The University Record, November 19, 1997
I am grateful to Lou D'Alecy and the Assembly for providing me with this opportunity. I want to begin by thanking the many groups and individuals who have helped to develop my thinking on the University's budget: the VCM Faculty Oversight committee, t he Advisory Committee on University Budgets (ACUB), the Financial Affairs Advisory Committee, the OVPR Committee on VCM, The Academic Program Group, the Budget Administrators' Group, my colleagues Lester Monts and Pamela Raymond, many other faculty member s, my colleagues among the Executive Officers, particularly Robert Kasdin, and of course, Lee Bollinger. Most importantly, this is a thoroughly joint effort with Paul Courant, and we have depended throughout the last two months of discussion on the expertise and thoughtful commentary of Marilyn Knepp .
The topic of this speech is the evolving budget system of the University. Or, more precisely, it is what we believe we should do with the current budget system in order to serve the academic purposes of the University. Therefore, my speech today will be as much about those purposes as about the details of our budgeting system. I will articulate here a set of principles about the academic purposes of the University and the core commitments of its faculty and students. Having done so, I will also present a set of reflections on the cur rent budgeting system (VCM), with some proposed changes to it (including changes to its name) that we are ready to firmly stand behind, precisely because they articulate so closely with these core purposes and commitments.
At the same time, however, we also recognize that budgets live in their details, and some of the suggested changes that I will describe today - especially those that serve to simplify the current system and to focus attention on creating appropriately-tuned budgets for central services and realizing savings to be used f or academic purposes - will provoke disagreement and thus require some time for digestion and reflection. We believe that we have a good plan in these regards but nonetheless, we are open to the possibility that others will provide information that chang es our minds. Therefore, we intend to announce a "waiting period" for reflection, feedback, and discussion, from now until the end of the semester, after which time there will be genuine need to get on with the business of actual budgeting for next year. If you have comments please e-mail them to firstname.lastname@example.org.
Having made clear then that at least some part of what I will say today is only presumptive (and will not take effect at the stroke of midnight), let me start with the parts about which I am most sure - that is, those that concern our academic commitm ents. In our view, a good budget system serves (not defines) these commitments - what the faculty and students most want to do at Michigan is where we must start-- and so our task is to be clear about the commitments, and then to configure the budget so as to make these "desired doings" as affordable as possible.
Before considering the academic commitments that we believe our budgeting system must support, let me take a slight detour to discuss the centrality of faculty compensation and the affordability of student tuition to a successful University budget. Although I will not be focusing on them today, we do not mean to shortchange the importance of those tangible resources. These will be the top ics of future speeches. Today I want to concentrate instead on how tangible institutional resources (those garnered through the hard work of regents, legislators, students, parents, faculty and staff) can be critically directed toward our academic commitm ents. To paraphrase the great moral philosopher and economist, Amartya Sen, quality of life depends critically upon what a person can manage to do or be - the valued functionings he or she can achieve in leading a life. We must worry about what faculty and students can manage to do at Michigan.
One way to approach the question of academic purposes or "desired doings" is to consider the commitments that are treasured at Michigan and the aspects of University life which make people want to be here. Phil Brickman, a wonderful Michigan social psychologist, once characterized commitments as living in the realm bet ween what one wants to do and what one has to do. Accordingly, a good budget system should address both what we personally want to do and what is needed to maintain a worldclass institution.
In keeping with this view, we suggest three general forms of commitments: (1) those that are local in nature and concern one's own work, (2) those that move out of one's local academic neighborhood to involve collaborations with others, and (3) those in which one may participate only indirectly as they are distributed across the campus and constitute the public life of the University.
These are readily concretized by considering the benefits to faculty and students of opportunities to participate in the life of a first-class department or a cutting-edge research project; moving then to the excitement generated when a discipline is challenged in collaborations that cross traditions (be they in jointly taught courses, research, performances, or community-service learning projects), and ending with the expansiveness provided by those opportunities that are held in common for the whole University (from the library to the football stadium to Hill Auditorium).
The nice thing about commitments is that they can be real or virtual, and the same benefits to well-being can accrue. We are happier at Michigan when we know that a lesser-known language is still taught here or a concert has taken place, even when our happiness comes only from basking in reflected glory, not actual participation. We take pride in the football team, even though few of us have the talent to participate directly. Faculty and students want to be connected to their disciplinary or departmental homes, to the collabo rations that extend beyond those local boundaries, and to their common fate as citizens of the University.
