Shaping What Comes Next: Our Budget Model

Our new budget model

Over the next few months, some of my weekly posts will include information on the new budget model for IU Indianapolis. I encourage you to share your comments and questions as we finalize the details. This week’s post is a commentary on our current model.

Current model

Often described as the Responsibility Center Management (RCM), each college (academic unit) is a center entrusted with the responsibility to ensure that it generates revenues sufficient to cover its expenses and pay for overhead costs. Data shows that fewer than 70 universities in the country today use the RCM.

Why use an RCM:

The responsibility aspect of an RCM is desirable as units are responsible for managing their expenses. Losses in one area do not spread to other areas and risk is localized. The model incentivizes enrollment growth since revenues follow credit hours and enrollment. It is a simple model and revenues follow the source in a formulaic fashion. Overhead is allocated proportionally to usage, which could be the number of faculty, staff, students, or square footage (in the case of facilities costs, if allocated out). It is very much a business model where every unit operates independently.

Drawbacks of an RCM:

Mission versus Revenue: The model does not incentivize the accomplishment of mission-based goals that may require large investments but do not generate immediate revenue. Some examples include student retention, graduation, or research excellence. Improving student retention takes time and does not immediately result in revenues. Research that could result in a cure for cancer or innovations that could improve healthcare delivery may have a long gestation lag and do not immediately generate revenue. Such goals are not directly incentivized in the RCM.

Risk-sharing: Another drawback with the RCM is the absence of risk-sharing. When student enrollment and credit hours go up in one college, that college alone sees the benefit. Conversely, when enrollment and credit hours go down, the college alone is responsible. The entire risk related to enrollment is borne by the college. Some colleges at IU Indy experienced this with the IU-PU realignment and with changes to the high school curriculum in Indiana, where students enter college having completed general education requirements.  

Social Good: Unlike businesses that sell a product or service that benefits the buyer, higher education is a social good whose benefits accrue to more than just the buyer (student) who receives the education. The fruits of research, whether in the humanities, social, or physical sciences, are available to society at large; hence, their costs should not be allocated to these units alone. For this reason, most universities that adopt the RCM use a hybrid version where a portion of revenues is allocated to the responsible centers/units and the remainder is retained centrally for investments that do not immediately generate revenue, that are large in scale, that no single unit can afford to pay, but that are important to address our biggest societal problems.

Perverse incentives: Additionally, when student credit hours become the primary source of revenue, colleges are incentivized to teach all courses required for a degree, including general education courses. For instance, at universities with RCM, it is not uncommon for colleges like journalism, public health, business, or social work to teach the required math course for their majors when it is best left to the math department (which is generally located outside these colleges) to teach the courses. While this benefits the college offering the course through the credit hours, it results in duplication of resources at the campus level and increases overall costs.

Cost escalation: Under the RCM, overhead costs are directly passed on to the colleges/units. While there are checks and balances within the system, the RCM model does not naturally lend itself to the containment of overhead costs.

For all these reasons, but recognizing that there is no one perfect model, we, IU Indianapolis, are proposing a refinement that tries to address some of these drawbacks. More to follow in a later post.

Go Jags!

Latha Ramchand
Chancellor