College and university leaders are facing difficult challenges, both internal and external. Ever-increasing numbers of prospective students and their parents expect education to ensure a successful career upon graduation. Many public universities continue to experience significant cuts in state financial support, while government-appointed boards demand greater efficiency. Institutional costs are consistently rising, while revenue sources are not. And, increased competition for a smaller number of high school graduates is leading many institutions to raise tuition discounts to financially unsustainable levels.
Faculty are concerned about what they perceive is the erosion of shared governance in the face of financial, technological, and organizational challenges, and trustees want to be assured that their institutions are run as efficiently and effectively as possible. Many stakeholders go as far as demanding a new business model to help their institution survive and thrive.
In fact, NACUBO’s Economic Models Project (EMP), initiated in 2012 by the NACUBO Board of Directors, was a product of the realization that reductions in public funding and endowment returns, changing demographics, and increasing cynicism about the value of higher education—coupled with reliance on traditional missions and structures—required institutions to actively engage in examination of their existing business models and envision new ones.
Even before the current set of economic circumstances, some of my colleagues and I developed and implemented effective budgeting processes at our respective institutions. Although our colleges and universities differed in size and mission, a similar approach has consistently resulted in positive outcomes: a collaborative, comprehensive, and transparent budget planning process that engages all institutional constituencies in developing a strategic, comprehensive, multiyear budget.
While this form of collaborative budget planning would likely not work in an institution with a highly decentralized and complex financial planning process (such as responsibility center management), or in some large, public, higher education institutions that involve a system of multiple institutions, the process can be successfully implemented in a large number of higher education institutions. Often, it can lead to a stronger understanding of shared governance as a basis for a long-term successful business model. For the institutions—all of which are private—profiled in this article, the leadership of each demonstrated a strong belief in and commitment to shared governance, although it might take a slightly different form in each institution.
Shared Understanding
Underscoring the importance of shared governance to the vitality and success of higher education, the board of directors of AGB (Association of Governing Boards of Universities and Colleges) released two relevant documents. In March 2017, an AGB White Paper, Shared Governance: Changing With the Times, stated that, "Shared governance policies, regardless of their clarity or familiarity to key constituents, are central to the operation of most American colleges and universities, and effective shared governance creates a healthy campus environment that can more easily act on needed change and emerging opportunity." And, in October 2017, the AGB Board of Directors’ Statement on Shared Governance, stated, "As the Association of Governing Boards of Universities and Colleges (AGB) said in its Statement on Board Responsibility for Institutional Governance (2010), shared governance ‘had historically resulted in continuous innovation and concomitant effect that American college curricula and pedagogy define the leading edge of knowledge, its production and transmission.’ Despite the remarkable value of shared governance, the stakeholders who are fundamental to its impact often lack understanding of, appreciation for, and even commitment to it."
For the higher education business model to be successful, trustees, the president, the senior leadership team, and the faculty need to reach a mutual understanding of the academic mission and goals of their institution, as well as the financial structure and processes that support them. While the commitment of each of those group members to their institution is often quite strong, they face a number of stumbling blocks that might cause disagreement.
It is important for the president of the institution not only to educate the board members on the realities of their institution but also to hear the challenges brought by trustees and come to agreement with them on institutional goals and the institutional business model. The president must also educate both the board members and the institutional faculty on the importance and reality of shared governance at their institution. Collaborative budget planning can be a key element in educating the community and reinforcing the importance of shared governance across the institution.
Procedural Steps
The collaborative budget-planning model that we endorse involves board members, the president, the senior leadership team, the faculty, staff members, and students. It also includes developing guidelines to help formalize the process and communicate it to stakeholders.
The budget planning committee. The chief financial officer or the chief academic officer, or both as co-chairs, often lead the budget planning committee. The members of the committee usually include three to five faculty members, often chosen by the faculty governing body; two to four students nominated by their student governance structure; and two or three staff members representing various sections of the institution.
The members serve in two- or three-year staggered terms, so that more and more faculty and staff members are involved and familiar with the budget planning process over the course of time. Members of the institution’s finance staff usually support the budget planning committee in its deliberations.
