Taskforce Two

Executive Summary

In August 2009, the Alternative Budget Model Task Force (BMTF I) released its report which

recommended that:

"McMaster University investigate the development of a version of an activity-based budget system that fully supports and enhances its academic mission. This investigation shall have established consultation points and decision points. Any proposed new budget system should be phased in to ensure a smooth transition from the existing budget system and with provision to hold units harmless, to the extent possible, during the transition period."

In response to this recommendation, the University established the Alternative Budget Model Taskforce – Phase II (BMTF II) whose overall mandate was to take the recommendations from BMTF I and move forward to develop a version of an activity-based budget system that fully supports and enhances McMaster’s academic mission.

During the period of December 2009 to June 2011, BMTF II met on a bi-weekly basis to investigate implementation options and make recommendations on the specific methodologies to be used in McMaster’s version of the activity-based budget system. The Task Force provided regular updates to an Advisory Board of Vice-Presidents and Deans for information and feedback. Regular presentations were also made to a Directors of Administration forum to get their feedback.

BMTF II has now completed its review of revenue distribution options and made recommendations on a methodology for each revenue type. It has also completed working through an allocation methodology for Occupancy Costs and Administrative/Service Unit costs. Discussions were also held to provide recommendations on a governance mechanism associated with the proposed budget model and the establishment and use of a University Fund to support strategic initiatives and to facilitate the move to the new budget model by “holding units harmless” (This means that the incremental costs allocated to Faculties will at least be covered so there is no negative impact on Faculties) during a transition period.

This report contains detailed information on the options that were considered and the recommendations and rationale for both revenue attribution and cost allocation. The University Fund concept as referenced by BMTF I is expanded on with a suggested methodology for the fund’s calculation and operation. The governance options for the new budget model are explored, in terms of governance requirements/tasks and associated responsibilities. Finally, outstanding issues are highlighted, along with the next steps for taking the new budget model testing and refinement forward through a shadow budget process. The shadow budget process will also involve the development of tools to help administrators in the implementation of the new budget model. Appropriate training programs and transition plans will also be developed during the shadow budget process. Once the objectives of the shadow budget process have been achieved, McMaster will be in a position to determine whether the new budget model should be implemented and if so identify a strategy for a smooth transition to this new model.

The development of the model presented in this report involved extensive efforts from members of the BMTF II and many others with the McMaster community. It is through these dedicated efforts that such an ambitious goal appears to be near fruition. I would like to take this opportunity to thank them all for their dedication to this significant undertaking. I would especially like to thank the project Manager, Kim MacDonald for her commitment to keeping us marching towards the finish line. Thanks are also due to Iain Clarkson (BMTF Analyst) and his predecessor Wenny Li for all the work they have put in behind each meeting of BMTF II. Finally, thanks are due to our Advisory Board and Directors of Administration forum for their feedback and advice throughout this process.

Membership

Alternative Budget Model Taskforce – Phase II (BMTF II)

NAME AREA
Barb Campbell (Office of the Provost)
Iain Clarkson (BMTF Analyst), replacing Wenny Li (BMTF Analyst)
Linda Coslovi (Engineering)
Ross Gardner (Health Sciences)
Brooke Gordon (School of Graduate Studies)
Khaled Hassanein BMTF II Chair
Mary Law (University Budget Committee), formerly Abigail Payne (University Budget Committee)
Ying Liu (IRA), formerly Sam Curtin (IRA)
Kim MacDonald BMTF II Project Manager
John McKay (Advancement)
Barb McKenna (Research and International Affairs)
Karen Menard (IRA)
Lou Mitton (Financial Services)
Gina Robinson (Student Services)
Lilian Scime (Financial Services), left University January 2011
Julianne Simpson (Administrative support)

Mandate

  • Develop a suitable plan of implementation for a new budget model (including a transitional plan and development of tools and training as needed).
  • Define appropriate datasets and metrics and support and standardize their use across campus.
  • Identify and assess different options for revenue allocation.
  • Identify and assess different options for expense recognition and distribution.
  • Investigate various conceptual models of different methods of flowing revenues and costs to identify the best option for McMaster.
  • Ensure that best practices are used in the determination of datasets and cost drivers.
  • Collaborate with stakeholder groups and integrate their feedback on a regular basis.
  • Identify governance mechanisms suitable for the new budget model.
  • Make recommendations for improvements to existing and potential systems.
  • Communicate key decisions/activities to the broader McMaster community on a regular basis.

