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Resource Allocation in Higher Education

RESOURCE ALLOCATION IN HIGHER EDUCATION


Institutions of higher educationbe they large public universities or small private collegesare not homogeneous organizations. Because of differing missions, goals, programs, histories, traditions, laws, and explicit procedures, they obtain and expend revenues, or financial resources, in myriad ways. Therefore, there is no universal model about the best way to allocate financial resources within higher education. Nevertheless, there is general consensus within the U. S. higher education community about the meaning of certain terms pertaining to resource allocation, as well as a general consensus about certain methods and processes for channeling financial resources into specific programs and projects.

Budgetary Concepts and Terms

For the layperson, the terms budget and allocation are often confused. Although the two terms are certainly related, and often synonymous, there are differences that one should be aware of in order to gain an appreciation of the resource allocation process.

Broadly interpreted, the term budget represents both an institution's revenue sources and its expenditures. For public institutions, this side of the coin is usually comprised of legislative appropriations; tuition based on the number of credit hours and level of courses taken; contracts and grantswhich comprise revenues received from external sources for research and certain types of off-campus program development; auxiliary operationswhich refer to on-campus operations that are self-supporting, for-profit enterprises (such as the campus bookstore, cafeteria, and laundry); and local funds. Local funds, particularly within public universities, refer to those revenue sources not kept within the state treasury, but within local banks. Local funds may be comprised of fees and assessments charged against students for the support of campus-wide student activities, intercollegiate athletics revenues, concessions, and financial aid monies.

Taken together, these revenue sources make up an institution's operating budget. They represent the totality of monies required to finance the institution's normal and recurring expenses (its core operations). However, this is not the complete picture, for the operating budget does not include fundraising revenues, which are monies donated to the institution by private donors, usually for specific purposes (such as endowed academic chairs, athletic scholarships, or a new academic program that is acceptable to the institution and a priority of the donor). Although fund-raising revenues have become ever more critical for institutional operations, they are rarely considered part of the traditional operating budget.

Expenditures represent the most common understanding of the term budget. In this sense, the budget formally represents the institution's strategic priorities and associated costs. That is, the budget is a detailed plan for expending revenues for various institutional purposes. Moreover, these purposes are, or should be, focused on long-term strategic imperatives that parallel and support the accomplishment of the institution's most critical needs and aspirations.

Traditionally, expenditures for the operating budget fall into certain main categories that apply to both public and private institutions. Certainly, the largest slice of the budget pie is earmarked for instruction and research (I & R)the core activities of any college or university. At Florida State University, for example, approximately 70 percent of the operating budget is designated for I & R purposes. Other large slices of the budget pie include administrative support services, such as centralized computing and accounting services; student services, such as the registrar's office and financial aid; plant operations and maintenance, including grounds, building services, and utilities; and libraries.

Expenditures from the operating budget are generally unrestricted. That is, there is some flexibility in allocating resources within and between the various categories that make up the operating budget. However, there are also restricted budgets, both within and external to the operating budget. Restricted means just thatmonies can only be expended for strict, narrowly defined purposes. For example, within I & R, a public university could receive a restricted legislative appropriation to fund a Title IX (gender equity) program. Likewise, restricted budgets outside the operating budget may include monies earmarked for sponsored research or financial aid monies received from external sources, such as the federal government.

For most core operations, whether financed by unrestricted or restricted budget expenditures, one should be aware of exactly how the monies are earmarked within the major expenditure categories. Generally, the monies fall into three main activities: (1) salaries and benefits, which are certainly the most costly activities; (2) capital outlay, which refers to major purchases of expensive equipment, such as computer systems; and (3) expense items, which include less expensive items and continuing costs such as office furniture, service contracts, expendable supplies, and travel.

One critical budgetary category that is not considered a part of the traditional operating budget is fixed capital outlay, which comprises the monies earmarked for major construction and renovation projects. The auxiliary budget, also kept separate from the core, concerns the receipt and expenditure of monies obtained from revenue producing campus enterprises (e.g., a bookstore). Institutions with medical schools and teaching hospitals often have separate budgets for these purposes.