The committee comes together on a regular basis to develop the institution’s annual operating budget, usually within the context of the institution’s strategic plan and most often including a three- to five-year budget projection.
Organizational support. Formalizing documents and procedures helps underscore the messaging that informs stakeholders of the details of the budgeting model. That might include, for example, official institutional documents that identify the membership groups, processes, and functions and assist in institutionalizing the model.
Goal-oriented leadership. The president, provost, and the vice president for finance and administration are steadfast partners in this process and committed to open, collaborative communication and support. While the president typically is not involved in the ongoing meetings of the budget planning committee, he or she emphasizes the importance of the work, sets particular goals that align with the institution’s strategic planning initiatives, and stresses the importance of confidentiality prior to communicating and finalizing the budget with stakeholders.
The budget planning process will change slightly every year based on the challenges external to the process and the institution, and the membership of the committee. Those leading the process will find that proper management of this change will bring great benefits.
Timetable. The budget planning process usually takes six or seven months to complete. It begins in September with a review of the previous year’s budget and a charge by the president regarding the institution’s priorities reflected in the strategic plan and supported by the trustees. The president also charges the committee members to act as institutional representatives, not representatives of their particular constituent group.
The committee then works with the various institutional leaders—the vice president for enrollment management, the chief financial officer, the vice president for advancement, and the academic vice president—to estimate the next year’s revenue from various sources.
The budget planning committee: (1) examines budgets with a sufficient level of detail to provide a deep understanding of each budget without revealing confidential information, such as individual salaries or benefits; (2) identifies budgeted items that overlap in two or three different divisions or areas of responsibility in the institution; and (3) encourages stakeholders to organize their budget numbers in a responsible manner. For example, departments often retain funds in their annual budgets to pay for unexpected capital purchases. That is not something that works well in any annual budgeting process.
Institution leaders present to the committee their annual budget requests, often in writing and in person, within the context of their divisional strategic plans. The budget planning committee plans a balanced budget for the next fiscal year, based on combined budget requests, and presents it for review and approval by the president and CBO, usually in January. Once approved, the budget goes to the board finance committee for review and approval again, usually in February with final approval by April, if necessary.
When everything is finalized, the committee chair(s) presents the budget to the institutional community, and the various members of the committee make presentations to their own constituent groups, explaining why they supported the budget as developed.
The Impact of the Process
With such a transparent and well-defined budget planning process, the campus community is more apt to trust the process and feel less suspicious about hidden agendas. As the committee members develop expertise, they become responsible partners in budget planning and even suggest ways to save resources on their own. As members become knowledgeable representatives, they not only can explain the institution’s budget—both internally and externally—they also develop greater trust in each other and in the process. With mutual trust and shared governance across the institution comes the ability to become more innovative in changing the institution’s business model in response to external forces.
A Basis for Long-Term Budget Benefits
In my career as a chief business officer, I’ve served at several institutions (as an ACE Fellow at Princeton University, Princeton, N.J.; and as the CBO at the University of Puget Sound, Tacoma, Wash., and Davidson College, Davidson, N.C.), in which this collaborative form of budgeting has proven effective across several decades.
Collaborative committee structures at Princeton.
The evolving model at Princeton University demonstrates the way that a special committee, established in 1969, grew to encompass numerous stakeholders across the campus in what has become a stable, multilevel, trustworthy budget process that serves well in good times and bad.
The original Special Committee on the Structure of the University proposed the establishment of the Council of the Princeton University Community (CPUC), conceived as "a permanent conference of all major groups of the university." The Princeton Priorities Committee is advisory to the president; and its processes regarding revenue, expenses, and overall budget reflect those described in this article. In addition to its collaborative work on the operating budget, the Priorities Committee serves as a key focus group on campus issues that have a financial or service impact.
In late fall, the committee hosts an open meeting for the campus with the CPUC, during which any community member may raise questions about the budget. The committee then meets with the board’s finance committee in November to discuss the budget and assumptions.
The Priorities Committee recommended additions to the operating budget that focus on three main goals: recruiting and retaining the best students, faculty, and staff; increasing access and affordability; and supporting success in a diverse student body. The committee endorsed a proposal from the graduate school and graduate student government to expand the benefits available to graduate students with dependent children.
