Running head: COMPETING STRATEGIES 1 ...

Running head: COMPETING STRATEGIES

Competing Strategies to Balance the Budget

Mahmoud Yousef Askari

University of Calgary

1

COMPETING STRATEGIES

2

Abstract This paper compares and contrasts different strategies to balance academic institutions’ budgets. Some strategies use economic theory to recommend a budgeting technique, others use management methods to cut cost, and some strategies use a management accounting approach to reach a balanced budget. Through the use of a simplified numerical example of a breakeven analysis model, this paper argues that excess capacity and high enrolment levels are needed for some proposed recommendations to work. It also argues that low enrolment institutions and academic units need to be subsidized to keep their doors open.


3

Introduction Managing capital and operating budgets was highlighted by Patterson, VanBalkom, Jensen, and Cummings (2009) as one of the leadership challenges in higher education. Shrinking public funding in higher education, according to some scholars (Hauptman & Nolan, 2011), is putting budget balancing strategies at the top of leaders’ agendas in many colleges and universities. Gerson (2012) explains that the University of Calgary has been wrestling with a deficit of $50 million throughout the past few years and now it is back to balanced budget in 2012 - 2013 after the two percent increase in the university’s grant from the province of Alberta. The importance of a balanced budget for publicly funded colleges and universities led their leaders to redesign their strategies and rethink their approaches to properly manage their capital and operating budgets. In this paper, I compare and contrast different strategies, proposed by different scholars, to balance the budgets of academic institutions. The paper is divided into four sections. The first section presents the rationale for addressing budget balancing in higher education and presents the key question in this paper. The second section is a review of literature. The third section is a critical analysis of the proposed strategies. The fourth section is a conclusion which offers a preferred strategy based on the arguments presented. Section One: The Rationale for Addressing Budgeting Strategies Leaders’ understanding of the funding dilemma is critical in leading higher education institutions. Many believe that the reliance on a government bailout to balance a budget may be something of the past. Eight out of ten Canadian provinces are expecting budget deficits themselves and are struggling with their own financial dilemmas (Canadian Business, 2012). The fallout of the 2008 economic crisis, an ongoing recession, and many financial difficulties of


4

the global economy are all contributing to financial problems for the provinces in Canada. Their ability to fill the gap in the budgets of academic institutions using their own surpluses is not an a viable solution anymore. Institutions have to find their way to balance their own budgets, using their creativity to utilize whatever available tools to accomplish this task. In any case, the need to run a successful/sustainable operation is here to stay and the need to be in a good financial shape is a fact of life for publicly funded colleges and universities. Figure (1)

Source: http://www.canadianbusiness.com/blog/data/74031--comparing-the-2011-2012provincial-deficits The disturbing concerns of budget deficits of colleges and universities can be felt by the whole academic family. Governing boards, the senates, administration, staff, professors, students, and community of academic institutions can be affected by budget deficits. Raising tuition fees as an action to battle deficits can directly affect students’ affordability and may restrict accessibility of some of them. Massive lay-offs and the deterioration of job security for staff and faculty can also be consequences of budget deficits. According to many scholars


5

(Hauptman & Nolan, 2011; Mingle & Southern Regional Education Board, 1982; Newell & California Postsecondary Education, 2009; Serban & Burke, 1998), lay-offs are used by some colleges and universities to cut costs and balance budgets. Indeed, it is hard to envision that institutions can do more with less staff or even deliver the same services. The lack of job security for the remaining staff can also affect their performance. It can be hard to assume that staff will function efficiently knowing that their jobs can also be endangered due to a budget deficit. Question One wonders if there is a budgeting strategy that can be the cure of current or anticipated budget deficits for all institutions. Is there a “one size fits all” strategy to maintain a balanced budget? Can different situations dictate the crafting of different budgeting strategies? This paper addresses the following question: •

How can different situations be the key factor in deciding the right budgeting strategy? Section Two: Review of Literature

Hauptman and Nolan (2011) propose four budget balancing strategies for higher education institutions. These four strategies are summarized below: 1. Increase enrolments and maintain the current tuition fee. 2. Cut costs by limiting enrolment. 3. Recruit more international students who pay higher tuition fees. 4. Increasing tuition fees for current and new students. Hauptman and Nolan explain that unlike the case in K – 12, tuition fees can be a good source of revenue for higher education institutions. Hauptman and Nolan add that the ability of


