Campus Budget
Some Basic Information About the Campus Budget
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October 23, 2008
By Chancellor Robert C. Holub
Since we will be dealing with difficult budgetary situations for the next period of time, I thought it might be a good idea to provide for the campus some insight into basic concepts of campus budgeting. Many of you may be familiar with much of what follows, but others, particularly our students, may be inexperienced in navigating the budget process.
Revenues and Expenditures
Although we have several sources of revenues, many of these sources are directed at specific items (that is they are “restricted”) and are therefore not subject to discretionary use. For example, money that is given to us by government agencies or by industry for research must be used for that purpose and cannot be reallocated elsewhere. Similarly capital projects are often the result of direct appropriations to build a building or to renovate a building and cannot be used for general instructional purposes.
In our General Funds, the two major sources of funding for our campus are state allocations and tuition/fees. We receive smaller amounts of money from the indirect cost recoveries associated with grants and contracts, and from interest we earn on deposits in our accounts (some of which is explained below). We do have several other unrestricted sources of revenue, but the revenue from these sources must go to support the activities that produced the revenue (e.g., auxiliaries, continuing education).
When we budget for the year we estimate the amounts available to us from all available sources; thus there are already claims on almost every dollar of revenue prior to the start of a fiscal year. In general, the only way we can add something (more faculty, more staff, more supplies, etc.) is by receiving extra funding in one or another category, or by taking funding away from one category to support another activity (hire fewer staff and more faculty; buy fewer supplies and purchase additional equipment, etc.)
Operating and Capital Budgets
There are two sorts of funds on public campuses: operating budgets (current funds) and capital budgets (plant funds). Operating budgets encompass all facets of daily operation: salaries for faculty, staff, graduate teaching assistants, research assistants supplies and equipment, fuel costs, etc. These costs are almost always recurring, meaning that they must be supported by a funding stream that will be available every year.
Capital budgets involve major equipment and capital projects, such as the construction of a building or the renovation of a building. These projects are funded with one-time budgets, that is, with a specific allocation that is given once and that need not be given again the following year. Very often a campus will save money for a capital project in a special account (Plant Funds). It may thus appear that a campus has a great deal of unclaimed money, when in fact that money is designated for a specific capital project.
At times, the campus may need to transfer money from the operating budget to pay for capital expenses. For example, during recent years we have borrowed money to do many construction projects. We have to pay a debt service on those projects, which is an expense that recurs for many years, but at some point will disappear from our expenses. We also need to allocate some funding to capital expenses for emergencies and to address the most critical deferred maintenance that cannot be accomplished with borrowed funds, since on a campus as large and as old as ours we average over $11M per year in smaller projects that have to be done to ensure the safety of the campus community and for critical maintenance. The repair of roads, or leaking roofs, or of heating systems would fall into this latter use of funding.
Money transferred from operating to capital therefore most often involves sums that cannot be simply used for other operating expenses, such as hiring faculty members. We cannot renege on our debt payments for projects under way or recently completed. Nor can we endanger our campus employees and students by not having a fund to support emergency repairs, especially involving health and safety issues.
Temporary Reserves and the Resultant Interest
Every year students pay tuition and fees. The campus takes the allocation of tuition and fees from students (as well as any other payments that come into the campus) and places it in an interest-bearing account. At certain times it may appear that the campus is flush with money. But this money is already budgeted for operating expenses and therefore cannot be used for other operating expenses.
To understand this concept, you might think of your own checkbook. At one point or another during the month you may have a rather large amount of money in your checking account. But you can’t simply spend that money on anything you would like to spend it on, since you know that you must pay your rent or mortgage, your utility bills, your grocery expenses for the month, etc. For that reason looking at a snapshot or even an average of the balance you have in your checking account does not really disclose anything about discretionary funding at your disposal.
Some banks will also give you interest on the average balances in your accounts. In the average checking account this interest does not amount to very much, and it may not be something you incorporate into your budget. But when the balances are tens of millions or even more than $100M dollars, as it is on a large university campus, then the interest on the cash flow can be considerable. We do accrue a great deal of money in this fashion: in recent years we find $9M in interest for a given year. But this money is also not free to be used for any expense. It is part of our calculation of revenues right from the start and is already destined for use in the operating budget—paying salaries, buying supplies, paying fuel costs, etc.
People versus Capital Construction
Because the sources for funding salaries for people and for funding capital construction are very different, it is most often not possible simply to choose one or the other, or to transfer funds from capital expenses to “people” expenses. In difficult times for employees, I have often been asked here and at other institutions why we don’t simply devote the millions of dollars in ongoing capital projects to paying salaries, or paying increases in salaries, or even hiring additional people.
There are many reasons that it is not possible to shift funding in this way. For many construction projects the funding is restricted, either by a private donor or by the state or federal government, or by the covenants on the bonds for funds borrowed and cannot be used for other purposes. In some cases the project is already ongoing: shutting off the funding would result in additional costs resulting from having to start the project up anew, and would probably result in layoffs of people working on the construction, or cost the campus resources resulting from breaking legal contracts with contractors and sub-contractors. Finally, even if it were possible to stop all construction without incurring any additional costs, even if none of our construction had restrictive funding, the funding we have available is one-time money and would be quickly exhausted. The reason: hiring people into permanent positions or paying salaries for permanent employees is a recurring expense.
You might think of the following situation. Say that you received from an aunt the sum of $10,000 to remodel your kitchen. You go out and hire a project manager and sign contracts to have the work done. In the middle of the project you decide you’d rather devote the money to hiring a housekeeper to clean your house and manage the affairs of the house; the housekeeper you have in mind would cost you $40,000 per year. It is obvious that you cannot simply cancel your plans and hire this individual since you would be subject to legal actions against you for violating signed contracts. But even if you had not yet started the project, you can see that the $10,000 could be used to hire the housekeeper for only a finite period of time, and that unless you can count on your aunt supplying this sum every three months, you cannot really commit to hiring a new employee.
The general principle of budgeting in higher education is thus that capital funds cannot be easily exchanged for operation funds, and that in order to put something on the recurring operational budget (hiring permanent faculty or staff; making permanent additions to departmental budgets for supplies and expenses, etc.), you must have a steady source of funding. As we have seen above, the two main sources of steady funding for a public institution of higher education are state allocations and tuition/fees.
Helpful Input Wanted
I hope that this short explanation of campus budgeting assists the campus in understanding the real options that are open to us as we deal with financial choices. I want to encourage input from the campus community regarding the budget, and I am determined to listen carefully to the campus community in establishing priorities in these difficult times.
More information:
University of Massachusetts Amherst Projected FY09 Operating Budget Revenue (as of 10/23/2008) -
