Increasing Central Fungible Dollars
Executive tactics to secure funding and garner buy-in for strategic priorities
John Workman, Managing Director
The aftermath of the recession and unfavorable demographic shifts have combined as a serious threat to traditional business models. Ensuring future growth and success will require most campuses to make significant strategic investments in themselves to recalibrate offerings and serve a wider student population.
Planned strategic investments vary by size and type at each institution, but all will require significant capital. And unfortunately, higher education has historically struggled to adequately fund important strategic investments, especially compared to other industries.
The first, and likely most damaging, factor affecting investment in strategic priorities is decelerating tuition growth. Across the 1990s and early 2000s, most institutions funded strategic priorities primarily through enrollment growth. However, as tuition is now slowing or even declining at most institutions, tuition growth alone is not providing the resources necessary to fund high-priority initiatives.
This study outlines eight tactics to help institutions fund critical investments by increasing central dollars, organized into four main categories.
Reallocate existing dollars
1. Iteratively migrate to gainsharing policy that governs unit surplus
The first tactic to create more central fungible dollars is to migrate to a gainsharing policy that governs unit budget surpluses. This tactic represents a significant opportunity to reallocate resources at most colleges and universities. Many institutions utilize a 100% carry-forward policy, where units retain all year-end surpluses. However, this often results in units accumulating massive reserves while the center struggles for funds.
2. Direct portion of savings from vacant lines to central fund
The second tactic to increase central strategic resources is to reallocate a portion of salary dollars tied to academic unit positions (particularly faculty) as they become vacant. Clearly the most impactful approach would be to reclaim vacant salary lines centrally. However, the ultimate owner of faculty lines varies from institution to institution.
While reverting faculty lines to the provost is the most flexible option and allows lines to be redeployed to areas of greatest demand on campus, it is the least common approach. That said, this policy is more common today than 2008, when EAB last conducted this survey and found roughly 10% of institutions pulling vacant lines to the provost.
3. Gradually increase percentage of budget dedicated to strategic priorities
The third tactic to generate central fungible dollars is reallocating a fixed percentage of academic unit budgets to the center. There are two options for this “unit tax” approach. First, with the top slice approach, the institution withholds a percentage of revenue for strategic priorities and creates a budget around the remaining funds. Conversely, with bottom slice, the institution allocates out budget dollars as normal and then pulls back a fixed percentage of each unit’s budget.
Grow highly fungible revenue streams
4. Tie nontraditional revenue streams to strategic funds
While the first three tactics focused on ways to reallocate dollars from academic units to central strategic priorities, the next two tactics focus on opportunities to grow revenue. Of course, most revenue colleges and universities generate is committed to cover fixed costs like labor, capital, and debt service. Therefore, increasing central strategic dollars depends on pinpointing more flexible revenue streams.
5. Optimize auxiliary contribution by increasing efficiency and growing operation
The fifth tactic is a specific source of flexible dollars—auxiliary revenue. The vast majority of non-athletic auxiliary units generate enough revenue to cover their own costs and debt service. Many also return a portion of surplus revenue to central administration, though the budgeting mechanism varies.
An EAB survey found that 29% of auxiliary units pay a flat fee or a fee based on a cost allocation algorithm to cover their portion of central services, 31% return a fixed percentage of revenue to the center, and 2% use a combination of both. Nearly a quarter (24%) of auxiliary units return all surplus revenue to the center.
Absent specific state restrictions, auxiliary revenue returned to central administration is highly fungible. So, many business executives are seeking strategies to enhance this source of funds without increasing student fees. Given intense scrutiny on rising tuition, no institution wants to create similar unwanted attention on room and board fees.
Put strategic dollars to best use
6. Prioritize executive-driven investments by developing total cost forecast
Tactic 6 helps business executives more rigorously evaluate top-down, executive-driven strategic investments. There are two major pitfalls in making top-down investments. The first is overcommitting strategic dollars. This often results from underestimating the cost of a project or partially funding too many initiatives, causing most to underperform relative to expectations. The second pitfall is undercommitting strategic dollars. If institutions have additional, uncommitted money partway through the year, they often look to fund something that can be completed in the same budgeting cycle. This is often a low-priority pet project that can be completed quickly and would not have been funded otherwise.
7. Structuring seed funding to minimize financial risk and make fund self-sustaining
In addition to executive-led, top-down investments, the other use of central strategic dollars is seed funding—central resources set aside specifically to support select faculty and academic leader ideas for new courses, new programs, or new research. Seed funds are an important mechanism to foster entrepreneurship and innovation across campus. However, many of these “bottom-up” investments fail, leading a very low collective rate of return. Worse yet, institutions often have to continue funding failed projects for years or even decades.
To ensure they are putting limited central dollars to best use, a handful of institutions are increasingly taking a venture capitalist approach to seed funds. These institutions isolate and invest in only the projects with highest ROI potential, then direct returns of successful investments to fund the next set of projects.
Win buy-in for strategic savings
8. Communicate appropriate levels of financial information to boards and faculty
Efforts to reallocate resources and grow fungible revenue streams can be quickly undone by poor communication that leads to resistance from faculty, boards, or state governments. Learn how to find the right balance for communicating information by answering two critical questions.
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