6

colleges and universities to recruit students from different regions, locations, and ages is very unique. According to Hauptman and Nolan, leaders need to consider their unique situations when choosing budgeting strategies. Hauptman and Nolan recommend that academic institutions need to increase enrolment and maintain the same tuition fee levels if the charged fees exceed marginal costs. They argue that increasing enrolment will not affect quality because the relationship of class size and quality is not clear in higher education. At the same time, they highlight the need for a good understanding of marginal cost when crafting a budgeting strategy. Zierdt (2009) believes that business and academic organizations can use responsibilitycentred budgeting to balance their budgets. Zierdt believes that each academic unit will have academic authority and fiscal responsibility when using responsibility-centred budgeting. Zierdt states that expenses of academic units need to be supported by sufficient revenues generated by that unit. Zierdt claims that other budgeting techniques do not offer enough accountability and has no incentives to cut costs or generate additional revenues. Zierdt concludes that since 1983, University of Southern California has been using this budgeting approach and the university had fewer budget deficits since then. Lewis and Pendlebury (2002) propose the use of cross-subsidies in higher education, where departments, faculties, or even single courses with deficits can be subsidised by departments, faculties, or courses with surpluses. Seven techniques are proposed by Mingle and Southern Regional Education Board (1982) to balance the budgets of colleges and universities. These techniques are summarized below: 1.

Create a fund to build up reserve.

2.

Reduce the scale of the operation.

3.

Increase tuition fees to cover the extra costs.

COMPETING STRATEGIES 4.

Limit enrolment to protect quality.

5.

Eliminate some individual courses or an entire program to reduce personnel cost.

6.

Terminate contracts of support staff to reduce administrative costs.

7.

Merge some units and programs.

7

Mingle and Southern Regional Education Board believe that “short-term solutions create long-tern problems” (p. 3), and reducing the cost of energy, telephones, and administrative wages cannot address the ongoing problem of public funding reduction. Newell and California Postsecondary Education (2009) highlight some budgeting strategies used by University of California, California State University, and California Community Colleges to respond to governments’ funding cuts. Among these strategies are 25% enrolment increases, tuition increases, cancelling inefficient programs, cutting library operating hours, eliminating nonacademic activities, reducing support services to students, and hiring part time instructors while freezing the hiring of full time faculty. Serban and Burke (1998) state that short-term solutions like reducing enrolment, raising tuition fees, hiring and earnings freezes, and encouraging early retirement are used by higher education institutions in their study of six US states to overcome funding shortages. Davie, Dinu, and Ferguson (2010) state that the state of Louisiana allowed universities to raise tuition fees by 10 percent to recover the $290 million funding cut in 2009. Section Three: Discussion and Analysis One can argue that the choice of a budget balancing strategy may affect stakeholders of higher education in many ways. Minimizing harm effects when crafting a budgeting strategy needs to be one of the key points in a budgeting process. It can be argued that a strategy needs to pass the test of specific criteria to fit the needs of an institution due to the unique case of every institution. At the same time, there can always be an academic wish list or key points when


8

crafting a budgeting strategy. It is important to highlight these key points and consider them when proposing a budget. I summarize these points below. Key Points to Consider When Crafting a Budget Strategy It is always the wish of students as key stakeholders in higher education that tuition fees stay the same, go down, or even disappear. Maintaining affordability and accessibility for students can be directly linked to tuition fee levels. A proposed solution to balance the budget needs to maintain the same level of tuition fees, if possible, for affordability and accessibility purposes or use tuition fee hikes as the last resort. Higher tuition fees may lead to higher student debts. According to Stokes and Wright (2010), 66 percent of American undergraduate students graduated with debt in 2004. 57 percent of Canadian students, according to Statistics Canada (2010), graduated with debt in 2005. The pressure to have a balanced budget should not lead to lower academic standards. Maintaining an institution’s admission policy of admitting qualified students can be jeopardised by the need to recruit more students for their associated revenue. The need to have quality graduates as the output of higher education requires the input of qualified incoming students. Unlike business organizations which can sell products or services to any customer who is able and willing to purchase, academic institutions may not accommodate “customers” based on their ability to pay. In the case of an academic institution, the ability and willingness of a “customer” to pay should not be, ethically, the main determinant of providing that service. While a balanced budget can be an ongoing dilemma for higher education leaders, it is their responsibility to protect the integrity and quality of higher education. Therefore, a proposed budgeting strategy may include the admission of more qualified domestic and international students only if the institution has excess capacity and the quality of education can be maintained.