Some institutions have service-center budgets, which refers to certain centralized services such as photography, printing, and copying. These services are not financed by operating budget expenditures. Rather, units under the umbrella of the service-center budget are reimbursed for their services by charging operating budgetary units, which, in turn, pay the service-center unit from operating budget expenditures, usually from the expense category.

Allocation Concepts and Terms

For the purpose of understanding the differences (and nuances) between the concepts of budget and allocation, one could say that the formal budget is the architecture (or basic plan per category) of how monies will be expended. Allocation, however, refers to the actual funneling of dollars to various units within an institution. In some instances, allocation flows will exactly mimic the expenditure categories. However, were this always the case, the descriptive analysis of budgets and allocations would end here. Rather, allocations often do (and should) have an element of flexibility built within them to reflect changing environmental conditionsincluding both internal and external environments, such as political circumstances, economic exigencies, and the strategic direction of the institution.

Although most institutions do permit some flexibility within their allocation decisions, many eminent higher education leaders, such as Dr. James J. Duderstadt, the former president of the University of Michigan, have publicly noted that far too many allocation decisions have become overly mechanistic. This has become particularly true within large, public institutions, which have also publicly expressed their collective concern over the ineffective and inefficient ways that monies are allocated. In addition, the National Association of College and University Business Officers (NACUBO) has also publicly expressed concern about the deficiencies currently inherent within internal allocation systems and processes.

Before discussing normative issues concerning how such deficiencies may be corrected, one must first understand the basic processes of allocations, particularly within the unrestricted I & R category. Historically, both academic and administrative units have relied upon incremental budgeting for determining allocations. Incremental budgeting simply means that the unit will sum the dollars contained within its current (annual) salary and benefits, capital outlay, and expense activities, and then increase the sum by a percentage to cover inflation and other expected cost increases. Incremental budgeting certainly simplifies the allocation process and facilitates accounting. With limited exceptions, incremental budget requests are accepted as forwarded to the central budget authority, funds are allocated according to the three major activities, and the unit lives within the allocations. At some institutions, academic and administrative units, with approval of a central budget authority, are able to transfer a minimal percentage of funds among salaries and benefits, capital outlay, and expenseif critical exigencies so demand. Nevertheless, this type of allocation system remains basically static.

The problem with static allocation systems is that they are inherently unable to anticipate change. Duderstadt duly notes that within large public universities, legislative appropriations, in terms of real dollars, have continuously diminished since the 1970s. Diminishing public appropriations, coupled with the opportunities and threats posed by a volatile environment, limit an institution's ability to adapt. During extreme economic situations, static allocations based upon incremental budgeting could actually spell the death of a public institutions' major academic offerings.

Another allocation process, often coupled with incremental budgeting, is formula-based allocation. This can be more flexible than simple incremental budgeting, because such formulas are usually based upon total credit hours or full-time head count per academic unit. This type of allocation process rewards those academic units that are most popular with students, and therefore does provide flexibility to fund those programs that are most in demand. Conversely, if an academic program is critical to a university's mission, but does not attract large numbers of students, it is automatically punished by formula-based allocations. In short, this is a market-based allocation process. While a for-profit organization can and should allocate its resources into the maintenance and expansion of its most profitable offerings, higher education institutions are striving for both tangible and intangible successes that may not necessarily be popular among students.

Colleges and universities, recognizing the inadequacies of incremental and formula-based budgeting, have enacted certain allocation adjustments to enhance flexibility and the quality of certain programs. At one university, for example, a 1 percent flat tax was charged against the allocations to all academic units to replenish a central reserve fund and enhance certain graduate programs. However, according to a report by that university's provost, this type of allocation mechanism proved itself insufficient to meet most challenges facing the institution.

In order to meet institutional objectives, and depending upon the authority granted to an institution by its governing board or its state legislature, an institution may be required to reduce allocations in one area to cover allocation demands in another. In order to meet the salary needs of the faculty, for example, resource allocations may be significantly diminished for libraries, computing systems, or facilities maintenance.

