Potential Benefits and Problems of Implementing the Responsibility Centered Budgeting Model in Higher Education

Colleges and universities are experiencing cuts in their operating budgets all across the United States. As measured by the Center on Budget and Policy Priorities, the overall state funding for public two-year and four-year colleges in the 2017 school year, after adjusting for inflation, was about nine million dollars below its 2008 level (Mitchell, Leachman, & Masterson, 2017). This funding decline, as argued by scholars, may contribute to a rise in tuition and student fees, a reduced quality of instruction, a freeze in faculty hiring, or even a delay in building repairs inside the campus (Dick, 1993). While facing increased challenges from balancing revenues and expenditures, colleges and universities are looking for ways to explore new approaches to budgeting. One innovation is the Responsibility Center Budgeting (RCB) model, sometimes referred to as Incentives-based Budget Systems (IBBS) or Value Centered Management (VCM) in literature. Borrowed from management practices, the RCB model aims units within institutions (Hearn, Lewis, Kallsen, Holdsworth, & Jones, 2006).

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Traditionally, higher education institutions in the U.S. have employed a centralized structure for both budgeting and the decision-making process (Deering & Sá, 2018). This centralized approach places the responsibility for both budgeting and decision-making for the entire institution on the central administration (Deering & Sá, 2018). Senior administrators, under the centralized model, are expected to estimate future expenses of all the departments based on their previous experience or knowledge and set budgetary goals for revenue, expenses, and expansion.

Despite some advantages mentioned in the literature (Gibson, 2009), the traditional budgeting model is not without challenges. As demonstrated by scholars, to ensure the success of a centralized model within an institution, senior administrators must understand the complexity of each unit within the institution (Deering & Lang, 2017; Deering & Sá, 2018; Hearn et al., 2006; Heath, 1993). The central administration should, first, avoid setting inappropriate or unattainable budget expectations and, second, to accurately estimate the expenditure that each unit will need for both instructions and activities. However, due to the increasing complexity of the higher education environment, this centralized budgeting process often results in disenfranchisement at the unit-level, as the budget plan fails to address the unique needs of various units to achieve predictable success (Deering & Sá, 2018). More importantly, since people who are implementing the budget plans, such as deans, faculty members and staffs, are not involved in the decision-making process, they have less, or even no, incentives to minimize costs or maximize revenues (Health, 1993). Therefore, to increase budget autonomy at the unit-level and to prompt unit-level leadership became two critical issues that need to be addressed in higher education budgetary system, especially when financial resources shrink.

The RCB model, namely, is a framework that decentralizing the management and allocation of resources in higher education. Under the RCB model, the entire institution is divided into units, and revenues and costs are assigned to the units that originate them (Deering & Sá, 2018). Common-use campus resources, such as libraries, recreation centers and some campus amenities, are supported through taxation – a percentage that the central administration demand from the revenues from the revenue-generating units (Health, 1993). Since each unit is responsible for its own revenues and expenditures, extra funds will be allowed to keep within the unit while deficit is required to be made up in the next fiscal year (Vonasek, 2011). The motivation for the RCB is that academic officers, department chairs, and faculty members get to keep and utilize all revenues they generate above budget projections, and all members can directly benefit from the rewards of their labor and have more finances to strengthen their academic and research programs. The move to RCB model reflects the higher education community’s interest in more decentralized management approaches (Hearn et al., 2006).

Despite the good intentions behind the RCB model, scholars raised concerns on whether this innovation can move universities and colleges to new levels of financial creativity or whether deans, department chairs, and faculty members are likely to be further demoralized by being charged to be responsible for revenues and expenses (Heath, 1993). Moreover, how this budgeting process will influence instruction quality and students need to be further addressed as well. Therefore, this review, in the next two sections, aims to analyze the potential benefits and problems of implementing the RCB model by providing perspectives from both the proponents and the opponents.