As a result of their collaborative and transparent efforts, Princeton’s budget-related committees involve members who become well informed about university governance and budgets—and bring that knowledge back to their respective departments. Even in the difficult times brought on by the recession of 2008, the Priorities Committee was instrumental in helping shape budget adjustments to respond to the financial crisis.
Princeton’s endowment declined in value by 23.5 percent in FY2009. The university implemented $170 million in budget cuts and adjustments. In that year, the Priorities Committee participated in prioritizing those cuts and also determining what should be sustained.
The fact that students, faculty, and university leaders all discussed these difficult budget issues made the necessary adjustments understandable and somewhat easier to accept.
Advancing to benchmarks and metrics at the University of Puget Sound.
In 1977, the University of Puget Sound, Tacoma, Wash., created its Budget Task Force, and its collaborative style has worked effectively for more than 40 years. The task force, chaired by the provost, in strong partnership with the CFO, is advisory to the president, who charges student, faculty, and staff task force members to represent the university, as a whole, and to recommend key variables leading to a balanced budget for the upcoming year.
The budget process generally includes the following steps:
- Holding an open forum for the campus to explain the budget planning process and to answer any questions and invite comments.
- Providing financial context and distributing presentation guidelines to campus leaders invited to meet with the Budget Task Force regarding budget decisions for the next year.
- Evaluating external economic realities, considering strategic priorities, weighing competing factors, and modeling various scenarios to test financial viability.
- Distributing a written report of budget recommendations to the campus, followed by task force members meeting with their respective faculty, staff, and student senates to explain the decisions.
- Inviting all campus members to send feedback directly to the president.
- Presenting the president’s budget recommendation to the board.
- Receiving final budget approval from the board and then reporting to the campus community.
The Budget Task Force continues to evolve, in order to improve the various processes. Recent changes include:
1. Orientation for new task force members. The associate vice president for financial planning and analysis, who provides budget modeling support to the task force, meets with new task force members in advance of the first meeting. The goal is to orient them to the financial terms they will encounter, key variables of the budget, and the modeling tool, so that they feel more comfortable going into the process.
2. Report guidelines for those who make presentations to the task force. Providing guidelines to the presenters resulted in standardized report formats and facilitated efficient review of a large body of material. Among other things, the guidelines require (1) an overview of current budgets, (2) an exercise to identify what would be cut if a 5 percent or 10 percent budget cut were required, (3) rationale for any new budget requests, (4) provision of key metrics and benchmarks to assess effectiveness and efficiency, and (5) discussion of trends and planning issues for the next several years.
3. An open forum to increase transparency and communication. Introducing an open forum helped to demystify the budget and provided an opportunity for campus members to ask questions about the budget and the process to develop it.
4. An improved written report from the task force that has been shortened with appendices. If you write too much, campus members can feel overwhelmed; and, if you write too little, they can become concerned about lack of transparency. Some prefer a simple visual presentation, while others prefer commentary. The task force sought a balance. It trimmed pages from the core report, added more graphics, and included data-rich appendices for those looking for greater detail.
Following the financial crisis of 2008, the task force developed greater scrutiny in the budget planning process, using benchmarks and metrics. The task force needed relevant data from all areas of the university to assess efficiencies and effectiveness and to inform its budget recommendation in a resource-constrained environment. The task force considered a wide range of metrics in comparison to peers and/or standards, including matriculation rates, tuition, discount rates, retention and graduation rates, student-to-faculty ratio, staffing levels by area and overall turnover rates, fundraising expense per dollar raised, facilities condition index, technology expenditures per campus member, compensation levels, wait times in the health center, and many more.
In addition, the president’s cabinet worked with their teams to identify strategic cuts in expenses rather than leaving these difficult decisions to the task force, which incorporated the cuts in its budget recommendation to the president.
The university was determined to avoid across-the-board expense reductions and instead invested in some areas and trimmed in others. For example, investments were made in revenue-generating areas, such as student recruitment and fundraising, while trimming occurred in other areas of the university based on identified efficiencies and a fresh assessment of operational needs. The increases and decreases in expenses were explained in the Budget Task Force’s report.
On the learning curve of trust at Davidson.