Flat taxes and other short-term options, such as hiring adjunct faculty or downgrading positions, can only operate at the margin, however, because not enough financial resources are generated, particularly on a long-term basis, to solve problems resulting from a lack of allocation flexibility. Similarly, wholesale raiding of funds from one allocation category to fill the coffers of another, if permitted, can only serve to weaken the entire university structure over time. Whether the allocation process is incremental, formula-based, or stopgap in nature, such processes focus only upon short-term, year-to-year allocations.

In 1999, Drs. Edward Ray and William Shkurti, the provost and senior vice president for finance, respectively, at Ohio State University, succinctly stated the problems accruing to that particular institution as a result of allocation inefficiencies:

  • Current practices were not supportive of the instructional mission.
  • Current practices were not supportive of the research mission.
  • Current practices did not provide sufficient incentives to reduce costs and/or generate additional revenues required to address academic priorities.
  • Current practices did not provide sufficient accountability for the costs of individual unit decisions that impact the entire university.

Achieving Normative Consensus

The problems inherent within traditional budgetary and allocation processes indicate the need for a new approach. Notwithstanding the fact that public institutions are further hampered by legislative mandates, private institutions also face the same problems inherent within incremental and formula-based allocations.

The challenge facing higher education is to embrace new philosophies and outlooks that take a long-term, wide-ranging view of what the institution is, what it should be, and how it can move from what is to what should be.

Appropriate, sufficient, and equitable resource allocation processes simply can no longer be based on what worked in the past. In this sense, most colleges and universities have embraced strategic planninga long-range, holistic examination of what the overall mission of the institution should be; in other words, a vision. To better define this vision, one must further ascertain the specific goals that should be set to accomplish the mission, and what environmental factors existinternally and externallythat can either enhance or inhibit the accomplishment of the vision. Specific questions need to be asked, such as: What does the university plan to accomplish over the next several years? How does the university plan to accomplish its goals and objectives? What resources are needed to carry out this plan? What are the funding sources from which the institution can obtain the necessary financial support?

To best answer these questions, institutions should first examine their decision-making structures. Colleges and universities are not pyramidal, hierarchical structures ruled by an autocracy at the top that transmits decrees downward through the chain of command. Conversely, colleges and universities cannot be anarchistic organizations where decision-making is randomly conducted by individual units. The problem, thus, is to create a decision-making structure that seeks consensus through participation.

At one Eastern university, for example, allocation decisions remain the basic prerogative of university executives, such as the president, provost, vice president for finance, and the deans. Nevertheless, to reach its highest-priority strategic objectives, faculty and staff members from colleges and departments are invited to submit their own ideas on how best to achieve the institution's overall mission, long-term strategic initiatives, and specific goalsall within the context of maintaining and enhancing the quality of priority programs identified by strategic planning. Specifically, faculty and staff members are requested to review the allocation and adequacy of resources vis-à-vis the quality of programs relative to peer institutions, the centrality of programs to the university's mission, and the cost-effectiveness of programs relative to the best practices of higher education and the private sector. To facilitate and direct this endeavor, a university-wide committee, the Strategic Plan Advisory Committee (SPAC) was formed. SPAC not only identified allocation problems in detail, it helped develop a long-term, multiyear plan that will enable the university to respond to special opportunities and eventually solve the most basic and continuing allocation problems.

Similarly, at the small, private-college level, Wheaton College in Massachusetts has set up a formal groupthe Budget Advisory Committeesimilar to the SPAC. Wheaton's committee, consisting of faculty and staff members, reports directly to the college president, and operates with the long-term view that allocations should be treated as strategic investments, not simply as annual costs. Hence, it has determined that allocations should regularly include reallocations from lower priorities to higher priorities, and that cost savings should be actively pursued in order to increase the college's strategic flexibility.

In short, if realistic and successful allocation processes are to be developed and accepted throughout the institution, structural arrangements must be designed to facilitate the participation of stakeholders and attainment of consensus.

Once consensus on basic allocation-decision parameters is achieved, a second consideration includes the formal allocation structures and processes that might be adopted. To help identify these means, decision-makers and participants in the decision-making process should be provided with feasible and workable alternatives.