Potential Benefits of RCB Implementation

 Whether or not universities should adopt the RCB model is still controversial. Proponents of RCB model claim that this model, as compared to the traditional centralized budgeting model, can encourage revenues and aligns with academic priorities within the unit (Deering & Lang, 2017; Dick, 1993; Hearn et al., 2006; Heath, 1993).

 In the RCB model, units generate revenue from student enrollments in the form of tuition, fees, and, in public institutions, state appropriations. Additional revenue can be generated through grants, contracts, and endowments (Hearn et al., 2006). By decentralizing the budgeting and decision-making process, unit deans, chairs, and faculty members are given the autonomy of allocating these revenues within their own unit and therefore, be motivated to generate more revenues. In other words, the old fiscal year philosophy of “if-you-don’t-use-it-you-lose-it” can be removed under the RCB model (Dick, 1993). Each unit is allowed to have overhead from all kinds of revenues returned to them, with the result not only of increased incentives to obtain more revenues, but with the result that the overhead will be spent in ways more directly related to unit development.

 In a study conducted by Deering and Lang (2017) based on data from 23 universities and followed up interviews of five public research universities located in either U.S. or Canada, the researchers found that the implementation of RCB model can increase unit revenues. Specifically, although participants did not mention a reduction in cost, 85% of the participants being interviewed reported gains in revenues (Deering & Lang, 2017). Similarly, in another study investigating the implementation of RCB model at 27 universities, deans confirmed that this model creates incentives for growth by rewarding units for increasing revenue and suggested that RCB is an effective budgeting model which allows them to work on all aspects of their operation (Kosten, 2009; Kosten & Lovell, 2011). These empirical findings indicate that, although the RCB model may not be able to reduce the cost of unit operation, it does motivate units to generate more revenues as a way to balance their budgets.

 Another benefit of implementing the RCB model is that it aligns with the academic priorities in colleges and universities. As mentioned by Kosten (2009), in most of the higher education institutions, the financial overhead will be used on research and other academic priorities, which, in turn, provide opportunities for faculty members to have more finances to strengthen their academic and research programs. Since RCB model is created based on a decentralized decision-making process, it can help deans understand the budgetary consequences of their decisions through the way of linking academic decisions with financial decisions. This means that, rather than relying on central administration for financial support, each unit can plan its budgeting according to its own academic needs and responsibilities (Hearn et al., 2006). Considering that the traditional budgeting model is criticized by its inability to predict each unit’s year-round budget accurately, the RCB model can address this issue by narrowing down the distance between decision point and implementation unit (Heath, 1993). Ideally, decision quality, especially decisions related to academic and research, can be improved because better information is available at the unit level and, generally, decisions can have a direct and consequential influence on unit outcomes.

As mentioned by Hearn et al. (2006) after interviewing three collegiate deans on the Twin Cities campus of University of Minnesota, the participants cited facilitating the implementation of needed academic reforms and creating an awareness of cost implications of actions as two benefits of implementing the RCB model. To be more specific, the participants indicated that the RCB model serves as a mechanism for maintaining academic priorities as all members in the unit are aware of what they can get back from the investment. Therefore, each unit under the RCB model can be motivated to promote its efficiency and effectiveness to those activities most involved in academic productivity (Hearn et al., 2006; Kosten, 2016).

Potential Problems of RCB Implementation

Opponents of the RCB model argued that this might bring some unintended consequences to higher education institutions, such as lowering the academic standards and encouraging competition rather than collaboration between units (Birnbaum, 2000; Kennedy, 1993). Unlike business projects that have a precise rate of return on investment, the return on investment of academic programs is less likely to be prepared to assume or even be quantified (Heath, 1993). Therefore, in order to address or to prevent a shortfall in finance, units can be aggressive in generating more income or cut program costs to balance the budget.

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In order to generate more income, institutions may strategically raise the faculty and student ratios by increasing average class size, lowering admission standards to admit less qualified students, increasing the number of required courses or simply by increasing the number of courses (Gros Louis & Thompson, 2002). Although these tactics would generate more revenues for units from student tuition and course fees, they would incur the quality of teaching and services that compromises or contradicts the mission of both the university and the unit (Hearn et al., 2006).

