencies in the 1990s that differed significantly from those in prior years.

The 1980s were characterized by high rates of growth in operating and capital expenditures that were matched, in part, by higher than normal rates of return on endowment. The projected growth in the 1990s was expected to be greatly diminished.

The College's solution was to introduce the concept of equilibrium both financial equilibrium and institutional equilibrium.

Financial Equilibrium

Recognizing that Amherst, like most other colleges, must have a strong financial base if it is to undertake high-quality programs, the trustees adopted the following principles to apply to the college's finances:

  1. Current  revenue must be equal to or greater than current expenditures.
  2. Growth in revenue must be equal to or greater than growth in expenditures.
  3. Spending from endowment must be at or below the level necessary to preserve its real purchasing power. In other words, if the annual appreciation of the endowment is 8 percent and inflation is 3 percent, then the college could not spend more than 5 percent of the annual return on the endowment. The higher the annual inflation for the same rate of return on the endowment, the lower the amount of funds available for the annual operating budget. In reality, a college would not spend the full 5 percent, as it would be prudent to set aside a portion of the return for growth.
  4. Expenditures for renewal and replacement of facilities must be at or above a level that preserves their useful life. Amherst recognized that if projected budgets do not provide for the renewal and replacement of facilities and equipment, the institution will consume its physical assets and eventually face financial deficits.
Institutional Equilibrium

Institutional equilibrium can be defined as the effort to maintain the quality of the major nonfinancial assets of the institution. The Amherst trustees identified the following three criteria:

  1. College policies must maintain or increase the quality of the faculty.
  2. Educational programs must maintain or increase the quality of the potential student pool relative to comparable colleges.
  3. Development efforts must maintain or increase financial support of alumni and friends.
Budgeting at Amherst

The Amherst College trustees stated, "The most important step the College must take in managing for the nineties is to adopt budgetary guidelines to ensure that all existing expenditures grow at a rate equal to or less than revenue projections''8 (italics added).

In pursuing its budgeting process, Amherst adopted the following strategy:

  1. Reduce projected operating deficits by a combination of reducing expenditures and increasing the number of enrolled students.
  2. Allow annual growth in the comprehensive fee not to exceed the rate of inflation by more than 2 percent.
  3. Continue to lower the rate of endowment spending (i.e., do not spend the full amount of the difference between return on endowment and the rate of inflation).
  4. Budget as an annual operating cost the total annual cost of deferred maintenance.
  5. Budget for an institutional contingency (i.e., provide for a fund that could be tapped if the return on investments was significantly lower due to a decline in investment markets).
  6. Manage the rest of the budget so that total expenditures, including financial aid, grow no faster than 1.25 percentage points above the rate of inflation.

Amherst, like other colleges and universities, has established a framework in which its administrative departments can work intelligently to plan for their budgets to meet the college's goals.

Bowdoin College

Writing in the September-October 1995 issue of Change The Magazine of Higher Learning,9 Kent John Chabotar, the vice president for finance and administration and treasurer of Bowdoin College, explained the participative budget process he implemented on the Bowdoin campus to achieve a balanced budget.

Bowdoin had been suffering from a series of deficit budgets. The new participative process turned the situation around and has resulted in four consecutive balanced budgets. Chabotar wrote, "A budget developed with genuine participation is more likely to be understood and may also be more acceptable."

The concept depends on a budget committee made up of a broad cross-section of personnel representing various campus constituencies, including faculty and facilities, dining service, and other administrative department personnel. The committee reviews each departmental and faculty budget. Working within clear guidelines, it approves or rejects the budget request.

By involving the campus community in open, public budget hearings; providing full updates and explanations in campus media; and continuously briefing the governing board, the process produces a balanced budget that the entire campus community believes is fair and equitable.

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The Budget Process


Much has been written about various budgeting techniques. This material is readily available to the interested reader, so it will not be repeated here except to mention that the zero-based budgeting process probably offers the best procedure for current budgeting. Instead, it may be of more value to the reader of this text to review some basic principles that reflect the current conditions under which one must budget in a time of limited resources.

Think Strategically

The basic principle underlying budgeting is planning. Annual budgets should reflect plans for the year in which they will be in effect. In an era in which operations that affect budgets are changing rapidly, one must seek out and plan in accordance with the strategic goals of the institution.

Facilities managers must develop strategic goals for their departments that are consistent with and reflect the strategic goals of the institution. Only then will facilities operations be fully supportive of the college or university. If the college intends to grow (i.e., admit more students over time), then building and staffing needs must be considered. If the college does not know the magnitude of its deferred maintenance/renewal and replacement costs, a building needs assessment should be undertaken. These are strategic planning matters.

