The posting below looks at a range of institutional approaches to budget reductions, something of considerable interest to faculty, staff, and students as well as top administrators. It is from Chapter seven, Managing Budget Fluctuations: Institutional Approaches to Budget Reductions, in the book, Budgets and Financial Management in Higher Education, by Margaret J. Barr and George S. McClellan. Published by Jossey-Bass A Wiley Imprint 989 Market Street, San Francisco, CA 94103-1741 [www.josseybass.com] Copyright (c) 2011 by John Wiley & Sons, Inc. All rights reserved. Reprinted with permission.
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Managing Budget Fluctuations: Institutional Approaches to Budget Reductions
The institution has several alternatives available when implementing a budget reduction. This section describes issues influencing an institution's choice of approach and discusses various strategies commonly employed by institutions in considering and implementing budget reductions.
Time, Information, and Risk Tolerance
Three issues will influence the institution's approach to budget cuts. They are time, information, and risk tolerance by the institution and the institutional governing board.
The first issue to be addressed is, how much time is available to institute cost savings measures and budget cuts? That is a critical question, for if the reduction must be made in the current fiscal year then the strategies used will be entirely different than if the institution has two or three years to confront a fiscal problem. If a careful plan of cost reductions can be implemented over several years, the results will be much less painful than if the reduction must be made in the current operating budget fiscal year. Goldstein (2005) urges institutions to routinely plan for budget reductions. Although that is a rational approach to the situation, unfortunately, most often budget managers must respond very quickly to an institutional fiscal problem.
The second issue to confront is whether the information available to decision makers is strong and reliable. Underlying assumptions for choosing a specific strategy must be tested so that decision makers are assured that they are making the best possible choice. Questions must be asked about past performance and future income projections, and those questions must be asked in detail. All institutional budget managers should be prepared to provide the data needed to make decisions and should do so in an honest and straightforward manner. For example, if the budget is based on enrollment figures those responsible for predicting the size of the entering class for the next academic year should provide the best data about whether the enrollment target will be met for the coming year. Or if the athletic director is asked to provide his or her best estimate of attendance at home football games for the next year that data should be as accurate as possible. Being overly optimistic does not serve the institution or students well when fiscal issues are at stake.
Finally, decision makers must consider what the tolerance for risk is within the institution and by the governing board. To illustrate, if a long-term planned investment in technology will improve services to students (and perhaps student retention and recruitment), should the institution take the risk of investing in a large technology upgrade when funding is in peril? Is that a good strategic strategy for the institution to take? Toleration for risk will have a great influence on the budget reduction strategy chosen by the institution.
Forms of Budget Reduction
Each institution will choose an institutional budget reduction plan that is unique to its environment. However, there are common forms of budget reduction employed by colleges and universities.
A budget freeze is not really a budget reduction, but it may be perceived as one by faculty and staff members in the trenches. Discretionary spending for such items as travel or nonessential purchases is curtailed or stopped when a budget freeze is declared, and major equipment purchases are often postponed. In addition, hiring of new faculty and staff is put on hold and can only occur under special and critical circumstances. A freeze is often used as an interim step while institutional decision makers are attempting to determine the best course of action for the institution. Declaration of a budget freeze is also an effective way to get the attention of faculty and staff regarding the serious nature of the institutional financial problems.
Use of across-the-board cuts is the simplest and most expedient way to manage a budget reduction. Unit budget managers are simply informed that they must cut X% from their budget by a certain date and must specifically report those reductions to the central budgeting authority. The specified percentage may be uniform across the institution, or it may vary by broad administrative category (i.e., academic affairs, financial affairs, or student affairs). The money recaptured from such cuts is used to offset financial problems within the institution or as a tool to avoid deficit spending in the current fiscal year.
The advantage of this strategy is that it provides great flexibility to individual unit administrators and budget managers regarding where cuts can be made. It is also equitable, in one sense, since all budget units within the institution are treated alike. The major flaw of the strategy is that it does not differentiate between budget units that have greater flexibility in their budget allocations and those operating under tight fiscal restraints. The resulting impact of the across-the-board strategy is that the reductions are felt differentially within the institution and programs critical to the mission of the institution are not protected.
Some institutions chose a targeted reduction strategy that requires cuts in certain line items to achieve savings. Such an approach reduces the flexibility of a unit to respond to a reduction but may provide a more equitable approach to implementing reductions between units. Examples might include targeted reductions in travel, honoraria, equipment replacement, or minor construction projects. Funds originally allocated in these line items are pulled back from the unit budget and held central to meet institutional shortfalls.