Comments

RESPONSE TO COMMENTS TO THE BMTFII REPORT RELEASED NOVEMBER 2011

Following the release of the Budget Model Task Force II Report, members of the McMaster community were asked for comments and suggestions on the latest report.

The great majority of comments were received from faculty as well as organizations such as the MUFA Executive and University Library Board. This report addresses the comments at a summary level.

It should be noted that many of the commentaries began with statements such as:

“I would like to thank you for putting together this report, and I am impressed by the level of detail it shows and the dedication that you all show to transparency in this important process. I would also like to thank you for providing everyone an opportunity to give feedback on the report.”

“I am very glad to hear that the university is finally doing something about the present highly inequitable budget model.”

“I hope these comments are of use. Again, I express my appreciation to the Task Force for their work in sorting through a very complex undertaking and providing us with a basis for moving forward. I hope that as the process evolves we can identify and address inequities and ensure that units which make important contributions to the university but either do not generate revenue or have particularly challenging operational needs can be appropriately supported.”

“Overall there is cautious enthusiasm about the New Budget Model, although the devil will be in the details and in particular how we estimate the costs.”

GOVERNANCE AND PRINCIPLES

Generally comments were supportive of the recommendations of BMTFII but requested more clarity and stronger statements about commitment to principles in particular to the President’s letter Forward with Integrity.

The BMTFII report offered little detail on how the new structure will be governed. BMTFII found that the current structure of the operational budget work done at the University Planning Committee and the Budget Committee did provide budget governance for the University but would need to be augmented with, at minimum, some kind of advisory board for service units. The comments suggested that composition of these committees and how members are selected will need to be truly transparent to ensure that all stakeholders have the opportunity for input and a means of having their concerns addressed. The governance structure must also be endorsed by senior management and the Board of Governors. As governance structure is discussed, there will be a need for wider consultation.

Some concern was raised about key decisions that remain to be made before and subsequent to the implementation of the new budget the model. These include the length of the transition period, the meaning of “hold harmless to the extent possible” and the proportion of revenues directed to the University Fund. These decisions need to take into the account the principles that were recommended by BMTFI, BMTFII and the President’s letter.

These are the kinds of issues that will be reviewed and resolved during the shadow budget year. The shadow budget will play an important role in the transition to a new budget model. It will provide a mechanism for confirming the revenue attribution drivers and cost drivers, time to develop the service level definitions, and an opportunity to deal with data source and integrity issues. By the end of the shadow budget, there should be a review of the governance requirements. The shadow budget will also coincide with the implementation of the reporting strategy (part of the larger ERP project) that will enable the dissemination of data to activity and service units.

The comments about the University Fund reflect that there must be a clear understanding of how the University Fund will be allocated and managed, and that there is transparent reporting of expenditures from the Fund. The University Fund has two purposes, to fund strategic initiatives and to provide funding to support activity units through the transition period. How the size of the University Fund is determined must be clear to the community.

REVENUE ATTRIBUTION

There are three major concerns raised about revenue attribution: how interdisciplinary programs will be funded, how research institutes will be funded and how tuition will be distributed. These concerns are not atypical and universities that implement activity based budgeting have different ways of attributing this revenue. Generally the recommendation of BIUs being attributed to the faculty where the student is registered was accepted.

Interdisciplinary (ID) program tuition and BIUs are allocated in the same manner as other programs. For undergraduate programs, funding is provided to the Faculty where the program resides based on a share of the tuition and the BIUs. For graduate programs the tuition and BIUs are allocated to the faculty where the program resides.

In December 2011, The Task Force on Interdisciplinary Studies (TIPS) presented a series of recommendations that included financial considerations that would be supported using this distribution. The TIPS Report included a recommendation that “specific Memoranda of Agreement (MOAs) should be put into place for every ID program to increase transparency and equity, and maintain stability across changes in leadership at the Director and/or Faculty Dean levels. Each MOA should specify how funding, including both tuition and BIUs, will be shared amongst Faculty, and what the specific commitments and responsibilities are to the program itself. MOAs should also indicate how the program administrator will be funded and housed; what human, space, IT and library resources are required for and available to the program; how TA resources will be allocated and assigned; how visa tuition bursaries are allocated; and the source of funding to support students and faculty, including the support of faculty who would teach/supervise in the ID program but who normally would be appointed to a Department or equivalent.

