I. Setting the Stage

Using Budgeting Effectively

Dr. Sherman Bloomer

Budget policies and practices are tools to advance the goals of an institution. Budgets are also visible to most members of a university community and can sometimes be viewed as the only motivation for decisions—to the detriment of pedagogy, curricular needs, and mission. Aligning budget practices with institutional goals and priorities and communicating (repeatedly) how those practices support the goals and priorities are critical. A change from historical and incremental budget distributions to productivity-informed or responsibility-centered management (RCM)–based distributions at Oregon State University and a recent review and revision of that change together provide an example of the opportunities and challenges in such a transition. The budget distribution approaches had to balance real and perceived incentives for scholarship and teaching, online and traditional instruction, high-cost but mission-critical programs and high-enrollment lower-cost programs, and the needs of academic units for both sufficient staffing and high-functioning services and support operations. The most productive discussions about balancing each of these interests came when the focus was on “and” rather than “versus.” Budget development is commonly very focused on annual cycles but benefits from being part of longer-term financial planning. Forecasting three- to five-year trends can help the development of productivity-informed or RCM budget practices by buffering them against significant changes in state funding, pension costs, or international enrollments. Long-term forecasting at an institutional level can identify areas of concern for the institution’s financial health (unaddressed depreciation costs, for example) and can inform annual budget decisions that contribute to long-term financial goals.


The observations here come from my work at Oregon State University as a department chair, dean of a large college, and associate vice-president for budget and resource planning. My thoughts are shaped by what I learned along the way and as much by the absence of some things as by the presence of other things. I was very fortunate in my role in budget to have many talented, professional, and patient finance colleagues educate me about the nuts and bolts of university finance and many academic colleagues who willingly engaged in rethinking how we did some things and patiently (mostly) listened to me talk about why the financial and business realities of the institution did limit how fast we could do things or how much of certain things we could do. I am particularly grateful for the learning and planning we did together through the pandemic.

The observations in this essay are much influenced by my experiences as OSU transitioned from a largely incremental education and general budget process (though there were activity-based budgets associated with the online education program) to a modified responsibility-centered-management (RCM) budget process. The work on this transition was in collaboration with deans, senior leadership, and university budget committees from 2015 to 2018; it was implemented in 2018; it was reviewed comprehensively in 2021–2022 and is currently being revised. The review provided not just an understanding of what had worked (and what had not) in the budget model change, but a great deal about how people viewed the budget model, how they understood it to work, and the things they did not understand. It emphasized to me the importance of effectively communicating about budget and budget processes.

What Are the Mechanics?

One of the things that surprised me when I went from my role as a dean to the budget office was how little I actually understood about the budget mechanics of the institution—how much revenue comes from tuition? What’s our discount rate? What are the trends of state funding? How much of the total budget is spent on people? What are the central costs we have to pay (debt, insurance, contracts with the city, etc.)? Not all of the details would have mattered in my dean role, but understanding some of those details would have been very valuable in explaining budget to department chairs and faculty (and understanding it myself).

Depending on your role at your institution, some level of knowledge of how the budget works is valuable. A department chair might want to know the broad outlines of where revenues come from and how they are spent in the education and general budget and what recent trends have been. This can be helpful in showing faculty why engagement in student recruiting is important or why expectations of state funding or endowment returns are limited.

For senior leaders, having a broad knowledge of the budget levers for your institution would include the mechanics of the education and general budget, the magnitudes and trends of revenue streams for the major self-support operations, how philanthropy works at your institution (an affiliated foundation or within the institution), and what the restricted fund portfolio looks like. It’s useful to know the current state of affairs and what the trends have been the last few years.

The point of my suggestion is not that you will be managing the details of those funds but understanding them helps you talk with faculty, staff, and the campus about budget and how it works. Public universities would love to see more investment from the state, but if it is 15 percent of your revenues and has not changed in fifteen years, it may not be a strategy that is promising. Growing grant revenues is important for the mission at some institutions, but that may or may not grow the finance and administrative costs recovered from those grants depending on the types of grants and the agencies they come from. Unit-level enrollment strategies and ideas can generate lots of enthusiasm, but if your institution has been stagnant in undergraduate student enrollment for years, the issues are likely larger than individual unit programs. A broad understanding of your budget mechanics can help you engage with the university community more effectively.

