November-December 2002

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The Philosophy and Psychology of Effective Institutional Budgeting

Why does college and university budgeting seem so painful, conflicted, and ineffective? To escape the budget syndrome, we need to reassert core values and revalue faculty expertise and participation.

By Peter A. Facione

If the budgeting process at your institution is working well, you are fortunate. Budgeting at too many colleges and universities amounts to muddling through from one year to the next. This is a poor way to function in good economic times, and it can be fatal to an institution in bad ones. Few higher education leaders are genuinely satisfied with their institution's budget process, and many are frustrated that major questions of long-term importance to the future of the institution are inadequately addressed. Dedicated faculty, administrators, presidents, and trustees lament lost opportunities as valuable time and energy are consumed by a process that often seems to achieve nothing other than extending the status quo.

The budget process can be improved when institutions apply four essential principles:

    • Involve people whose authority derives from responsible expertise.
    • Understand human decision-making risks and guard against them.
    • Address questions of long-term importance to the future of the institution.
    • Structure positive budget incentives for all levels of the organization.

Divergent Philosophies

Most American colleges and universities function fiscally, like the former Soviet Union, on the philosophical principle of a controlled economy. A central committee builds the budget, and the rules are simple. On the income side, project next year's income, establish revenue targets, and pool all revenue as it arrives. On the expenditure side, project allowable expenses, establish budget categories, fund approved lines and accounts, review and approve each expenditure as it is made, prohibit all other expenditures, and take back unexpended balances as the fiscal year draws to a close.

Such controlled economies naturally thwart change and inhibit adaptability. The prevailing psychology of a controlled economic system is that minimizing the potential loss is more important than maximizing the potential gain. While there are often penalties for failure, there are seldom rewards for achievement. Typically, this system allows no incentives for excelling in productivity, for achieving greater efficiency, for collaborating across segments of the organization, or for demonstrating responsible creativity. In bad times this budgetary environment can foster mistrust, hoarding, inflated expenditure requests, overly conservative revenue forecasts, the belief that sacrifices for the common good may be unwise or unnecessary, scapegoating, micromanagement, and resentment all around. In good times it allows top- and mid-level managers to shore up weaknesses, attend to deferred problems, and if they are clever, squirrel away resources for the rainy days that, no doubt, will return. However, they rarely pursue opportunities for significant innovations. The budget code for "venture capital" is not found in a controlled economy's chart of accounts.

This command-and-control philosophy with regard to fiscal matters diverges from the representative philosophy most American institutions of higher education espouse with regard to governance. In deference to this representative spirit, the institution's faculty usually have a representative or two on the central budget committee. But in this system, the faculty is just one more interest group, and since the system is geared to constituency group politics, it undervalues and underutilizes the talents and expertise of the faculty as academic professionals. Regardless of their capacities to seek objectivity and to give priority to the common good, faculty, along with divisional vice presidents, deans, department heads, and program directors from every campus unit, are expected to behave as self-interested individuals whose data, motivations, proposals, and perspectives are suspect. Interest groups are not expected to make serious, fair-minded contributions. They are expected to advocate for their special needs.

In a representational governance system the assumption often is that the trustees, the president, the chief financial officer, and the budget office professionals are the persons charged with standing above the fray and speaking on behalf of the institution as a whole. Sometimes they are successful in attaining a detailed understanding of all the parts of the institution and in achieving perspective and disinterest. Yet often, in spite of their good intentions, the gripping politics and the sheer complexity of the institution's educational enterprise limit their accomplishments.

Although of critical significance, questions of long-term academic quality, curricular and co-curricular programming, and educational policy consistently are subordinated to the urgent issues of the moment: "How are we possibly going to budget adequately for the projected needs in salaries and benefits for current employees, institutional and student support services, physical plant repairs and infrastructure, safety and security, disability access, financial aid, utilities, debt service, technology, libraries, the athletics department subsidy, institutional development, and so on?" It seems absurd, once those representatives on the central committee learn the scope of the continuing needs, that anyone would hope to fund new endeavors or quality upgrades of any genuine scope or significance!

Each fall the central committee, which is consumed with the singular task of proposing a politically and fiscally balanced budget, seeks to engage all the stakeholders and constituency groups directly. Reports are published, open meetings are held to explain the process and the budget constraints, and individuals or groups are invited to send their ideas to the committee. This is all done in good faith, and given our democratic ideals and the belief that information and reasoned argument should prevail over secrecy and autocracy, these steps are important. People at all levels of the institution should have the opportunity to understand how things stand financially. If there are good ideas out there, the central committee should ask that they be communicated. But do not be confused about the efficacy of all of this. The result of the consultative process is fundamentally political, in the best sense of the term. Broad consultation, though important for other reasons, only rarely results in substantial improvements in the overall budget. It should surprise no one that each year we hear, "Nobody's happy, but it's the best we could do."