Of course, the tangible resources available for these purposes are not infinite, so in daily practice a good budget system must support those who have to make thoughtful choices about what opportunities to enhance or forego. (That we cannot do everyt hing we want is implied by Harold Shapiro's remark that "there has never been enough money to satisfy the legitimate aspirations of a truly enterprising faculty or administration.") Therefore, our systems of budgeting and planning should make clear what is possible without artificially re stricting what is possible.
Taking these assumptions about local, collaborative, and widely distributed commitments as constituting the core of our academic purposes, we turn now to asking how well our current budgeting system serves these purposes.
VCM is an example of a budgeting and management approach called "Responsibility Center Management," or RCM. Like most RCM systems, VCM does very well at supporting the first of the three domains of participation and commitment that we identified above -- the commitment to one's own work, participating in the life of one's department (or institute, or museum, or school or college). T he incentives that VCM provides (by allowing control over revenues and responsibility for costs) enable deans, directors, and other administrators who are reasonably close to the substantive action of students and faculty to make well-informed choices ove r a wide range of possibilities. This is VCM's great strength, and we find the case for keeping it intact to be compelling.
It is worth noting that the purpose of RCM systems is not to minimize cost in a narrow sense, but to assure well-informed choices and cost- effectiveness. This formulation takes a broad view of cost (emphatically including demands placed on the time and effort of faculty, students, and staff, in addition to dollar cost) and of effectiveness (emphatically including difficult-to-measure but vital intellectual outcomes, as well as such things as credit hours.)
Budgeting and allocation of space is a good example. Until recently, in almost all Universities that we know of, space was treated by its residents as a free commodity, and the interest of every dean, department head, and faculty member was to get as much space as possible. Under RCM systems, where units pay for the operating costs (and sometimes also for the capital and long-term maintenance costs) of their space, the units can decide, for example, to give up some square feet in order to support more faculty and students. Space uses real resources that can be used for other things. Under RCM systems, the users of the space are in a position to weigh its value against the other things that the same money could buy. The same logic applies to other costs, including the costs associate d with changes in activities that generate revenues.
Having underlined the great strength of VCM, we turn now to some weaknesses that may impede our ability to support all three domains of academic commitments noted above.
Most, if not all, of these difficulties that we see have been recognized from the beginning, by the framers of VCM as well as by its critics. Nonetheless, the power of some of the negative incentives in the system, and the difficulty of counteracting the resulting behaviors that tend to weaken the ability of the University to define itself as a university community, seem not to have been fully appreciated in the implementation of VCM.
In our view, the fundamental flaw is that too much in the current budget system is allocated automatically, and too much of the authority to make choices and decisions is driven by incentives to enhance local well-being at the actual or potential cost of collaborative activity and attention to the University as a whole.
1. The language of VCM
Issues of language lie at the heart of many of the difficulties that many faculty and other critics have with VCM. First, while the framers of VCM had more subtle ideas in mind, the emphasis that the system places on revenue and cost have led many faculty members to infer that the University administration wants them mainly to act like members of a firm whose mission it is to maximize dollar profits . Such "bottom line" behavior would be a disaster for the University.
Moreover, although budgets are instruments of management, they are but one of many, and it is impossible for budgets that use automatic allocation mechanisms to articulate fully the purposes of the University. The phrase "Value-Centered-Management" i mplicitly claims too much for itself, leading both proponents and detractors to see the issues raised by the choice of budget system as being of higher stakes than they are or can be. Budgeting systems are not themselves academic policy. RCM-type systems do not prevent central initiatives and centralized systems do not prevent local initiatives. There are areas in which fairly automatic modes of resource allocation work well, and there are areas that require deliberation and even politics in the service of wise choices and good management. The name VCM, and the rhetoric that has surrounded its implementation, have stressed the automatic relative to the deliberative. We should be explicit that our budget system should help us to make choices, bu t should not itself make them.
Therefore, with these two objections in mind, we propose to change the name of the resource allocation system and budget model that we use from "VCM" to "the budget system and the budget model."
2. Support for valued but less profitable units and activities
RCM systems directly raise the question of the fate of units and activities that cannot expect to be self-supporting. From the very beginning, the Michigan implementation of RCM explicitly emphasized this problem, and urged that central resources (in the form of provost allocations) be directed to remedy it.
However, despite the explicit commitment to deal with the problem, the basic concern remains: under VCM, the ability to be self-supporting is more highly prized than it was under a centralized system, and this has fostered widespread insecurity. Therefore, it is essential to all of the levels of participation and commitment that we have discussed that the budget system allow flexible resources to support valuable activities that cannot be self-supporting.