Budget as a Strategic and Communication Tool

Budget is something that almost everyone at a university or college notices and has an opinion about. This can make it a source of frustration, but it is also an opportunity to engage the campus community in conversation about how the budget works and why certain decisions were made.

Productive conversations about budget require a degree of openness about budget and budget data. The extent to which you can share budget detail likely varies depending on your type of institution (private, public with an independent board, public and part of a state system, etc.), but at some level it is likely you can share budget information with your leadership and the campus community. Where does the budget for your unit (or institution) come from? Where does it go? What is the general outline of the budget distribution process? In the absence of shared information, the members of your unit and the campus community will create a narrative that likely will not match reality very well.

Making budget information available is not necessarily the same as making it understandable. How you present it, how much explanation you provide, and the acronyms or language used can obscure what you’re trying to share. Making the public budget data understandable is an important part of sharing it. One way we approached this at Oregon State was to start a series of informal budget seminars. We called them “Budget Conversations,” but they were really a series of budget primers. We’d put together a one-page (front and back) summary, explain it for about twenty minutes, then open the conversation up for questions. These ranged from where the whole budget comes from and where it goes, to how finance and administrative cost recovery from grants works, to how capital projects come to be, and so on. These have proved to be very useful both for helping more of the campus understand the budget and for creating a small library of explanations to commonly asked  budget questions.

A more formal, and unit-specific, budget report can also be useful. The provost at OSU asks each college leader to do an annual financial report that is for the members of the college (and also informs the provost). The report details the budget sources and distributions in the college, highlights major budget investments in the last year and their outcomes, looks ahead to major investments planned in the next two years, and discusses any threats or emerging opportunities for the college. These have been helpful in creating a resource for faculty and staff to have access to an overview of their unit’s finances and are a resource when questions are asked or someone says, “well, no information is ever shared with us.”

Data as a Foundation

Something to ask when you take on a leadership role is how well does the institution or unit understand itself? Are there good data on credit hours, spending, faculty and staff FTE, benefits costs, grants and contracts expenditures, and so on? The question is probably not “are there data” but “are the data accessible and accurate enough to inform decision-making.” There are two big reasons for checking into the data tools.

This first is for planning. It is very hard to know what your strategy should be if you don’t know what the organization looks like now and where it has been. How much do the faculty in your unit teach? What do they teach? Who is bringing in external funding? In what areas? Who are the students who come to your institution? What’s their socioeconomic distribution? What’s the staff to faculty ratio across your units? Are there good reasons why they are different? There are a lot of questions you’re likely to want to have answered to inform your strategies, and it should be (relatively) easy to get at least first order answers to those questions.

The second reason is that you’re going to want to be able to assess if the strategies you put resources into have the effect you want. Did adding those two recruiters in Texas move enrollment for you? Did the investments in a summer bridge program meaningfully affect first-year retention or graduation rates? Did the research center you funded make good on the projections for grant funds and external engagement? Higher education has not always built assessment into the academic (and service) investments we make. Increasingly slow revenue growth makes it more imperative that an honest look at the effectiveness of new things is part of making those investments.

So, as you take on a new leadership role, explore the data ecosystem for your institution. If it is hard to get answers to questions you’re asking, it may be that is one of the first areas you want to give some attention. Good information is foundational to making good (or at least informed) budget decisions.

What Does Your Budget Process Encourage?

There are lots of approaches to budget development and distribution in higher education. Incremental budgeting, activity-based budgeting, RCM budget models, other outcomes-based budgeting, and combinations of these can be found in the public and private sectors. These intersect with constraints that may come from your legislature, state system, or board. All of these systems can work and they all can create incentives for certain behaviors by your leadership and faculty.

If you’re using incremental budgeting, you may expect to provide stability and to encourage strong professional relationships between deans and the provost and college-based advocacy for budget decisions. You may not intend to create a perception that a particular dean is successful in that advocacy because of personal or social relationships. If you’re using RCM budgeting, you may intend to encourage deans to pay close attention to college enrollments and graduation rates. You may not intend for colleges to think up entrepreneurial ways to teach courses outside their core expertise to capture credit hours. At Oregon State, prior to the development of the modified RCM, our growing online program was budgeted on a revenue-sharing model, and the campus programs were budgeted largely through an incremental approach. This encouraged units to grow their online programs, but it also turned out to encourage offering sections for on-campus students online instead of in person.