In order to cut the costs, institutions may intend to use cheaper instructors, such as part-time lecturers or teaching assistants, instead of hiring a full-time professor. As mentioned by Schuster (2003), although part-time instructors did not show a significant lower-quality in teaching, they are less accessible to students, bring less scholarly authority to their jobs, and less integrated into the campus culture. Upper division courses, which might provide greater intellectual growth and capitalize upon the expertise of full-time professors, could be replaced by lower level courses which would attract higher enrollment income (Dick, 1993).

 Moreover, as argued by Kosten (2016), the RCB model may encourage competition rather than collaboration among academic units. Units may be tempted by the RCB model to develop as much internal to itself as possible, such as course requirements, libraries, or computing centers, which goes contract to the initiate of the RCB that to improve the efficiency of expenditures of each unit. Meanwhile, duplication can arise when similar courses or services being provided under various units as a way to prevent capital outflow (Hearn et al., 2006). As each academic unit becomes more autonomous under the RCB model, internal competition may ensue at the expense of campus-wide goals and collaborative programs.

The conflict between units and the institution has been well documented in the literature (Gros Louis and Thompson 2002; Kirp, 2003; Lasher & Sullivan, 2005; Whalen, 1991). One study conducted by Deering and Lang (2017) found that, deans of the programs, who served as the decision makers, are encouraged to raise funds from private sectors, and implicitly persuade donors to restrict their gifts to particular purposes within their own programs rather than the programs of their fellow deans. As an unintended consequence, this will limit the fluidity of funding among academic units, which may harm some academic units, such as education and journalism, that have less capability to generate revenues (Deering & Lang, 2017).

 Opponents of the RCB model argued that this model only identifies those aspects of institutional performance that result in the display of revenues and expenses and omits most contextual information that is crucial to education but can hardly be quantified (Adams, 1997; Cantor & Courant, 1997; Deering & Sa, 2017). As mentioned by Birnbaum (2000) and Kennedy (1993), with such a strong focus on balancing revenues and costs, the RCB model may eliminate the development of some units, such as liberal arts, that are academically or socially important but can hardly generate sufficient revenues by themselves. Whether RCB model would remove the protection of high-quality programs that could not support themselves without funding from a central source is still under question (Kissler, 1997).

Conclusion

The literature to date regarding the RCB model has not reached a consensus on whether this model can benefit higher education institutions on balancing the budget or not. Proponents argued that the RCB model could return more autonomy to the department so that deans, chairs, and faculty members will be motivated to generate revenues and use money wisely (Deering & Sá, 2018). Opponents demonstrated that RCB model might lower the education quality or water down the curriculum as some departments may not able to generate sufficient revenues to cover the costs (Gros Louis & Thompson, 2002; Kosten, 2017). Meanwhile, it is also necessary to point out that little empirical research has been conducted on the benefits and challenges of implementing the RCB model (Hearn et al., 2006).

Acknowledging both the potential benefits and problems of the RCB model, some scholars argued that higher education institutions should make decisions based on the extent of each unit’s commitment (Hearn et al., 2006; Vonasek, 2011). Institutions that intend to implement the RCB model needs to make sure that each unit is fully committed to the process, along with an adequately sized, technically skilled, and motivated group of financial managers and administrators. Each unit needs to “buy-in” to this RCB model to make sure its success (Vonasek, 2011).

Equally important when implementing the RCB model is the human resources within the unit and the institution. Specifically, an institution’s administration must ensure that they themselves have sufficient human resources and leadership skills that will be required to engage in an open and equitable process of the RCB model implementation. Since each unit may encounter its own challenges during the implementing process and can be very different from other units, the central administration office needs to treat the units equitable but not equally, which requires a comprehensive design of the model implementation. A practical implementation of the RCB model demands the commitment of units as well as a full understanding of the RCB process by administrators in all levels – the institutional level and the unit level.

References

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