As one way of achieving this end, we will work with the schools and colleges to develop long-term plans in which the Provost's allocation for each unit is articulated with the units' abilities to generate support from external sources. These plans sh ould be flexible -- although more concrete in the near years than in the out years. They will reflect the high priority we place on supporting valuable activities that cannot be self-supporting, and the high priority we place on giving due consideration to the consequences for the broader University community of units' activities.
These trajectories for the Provosts' allocations, which we will develop and revise annually in consultation with the units as part of the budget process, will add a deliberative component to the units' planning, allowing them to maximize the value tha t they get from the revenues that they generate through automatic features of the budget model. We reemphasize that one important principle guiding the Provost's allocation is that we have a happy obligation to support many activities well beyond the levels that can be supported by self-generated tuit ion, gifts and sponsored research.
3. Incentives for collaboration
The third set of objections to VCM stems from its tendency to weaken incentives for activities that require collaboration across units.
Research. In a centralized system, units have little incentive to seek external funds, including Indirect Cost Recovery (ICR) to support the overhead costs (as distinct from faculty salaries) of research. To correct this problem, VCM assigns ICR and the responsibilities that it is meant to support to the units where the relevant research is done. A problem arises when the allocation of ICR across units is not straightforward. Deans have an incentive to ask their faculty to make sure that grants are run through the home unit, and faculty, not surprisingly, tend to do what their deans want. Where there are real costs that can be incurred in one place or another, deans and program directors may engage in elaborate treaties to make sure that no one get s taken advantage of financially.
It is probably true that in most cases these difficulties have fairly natural solutions, with ICR divided according to faculty fractions and use of space on grants. However, many faculty report that they avoid interunit activities because the negotia tion costs may be prohibitively high.
Especially vulnerable to these kinds of difficulties are units (such as small interdisciplinary institutes and centers) that rely on faculty whose primary appointments are elsewhere. Especially troubling is the certainty that many faculty will decide that it simply is not worth it to make the effort to do collaborative work across units (such as those with joint appointments). This kind of preemptive behavior -- "gaming the system" -- leads to underestimates of the magnitude of the problems: It is always harder to hear the dog that doesn't bark.
Teaching. A similar set of problems occurs with collaborative teaching. Under the budget system that preceded VCM, units had little incentive to generate enrollments, and hence tuition. One of the great improvements in the new budget system is that i t makes the connection between teaching and the overall health of the University clear to everyone who has authority over budgets.
However, there is no ideal way to attach tuition revenues to teaching activity. At one extreme, all or most of revenue could follow the location of credit hours. This setup has a number of potential problems: (1) There is the possibility that some courses will be designed primarily as profit centers, based on expected popularity rather than academic merit. (2) There are incentives for schools and colleges to reconfigure their curricula along mercantilist lines, requiring t hat their students take many courses at home, and even duplicating offerings of other schools and colleges. On the other hand, there can be real benefits if schools and colleges use the credit-hour incentive to attract students from the campus in general to take advantage of opportunities that they are best qualified to provide.
The other extreme is to have tuition follow registrations. This solves the problems of mercantilism and potential pandering, but it also removes the incentive to provide broadly-pitched courses to students from other locations on campus. Additionally, it provides an untoward incentive to admit students and have them do as much of their work as possible elsewhere. Both extremes have advantages and pose problems.
The current policy has tuition following registration, so that incentives with regard to curriculum and teaching are analogous to incentives for research and ICR. Units now have no incentive to provide valuable courses that would appeal to students in other units. It would be desirable for interested LSA students to take courses in the School of Art, for example, but under the current version of VCM there are no mechanisms to support the cost of such teaching. The incentive is for deans to admit students and have them taught elsewhere, rather than to provide courses to students who come from other units.
Thus, in both teaching and research, the fiscal incentives under VCM are to minimize the extent to which units' activities provide benefits to other units on campus. We are a University whose distinctive strength derives from collaborative activity across the campus, yet we have instituted a budget system that penalizes deans for supporting such activity and rewards deans who penalize it. The problem is not, as has been suggested, that there is something wrong with our d eans. It is that deans, like everyone else, respond to the incentives that they face, and in the domain of support for collaborative activities, VCM has created bad incentives.
We will do what needs to be done in order to assure that the budget system's automatic incentives in opposition to collaborative work are countered, in both research and teaching, and to assure that the location of these collaborations be dictated by the intellectual merits, not by automatic rules regarding who gets financial credit for what. We do not yet know what financial resources will be required to accomplish these goals, and we have no interest in proposing formal programs -- "central initiatives" -- with formal application mechanisms. Rather, we want to assure our colleagues on the faculty and in the deans' offices that we are prepared to reallocate in the service of collaboration, and that we want to hear about their best ideas in both teaching and research.
