Questions

What is Incentive Based Budgeting (IBB), commonly referred to as Responsibility Center Management (RCM)?

Incentive based budgeting and RCM is a management philosophy designed to align budget allocations with university goals and objectives by decentralizing several components of the University’s budget authority.

The goal is to delegate aspects of the University’s operational authority to colleges, divisions, and other units, allowing them to align their goals with the University's central mission: Teaching, Research and Outreach.

These decentralized models result in increased transparency and empower local leadership to make data-driven decisions.

In an incentive based budget model a framework is created to direct funding to the units generating the revenue, then charges are assessed to cover the unit’s share of centrally borne expenditures like administrative and common service and support.

Incremental budgeting is the most common approach to university resource allocation, though an array of alternative and hybrid models exists.

It is very common to find institutions that are utilizing multiple budget models simultaneously, either as hybrid models or models to facilitate various university missions.

Common Budgeting Models1

Incremental Budgeting

  • Centrally driven
  • Current budget acts as “base”
  • Each year’s budget increments (decrements) adjust the base
  • Focus is typically placed on expenses
  • Common modifications:
  • Block-grant models bucket line-items together to promote local control
  • Revenue incentives may be incorporated for the allocation of resources above-and-beyond the base
  • Approximately 49% of institutions and 65% of public master’s/baccalaureate institutions report using this model

Formula Funding

  • Unit-based model focused on providing equitable funding
  • Unit rates are input-based and commonly agreed upon
  • Annual fluctuations are driven primarily by the quantity of production and not from changes to rates
  • Common modifications:
    • Weighting schemes to control for local cost structures
    • Used only for select activities (e.g., instruction)
  • Approximately 24% of institutions and 28% of public master’s/baccalaureate institutions utilize a formula funding model

Performance Funding

  • Unit-based model focused on rewarding mission delivery
  • Unit rates are output based and commonly agree upon
  • Annual fluctuations are driven primarily by changing production and not from changes to rates
  • Common modifications:
    • Weighting schemes to control for local unit mission
    • Used only for small portions of overall resources (as little as 1% - 5%)
  • Approximately 19% of institutions and 14% of public master’s/baccalaureate institutions utilize a performance funding model

Incentive-based Models

  • Focus on academic units
  • Incorporates a devolution of revenue ownership to local units, as generated
  • Allocates costs to revenue generating units
  • Utilizes a centrally managed “subvention pool” to address strategic priorities
  • Common modifications:
    • Revenue allocation rules
    • Number of cost pools
    • Participation fee (tax rate)
  • Approximately 32% of all institutions and 27% of public master’s/ baccalaureate institutions use an incentive-based model
(1) Adoption rates from the 2017 Inside Higher Education Survey of College and University Business Officers; Percentages do not add to 100% due to hybrid budgeting models.

It is very common to find institutions that are utilizing multiple budget models simultaneously, either as hybrid models or models to facilitate various university missions.

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What is the goal of RCM/IBB?

The primary goal is to incentivize units to make data-driven decisions that support the unit’s and University’s overall strategic plan. Units are empowered to take greater ownership over their revenues and expenses to drive tactical growth and spur innovation.

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What are the guiding principles for a new budget allocation model?

UNL’s Steering Committee developed the following guiding principles to define and govern UNL’s budget and planning philosophy. These principles will not only guide the institution as it creates a new approach to resource planning, but represent a touchstone as we evaluate the effectiveness of UNL’s ability to financially plan for the future.

UNL Guiding Principles:

  • Supports the values, mission, and strategic vision of the University in the advancement of excellence in teaching, research, creative activity, outreach and engagement.
  • Provides units with the responsibility and accountability in order to enable and empower those units to be efficient, entrepreneurial, collaborative, flexible and creative.
  • Allows for investments in University strategic priorities and ongoing support of mission-critical campus operations.
  • Supports collaborative, data-driven decision making.
  • Provides accessible, predictable and clear information that is simple to understand, is transparent and facilitates trust across campus, and is subject to periodic review.
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Why is UNL changing its budget system?

The University made the decision to move forward with a Budget Model Design, Development & Implementation process based on the 2017 recommendation to the Chancellor from the “Strategic Planning Task Force on Budget Model.”