9

A quality higher education can be maintained through the support and efforts of full time faculty members. It can be argued that a cost cutting strategy that includes the replacement of full time faculty members and the recruitment of casual lecturers may not support quality in higher education. Excessive dependence on part time and sessional instructors can be costly for academic institutions. One can argue that quality in education requires qualified professors, and that high quality faculty members can be the main requirement for an ongoing quality of education and research. Arguably, a strategy which claims to do more with less can end up doing much less with less qualified part time instructors. Similarly, a proposed strategy that includes staff lay-offs or services reduction may not be desirable. Maintaining high quality services to students with less staff may not be achievable. Less staff can translate into less quality services and heavier workloads for the remaining staff. Comparing and Contrasting Budgeting Strategies The focus of Zierdt (2009) on accountability and fiscal responsibility of each academic unit may not be the right solution for a balanced budget in higher education. It can be argued that this form of discrimination among academic units’ may lead to prioritizing disciplines based on their power to generate revenues. This can further lead to a business oriented higher education, where the goal of an academic unit becomes the maximization of revenues and the minimization of cost. This fiscal focus can shift attention away from academic matters toward a business mentality that seeks to remain solvent. It may lead to the adoption of business oriented approaches which can be inappropriate for an academic institution. As Askari (2012) puts it, “Solvency and cash flow should not be the main points of stress for higher education leaders… Their mission should not be a surplus in the yearly operating budget. Their vision should not be “To be the most solvent academic institution” (p. 5).


10

On the other hand, sharing financial responsibility with academic units can be effective. Their help is essential in addressing the ongoing funding dilemma and the need to have a balanced budget, and their contribution can certainly be appreciated. Communicating fiscal realities to all stakeholders of an academic institution can distribute the fiscal load to all units. Searching for efficiencies which can reduce costs or increase revenues without affecting the core academic goals of a unit is always going to be an important element of budgeting. Motivating members of academic units to benefit from economies of scale and scope can also lead to a more efficient unit operation. If merging two classes with related academic focus can be done (e. g., one research methods course for K-12 and Higher Education doctoral students), academic units can benefit from economies of scope which can minimize cost. Also, if an academic unit can absorb more students due to its existing excess capacity, the unit can benefit from its economies of scale due to extra revenues with the same fixed cost. The key issue in following this path is to preserve the core academic goals of the unit, while searching for efficiencies, so that academic units can stay “academic” and not business units. Indeed, some academic units will need to be subsidized to maintain their existence. Their lack of ability to match revenues with expenses will lead to their slow disappearance from academic institutions. Viewing education as a public good requires some form of subsidization to continue offering these academic public goods to the public. Lewis and Pendlebury (2002) Cross-Subsidization approach can be one way to address the dilemma of budget deficits. One academic faculty or department with a surplus can fill the financial gap of another faculty or department with a deficit. In other words, one unit is subsidizing the other unit. Theoretically, this approach can be one solution if there are enough units to subsidize the units in need. A major institutional problem remains in the overall budget, which includes other overhead