One alternative, as suggested by Duderstadt, is an institution-wide, integrated resource-allocation model he calls Responsibility Center Management. Resource-allocation decisions are shared between academic units, administrative units, and the central administration. After determining strategic priorities, this alternative allows critically-important units to keep the resources they generate, makes them responsible for meeting costs they incur, and then levies a tax on a unit's expenditures to provide a central pool of resources for supporting central operations and facilitating flexibility funding. This alternative has the potential to reduce some of the inequities and inefficiencies inherent within formulaic or incremental allocation processes.

Another alternative is substitution, or the elimination or reduction of noncritical activities to release allocations for more critical, strategically oriented activities. This alternative not only reallocates resources to those programs deemed most critical for strategic purposes, it also alerts the public and the institution's stakeholders that the college or university has taken cost effectiveness very seriously.

Other structural and process alternatives for resource allocations include: differential tuition rates based upon program popularity; using foundation allocations to replace traditional allocations; permitting the carry-over of surpluses from one year to another; and permitting the most productive research units to retain a large portion of the overhead (indirect) costs assessed against their research awards. The point is that viable and reasonable alternatives should be presented at the start of the analysis in order to preclude time being wasted.

Conclusion

Traditional budgetary and resource allocation procedures that have been utilized for decades in America's colleges and universities are rapidly losing their functionality. Indeed, reliance upon their continued use can cause irreparable damage to the system of higher education.

Budgets and resultant allocations are complicated subjects. Because of their complexity and a reliance on the fact that they worked well enough in the past, inertia exists. However, in light of the volatile higher education environment of the early twenty-first century, the increasing inequities and inefficiencies of current systems and processes, and greater demands for accountability by legislative bodies and institutional stakeholders, structures and procedures for budgeting and allocating financial resources must be re-examined. The task is not easythe problems are complex, and consensus about what should be done is difficult to attain. Nevertheless, to ignore the problem can, and will, have a negative impact upon public and private higher education systems.

See also: Accounting Systems in Higher Education; Finance, Higher Education.

bibliography

Callan, Patrick M., and Finney, Joni E., eds. 1997. Public and Private Financing of Higher Education: Shaping Public Policy for the Future. Phoenix, AZ: Oryx Press.

Duderstadt, James J. 2000. A University for the Twenty-First Century. Ann Arbor: University of Michigan Press.

Meisenger, Richard J., Jr., and Dubeck, Leroy W. 1984. College and University Budgeting: An Introduction for Faculty and Academic Administrators. Washington, DC: National Association of College and University Business Officers.

internet resources

Ray, Edward J., and Shkurti, William J. 1999. "University Goals and Resource Allocation." <www.rpia.ohio-state/Budget_Planning/html>.

Schwartz, John E. 1999. <http://w3.Arizona.edu/~provost/issues/issues-5.html>.

Southern Illinois University. 2001. "What Is RAMP?" <www.siu.edu/~budget/rampint.html>.

University of Maryland-College Park. 1998. "Rationalizing Resource Allocation and Administrative Operations." <www.inform.umd.edu/EdRes/provost/StrategicPlanning/SPAC2_IV_Rationalizing.html>.

Wheaton College. 2001. "College Priorities for 2001-2002." <www.wheatonma.edu/admin/finance/RA/Prior.html>

John R. Carnaghi

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Decision-Making in Schools, Applying Economic Analysis to

DECISION-MAKING IN SCHOOLS, APPLYING ECONOMIC ANALYSIS TO


In the 1999 through 2000 school year, spending for all levels of education amounted to $646.8 billion. According to the National Center for Education Statistics, of this total, $389 billion was spent for K12 education and the remaining $257.8 billion was expended by postsecondary institutions. Despite the substantial financial commitment to education, the impact of economics on the way educational institutions allocate and use their resources has been remarkably limited. Economics is concerned with obtaining the best possible outcome from a limited budget, and thus seems an ideal approach for dealing with how to allocate resources within schools. Although economists are beginning to analyze educational problems in increasing numbers, they have yet to make major inroads in improving educational productivity. This article describes ways in which economic analysis could be used to improve decision-making in educational institutions, and to inform the allocation and use of educational resources.