A task force report recommended shifting to a modified RCM model. Further, during his 2019 State of the University the Chancellor identified IBB/RCM as one of the top priorities for UNL:

"I am eager to see us now moving forward in the final planning for implementation of a new budget allocation model. A university committee reviewed this in 2017 and recommended we move toward a hybrid responsibility center model. RCM [/IBB] budget allocation allows increased transparency into budget decisions, enhanced stewardship of funds at the decentralized level, incentives or academic entrepreneurship and a data-based foundation for resource allocation. The campus will be engaged as the model is developed and it will be ultimately vetted with campus leadership during the first half of the coming fiscal year, with the new model shadowing the existing incremental model during FY20. Beginning with FY21, the new model will go into full implementation. I am confident that this will be a significant move forward for the campus. I thank interim VC Nunez and the executive leadership team in advance for bringing this to fruition-I consider it to be among our highest short-term priorities."

UNL is transitioning to an IBB model to accomplish three primary goals, consistent with our core mission and values:

  • Enhance transparency about both revenues and the costs of operating our institution
  • Place greater and clearer authority and accountability at the level of Deans and Vice Presidents
  • Strengthen motivations to achieve and optimize revenue generation and cost-effective practices
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How does the new budget model compare to our current budget system?

UNL’s current budget model is incremental based. This means that revenues (tuition & fees plus state appropriations) are held centrally and distributed to the campus following a historical model. The university submits annual payroll and operating budgets as well as biennial budget consistent with the State of Nebraska’s coordinating Commission for Postsecondary Education (CCPE) guidelines. The budgets represent a comprehensive financial plan for the university and include not only student tuition and fee revenue and state appropriated funds but also auxiliary funds, private, state and federal grant and contract funds.

Traditional Funding Model flowchart showing the directional flow of funds in a traditional CCPE modelAppropriationsTuition & FeesSchools & CollegesTraditional Budget Model Funds FlowMiscellaneousRevenuesCentral UniversityGeneral FundAdministrativeUnits
Source: Curry, J.R., Laws, A.L., Strauss, J.C. (2013). Responsibility Center Management: A guide to balancing academic entrepreneurship with fiscal responsibility. National Association of Colleges and University Business Officers.

The preparation of the individual budget documents varies slightly, but generally follow these steps:

  • Planning
  • Review
  • Department Preparation
  • Monitoring

Expenditures budgeted are funded from multiple sources, including general fund, tuition, fees (program, course, lab, flight, activity etc.) sales, room, board, grants, contracts and gifts. Decisions regarding the allocation of resources are guided by a process that links planning and budget. This process is aligned with strategic priorities.

In a RCM/IBB budget model a framework is created to direct funding to the units generating the revenue, then charges are assessed to cover the unit’s share of centrally borne (Administrative and common service and support) expenditures. An RCM/IBB model is often used to align budget allocations with university goals and objectives by assigning both revenue enhancement and cost reduction to the units supporting its’ strategic mission.

flowchart showing the directional flow of funds in a RCM modelAppropriationsTuition & FeesSchool & CollegesRCM Model Funds FlowMiscellaneousRevenuesCentral University(Subvention Tax)AdministrativeUnits (ExpenditureAuthority)
Source: Curry, J.R., Laws, A.L., Strauss, J.C. (2013). Responsibility Center Management: A guide to balancing academic entrepreneurship with fiscal responsibility. National Association of Colleges and University Business Officers.

Successful implementation of RCM requires funds to be set aside for the creation of strategic investment pools.

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How do funds flow in an IBB model?

In IBB models, revenues, based on customized activities or drivers (e.g. credit hours instructed), are allocated directly to the unit generating those activities. Units that do not generate revenues are funded by a subvention fund, which is a determined contribution from each revenue-generating unit to fund University support activities (e.g. IT). The subvention fund also allocates a strategic pool of resources to the University leadership to fund key institutional priorities. It is important to note that in initial IBB implementation, the allocation methodology stops at the school/college level meaning it is the Dean’s discretion as to how funds are allocated within a particular unit.

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What is the timeline for implementation of the new budget model?

