Realistic Budgeting in a Period of Fiscal Stress
Colleges and universities will be challenged to offer more with less income and smaller student bodies in the 2020s, and for a variety of reason not stemming from the pandemic. Many institutions have already begun to feel the impacts of later marriages and smaller family sizes. The Great Recession made parents and students much more cost conscious. And the financial aid model of heavy discounting with significant tuition increases annually is no longer effective in student recruitment. Additionally, higher education faces significant increased costs from meeting higher student expectations regarding housing, sports facilities, academic support, and pressures for more glamorous eating facilities as well as dormitories that resemble modern apartments. All these cost pressures come at a time where it will be harder to recruit full classes and to retain students recruited to graduation, requiring more costly retention and advising interventions.
Recent newspaper articles have focused on budget cuts at a number of institutions in Minnesota—among them the University of Minnesota, Bethel University, St. Thomas University, and St. Cloud State University—due to enrollment shortfalls. Some involve the closure of sports programs, and many others involve the closure of academic programs and layoffs of faculty. Few institutions will be able to escape the reality that incremental budgeting models that depend on ever-increasing tuition revenues and new program expansions will no longer work. Serious budget cuts must occur. Institutions must, through budgeting, become more strategic.
What does realistic budgeting under fiscal stress look like?
No one budgeting system is best for all institutions or even an individual institution given its changing competitive environment. Realistic budgeting depends on matching the budget to an institution’s growth stage—growing enrollment, losing enrollment, or maintaining a static enrollment. Implementing across-the-board percentage cuts or continuing incremental budgeting with the false hope that next year’s enrollment will stabilize finances will ensure a downward spiral for most institutions.
Budgeting is as much an art as a science. Communications and consultations are necessary. If the budget is primarily driven and defined by the chief financial officer or president, it will not gain significant support on campus. Cuts will inevitably meet resistance since important stakeholders have not been involved in creating the rationale for specific cuts finally decided upon through committees or special task forces. Thus, the academic leader must act in concert and systematically with chief financial officer (setting budgetary targets for all units) and the president (academic vision and institutional mission). The academic leader must also be responsible for creating a committee including representation of all major budgetary units. It is critical that everyone involved understands the process of the final budget and believes it to be fair, no matter how painful. A budget system that relies on defining cuts mostly through cyclical academic program reviews and eliminating or downsizing departments (or both) will not be effective if similar program review systems are not also applied to all significant cost centers. A rigorous system of review of capital expenditures emphasizing an effective rate of return on investment must also be put in place. Finally, there must be an effective, post-budget performance review system that measures how closely budget allocations aligned with actual expenditures. Significant differences in allocations and expenditures must be analyzed and corrected for the next budget cycle as well as effectively holding accountable all budgetary unit leaders who overspend allocations through the chief financial officer by reducing their budget for the next fiscal year.
Budgeting involves the whole community in strategic planning
The SWOT business model is a good starting point for strategic planning. There needs to be a detailed analysis of institutional strengths, weaknesses, opportunities, and threats (SWOT) within the context of local and regional competitors. This will involve developing extensive demographic trends data regarding college enrollment patterns, retention program successes and failures, and trends in financial aid programs employed to reach enrollment targets. Finally, it will also involve a thorough analysis of local and regional competitors for the degree programs and services the institution offers.
Budgeting requires a thorough examination of the current and previous year’s budget performance
The budget examination should include the following actions:
- Identifying likely large targets for elimination from the last year’s budget
- Identifying all likely shortfalls in expected revenues from enrollment and retention declines and fundraising shortfalls
- Critically examining all over-expenditures from the previous year’s budget and rectifying them in the next budget
- Imposing significant fiscal discipline and reward strategies
- Units that spend significantly less than budgeted should be rewarded with at least half the money they saved in their next year’s budget. At the same time, units that have significantly overspent need to have their next year’s budget cut to make up at least 75 percent of their unacceptable over-expenditure.
Budgeting requires a computerized monitoring system to make corrections
The system should track especially the first and last quarter of fiscal year expenditures to make changes to balance the budget by the end of the fiscal year. A central budgetary committee involving major fiscal units should make timely budget adjustments based on the computerized data. All budgetary units need to be informed whenever their current year budget is cut due to overspending so they might appeal the decision in the event of extraordinary circumstances beyond their control.
Key budgeting opportunities in a competitive environment
Key budgeting opportunities include but are not limited to the following:
- Using attrition and creating faculty retirement options that are cost-neutral or can be made over a two-year period
- Seeking new markets for academic programs through selective and strategic development of graduate, online, adult, and accelerated programs, partnerships, and other ventures with solid net revenue projections over an extended period of time
- Creating a well-balanced portfolio of academic programs
- Changing the inputs of teaching for credit-hour generation to involve more adjunct teaching and more technology-assisted instruction
- Controlling wage and compensation aspirations by selecting appropriate peer-group comparisons
- Reducing academic and nonacademic programs through program-review analyses that protect the most productive programs
- Changing the curriculum structure by reducing the size of the core curriculum and the size of majors and using more credits from allied disciplines within majors to effectively use faculty dollars
- Developing partnerships and alliances for experiential credit generation opportunities using outside resources primarily to reduce faculty costs for credits
By taking the necessary steps to ensure chief opportunities are addressed, the budget will help steer the institution’s future. Being thorough in defining and assessing opportunities will enable the institution to build future budgets in an efficient and productive manner.
Henry W. Smorynski, PhD, earned his doctorate in government from Georgetown University. He has 40 years of teaching and administrative experience and has led academic administrative teams as dean, vice president for academic affairs, and provost for 22 years at five different institutions.
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