Any approach to university budget will create incentives for some things you didn’t intend. If you know what they are and they’re outweighed by the positive aspects of the approach, then you’re good. If, however, you don’t know what those intended and unintended behaviors are, your units may be spending quite a bit of effort on activities that aren’t actually moving the institution forward.

It is worth spending some time understanding how your budget process is perceived. Ask your leadership team what they think increases their budget allocation. What are they doing with the intention of securing more resources? When you have an opportunity to talk with department or school heads, ask them what activities they think change their budget allocation. You don’t need to do all that yourself, but it is important to understand how leaders and managers understand your budget process and what it is encouraging them to do or not do. If those actions are at odds with what you need to advance your strategy, you likely need to either communicate the actual budget process more clearly or consider a revision in your budget process to align the incentives with the desired actions.

Once you do understand your budget process, I would also encourage you to honor it in your decisions about budget allocation to the degree possible. Unexpected circumstances and emergencies do arise, and resources have to be committed outside of the usual annual budget cycle. However, if your direct reports find they can lobby you successfully for resources outside the institution’s usual process, you’ll spend a lot of time in those conversations and will frustrate leadership in units that are sticking to the defined budget process.

Long-term and Short-term

Balancing short-term and long-term budget needs is one of the most challenging parts of allocating your institution’s resources. Budget is, of course, an annual process, and the immediate needs of replacing positions, easing advising loads, shoring up Title IX services, and the myriad other needs of a university of any size can trump the need to maintain operating reserves, set aside cash for capital renewal projects, or plan for essential strategic investments, like replacing the ERP  or making cluster hires of faculty in key areas. The problem is exacerbated by the fact that almost all of the existing budget is distributed to someone doing something, and maintaining those efforts, every year, is the largest annual incremental budget investment any institution has to make. Carving funds out of increasingly limited new revenues for long-term needs isn’t easy and has to be intentional.

Making allocations for long-term strategic needs should be an integral part of your annual budget development process. There are a couple approaches that can help with this. Oregon State’s Board of Trustees asks for an annual ten-year business forecast that lays out current plans for capital projects, enrollment strategy, and trends in revenues and expenses. It is at a very high level and, of course, has significant uncertainty in years farther out. However, it is very valuable for management to identify key areas of weakness and to consider different ways of addressing those weaknesses. It provides a way to talk to the campus community about why funds are being set aside for a particular reason (“in five years we’ll have enough to completely renovate Founder’s Hall”) or why a particular program is being started now, even though it may have little impact for one or two years (“in six years this master’s degree program should have enrollment of x and will be generating y dollars to support other needs on campus”). It was not a small amount of work to set up the methodology for doing this, but it has been well worth the return.

On a more local level, we have begun asking units to make their annual requests for new budget resources in a three-year time frame. Unit heads in service and support units are asked what new resources they need (and for what of course) for the next fiscal year, and for the two years after that. This has helped them think more strategically and to think ahead a bit about how much they can realistically manage in the next year. It has allowed leadership to look at the aggregate requests and consider if some can be staggered across years, if there are common “pain points” across units, or if there are some things that could be funded from reserves rather than new recurring funds. We also have all of the unit leaders reporting to the provost all of their colleagues’ requests for new budget. It has helped unit leaders develop a better understanding of the complexity of the institution and a more strategic view of the annual budget process.

Flexibility for Leaders

When I came into the budget office, I was surprised how many requests for resources (often one-time) came to the Provost or the Vice-President every year outside of the usual budget cycle. I was equally surprised at how small many of those requests were and how little latitude the senior leaders had to address them. The requests consumed a lot of time and energy and resulted from a lack of consistent strategic reserve allocations at the right levels.

Giving leaders at every level some level of discretionary reserves can be very helpful in getting small things done without having to go up the approval chain for every single thing. Making sure senior leaders have reasonable strategic reserves lets them respond to institutional strategic needs effectively. Institution leadership sometimes wants to retain year-end balances all centrally so funds are not “wasted.” Unit level leaders want to retain year-end balances because they “earned” them by good management and know best how to use those resources for their part of the mission. Some balance between those extremes is good. If unit leaders have some discretionary reserves, they can make smaller local decisions quickly. If the Provost has reasonable strategic reserves, they can respond to strategic opportunities. In all cases it is important that leaders using those reserves clearly recognize they are spending one-time funds, not recurring funds.