The development and introduction of a new budgeting model is being made in phases.

Scroll horizontal to view more

gant chart implementation timeline
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Have other universities done this?

Many universities, both private and public, use some form of an RCM/IBB budget model. It was developed and has evolved over some 35 years with the University of Pennsylvania being the first higher education institution to implement RCM/IBB, in 1974.

Example of other universities' RCM/IBB implementation sites:

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How is the Institute of Agriculture and Natural Resources treated in this model?

IANR will be treated like a college at UNL when it comes to model allocation methodology and practice. The extension mission of this unit will continue to be a focal point of future funding decisions for UNL.

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How are interdisciplinary centers treated and have they been identified?

The Office of Research and Economic Development (ORED) along with academic deans have made a determination that due to the interdisciplinary nature of some UNL centers, select centers will be treated as stand-alone units with the new model. The criteria defined interdisciplinary centers as centers which have broad collaboration between more than a single college. It is important to note that most centers will continue to be managed by a specific college.

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How is the quality of data used to drive the model ensured?

Data quality is the responsibility of the entire university community. This is essential to the success of an IBB. Also, a Data Quality Committee, consisting of membership from across campus, has been selected and will be announced in the near future.

This committee will evaluate model inputs and propose recommendations around the improvement of the current data structures prior to model implementation.

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How does IT fit into the new budget model?

The OneIT initiative (ITS) will allow for IT to be centralized at the system-wide level. Today, UNL pays for IT expenses out of its own operating budget. In UNL’s future incentive based budgeting model, a portion of UNL’s state appropriations will be taken off the top to fund central IT before being distributed to UNL.

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How will this budget model incentivize activities that are not clearly defined?

No incentive based budget model is able to explicitly incentivize all activity that a university values. Nevertheless, there should still be investment into activity that is not incentivized in the model but highly valued by UNL.

The Chancellor and UNL leadership will have a Strategic Initiative Pool. This pool of funds will be available for all units to apply for through a transparent and fair process. This pool is meant to provide startup funding for activities that leaderships sees as important to the University.

Additionally, while the model funding metrics will undoubtedly be crucial for colleges to understand and respond to, it will be equally important for Deans to demonstrate continued commitment to mission-critical operations that may not be explicitly incentivized or measured within the model.

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How will employee benefits be affected by the new model?

Simply put, the model will not affect employee benefits.

The budget model cannot create or eliminate dollars it just changes the way money is allocated to UNL’s colleges and other units.

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How are model decisions being made and how is the input of campus being handled?

There are four primary avenues for campus involvement and input:

  1. Steering Committee - The Steering Committee was charged with creating an incentive-based budget model that fits UNL’s needs. The committee is made up of a diverse set of campus members from several colleges and roles. One of the jobs of each Steering Committee member is to solicit feedback from his/her constituents so that their opinions can be considered during key model decision points.
  2. Deans Meetings – Representatives from Huron and relevant UNL leadership (as needed) meet with the Deans and Business Officers individually from each college three times throughout the project. The meetings are meant to both introduce Deans to incentive-based budgeting principles generally and the one that UNL will be operating under. These meetings provide opportunities for Deans to ask questions and voice their opinions on model decision points.
  3. Open Forums – Two Open Campus Forums, being held during the development of the incentive-based budget model, are opportunities for anyone on campus to be provided an update on the process and voice their comments and questions.
  4. Governance Committees – In time, governance committees will be established to maintain and support an efficient budgeting process year over year.
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How will units be able to effectively manage their budget within this model?

The primary goal of an incentive based budget model is to provide Deans with the resources and information to make informed and strategic budgeting decisions. To help achieve this, the Steering Committee explicitly defined the following guiding principles:

  • Provides units with the responsibility and accountability in order to enable and empower those units to be efficient, entrepreneurial collaborative, flexible and creative.
  • Provides accessible, predictable, and clear information that is simple to understand, is transparent and facilitates trust across campus, and is subject to periodic review.

The incentive based budget model that the Steering Committee has designed is intended to be simplistic enough that it can be easily operationalized within the units, while also transparent enough that it provides the necessary information for making strategic decisions.

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