The ways in which funds are shared may depend on the nature of the program (e.g., course intensive, research intensive, program size, numbers of Faculty involved), but to the greatest extent possible, there should be consistency in the metrics used to determine the way in which funds are distributed. The details of the MOAs should be shared amongst all Faculty Deans to ensure transparency, consistency, and fairness of agreements. The additional financial responsibilities of the coordinating Dean should be addressed in the MOA. The development of clear and open MOAs will reduce the difficulties that ID Directors have in appropriately planning and funding their programs, and will reduce the amount of time they must spend negotiating funding and tracking funds through numerous post-hoc journal entries.” To the extent possible, these MOAs will be incorporated into budget modeling but given the complexity of them and the current software applications, this may be a future project and the financial arrangements may continue to be managed at the Faculty level.

Additionally, the TIPS Report recommends that seed funding should be available and this would be accomplished through the University Fund. The Report goes on to suggest that there should be formal financial recognition for graduate student teaching and research supervision. The data to support this are not currently available and could be considered as part of the implementation of the new ERP.

Also in December 2011, a new policy “Guidelines for the Governance and Review of Research Institutes, Centres and Groups” was approved. This policy articulates the expectations of these units and will be used as a guide for the establishment of the financial requirements of institutes. To the extent possible, this will be included in the budget modeling. As the new policy is implemented this will be reviewed.

BMTFI and BMTFII were guided by a decision made by the Provost and Deans to implement a tuition sharing formula of 50% to the faculty who provides the teaching and 50% to the faculty where the student is registered. No provision is made for Faculties who offer courses that are specifically for students registered in another Faculty and it is assumed that the tuition sharing methodology will compensate for this teaching. Based on comments received and reviewing other University formulae, this formula may be too low of a percentage to the faculty providing the teaching. This is a decision that would have to be revisited by the Provost and Deans if a change were to be recommended. The allocation is based on the average unit tuition rate of all tuition at the university with the exception of excluded tuition (i.e. tuition from very specific programs such as Medicine and Physician Assistants which have received targeted funding).

The alternative for allocating tuition would be to use each Faculty’s average tuition rate for courses taught in that Faculty. However, this would require a system to follow each student to each course. Following each student to each class and trying to attribute tuition based on individual students is not feasible with the current application software and it is not clear, given the level of complexity this would entail, that it would be feasible with a new application. The decision to use 50/50 tuition splitting of the average tuition rate was specifically endorsed by the Budget Model Executive Committee that is comprised of the President, Vice-Presidents and Deans.

A question was raised about how the calculation of undergraduate average tuition is calculated. The calculation in the model outlined in BMTFII is:

  • The total faculty tuition earned is calculated. Of that amount,% goes directly to the faculty where the student is enrolled.
  • The total university tuition (minus excluded tuition) is divided by the total units taught at the university to get the average tuition rate.
  • The remaining% of tuition is allocated to Faculties using total number of units taught by the Faculty * the average tuition rate.

A comment discussed categorizing courses and then developing a way of allocating revenue to each category. Going from the more expensive downwards: (a) program teaching; (b) service teaching (with allowance for labs); and (c) teaching of electives. With the current application software at McMaster this would be administratively onerous to manage but could be considered when the new application software is implemented. It would take administrative resources at the Faculty level to determine the categories and develop acceptable revenue models for each category based on the cost to deliver the courses.

Some programs, for instance in Geography and Psychology, have the expenses primarily in one Faculty and the students enrolled in another Faculty. These programs are being reviewed by the Provost and the Deans involved to determine if there should be a different methodology for distributing revenue. There are also several programs such as collaborations between McMaster and other institutions that have been treated differently in revenue and cost drivers to honour existing agreements.