11

expenses that need to be paid using the combined revenues of all units. If the combined revenues cannot cover all institutional expenses, cross-subsidization may not be the right approach. Hauptman and Nolan’s (2011) recommended strategy to increase enrolment and maintain the same tuition fee levels can be a viable solution if excess capacity exists to absorb the extra students. It can be argued that if there is no excess capacity in an academic unit, the marginal cost per student (the extra cost when adding one extra student) may be higher than the charged tuition paid by the student. An example of this can be when new students are added and extra classes become necessary with their associated fixed and variable costs. In this case, the extra tuition fees generated from the added students may be less than the new fixed and variable costs to accommodate the extra students and the net effect will be negative for the budget. In other words, the extra students will increase the expenditure side of the budget more than the revenue side of the budget. Indeed, if the right conditions exist in an academic institution and there is room to capitalize on the existing excess capacity, the recommendation of Hauptman and Nolan can be the right budgeting strategy. By increasing enrolment and maintaining the same tuition fee levels, institutions and students can win. This means that an institution will have a balanced budget, its students will not see their tuition fees increase, and the affordability and accessibility of higher education will be maintained. Some qualified students are usually rejected due to strict admission rules that limit the number of students to be admitted to maintain quality and students / faculty ratio. Arguably, a clear cut quantifiable measure of quality in higher education may not exist. According to Hauptman and Nolan, the correlation of class size and quality is not clear in post-secondary education. The need to keep students / professors ratio as a symbol of quality needs to be reassessed by higher education institutions and should not be taken by face value.


12

The way universities look at quality needs to evolve because the model to deliver higher education has changed. Sawyer (2007) believes that the traditional model of teaching is “based on common-sense assumptions that had never been tested scientifically” (p. 2). This means that the old stand and deliver model of lecturing which rationalized the students / professors’ ratio is not the way to facilitate learning anymore. Three additional students to a class of 20 students may not affect the quality of that class. If it is assumed that teaching five students is easier than teaching 10 students, then it is good to remember that education is about learning and not teaching per se. Education, at all levels, is the process of learning through the facilitation of teachers and professors. The stand and deliver approach in higher education which benefited from small class sizes is vanishing from classrooms. Sawyer believes that “knowing is a process that involves the person, the tools and other people in the environment… This perspective moves beyond a transmission and acquisition conception of learning that is implicit in the standard model.” (p. 3). When crafting a budget balancing strategy, leaders need to consider the specific circumstances of each academic institution. The strategy that can be the perfect fit in one case may be the wrong approach in another case. Zierdt’s responsibility-centred budgeting can be used in some cases and may not work in other ones. Some academic units (e. g., School of Business) may easily manage a responsibility-centred budgeting approach and probably subsidize other units and contribute to an overall budget surplus. Other units (e. g., Humanities) may not be able to balance their books due to low enrolment, relatively high fixed costs, high variable cost per student, or a combination of all factors. To explain the effect of these different variables, I use the Breakeven Analysis Model in a simplified example: Breakeven Point = Total Fixed Cost / (Tuition – Variable Cost) = # of Students to Breakeven


13

Simplified Example Assuming that an academic unit has the following statistics for an academic year: •

Total fixed cost for the unit = $2,000,000.00

•

Tuition per student per year = $4,000.00

•

Variable cost per student per year = $3,000.00

The breakeven point in this case will be: $2,000,000.00 / ($4,000.00 - $3,000.00) = 2,000 Students to Breakeven. In this simplified example, the academic unit will need 2,000 full time equivalent students to breakeven and have a balanced budget. This means that 2,000 students with a contribution margin of $1,000.00 ($4,000.00 - $3,000.00) each are needed to cover the fixed and the variable cost of the unit. If the unit was able to attract only 1,500 full time equivalent students with a contribution margin of $1,000.00 per student, the unit will have a deficit of ($500,000.00) for the year. If the unit is required to match revenues with expenses, the unit will have to reduce its fixed cost by $500,000.00 which can include the layoff of faculty and/or staff. The unit can instead raise the annual tuition fees (if permitted) by $333.34 per student or find a way to reduce its variable cost by $333.34 per student. Theoretically, the unit can use a combination of fixed cost reduction, variable costs reduction, and tuition fees increase to balance its books. Indeed, the above described tactics to balance the budget are easier said than done. An academic unit may not be able to raise its tuition fees or cut its fixed or variable costs due to many reasons, and highlighting these reasons is beyond the scope of this paper. At the same time, many colleges and universities were able to transform some fixed cost into variable cost by replacing some of their full time, highly paid faculty members with on-demand, underpaid


