Creating a Flexible Budget Process

Contingency budgeting is one response to economic uncertainty.
By James Frew, Robert Olson, and M. Lee Pelton

The budget process is often an especially thorny area in communication between administrators and faculty members. In the March–April 2001 issue of Academe, Mary Burgan wrote:

If there is one activity that higher education administrations guard jealously from faculty review, it is the budget. A few enlightened college and university administrations are willing to open the budget for faculty discussion; they actually invite those faculty members with fiscal expertise—from the economics department or the business school, for example—to aid them in adding things up and making decisions. But most administrations prefer to shield the budget and the process of making it from the inexpert, prying, and trouble-making eyes of faculty.

As William Cummings and Martin Finkelstein’s essay elsewhere in the present issue demonstrates, this problem is more pronounced today because many faculty members are experiencing a diminished sense of power within their institutions.

Last year, Willamette University took a step toward reducing tensions surrounding the budget. As we planned for the current year, we faced the high degree of uncertainty that the financial crisis has forced on many universities. We dealt with this situation by shifting from planning a fixed budget to planning a flexible one. The process required to design this more elaborate plan resulted in unusually deep discussion between faculty members and administrators about which high-priority items needed to be included in the “base” budget and which could be deferred pending receipt of the revenue that might be generated by higher enrollment. Contingency plans were thus devised and discussed before we incorporated them into the budget.

Of course, final budget authority rests with the board of trustees, which annually approves budgets in March. A major task for the administration was thus to ensure alignment between the core interests of the trustees and those of the faculty. This was especially essential during a year of global recession, which required an even sharper focus on institutional priorities and objectives.

To start the budget process, the president held forums with administrative staff and faculty members in each of the university’s colleges. He solicited suggestions about how to retain a commitment to core principles with a smaller budget. The resulting budget proposal had three possible levels, with precautionary cuts associated with lower enrollment levels. Each prospective level of funding was discussed by a special budget committee of ten elected faculty members. Six were elected at large from the College of Liberal Arts and two each from the Graduate School of Management and the College of Law. Then the trustees’ budget committee developed a specific timetable for when additional budget amounts would be released for spending, if enrollment levels yielded sufficient revenue.

Put another way, in order to minimize risk in an uncertain and volatile economic environment, we created a three-tiered, contingency budget with three funding levels based on enrollment performance. Most important, the budget— despite its tripartite contingency funding—fully reflected a set of core goals approved by the trustee and faculty budget committees and supported by the faculty: maintain core academic programs and activities, sustain competitive salaries for faculty and staff, manage financial aid in order to maintain a diverse and academically talented student population, and ensure that academic facilities support the educational mission.

We believe that our current plan is better than a fixed budget that would need to be reduced (or enhanced) if enrollment varied from our best estimate during the budget year. This is partly because some parties were persuaded to submit a more conservative budget request for the “base” budget, knowing that their allocation would be enhanced if more students enrolled. Departments were more careful in assigning priority to items in their budget requests. Moreover, with a conservative, fixed budget, the spending of any additional revenues generated by higher-than-expected enrollment is left to the discretion of the administrators who control the budget. The flexible budget process avoids this problem, resulting in better cooperation between faculty and administrators throughout the budget year.

Institutions interested in making the transition to a flexible budget arrangement should also note when the possibly higher budget levels are triggered during the budget year. The timing of these decisions is especially important given that many projects involve advance commitments (such as contracting adjunct faculty members to teach in future semesters). We decided to conduct “capitalization tests” for each of the four schools in our university to determine whether to trigger the higher authorized budget levels.

The goal of these tests is to avoid excessive spending if enrollment turns out to be less than expected. The tests are conducted on June 1, the beginning of the budget year (based on favorable numbers for new student deposits); October 15 (based on favorable results for net tuition revenue); and November 15 (based on a positive projection for the spring term). If any of the tests fail, the extra funds are not released for spending. This flexible plan thereby avoids the fixed-budget alternative of having to make emergency cuts in the funds that have not already been committed if revenue shortfalls are discovered during the budget year.

We believe that the flexible budget system we have established is an especially effective way to allow for faculty input into the budget process and to reinforce shared governance. Moreover, the consultative process for advance contingency budgeting creates transparency during the fiscal year if financial conditions require changes in spending plans.

James Frew is professor of economics at Willamette University, where he also teaches finance. His e-mail address is [email protected]. Robert Olson is associate vice president for financial affairs and controller at Willamette University, and M. Lee Pelton is the university’s president.