Responsibility Centered Management (RCM) Part 2: Campus Costs and Myths
In part one of this four-part series on Responsibility Centered Management (RCM), I presented the basic features of RCM, including the fact that no two versions of RCM are the same. Institutions have found ways to create comfortable versions on how to distribute tuition income and handle certain expenses. In this article, I discuss the critical setting of school subsidies along with the various ways that administrative projects can be funded and how the taxation of the responsibility centers (RCs) to provide resources for campus costs and services is determined. Finally, I discuss some assumptions about negative consequences of RCM.
In last month’s article, I mentioned the staged rollout of the RCM model across the IUPUI campus. This is common and necessary because it allows time for the campus finance office to collect data on the school-by-school impact of RCM by examining several possible outcomes using current information. Applying the principles of RCM with no variations (”pure” RCM) and using a proportional tax system would result in chaos. Those schools with healthy student enrollments and research programs with substantial federal funding and/or large contracts that return full overhead will prosper while those with limited student numbers and little or no external funding would go bankrupt. Particularly vulnerable would be undergraduate programs in health areas where accreditation requirements and clinical elements of the training limit class sizes and where few students from other schools take courses. Engineering schools with modest external funding and a largely resident student population coupled with their traditionally high costs of operation (faculty salaries, expensive instrumentation, space requirements) and the fact that their classes are taken only by students in their school (no “Engineering for Poets” class!) might also struggle under the “pure” RCM model.
The solutions to these potentially devastating problems are “hold harmless correction factors,” also called subventions, that are accurately instituted at the initial implementation of RCM. These are monetary supplements made to schools that would otherwise be in the red at the outset. These supplements often become permanent subsidies as there usually are no expectations that the schools involved change behaviors or adopt practices that will make them self-supporting. Instead doing things to improve their positions results in additional income in the same way that they do for solvent units. Having subvention levels correct at the outset is essential for RC budget planning and avoids the criticism of/loss of confidence in RCM that will certainly occur when everyone’s budget changes each year as adjustments are made.
Funding for administrative initiatives
Readers may be wondering about the source of the funds for subventions. Funding for this purpose and others (see below) comes from the same sources as RC funding but is accumulated differently. Earlier, administration was listed as a service RC. In reality, administration sets its own budget and can establish a fund for the provost (or chancellor/president) to take care of the subventions. In another model, a portion of student tuition income is set aside for this purpose. IUPUI offers up another variant in that the state appropriation is distributed in disproportionate ways to fulfill the concept of the ”hold harmless” intervention.
While we are discussing administrative revenue, it should be recognized that all levels of administration require discretionary resources to effect change, seed projects, fulfill strategic initiatives, incentivize behaviors, assist schools with extraordinary expenses, etc. All RCM systems provide funds for such things. These resources can be garnered through the tax structure of RCM, via special levies on schools, or through capturing part of the state appropriation. The levels of funding required, the sources from which they are accumulated, and the level of transparency in the process are all variables that define the “flavors” of RCM.
Different models for assessing usage
There are a number of ways that campus administration can tap the resources of the academic RCs to support the service RCs. I will describe the last two models that have been used at IUPUI to demonstrate how the system has become more precise. The older model used three drivers to determine the amount owed by each academic RC. Those drivers were employee FTE, student FTE, and space in assigned square footage (ASF). Other RCM models may also utilize grant overhead and unit expenditures in the assessment calculations. The total amount to be collected (the sum of the budgets of the service RCS) was divided into equal thirds—one for each driver. The total employee FTE, student FTE, and ASF were determined and the percent of each academic RC’s contribution to them was calculated. For example, if the total cost of operation was $90M, each driver amount would be $30M. A school with 10 percent of the employee FTE, 15 percent of the student FTE, and 12 percent of the ASF would have an assessment charge of $11.1 ($3 + $4.5 + $3.6) million. This system of taxation was clearly flawed but it was easy to calculate.
IUPUI then moved to a model that was more refined and attempted to assess the RCs based on their use of the the services provided by each service RC, and often times by each office or component within it, again using aspects of the same three cost drivers. Refinements such as splitting out total student FTE into undergraduate, graduate and professional student FTE and headcounts and separating employees into faculty and staff allowed a new level of specificity in terms of determining the distribution and amount of usage attributed to each academic RC. Replacing the total campus costs with calculating the cost that each academic RC incurs in consuming the services of each service RC also added a level of precision that made deans feel a little better about their tax bills. This “consumption model” is complex and obviously is not calculated by hand.
Some examples are in order. The decision on what the appropriate drivers are for the service RCs and the percent of each, when more than one is identified, is made by a committee of the RC heads and the campus CFO. Let’s start with a library that has a $10M budget. Who uses the library? Faculty use it, as do undergraduate and graduate students. If the ratio of use among the three is 50 percent/25 percent/25 percent, school A with 7 percent of the faculty FTE, 20 percent of the undergraduate FTE, and 12 percent of the graduate FTE would contribute $1.15M (7 percent of $5M + 20 percent of $2.5M + 12 percent of $2.5M) to the the $10M library budget while school B with 4 percent of the faculty FTE, 10 percent of the undergraduate FTE, and 6 percent of the graduate FTE would pay $550K. Meanwhile, the admissions office would be supported at 100 percent based on undergraduate FTE while the registrar‘s budget would be billed at 100 percent to the fall total student headcount. The updated driver data for each RC, the budgets of the units to be covered through assessments, and the contribution of each RC to each service unit are made available annually at budget time. These are important transparency elements of RCM.
Myths of RCM
One myth has been mentioned earlier: RCM places no impediments on collaborating on academic programs, team teaching, or research providing that the school representatives understand how money flows under RCM and they are reasonable people.
Another myth is that, in order to attract and recruit more students, academic standards will be lowered resulting in grade inflation. Grades are the responsibility of faculty, and I have never heard a faculty member link grade requirements with RCM.
Another assertion is that RCM will lead to larger classes and more adjuncts instructors. At public institutions that labor under small increases, and sometimes decreases, in state appropriation and tiny tuition increases it seems that larger classes and adjuncts are cost-saving measures that are not associated only with RCM. The issues of class size and instructor hiring speak to the quality of the offering. Mature, savvy RCs know this is critical to their fiscal health and make certain that classes are appropriately monitored and supported and that the instructors, both full-time and part-time, are well prepared. Upper administration who hold the line on denying other units’ permission to teach the courses are likely to do so only when they are delivered in a quality manner.
Part 3 in this series will run next month.
N. Douglas Lees is Professor and Chair Emeritus of Biology and former Associate Dean for Planning & Finance in the School of Science at IUPUI.