UNDER CONSTRUCTION Crafting a new campus budgeting system

By Craig Chamberlain

Larry Faulkner uses several different terms when describing the campus's
current budgeting system - from "defective" to "totally illogical." Other
administrators and faculty members, including those on the Budget
Strategies Committee, have come to a similar conclusion.

In a letter sent out last week to administrators and Senate Council
members, Faulkner, the campus provost and vice chancellor for academic
affairs, said he had "come to believe that the campus is badly crippled by
important shortcomings of our current budgeting system."

The Budget Strategies Committee, in a year-end report produced in May, said
the current system "does not cope with the realities we face." The
committee, chaired last year and this year by John Braden, professor of
agricultural economics, concluded that "the campus's budget problems are
endemic and must be addressed through systemic changes in the way we
conduct our financial affairs."

One of the realities faced by the UI, Faulkner said, is changes in the
state's approach to budgeting, especially in recent years, which have
removed much of the university's flexibility. The system needs to be
reformed within the next year or two, or budget battles could get very
messy, he said.

Faulkner is concerned about what he calls the "post-DeVor era," or what
will follow the completion of the five-year DeVor reallocation plan.

Developed by the 1990-91 Budget Strategies Committee, chaired by Richard
DeVor, professor of mechanical and industrial engineering, the plan set out
a system of differential taxation and reallocation to shift $15 million in
recurring funds to campuswide priorities.

Among the priorities already addressed or to be addressed with DeVor funds
are undergraduate education, including instructional equipment, facilities
and money to implement general education requirements; the library;
graduate fellowships; minority student support; faculty recruitment and
retention; the Research Board; development, in preparation for Campaign
Illinois; new program initiatives; and new resources for units. The portion
of funds designated this year as new resources for units went toward
campuswide salary increases, following approval from the Budget Strategies
Committee.

The DeVor plan, however, did not change the basic principles or assumptions
upon which budget decisions have been based for decades, Faulkner said.
Many of those principles and assumptions developed during periods of
growth.

Among the system's shortcomings, according to Faulkner, who dealt with it
as a department head and dean before becoming provost:

 * It allows for no systematic review of allocations to major units -
   colleges and other free-standing units - "in the light of their actual
   participation and performance in instruction, research and outreach."
   Allocations are based mostly on the previous year's budget.
 * It provides leaders of major units with "practically no budgetary
   incentives for effective performance in any area of teaching, research or
   service."
 * The focus is entirely on the allocation, or expenditure, side of
   operations, with no attention to revenue.
 * The allocation of new recurring funds "tends to be idiosyncratic because
   decisions are often made at the wrong organizational level, frequently the
   campus level." Put another way by Faulkner, "the problem with our system is
   that it's all judgmental, and it's done at a level where the judgments
   can't [or shouldn't] be made."
 * Large resources, particularly space and tuition waivers, are distributed
   as free goods to units and therefore "are not subject to a discipline based
   on demand or performance."

The DeVor plan took effect with the 1993-94 academic year - or fiscal year
1994 - meaning it will end in 1998.
The current budgeting system "really hangs from the DeVor reallocation
thread," Faulkner said. "That's where we get almost all of our resources
for addressing contemporary needs." Without a successor to the DeVor plan,
there is no strategy for acquiring funds necessary to promote improvement
of programs.

"It's really not a [choice] of doing nothing at all," Braden said, "because
doing nothing at all will leave us in a position where we don't want to be.
It's really a matter of what we do to follow DeVor."

To address that, and to fix the perceived deficiencies in the system,
Faulkner asked the Budget Strategies Committee last year to examine the
current system and consider new budgeting methods, paying particular
attention to a system known as responsibility center management or RCM.

(Faulkner noted, with humor, that this has occasionally been confused with
TQM, or total quality management. They are very different things, he said.)

Responsibility center management, first used in private universities, has
attracted attention at public universities in recent years and already is
in place at Indiana University. The University of Michigan adopted it last
year and will put it into place next July.

Teams of about 10 members, including administrators and members of the
Budget Strategies Committee, visited both Indiana and Michigan for full-day
briefings in December and January. A small working group chaired by Walter
Tousey, associate vice chancellor for academic affairs, then drafted a
budgetary model of the campus around a scheme similar to the one planned at
Michigan, in order to provide a basis for discussion.

By the end of the spring semester, the Budget Strategies Committee had
concluded that the campus budgeting system did, in fact, need an overhaul.
Its year-end report, presented to both the Council of Deans and the Senate
Council, also concluded that a reform of the system "informed by the
principles of RCM" would be a positive force for the campus.

Other discussions have followed, including one last week with a group of
faculty leaders, coordinated by Robert Zemsky from the Pew Higher Education
Roundtable. The Roundtable, sponsored by the Pew Charitable Trusts, is a
national program that seeks to identify the best practices for academic
restructuring.

The Roundtable discussions on the UI campus - with a follow-up scheduled
for December - are focusing on institutional values and how those values
are reflected in a budgeting process.

With the letters sent out last week, Faulkner announced that he has asked
the Budget Strategies Committee to recommend a model for a reformed
budgeting system by March 1 of next year.

Toward that end, seven budget reform subcommittees have been formed to deal
with the various issues involved, each of the subcommittees chaired by a
member of the Budget Strategies Committee but including others from outside
it.

When the Budget Strategies Committee delivers its recommendations in the
spring, Faulkner said, reaction will be sought from throughout the campus
community. No deadline has been set for implementation.

Among many of those who have studied the issue and are taking a lead in the
process, there is obvious interest in an RCM approach, and particularly in
the approach being implemented at Michigan, Faulkner said. They call their
new system "value-centered management."

In fact, members of the Budget Strategies Committee and the budget reform
subcommittees - along with administrators from all three UI campuses and
the university administration - held a day-long conference Oct. 31 with
Robert Holbrook, Michigan's associate provost and a principal figure in the
changes there.

But despite that obvious interest in an RCM-like approach, Faulkner and
Tousey are careful to say that no decision has been made other than to
develop specific reforms to the budgeting system.

Faulkner also points out in his letter that:

 * "Our aim is to cure identified, critical deficiencies in our current
   practices in a manner that can support the ambitions and values of the
   campus."
 * "We are committed to create a system that works at Illinois within our
   best traditions and habits. There is no interest in simply importing a
   system that has been devised elsewhere."
 * "The result may be a set of changes that can be installed fairly
   independently over a period of time, rather than an entirely new scheme
   with a sharp starting date."
 * "Continuing the status quo is not an option for us, regardless of the
   sense of security rooted in its familiarityÉ operating principles for
   the post-DeVor era will be defined in the months ahead, either by design
   or by default."

Braden said he is being especially careful not to prematurely fix labels
like RCM on the solution by the Budget Strategies Committee. The committee
sees RCM as "containing some interesting ideas and useful principles, but
it's not as if we expect to adopt some package off the shelf."

RCM, in fact, is not a package but a set of principles "that need to be
adapted and tailored to local circumstances," Braden. "So we are looking at
those principles and asking whether they are useful on this campus and, if
so, how might we go about implementing them."

"Above all, it needs to make sense within our local context," he said. "We
need to do things that make sense here."