One way we’ve tried to strike that balance at Oregon State is to redistribute reserves in the units reporting to the provost and the vice-president for finance at the end of each year, because these are resources allocated by students and the state and we need to use them strategically and responsibly. Twenty-five percent of the ending balance goes into a reserve fund for the provost and vice-president, and the balance remains with the unit to be invested in strategic needs (which ought to be periodically reported on by the unit). This approach has encouraged unit leaders to manage responsibly and has, over time, established strategic investment funds for the senior leaders.

The precise approach to this will depend greatly on your institution. Public institutions may have board or legislatively established minimum and maximum reserve balances; some portion of reserves are always committed to faculty start-ups or projects that cross over fiscal years, or there may be board limits on how you can manage your end of year balances. Within those limits, considering how to let leaders at every level have access to strategic funds they manage can be an effective tool in getting things done with your budget resources.

Scarcity and Opportunity

One of the things that was striking in our review of OSU’s modified RCM budget model was that virtually every conversation we had included the comment that “there wasn’t enough.” The specifics of the comment could be about tenure-track faculty numbers, supplies and equipment for laboratories, staffing in human resources, or accountants in business operations but came from colleges, business units, academic support units, and executive offices. The prevalence of a scarcity mind-set was striking.

This is hardly a surprise, as most universities, public ones particularly, deploy most of the resources they receive, don’t hold huge reserves, and always have longer lists of things to improve or start than they have new revenue. It was very clear the scarcity mind-set was limiting how units and unit leadership viewed what they could and could not do.

While the scarcity is real—there are always more things to do than there is incremental revenue to support them—institutions have millions, or tens of millions, or hundreds of millions of dollars to support and educate students, engage with their communities, and pursue scholarship and innovation. Those dollars come from students and taxpayers and provide an opportunity to do as much good as possible. Keeping that message as part of budget development and management is very challenging but very important. If the scarcity mind-set is the only lens that is used, it can easily squeeze out any thinking about new opportunities or new directions.

I don’t mean this to be unrealistically optimistic. The enrollment and state funding challenges faced by many institutions are real and daunting. Sometimes, they are severe enough that the conversation has to be about hard choices and reductions. But for many institutions with stable but challenging circumstances, it is worth considering how to talk about opportunities in each budget cycle, even as you have to say no to some things.

Plan for the Down Cycles

Most higher-education institutions have faced the impacts of a recession on state funding and endowment returns or a sudden shortfall in enrollment. These events are not always predictable, but it is extremely likely they will occur at some point, so planning for them is prudent. This isn’t completely at odds with the advice I just provided about promoting an opportunity mind-set. In that, I was thinking of the prevailing thinking about the annual budget at the institution. In planning for recession or enrollment-driven budget downturns I am thinking about the need to have a plan when those circumstances arrive.

If you’ve been able to set aside significant discretionary reserves over time, you have one piece of managing those downturns in place. However, for many institutions maintaining reserves at a level that would let you weather the one or two or three years of a major downturn is probably unlikely. If so, the more you have thought about what you would do in those circumstances, the more effectively you can manage them when they arrive. For most of us, when those downturns have happened, we have to make decisions quickly; there aren’t many options; and we wind up with largely across the board reductions that can have long-term consequences and aren’t very strategic.

It is worth thinking about your strategy for those downturns before they happen. What do you have to protect—advising services, research administration, the library? What could you defer or fund out of something else—capital renewal repairs, capital equipment replacement, staff professional development for a year? If you had to reduce programs or degrees or services what would be the criteria? There are many possible choices and it is a hard conversation. However, having those conversations before you are scrambling to deal with a sudden decline in budget resources can be invaluable in managing through that downturn.

Final Words

The purpose of higher education, regardless of institution size or type, is to make a difference in individual lives and to advance the economic and social well-being of the communities our institutions serve. It is a compelling and rewarding mission, and budget management is the engine that makes the work possible. Conversations about budget, budget processes, and budget priorities can be daunting, but I encourage you to embrace them. Clear and open dialogue about budget can help your institution understand your priorities and constraints and can help you understand how well the members of the institution do (or don’t) understand your priorities and processes.

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Using Budgeting Effectively Copyright © 2024 by Dr. Sherman Bloomer is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License, except where otherwise noted.