14

sessional instructors. The salaries of full time faculty members can be categorised as fixed costs which need to be paid regardless of the level of activities in the unit or the institution. Sessional instructors, on the other hand, are only hired when needed and are considered a variable cost. Consequently, the phenomenon of hiring sessional instructors has been motivated by some budget balancing strategies. Conclusion The reality of funding cuts is encouraging higher education institutions to become creative and innovative in dealing with this definite reality. Because public funding is changing, the approach to budgeting and financial planning in higher education needs to change. The above discussion leads to the conclusion that increasing enrolment, to a certain limit, may not harm quality if the institution (or the academic unit) has excess capacity. Universities can win the three battles of quality, accessibility, and cost by increasing enrolment due to excess capacity. At the same time, some institutions are battling with low enrolment and struggling with students’ retention and can hardly use the recommendation of Hauptman and Nolan of recruiting more students to balance their budgets. It will also be hard for low enrolment institutions to use Zierdt’s responsibility-centred budgeting to balance their budgets due to some unavoidable costs to run the operation. Low enrolment institutions and low enrolment academic units may need to be subsidized to keep their doors open. If these academic institutions or units are treated like business organizations, they will end up with a budget deficit or even close their doors.


15

References Askari, M. (2012). Funding complexities in higher education. (Working Paper No. 2061069). Available at SSRN: http://ssrn.com/abstract=2061069 Canadian Business (2012). Comparing the 2011-2012 provincial deficits. Retrieved from http://www.canadianbusiness.com/blog/data/74031--comparing-the-2011-2012provincial-deficits Davie, W. R., Dinu, L. F., & Ferguson, A. C. (2010). Weathering the budget storms of higher education in Louisiana: Communication faculty respond to the crisis. Louisiana Communication Journal, 1243-60. Gerson, J. (2012, February 29). U of C balances budget as it cuts enrolment, raises fees. The Calgary Herald. Retrieved from http://www.calgaryherald.com/news/calgary/expects+enrolment+students+balance+budg et/6224508/story.html Hauptman, A. M., & Nolan, P. (2011). Assessing the effects of four budget-balancing strategies in higher education. Higher Education Management And Policy, 23(1). Lewis, B., & Pendlebury, M. (2002). Surplus or deficit – who cares? Cross-subsidy in colleges of higher education. Financial Accountability & Management, 18(1), 25. Mingle, J. R., & Southern Regional Education Board, A. A. (1982). Redirecting higher education in a time of budget reduction. Issues in Higher Education. Available from: ERIC, Ipswich, MA. Accessed August 3, 2012. Newell, M., & California Postsecondary Education, C. (2009). Higher education budget cuts: How are they affecting students? Report 09-27. California Postsecondary Education Commission. Available from: ERIC, Ipswich, MA. Accessed August 3, 2012.

COMPETING STRATEGIES Patterson, P, VanBalkom, W.D., Jensen, D. & Cummings, H. (2009). Higher education leadership issues – 2009. Calgary: Canadian Centre for the Study of Higher Education. http://www.ucalgary.ca/ccshe/files/ccshe/Current%20Higher%20Education%20Lea dership%20Issues%20Report%20.pdf Sawyer, K. (2007). Optimizing learning: Implications of learning sciences research. In: OECD/CERI (Eds.) Focus in learning: Searching for alternatives. Paris: OECD/CERI. Online: www.oecd.org/dataoecd/14/9/40805146.pdf. Serban, A. M., & Burke, J. C. (1998). The impact of state budget reductions in the 1990's: A view of public higher education in six states. Available from: ERIC, Ipswich, MA. Accessed August 3, 2012. Statistics Canada. (2010, January 29). Study: The financial impact of student loans. Daily. Retrieved January 29, 2012, from http://www.statcan.gc.ca/dailyquotidien/100129/dq100129c-eng.htm Stokes, A., & Wright, S. (2010). What are the alternatives to student loans in higher education funding? Contemporary Issues in Education Research, 3(1), 19-30. Retrieved January 29, 2012, from ABI/INFORM Global. (Document ID: 1961212831). Zierdt, G. (2009). Responsibility-centred budgeting: An emerging trend in higher education budget reform. Journal Of Higher Education Policy And Management, 31(4), 345-353.

16