Even though virtually all educators believe that additional resources will lead to higher student performance, it remains unclear how best to spend dollars to achieve that goal. As a result, demands for more money, absent a well-reasoned description of how the money will be used, does not build confidence that moneyby itselfwill make a difference.

Researchers have used production functionsa statistical approach linking outcomes with specific inputsto understand how money matters. To date, this research has been inconclusive with some arguing that money matters and others suggesting a systematic link between higher levels of resources and more money does not appear to exist. This stems in part from disagreement over the proper outcome of schooling.

Traditional allocation tools like costbenefit analysis are infrequently applied in educational settings due largely to the difficulty of placing a monetary value on the outcomes or benefits of education. Henry M. Levin and Patrick McEwan suggest that linking costs to some measure of performance, or effectiveness, is a better approach for education. Under this model, the cost per unit gain of achievement is estimated so that programs that are more efficient, or cost effective, can be identified and chosen.

Eric Hanushek argues that the proper incentives for better performance and efficient use of educational resources are not in place, and that holding schools accountable for student performance is essential to use more effectively existing and new money. Improvement of student performance, with or without new funds, requires improved decisionmaking in the following four areas.

  • Reallocation of existing resources
  • Incentives for improved performance
  • Development of the concept of venture capital for schools and school systems
  • A more market-based budgeting environment

Reallocation of Existing Resources

Regardless of what impact additional funds might have, it is important that existing resources be used as efficiently as possible. In many districts it may be possible to reduce class size through different assignments of teachers throughout the district. To the extent that smaller class size improves student performance, these changes would offer an improvement in student performance at little or no cost.

Before seeking additional funds, schools may investigate other ways to restructure what is done with current funds. Allan Odden and Carolyn Busch argue that schools can find additional resources through a combination of creative use of categorical funds, elimination of classroom aides, and reallocation of resources, such as the elimination of one or two teaching positions. Although some of these options may result in larger classes, or fewer teachers, the more intensive use of staff and greater professional development activities available have resulted in improved student performance in many of the schools that have adopted this approach.

Incentives

The use of incentives to encourage schools or school districts to allocate resources in ways that lead to improved student performance is not a new idea. Unfortunately, the incentives that seem to have the most success have been sanctions. Schools faced with threats of intervention often act quickly to improve performance rather than risk the stigma of a sanction. Conversely, many positive incentives have been less successful. For example, high-performing schools are often granted waivers from state regulation in exchange for success. In this case, the regulatory system loosened constraints that may have made the organization successful. Perhaps the more appropriate incentive would be to provide such waivers to under-performing schools with the hope that increased flexibility would lead to improvements.

Hanushek argues that the incentives currently in place in schools do not encourage teachers to work towards improving student performance and therefore need to be changed. He suggests that there is not sufficient awareness of positive performance incentives, and that more experimentation and research is needed.

Venture Capital (Equity)

One problem of education in the early twenty-first century is that once funds are appropriated to a school or program, they become the possession of that entity. In a study of the costs of implementing California's "Caught in the Middle" reforms for middle schools, published in 1992, David Marsh and Jennifer Sevilla found that the annual costs of restructuring schools to meet the requirements of this program were between 3 and 6 percent higher than current average expenditures per pupil in California schools. However, they also concluded that the first year start-up costs amounted to approximately 25 percent of annual costs. The problem schools face is finding those start-up funds. Often such funds are not available for all schools in a district, and schools receiving such funds treat them as a continuous source of revenue. Yet if such funds were rotated among schools, it would be possible to institute new programs in all schools over a few years.

Related to the concept of venture capital is the concept of revolving funds. This notion offers a way for school districts to deal with large purchases, like computers, that occur on a regular but nonannual basis. Budget procedures in school districts do not reward schools for saving resources in one year to make large purchases the next year. A school that receives a sum of discretionary money in one year is likely to lose any of the funds it has not expended by the end of the fiscal year. As a result, schools are often unable to make a large coordinated purchase.