The strategy of targeted reductions rests on the premise that some activities are central to institutional purposes whereas others are desirable but less necessary. As part of considering where targeted reductions are to take place, units are asked to justify their expenditures on specific programs and activities such as symposia, retreats, and training. Wise unit budget managers and administrators are prepared for such requests by assuring that they have good evaluative data on the effectiveness of such programs and activities.
Another target reduction strategy is academic or service program elimination. Such decisions should not be entered into lightly and carry with them great potential for disruption and challenges to decisions. A more detailed discussion of this strategy is provided in the section on unit strategies in response to budget cuts (see p. 174).
A more dramatic method for reducing institutional costs involves restructuring the organization of the institution by combining programs and reducing administrative overhead costs. In addition, restructuring can involve changing the way the institution conducts business by instituting new fiscal policies and investing in technology for long-term gains in efficiency and effectiveness.
Organizational restructuring can be a very painful and difficult process. Because people are involved it is fraught with emotion. Examples include collapsing a music school and a visual arts school into one administrative unit renamed the College of Visual and Performing Arts. When such events are considered a number of critical questions must be considered. What programs should be combined? Who should stay and who should go? What is gained and what is lost through any restructuring move? Organizational restructuring can be a very time intensive and painful process, but it can result in substantial savings to the institution.
Establishing and implementing new processes and procedures and examining all aspects of the financial management of the institution is another way to approach restructuring. For example, developing a new banking relationship might improve the return on short-term investments. Restructuring the timing of when purchase orders are processed and paid might result in substantial savings to an institution.
The elimination of programs is never an easy decision but it may be the prudent decision for an institution to make. Priorities change as do interests of students in majors and degrees. If a decision is made to eliminate an academic program careful attention should be paid to the students currently in the program and an assessment made of what is necessary to help them complete their degree aspirations. Such an assessment might include allowing substitute courses or arranging for students to take courses at a nearby institution. Dickeson cautions that it may be necessary to phase in the program elimination until such issues can be satisfactorily resolved (Dickeson, 2010, p. 134).
Whatever form budget reduction takes at their institution, there are a number of strategies that unit administrators and budget managers can adopt that meets the institutional goal while dealing with faculty, staff, and students in the most humane way possible.
Useful Unit Strategies
In a time of budget cuts the jobs of unit members or the programs that they care about can be in jeopardy. When budget reductions occur, morale is a key issue to confront. Some strategies that might be used to meet budget reduction targets in the most humane way are described in this section.
Use The Least Drastic Means First
When personnel issues are involved Dickeson urges institutions to undertake a combination of actions \"designed to eliminate, or at least minimize, the impact of outright reductions in force\" (2010, p. 134). Such actions can include providing short-term sabbaticals for faculty, leaves with partial pay, furloughs, early retirement packages and leaves without pay, reduction in the number of hours worked, tenure buyouts, and severance packages. None of these actions should be considered without legal advice and careful attention to union contracts and in the case of faculty the AAUP Guidelines for financial exigency.
Rumors will abound when budget reductions are announced. The gossip lines will be working overtime both within the department and on the campus. One of the most useful ways to aid colleagues in a time of uncertainty is to provide clear information to them as rapidly as possible. Even if you do not yet fully know what is going on, let staff and faculty members in the unit know that. Trust is reinforced and people, at least, feel that they are being kept informed. When the strategy being employed by the institution is known, share that information with all members of the unit in as clear and concise a manner as possible.
Ask for Suggestions
Once you know the institutional strategy ask for suggestions from your colleagues on how to implement it. There are usually a lot of good ideas within any budget unit, and finding a way to harness those ideas to develop a coherent plan for the unit is invaluable. When asking for suggestions outline the dimensions of the problem for the unit and then specifically ask questions such as the following: In what ways can money be saved or reductions be made within the unit? What suggestions do you have for change? Even if their specific ideas cannot be implemented, your colleagues will have had an opportunity to be heard.
Use Contingency Funds First
Earlier in this volume a suggestion was made to build a contingency fund into the budget for each administrative or program unit. It may be labeled as a contingency, or it may be a line item such as equipment replacement that can be postponed to meet a financial need. Whenever possible a unit should always try to include such flexibility in the operating budget or through reserve funds. Such funds can be the first tapped to respond to a financial emergency at the institutional level.
Ask for Voluntary Cutbacks
If communication has been open and if faculty and staff understand the dimensions of the budget shortfall, it is likely that they will develop some creative solutions that have not yet been considered. Sometimes your colleagues can surprise you with their creativity and willingness to contribute to a solution to a problem facing their unit. There may be individuals, for instance, that would welcome a ten-month appointment as opposed to a twelve-month appointment. There may be others who would like to reduce their status from full time to three-quarters time. Listen to all proposals carefully and honor the sentiments behind them.
