McMaster Budget Model Status and Additional Adjustments

David S. Wilkinson, Provost and VP Academic

The current McMaster Budget Model (MBM) has been in effect for almost two full budget cycles. In that time we have been able to observe and learn – what is working well, what is problematic and what behaviours (whether helpful or counterproductive) are incented by the model. Over this initial period we have made several refinements to cost drivers, assumptions, resource treatments and revenue allocation methodologies, in response to issues or errors that have been noted. Many of these changes have been minor in nature. However, some have been significant, with the most notable being the increase in the revenue associated with out-of-Faculty teaching from 75% to 100% of tuition.

Some of the positive results we have noted, based on observed behaviours and supporting Faculty commentary, include the following:

  • Faculties have all requested supplemental data to assess revenue and costs down to department level to better understand and prioritize how programs are supported.
    “Because of the transparency that the new model offers we have been able to conduct detailed costing exercises down to the department level – something that was not possible in the past.”
  • Most Faculties have ramped up efforts to reduce costs and increase revenues.  Space needed in each Faculty is being reviewed and some areas are now available to be converted to new academic purposes.
    “The cost drivers (especially space) have helped us understand efficiency opportunities.”
  • Several new programs have been developed, all requiring intense scrutiny around resource implications in addition to academic needs. Departments and Faculties have been able to interact and plan with more clarity and understanding as to implications of various collaborations. This is proving to be of particular benefit it the development of interdisciplinary programs.
    “I love the new templates.  We have been woefully shy of standardized methods and procedures and the costing templates are terrific...Likewise with the MOA template.”
    “Our ability to properly cost out new programs (particularly at the graduate level) has improved greatly with the new model tools.”
    “The model’s transparency has made possible the MOU for the new Interdisciplinary program that has stalled in the past.”
  • It is now beneficial to teach students from other Faculties, thus opening up more elective opportunities for students.
    “We have seen some new effort put forth by some of our departments to increase the amount of service teaching that they do in response to their understanding of the model.”
  • With transparency comes a greater trust and dialogue with between Administration and Faculties.
    “There has also been a significant amount of flexibility offered in administrating the new model, which has translated into a willingness to make changes to it as needed.”

However, based on feedback from the community and our own ongoing review, a number of key concerns have come to light. These include:

  1. A call for increased support unit accountability and transparency
  2. Lack of incentive to grow enrollment in Hold Harmless Faculties
  3. Equity across the different Faculties
  4. The perceived lack of emphasis on research mission; thus, even though there were several features built into the model to support research intensity these are deemed to be insufficient.
  5. Inability to meet SAG and TSA requirements under the current fixed scholarship allocations

Following a review of these concerns and of Faculty budgets over the past two years, it became evident that some additional model changes were required, in order to better align it with the university mission while at the same time adhering as closely as possible to the main principles of activity based budgeting and to the principles developed by the task forces that first developed the MBM.

Following a fulsome discussion the proposed rectifying measures and model changes have recently been endorsed by the University Budget Committee and PVP and subsequently approved by the President. It is our hope, that with these changes the budget model will remain relatively static for the next few years, to better support long term planning and strategic investments.

Support unit accountability and transparency

The implementation of a “hybrid” activity based budget model means that support unit budgets do not fluctuate with activity and are instead held flat. Support units are able to request modifications to their allocation through the Budget Committee by submitting a case to address cost pressures or to support new institutional needs. In some instances, Faculties are concerned with the level of service and efficiency in each unit. In response, support unit budget reporting templates have been modified to capture clearer and comparable metrics, thus enhancing transparency. In addition, in an effort to better align support unit missions and Faculty expectations, we will begin holding budget conferences where the Deans can learn about and question support unit budget submissions prior to the Budget Committee receiving their budgets. We are also seeing greater interest in the university budget from the community at large, including faculty and students. This is a natural and desirable consequence of increased transparency. In order to promote greater awareness of the university budget and to enable the community to propose areas of concern and priority, an opportunity for input on budgeting priorities will be provided early in the cycle, before the budget allocation process begins.

Hold Harmless

In rolling out the new model it was agreed to “hold Faculties harmless”, i.e. to bring the Faculty allocations, net of central costs, up to their 2013/14 allocation level at a minimum. Originally it was hoped (and our modeling supported this) that all Faculties would grow out of hold harmless naturally over a few years. It is now clear that this is not the case and three Faculties are still in Hold Harmless, two at levels that would likely persist for quite some time. Over the long term hold harmless dampens initiative and growth. Any revenue growth only serves to decrease the amount of top-up required from the University Fund, i.e. the Faculties do not see this revenue directly. Even though the additional revenue for many new ventures developed by Faculties was guaranteed to flow “above the line”, this has proven to be a major disincentive to growth. Therefore, we are replacing the current Hold Harmless value with an incremental Faculty Supplement. This fixed supplement will be added to a Faculty’s calculated allocation, thereby allowing for all additional revenue to flow through to the Faculty.