A solution to this would be a revolving fund in the district to pay for such purchases. Schools would receive large appropriations of funds for such purchases once every few years. Finding a way to use the money in a revolving fashion would facilitate continued improvements in educational programs. The major problem is determining who gets the venture capital funds first and who has to wait. In many large districts, the superintendent publishes lists of the best- and worst-performing schools, and such lists could be used to prioritize the allocation of these funds. Another issue is the equity of the distribution. Although some schools will get more funds one year than others, over the established time period, all schools will receive an equal amountone simply has to accept the idea that equity is measured over some time frame, and not on an annual basis.

Market Approaches

Many reformers call for market-based changes in the organization of schools. There are many ways to introduce the market into the educational arena, but most of these fall under the heading of school choice. Public school choice can be considered as either an intradistrict or interdistrict choice, and these can be broken down further into the various types of programs in each category. Two other types of choice involve the blurring of the line between public and private education: private school vouchers and privatization of former public schools.

Intradistrict choice programs, by definition confined to one school district, grew largely out of an attempt to desegregate schools, rather than to provide competition or parent choice. The first of these programs is called controlled choice, where districts created models for assigning students to schools outside of the traditional neighborhood school model as a way of reducing segregation. A second type of intradistrict choice program is the magnet school. Magnet schools were designed to attract white students to schools with high minority populations, often located in heavily minority communities.

The newest model of intradistrict choice is the charter school. With the development of the charter school, the purpose of the choice models shifted away from desegregation to a focus on providing parents with the choice to send their children to schools that may be less regulated than their traditional neighborhood school. These schools operate under a charter between those who organize the school (typically teachers and parents) and a sponsor (typically the local school board or state board of education).

Interdistrict choice programs allow the transfer of students between school districts. Although interdistrict choice programs also grew out of attempts to desegregate, they always had the goal of increasing parental choice as well. Many states allow interdistrict choice through open enrollment policies, which vary from state to state; some states mandate that all districts have open enrollment while others allow districts to choose whether they wish to be open or closed.

Perhaps the most talked-about form of choice program is the voucher program. Voucher programs can be organized in different ways, but the basic idea is to give some children access to private schools by issuing vouchers to their families, which the families then give to the school in lieu of a tuition payment. Often these programs have the intention of allowing low-income students to go to schools they could not otherwise afford to attend, although vouchers are not necessarily limited to those in poverty.

A final market-based approach is the privatization of schools that were formerly public. This is also a relatively new approach, and one that arose largely out of a demand for strategies that could save failing schools. The argument is that if public education functions like a monopoly (a firm that has control over its price and product) because it is not subject to competition, it has little incentive to function efficiently. By introducing some competition through privatization, schools would be forced to provide higher-quality education at a lower price.

Recent efforts to collect resource data at the school site and even student level may lead to enhanced knowledge of how resources impact student outcomes. To the extent that such knowledge is applied to decisions about how schools are operated, the long-term impact may be improved educational productivity through enhanced and informed decision-making.

See also: Public School Budgeting, Accounting, and Auditing.

bibliography

Hanushek, Eric A. 1994. Making Schools Work: Improving Performance and Controlling Costs. Washington, DC: The Brookings Institution.

Hanushek, Eric A. 1997. "Assessing the Effects of School Resources on Student Performance: An Update." Educational Evaluation and Policy Analysis 19 (2):141164.

Levin, Henry M., and McEwan, Patrick. 2000. Cost Effectiveness Analysis: Methods and Applications. Thousand Oaks, CA: Sage.

Marsh, David, and Sevilla, Jennifer. 1991. Goals and Costs of Middle School Reform. USC Center for Research on Education Finance Policy Brief. Los Angeles: University of Southern California, Center for Research on Education Finance.

Odden, Allan, and Busch, Carolyn. 1998. Financing Schools for High Performance. San Francisco: Jossey-Bass.

internet resource

National Center for Education Statistics. 2001. "Digest of Education Statistics: Table 31." <http://nces.ed.gov/pubs2001/digest/dt031.html>.

Lawrence O. Picus

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