When I arrived at Davidson College, Davidson, N.C., in 2004, having had experience with both the Princeton Priorities Committee and the University of Puget Sound Budget Task Force, I proposed to President Robert Vagt that we form a faculty, student, and staff budget planning committee for Davidson. Because he had some initial skepticism that such a process would succeed, the president kept in place the budget planning process that had previously existed—the members of the president’s leadership team continued to plan the next year’s budget. However, after the first year of the new committee’s work in detailed budget planning, the president agreed that the new budget planning committee and process was indeed effective in many ways.
While this was a new committee, the members and the campus quickly learned to trust the new process, as the committee members began to develop important knowledge and expertise and thus became a very strong team. The budget committee members began to learn the details of budgets that they had not specifically considered before; for example, the cost of financial aid; the cost in information technology, both hardware and software; the cost of utilities; and the cost of campus maintenance. They also learned more specifically about the limited sources of revenue for the college.
As they developed this expertise, they passed it on to the campus community through their reports to them. The budget planning process, since it was more formal and more directly related to the strategic plan than in the past, helped both the budget presenters and the campus community to understand the importance of the direct connection between the strategic plan and the budget plan.
Over the course of time, the committee and the CFO improved the budget planning process every year, such that the group learned a great deal more about cost issues at the college than the faculty and students had ever thought possible.
For example, the committee added capital budget planning to the process and formally established a five-year budget plan. It also:
- Modified certain parts of the budget structure, for example, by reorganizing the information technology budget into a campuswide budget that greatly improved understanding and quality planning.
- Added a line item for emergency capital purchases, which eased the minds of those planning budgets in the science departments.
- Improved the process and participation in estimating enrollment and discount rates for the next year.
The collaborative budget planning process was enormously helpful to the campus during and after the Great Recession. As the process got underway in fall 2008, the budget planning committee began to understand the serious financial issues that would impact the budget and proposed several worst-case scenario budgets, in order to make sure that Davidson was prepared for the worst.
When the president presented the budget to the board of trustees, the discussions were much less difficult because the trustees understood the collaborative work of the budget planning committee and the campuswide understanding of the college’s financial situation.
In addition, during the 2008–09 academic year, the president established a midlevel management team to further brainstorm budget savings in various programs across the campus. That process, while difficult, was not subject to great suspicion, because of the trust that had been built up through the budget planning committee.
While the budget planning process has since been modified under a new president, returning most of the budget planning to the president’s cabinet, the collaborative aspects are retained in the form of an advisory group.
Long-term turnaround at Guilford College.
The Budget Committee at Guilford College was established by Kent Chabotar, then the college’s president, in 2002, and consisted of a faculty member as chair and the CFO as vice chair, two additional faculty members, one student, two mid- to lower-level staff, and two or three senior staff.
The process begins in early fall with the committee member orientation during which they receive their charge from the president. The budget plan is based on the college’s strategic plan, and the two processes run in parallel. The committee holds community meetings and receives feedback; the trustee committees are also involved in the process.
The end result is the annual budget letter submitted to the president for review and presentation to the board of trustees. Guilford is a Quaker institution, and the budget planning process is thus influenced by Quaker traditions.
When Chabotar took over as president of Guilford, the college was in severe financial difficulty with annual deficits of $1 million to $3 million, an endowment spending rate of 14.5 percent, and extensive deferred maintenance. Freshman enrollment was dropping, and the discount rate was high at 38 percent. A runaway building project had doubled the college’s debt at $30 million, and SACS (the Southern Association of Colleges and Schools) had barely reaffirmed Guilford for reaccreditation.
With collaborative budget planning introduced in 2002, by the time that President Chabotar retired in 2014, the finances at Guildford College had significantly improved. Budgets were balanced through 2009, endowment spending was capped at 5 percent, enrollment increased, and deferred maintenance and debt were reduced.
KAREN L. GOLDSTEIN is a higher education consultant and former chief business officer at several institutions. Contributors to the article are Sherry Mondou, executive vice president and chief financial officer, University of Puget Sound, Tacoma, Wash; Carolyn Ainslie, vice president for finance and treasurer, Princeton University, Princeton, N.J.; and Kent Chabotar, president emeritus, Guilford College, Greensboro, N.C.