COST ALLOCATIONS

A number of comments raised the issue of governance for service unit budgets and the level of control of the expenses, the apparent combining of the university and Health Sciences library budgets, the lack of rationale for some drivers using expenses and some using revenues, and the need to determine how space charges will be allocated and deferred maintenance funded. Another cost allocation issue is that some units perceive they are doing work that should be done by central units and would like a financial resolution to this in which costs are absorbed centrally. It should be noted that there are comments about ideas for changing how undergraduate and graduate scholarship funding is allocated. These methodologies are managed by the Registrar and School of Graduate Studies and changes to allocations would be initiated by those areas and not by BMTFII.

The BMTFII report was not clear on the directive for service unit budgets. The directive is that these budgets will be held at the 2011/12 budget allocation level unless an increase (or decrease) is granted following an application through the governance mechanism. Within the approved budgets, the drivers being developed for the service units will be used solely to allocate costs to activity units and not in aggregate to set the budgets. For example, in an instance where FTEs are the driver, if one activity unit’s FTEs increase while another’s decrease, the former will be charged more and the latter less but the overall charge will not change the service unit’s budget even if there is a net change of total FTEs. Service units will also be required to provide service level definitions so that activity units have a clear understanding of the services that are part of the budget allocations. These could be reviewed by a service unit advisory board (to be established) on some rotating basis and recommendations for increases or decreases to service unit budgets would go forward through the governance process.

This will also be the case with the libraries. While there is the same driver for the university libraries and the FHS library, the BMTFII report was not clear that, the two budgets will remain separate. The library budgets will be set at the 2011/12 level.

There were comments about a lack of clarity for the rationale of using revenues as cost drivers for some service units and expenditures for others cost allocations. Using revenues as a driver for cost allocations could be a disincentive for activity units to increase revenues while the use of expenditures could provide an incentive for activity units to reduce their own costs and may adversely affect the institution. Changes have been recommended to the drivers as a result of these comments. The drivers for the Presidential budget, the Provost’s budget and the University Secretariat budget have been changed from average operating revenue to average operating expenditure. As well, the driver for the Business Management Services budget has been revised from 3- year average direct expenditure (operating and research) to 3-year rolling average operating expenditure. This is recommended so that research expenditures are not charged a disproportionate share of the costs and to reflect that there are already some direct charges against research that provide funding to these units.

Health Sciences has, for a number of years, funded services that were provided to other faculties by the centre. There are no plans to change this model for Health Sciences or to extend an “opt out” option for services to other activity units. An exercise took place that examined the services in FHS and came to conclusions about which services were deployed. Four categories of service were determined. Central services are universally provided services such as payroll. Deployed services to FHS are services that have been deployed to FHS from the centre and are funded by FHS in response to business requirements, critical mass or unique needs. In the case of deployed services, FHS would be recognized for the services they perform that would have to be performed by central services if FHS did not provide the service. This would include some human resource functions that are performed in FHS. The fee for service category is where all Faculties pay for this enhanced service if they use it. The final category is operational work done at the Faculty level. This is typically work that is done by all Faculties. For instance all Faculties provide some level of computer support but this is support that is an enhancement to what is provided centrally and there are no plans to reimburse Faculties for providing enhanced services to their own employees. During the shadow budget process, the governance of service units may find other deployments that are in effect and make recommendations about changes to drivers but there are no plans to do this prior to formation of that group.

A number of comments raised concerns about the deferred maintenance that is accumulating at the University. Consideration is being given to whether it is possible to include a significant provision for deferred maintenance with the rent calculations. Discussions are also taking place about changing the Bond driver to the same driver as the space driver since all of the bond funding was used for capital projects. The bond interest would be charged to all activity units. It funded specific projects and freed up university funds for other projects so it would be unfair to retroactively try to assign to specific units.

NEXT STEPS

The community provided a substantial number of comments to the BMTFII report. All reflect a desire to change from the current model and support for a new budget model. They also support the need for continued clarity and transparency in moving forward and highlighted the complexity of the move to a new budget model.

The budget model implementation planning committee will continue to work with members of the McMaster community to examine the issues and to bring forward recommendations for resolution as the project begins to approach the halfway mark. Throughout the shadow budget year it is expected that drivers will be examined and further recommendations made to ensure that McMaster’s focus on the priorities and principles within the President’s Forward with Integrity letter is most effectively strengthened by the new budget model