Regarding teaching, we will use the Provost's allocation and other mechanisms to help units to support educational initiatives for their own students, and for students around campus. A great University offers many ways in which students in one school or college can benefit from activities undertaken in another. When good ideas require changes in the distribution of teaching activity across schools and colleges, we will undertake to move resources around to follow the ideas. We do not intend to do this by revising the tuition attribution formula. Rather, we will be open to proposals for changes in units' curricula, and responsive to the budgetary implications of such proposals. We will also be aware of changes in distribution of teaching across schools and colleges, and we will use this information in determining Provost's allocations. Finally, we expect to encourage joint appointments of faculty across schools and colleges as a mecha nism to encourage fruitful collaborations.
Similarly, on the research side, in collaboration with OVPR and with the active help of deans and directors, we will both provide resources and foster modes of operation that will simplify the assignment of ICR when there are disputes. We will also use the Provost's allocation and other resources to reallocate budgets to support units whose mission it is to foster collaborative research but that are disadvantaged in getting formal credit for ICR. Our goal here is t hat faculty, students, and others engaged in research see their advantage in finding the best collaborators and venues for their work, not in "gaming" the system so as to maximize ICR for one set of units or another.
4. Underproduction of public goods.
A similar set of problems arises with public goods -- activities whose consequences are broadly distributed across campus. Museums and libraries, the system of financial aid and the policy of recruiting a diverse student body, maintenance of walkways, and public safety are but a few of the many examples of public goods. Another public good, more subtle, is the general appreciation that Michigan is a University that is closely engaged with a stunningly large fraction of human knowledge and activity. (It is widely appreciated in academe that it is much harder to sustain a first-rate department when the Univer sity as a whole is not strong.) The key feature of public goods is that their benefits are widely available (although not, in general, uniformly appreciated) reaching well beyond the people and units that produce them.
The Provost can do several things to prevent the under provision of public goods. Where the public goods are best provided centrally, the Provost can use the resources at her disposal to provide such goods directly, by allocating resources to museums and libraries, for example, as well as to the physical, technical, and administrative infrastructure of the campus. Further, the Provost can use resources that she controls to reward units that act on behalf of the greater University, and to penalize units that are excessively inwardly-directed.
The resources necessary to assure deliberate attention to collaborative work and to University-level public goods will be reallocated from other potential uses. As a technical matter, this can be accomplished via reallocations from some central servi ce units, via changes in the Provost's allocation, or by increasing the University participation tax. We are not yet decided on the detailed budgeting practices we will employ, in part because we do not yet know how much money will be required to do the j ob. But we are committed to implementing a budget system that balances the whole of the University with its parts, a goal that will require an increase in the resources available for deliberative allocation.
None of these commitments solves the problem of how big the central administration should be, and how involved it should be in the activities of decentralized units. The question of "states' rights" has its analogue in the University, and, as in the larger society, the question raises both constitutional and poli cy questions. We make this point not because we know the right answer, and not because there are any straightforward implications for the budget system, but because it implies a continuing commitment to examine the appropriate mix between central and decentralized sources of authority and resources.
5. Rationalization of central service budgets.
In this regard, however, a fundamental problem that we do see in the current VCM system concerns the attribution of costs for central service units, (many of which are themselves public goods), including, among many other things, financial operations, the registrar, plant extension, recreational sports, the President's and Provost's offices.
Under VCM, the costs of centrally-provided services (and of some central units that are not primarily service units at all, such as the Bentley Library) are allocated to schools, colleges, research and auxiliary units according to some twenty-four dif ferent formulas. The formulas are generally based on numbers of students, faculty, and staff, and on expenditures of various kinds. These allocation formulas are inevitably somewhat arbitrary, and a remarkable amount of decanal attention has been paid to revising the formulas to more acc urately (or more favorably) reflect the pattern of use of the relevant central services.
Unfortunately in our view, what this system has done is focus attention not on questions of right-sizing the missions and associated budgets of each central service unit, but, instead it has locked us all into battle over each and every cost attributi on to each and every school and college - we have lost the forest for the trees, and meanwhile, we are no closer to rationalizing the budgets of central service units or to realizing significant cost savings for our academic purposes.
Most significantly, in this automatic cost attribution system, the formulas are not used in determining the budgets of the service units themselves. These are still determined centrally, and the formulas are used to allocate the centrally-determined total. Thus, if the Provost should decide to increase (reduce) the budget for, say, the Registrar, other units would automatically see decreases (increases) in their budgets according to the formula used to allocate t he dollar costs of running the Registrar's office. What looks at first glance to be something like a market really has none of the characteristics of decentralized authority and responsibility that make markets work well. Moreover, the system focuses att ention more on whether you (the unit's dean or director) should be paying that increased cost than on whether the central service unit is being managed and budgeted correctly. Because each school and college is most concerned about the set of units whose formulas have the strongest local impact, attention to the missions of the service units is diffused, and no one is attending to the question of whether the University at large is paying the right amount for each central service.