Be Creative

There is an expression that applies to budgeting: "Nothing generates creativity like a budget cut." Be creative before you are forced to be reactive. Consider your options and take the initiative to examine the way in which your department operates. Can you, as they did at Rensselaer, make organizational and operational changes that will result in a more efficient department?

Be Flexible

Recognizing that conditions may rapidly change, urge your organization to be flexible in meeting your customers' needs. Find different ways to accomplish the same tasks.

Adopt a "Can Do" Attitude

There is a tendency to generate reasons why work requests cannot be met when working with fewer personnel and other reduced resources. The challenge is to find ways to meet customers' needs.

Managers should eliminate unnecessary tasks, of course, and then prioritize their work. Department management can assist the staff by identifying work requests that should have lower priorities.

Use the "Team" Approach

Today, more than ever, it is impossible for managers to "do it all," nor should they try. Managers should recognize that the entire organization must be encouraged to participate in the operations of the department. Apply the principles of total quality management, and encourage employees to make decisions on their own.

Not all employees need to fill out budget forms, but all should be part of the budget process. For example, the shift supervisor of the night custodial crew or the supervisor of the carpentry crew should sit down with his or her respective employees and discuss the strategic goals of the department. The employees should be encouraged to offer suggestions about how they believe the group can best meet those needs. Where appropriate, managers should incorporate their suggestions into the budget.

Allowing employees to be part of the team that is working to meet the department's needs has another benefit. It allows them to better understand and be more receptive if funds are reduced in mid-year as a result of the budget control process.

Remember that employees have good ideas. Employees and managers should work together to produce a budget.

You Are In Competition

The budgeting process has become competitive. Each department must compete for its fair share of the limited resources available to the college or university. Those in the department should look on the process as if they were entering a contest.

It is important to make sure the submitted budget is well thought out and properly substantiated. Supporting material is often necessary and helpful, whether it is in the form of a professional report or a self-produced videotape documenting conditions for which funding is requested.

Relationship to the Funding Authority

Because departments are each competing with others, it is even more important to maintain a good relationship with the person or group of persons who will determine the department's level of funding. Cultivate a relationship with the funding authority. Make sure this person or group has a clear sense of your department's needs and knows you are working to meet the strategic needs of the institution.

Part of the Whole

Above all, remember that although you need to be competitive in your effort to secure funding, both you and your department are part of the whole of the institution. Ultimately, it is important to recognize that final decisions regarding budgeting must be made in the best interests of the institution. You, as a leader of that institution, must support those decisions and do your best to manage your department with the resources at your disposal.

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Summary


Colleges and universities currently find themselves in an awkward situation. Costs of education have risen faster than inflation as a result of the "lattice and ratchet" effect of growing administrative departments and the tendency of faculty to teach less and focus more on research and consulting.

Many colleges have recognized the potential financial disaster facing their institutions as a result of higher operating costs. The inability and unwillingness of students to pay for additional increases in tuition, the cost of deferred maintenance backlogs, faculty salary demands, loss or reduction of state funding, and the decline in institutions' ability to sustain alumni giving have combined to place great pressure on administrators.

This environment has caused campus leaders and others at large to call for colleges to reexamine their operations to become more businesslike, more competitive, and more focused, with simpler organizations and a greater ability to invest in programs that support the principal mission of the institution.

As a result, some colleges and universities have adopted principles and programs to ensure that they will have both financial equilibrium and educational equilibrium. Managers must adopt personal goals for their departments that are consistent with those principles.

Employees in facilities management, regardless of the scope of their responsibilities, must be in the forefront of this process and demonstrate leadership and an ability to meet stringent financial demands while maintaining a safe and attractive environment in which to teach and learn.

That is the budget challenge today and into the new millennium.

Notes

1. USA Today, July 21, 1987.

2. "The Lattice and the Ratchet." Policy Perspectives, Vol. 2, No. 4, 1990.

3. Sykes, Charles. Hollow Men: Politics and Corruption in Higher Education. Cited in USA Today, August 7, 1991.

4. USA Today, August 7, 1991.

5. "Financial Prospects for Higher Education." Policy Perspectives, Vol. 4, No. 3, Section B, 1992.

6. Review, September 25, 1992.

7. Rensselaer-The Alumni Magazine, September 1992.

8. Priorities Planning Committee, Amherst College. "Financial Framework." Amherst, Massachusetts: Amherst College, September 1992.

9. Chabotar, Kent John. Change-The Magazine of Higher Learning, September-October 1995.

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