Frustrated Constituencies

Over the long run the traditional process of budget building, as sketched above, alienates administrators at all levels and fosters disengagement, indifference, and, on occasion, cynicism among faculty and others. For all the hard work and goodwill that goes into creating annual budgets, most fail to advance strategic goals, and budget building is often perceived as an exercise focused chiefly on structuring the expenditure side of the budget. This renders futile a number of other equally vital projects, including strategic planning, program review, and new program development.

Once the budget is proposed and approved, it takes several weeks, if not months, for everyone to prepare for the coming fiscal year. Different offices at multiple levels of the institution must integrate budget data and set up accounts. At the same time, with the current fiscal year drawing to a close, the multi-staged process of closing down expenditure categories takes place. Bottom- and mid-level budget administrators use whatever flexibility they may have to balance their accounts and to spend all they can before it is swept away. At too many institutions of higher learning, despite what is known about human motivation, restrictive expenditure regulations and routine budget practices end up promoting waste, discouraging initiative, and inhibiting potential revenue generation. Because of this, and because expenditure regulations aim chiefly to prevent losses, not to maximize institutional gains, the very regulations on which we rely to control costs can jeopardize the institution's long-term welfare.

If these characterizations describe the situation on your campus, the system needs fixing. The following proposal takes advantage of the wisdom and natural authority derived from the application of responsible expertise.

Responsible Expertise

Although higher education institutions are distinct in important ways, they have in common the core mission of advancing human learning. American higher education is based on the optimistic, but not illogical, presupposition that as human learning increases so will personal freedom and professional success, cultural pluralism and tolerance, scientific and technological progress, agricultural and industrial productivity, democracy and social justice, public health and prosperity, and, in general, the well being of the nation and its people.

A well-designed budget will manifest an institution's core mission, its distinctive character, and its strategic goals. In teaching, what you grade is what you get; in institution building, what you fund is what you get. In other words, to the extent that the annual budget funds the advancement of human learning, it will fund the three essential functions of the institution: promoting student learning; discovering, refining, integrating, and applying knowledge; and engaging in those forms of public and community service that are appropriate to institutions of higher learning in general and to the distinctive character of the given college or university. A well-organized institution accomplishes these functions by the complex collaboration and integration of every member of the faculty and staff, with differing contributions being made by different individuals. Everyone engaged in advancing these important functions contributes to this worthy and vital work.

Shared governance based on expertise and role responsibility is well understood in curricular matters. Curricular authority derives from two sources, the expertise of the faculty and the fiduciary duties of trustees, presidents, and key academic administrators. Stakeholders (students and potential employers) and those with special technical knowledge (librarians, academic facilities specialists, and computer technologists) are consulted for advice. If the goal of the budget is to advance human learning, then faculty should participate in budget development in the same way that they participate in curricular development.

Building an effective budget requires the expert participation of the best teaching scholars, for they are the accomplished authorities in advancing human learning. The expertise achieved through years of effective teaching and productive scholarship, and the expertise to make central contributions to the kinds of public service that are uniquely appropriate to institutions of higher learning, can be supplied only by faculty and by those serving in various administrative leadership positions who have faculty experience in their backgrounds. Effective budgeting requires other kinds of knowledge as well. The budget building process must include professionals with the financial and technical expertise to shape the flow of the institution's many kinds of resources toward the realization of the three essential functions of promoting student learning, advancing scholarship, and providing valuable public service. The perspective and wisdom of those officers of the institution who have the legal fiduciary responsibility for the use of its resources are absolutely critical to the success of the budget building process.

Trustees, presidents, administrative officers, and faculty care deeply about the academic quality and long-term well-being of the institution. Students, alumni, staff, employers, and benefactors do, as well. Ultimately, however, by virtue of their expertise and the duties of their roles, major responsibility for the quality of the institution and for accomplishing its core mission rests with its faculty, administration, president, and trustees. There is a critically important difference between being a member of a constituency group that has an interest in the success of an enterprise and being one of those persons who, by virtue of the authority derived from expertise or role, are responsible for its success. Those responsible must do the work, build the budget, contribute their expertise, and take full responsibility for the results, seeking input from stakeholder groups and specialists.

It is vital that faculty be engaged meaningfully and collaboratively in the budget building process, not as representatives of a given perspective, but as persons sharing responsibility for the enterprise as a whole. It is disloyal and professionally unworthy of faculty not to participate as experts, rather than as constituency group representatives. It is foolish and inept of administrative officers not to gain the optimal participation of all who have requisite expertise in matters pertaining directly to building a budget that will advance the institution's mission. It is imprudent of presidents and trustees to approve budgets that were not crafted by those with the relevant academic and fiscal know-how.

It is naïve and contrary to the historical evidence to assume that the common good will somehow emerge when the budgeting system is set up so that each group is expected to behave as if it were seeking to advance its own interests. Budget building based on the model of responsible expertise projects the expectation that participants will, first and foremost, advocate for the overall good of the institution and the realization of its core mission.

Peter Facione is provost at Loyola University of Chicago.