We believe that the budget system could be markedly improved by removing the entire cost attribution part of the budget model, and returning to a system in which costs and functions that are centrally controlled are also budgeted, evaluated, and defen ded centrally. (Where costs can be measured accurately, as in the case of utilities and a number of other costs of operating space, we will continue to charge the costs directly to users.)
Removal of attributed costs will greatly simplify the budget system, making it more transparent to users. More important, it will provide incentives to the Provost and the Chief Financial Officer to evaluate the performance of centrally budgeted unit s. Any savings will then become available for deliberate reallocation and return to the academic units.
In making this change, we will provide extensive data on the costs of the centrally-budgeted units, because our purpose is to increase the accountability of the central administration for the choices that it makes.
Because the financial costs of centrally controlled units are now budgeted via attribution to the Teaching, Research, and Auxiliary units, when we move the central units' costs back to the central administration, we will have to move the revenues that pay those costs as well. There are a variety of ways that this might be done. Our initial thinking favors increasing the University participation tax on all relevant units, while adjusting Provost's allocations for all units so that these changes in budget model would not themselves cause any immediate net impact on the resources available to any Teaching, Research, or Auxiliary unit.
All of these changes would allow debate on the substance and cost of what central units provide, without those debates being obscured by arbitrary formulas. With the CFO and the President, the Provost's office should be the location for much of that debate, and Robert Kasdin, Lee Bollinger and I have publicly committed to engaging it right away. The Advisory Committee on University Budgets is completing a set of procedures that will guide us in evaluating the central units and their missions. The quantity, quality, and scope of centrally-provided public goods (including financial aid policies) are appropriately determined via a deliberative process, subject to di scussion and political influences throughout the University community. Reclaiming formal responsibility for financing these services and policies should help to make clear to everyone where the responsibility lies. We expect, and indeed we will welcome, pressure to cut taxes and to improve efficiency. Governments (and University administrations) ought to be able to explain what they are doing and why; if they can't, they should be voted out of office.
Finally, we return to where we began - with the commitments of faculty and students to activities in these local, collaborative, and shared lives. A good budget system should support the opportunity for all of these commitments, while also emphasizing the necessity of deliberative decisions about how and where to sp end tangible and non tangible resources. Presidents, provosts, deans, faculty and students should all be committed to supporting these three domains of activity, and to making wise choices within and amongst them. We should always be looking for what is , in our view, really good and worthy of Michigan's attention, and then we should demand a budget system that is flexible enough to attempt to support it.
Sometimes, there simply won't be the resources to support such activity, much as we would desire to do so. That is a fact of life and we can comprehend it. We all understand that of the many things that enterprising faculty and students want to purs ue, only some small fraction can be supported at any given moment. However, it should not be the case, a priori, that any given sphere of commitments, for example, the local as compared with the publicly-shared, receives special weight in the allocation of resources. Rather, what a good faculty and student body deserves from us, we believe, is a budget system that makes a great idea possible, no matter the locus of its instantiation. Accordingly, the changes that we are proposing, and the aspects of th e budget model that we are preserving, are intended to provide enough resources to support good local, collaborative, and public activities, and, even more pointedly, to make us all aware that often we need to be creative in reallocating revenues and in offering funding for activities in those spheres that some would fervently like to pursue, though many would be unlikely to support.
We do, at the end of the day, live in a world rich in the exceptional activities it supports; not a world altogether described by market principles, in which the marketplace would determine which activities were rewarded and which were not. We want to reward those who can garner revenues for their commitments, and yet simultaneously have some room to embrace those whose commitments make all of us, not only those who can generate revenues, better as a University.
The revisions to VCM that we are suggesting, including the change in name, represent an attempt to keep touch with those commitments in all three domains of University life that faculty and students value; we want, most of all, to have the resources t o be light on our collective feet in supporting innovation - wherever it occurs, be it in a school or college, across units, or in some location that is both open to us all and not closely attended to by any one of us. We want to make sure that each of us who allocates substantial resources is held accountable for the opportunities forgone in any choice we make, even as we celebrate the University's ability to support good ideas wherever they reside. Of course, a budget system cannot ensure our good behavior, but we hope that the proposed changes encourage deliberation, and equalize somewhat the attention to different promising domains of activity in the life of the campus.