In addition, staff colleagues may have suggestions that will not save a great deal of money but are symbolic of their commitment to help confront the issue. Staff agreeing to contribute for office coffee when it had been provided at no charge is one such example. Voluntary reductions only occur as a solution when everyone understands the gravity of the situation.
Make Few Promises
It would be difficult for any unit administrator or budget manager to fully understand the complexity of the financial issues being faced on an institutional level. When required budget cuts occur your managerial options become more limited. It is a time when any manager should make few promises, and those few should be limited to promises that the manager is confident will be honored. Credibility of the budget manager is never more on the line than in difficult economic times. The personal integrity of the budget manager is one of the few \"coins of the realm\" that a manager possesses under such circumstances. Promise support, provide information, but never say \"never\" when asked the question of whether any person will lose his or her job.
Cut Back on Nonessentials
Every budget contains nonessential items that are not central to the core of the enterprise. An important step in managing budget reductions at the unit level is to identify and reduce financial commitments to nonessential items. Is the purchase of a specific piece of software essential? Is it necessary for all departmental computers to be replaced in one fiscal year or will replacing only some suffice? Is new carpeting needed now or can it be postponed for another year? Target those items that would be nice but are not essential.
Outsourcing or hiring contract services for certain functions may be a means to reduce expenses. Dickeson (2010, pp. 152-153) developed a list of questions that any campus should ask if outsourcing is being considered. They include but are not limited to the following:
1. Is the service to be outsourced part of the strategic vision of the institution?
2. Will outsourcing result in an increase in revenue or a savings in costs?
3. Can the quality of service be maintained or improved?
4. Are actual dollars going to be generated that can then be reallocated?
5. Do the institutional policies (accounting, wage scales, and personnel policies) cause costs to be higher than if the service was contracted?
6. What will the impact be on employee morale?
7. Will the institution still maintain an adequate degree of control if the service is outsourced?
8. What other factors are going to influence the decision to outsource (management, governing board pressures, legal exposure)?
Obviously the decision to outsource should not be entered into lightly. This option should be carefully discussed with decision makers prior to soliciting information from potential vendors.
Look for New Revenue Sources
Consideration might be given to charging for services that were formerly free or adding a service fee to transactions. If such approaches are discussed then a careful analysis needs to be made of whether the additional revenue is enough to offset the costs of collecting the new fee.
With careful planning it may be possible to reduce costs by sharing resources with another budget unit. Equipment is often the easiest commodity to share. Sharing a fax machine, copier, or printer is a real possibility if offices are located in reasonable proximity. In addition, with the right office configuration positions might be shared with reception and initial phone contacts being combined into one position. There are many possibilities. Think creatively with colleagues within the office and the office across the hall.
Consistency has been an ongoing theme in this volume, and it is essential to success as a budget manager. Managing under difficult circumstances, such as during budget reductions, becomes even more complicated if the manager is not seen as consistent in his or her dealings.
In times of budget reductions (which by definition are times of uncertainty), information will constantly change. As a unit budget manager part of your responsibility is to consistently transmit those changing messages to your colleagues and help them interpret what they might mean. Your fairness and consistency will go a long way in bringing stability to difficult decisions.
Don't Be Afraid to Make Difficult Decisions
When all else fails a unit budget manager must be prepared to make difficult decisions, including termination of employees. Letting someone go is never easy, but it is much more difficult when it is caused by forces and situations outside of the control of the employee or the manager. When faced with such circumstances it is critical that the administrator and budget manager get advice from human resources and sometimes from institutional legal counsel. It is particularly difficult to make a termination decision when a union contract is in place. Failure to follow the provisions of the contract for termination involves potential for lawsuits and work stoppages. Strong legal advice is needed, and the institution needs to have straightforward conversations with union representatives when termination is possible. This is not a set of circumstances where a manager can act alone.
Additional complications occur in termination if the individuals involved are protected by tenure. A careful strategy for dealing with the situation is critical and must involve senior academic administrators, department chairs, and faculty governance groups. Financial exigency is a special case for an institution when reductions involve tenured personnel. The rationale for position elimination needs to be carefully thought out and no other options should be available to the institution (Goldstein, 2005, p. 150). This clearly is a case where a unit budget manager needs permission to move forward and should involve administrative superiors in the process. A fair and impartial process needs to be in place and be executed when such difficult decisions are at stake.
Document the Circumstances, Process, and Outcomes
There may come a time when you or others will need to look back on what happened, review how it was handled, and analyze the budgetary outcomes. Documenting the circumstances necessitating reductions, the process employed in addressing that necessity, and the outcomes of that process can be as simple as a thorough set of notes in an electronic or paper file, but having that information handy could prove invaluable at some point in the future.