These fixed supplements values will remain at the calculated values for the next 3 years. The Provost will initiate discussions with each Faculty affected to review how these values will be reassessed after that period. These discussions will be based on the premise that each Faculty currently in Hold Harmless has opportunities to add income or reduce expenditures to partially reduce the level of supplement required.

It is important to note an additional consequence of the removal of Hold Harmless. While HH prevented those Faculties from seeing the full benefit of new revenue generation they were also protected from the impact of increased central costs. Converting HH to a fixed supplement places each Faculty in the same situation, such that any increases in central costs or reductions in revenues will flow through to the Faculties in the same manner.

Equity amongst Faculties

The model flows income to the Faculties using the actual revenue received in relation to each program/student. Professional Faculties offer undergraduate programs that allow for significantly higher tuition rates that have been allowed to increase roughly 2% per year faster than for regular programs. Higher tuition is allowed by the government as a reflection of both the high cost of offering some kinds of programs as well as the perception that higher earning power for graduates of professional programs justifies a higher cost of education. This does however lead internally to disparities in the income-cost balance.

One approach to addressing this imbalance would be to institute a tiered taxation system whereby the Professional Faculties and the Arts & Science Program (which has none of the infrastructure costs of a Faculty) pay a higher tax to the pools. This still correctly aligns activity revenue yet provides an annual measurable redistribution to recognize that some Faculties have a higher resource base from which to support university priorities. This is the basis for the change below relating to the Research Infrastructure fund.

Greater support for research:

Research Infrastructure Fund (RIF):

Currently the RIF serves to redirect some of the framework funding received to support Faculties with high research infrastructure costs. Funds are drawn into a pool on the basis of total Faculty revenue by means of a tax. These funds are then allocated to Faculties on the basis of research overhead. The funds are then available to the deans to support research intensity in their Faculties. While the RIF is not new we have now increased the tax rate feeding the RIF pool for the high tuition Faculties and the Arts & Science program.

VP Research Discretionary Funds

The Research Infrastructure Fund provides deans with resources to support research intensity in their Faculties. However, it is also important that the VP Research have sufficient discretionary funds to be able to support new research initiatives at an institutional level. A VP Research Discretionary Pool was created in the MBM by withholding a percentage of research overhead, with the remainder going to Faculties. The initial size of this fund was established to match the funds previously used by the VP Research for this purpose. There is a perception on campus that in moving to the new budget model the VP Research had fewer resources. This is not true. All support units, including the VP Research, were kept whole in the transition. However, it is increasingly clear that, to be effective, the VP Research at McMaster needs a larger pool of flexible funding than has traditionally been the case. We will therefore increase the percentage of research overhead funds that are allocated to this fund.

Student Bursaries

The Undergraduate Bursaries envelope is currently a fixed amount which includes support for the student work program, general bursaries, some administration and the Student Access Guarantee (SAG) payments. Our analysis of the current system shows that left alone, we would fall below our government-mandated Tuition Set Aside (TSA) requirements in the next year. One of the primary causes of this is rapidly increasing SAG requirements driven predominantly by high tuition programs. Given that this payment is mandated, it is the first call on the fixed bursary pool, thereby depleting the resources available to other bursaries. We have therefore modified the structure of the bursaries pool and the method for allocation in the model. The base component (the amount set aside for general bursaries, administration and McWork) continues to be allocated to the Faculties based on student FFTE but at a reduced fixed value. The SAG component is now charged directly to each Faculty based on the actual amounts required each year. The bursaries pool will be adjusted as need to maintain student support at the level mandated by the TSA program.

Impact and Future Considerations

The combined changes will serve to address a number of critical issues; however, the impacts will be closely assessed. In addition, because the adjustments reduce the total level of Faculty Supplements that are required, the University Fund will have additional resources left for strategic reinvestment in the Faculties, ensuring we are aligning our resources with our strategic mission.

The future of university funding in Ontario remains uncertain. We do not yet know what the tuition framework will look like beyond 2016/17. Nor do we know the outcome of the government’s analysis of the funding formula. Either of these, but in particular the latter, could materially alter the nature of the university’s income, in which case we will need to examine the impact on income distribution within the university. At the current time it is neither possible nor useful to speculate on what these changes might look like nor how they may impact McMaster.

April, 2016