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Budget Balancing Strategies for Multi‐Year Plans: Case Study of the University of MichiganRowan Miranda, Ph.D. – AVP for FinanceSeptember 24, 2012

Presentation at the NACUBO Budgeting Forum

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Agenda

Taxonomy of Budget Balancing Strategies2

Overview of Mulit-Year Financial Planning1

Budgeting Context, Challenges & Opportunities at UM3

Tips and Traps for Budget Balancing Plans5

Effectiveness of Budget Balancing Strategies at UM4

Question & Answer6

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What is Multi-Year Financial Planning?

A combination of budgeting, strategy and forecasting over a multi‐year period

What is the “right” number of  “out years”?

A collaborative, visionary and visible process“Top Down”, “Bottoms Up” or Both?

Who should be involved?

Is the Financial Plan public or internal to management?

An anchor for financial sustainabilityInstitutionalize “long‐term thinking”

Changing mindsets from “local” to “enterprise” level concerns

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What is a Multi-Year Financial Plan (MYFP)? Why plan now?

Key ComponentsMission & Vision

The Base Budget

Revenue Forecast

Expense Forecast

Capital Plan & Debt Capacity Analysis

“Gap Closing” Actions

Why plan now?Tuition Constraints

State Appropriation Cuts 

Volatility in Other Funding Sources

Taking a strategic rather than “seat of the pants” approach

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A Summary of MYFP

Strategic vision for the College/University

Built on a foundation of sound financial principles

In‐depth understanding of drivers for revenues and expenses

Must be a collaborative and participative process“Buy In” from Board and Executive Leadership

Even Broader “Buy In” for Gap Closing Actions

Strong linkages to other plans

Requires an investment of time and money

Formal approach in place to track progress (e.g., benefits realization)

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Agenda

Taxonomy of Budget Balancing Strategies2

Overview of Mulit-Year Financial Planning1

Budgeting Context, Challenges & Opportunities at UM3

Tips and Traps for Budget Balancing Plans5

Effectiveness of Budget Balancing Strategies at UM4

Question & Answer6

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Taxonomy of Budget Balancing Strategies

Impact of the StrategyTransitory or Sustainable

Type of StrategyRevenue Raising Strategies

Recent Emphasis on Non‐Traditional Sources

Expense Reduction StrategiesRoutine or Incremental

Transformational

Process or Productivity Improvement StrategiesBPR & Lean Management

Information System Investments

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Agenda

Taxonomy of Budget Balancing Strategies2

Overview of Mulit-Year Financial Planning1

Budgeting Context, Challenges & Opportunities at UM3

Tips and Traps for Budget Balancing Plans5

Effectiveness of Budget Balancing Strategies at UM4

Question & Answer6

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Profile

Organization–3 campuses (Ann Arbor, Dearborn, & Flint) 

– 19 Schools & Colleges in Ann Arbor

– 42,000 faculty and staff

Students–59,000 students

Academic and Research Excellence–Academic Programs Ranked in Top 10: 95

–Times World University Rankings:18 out of 400 (2011‐12)

–Research Spending: $1.2B

Financial Strength–Operating Revenue ‐ $5.6B (includes health system) (FY2011)

–Endowment  Size ‐ $7.8B

–Bond Ratings – S&P (AAA), Moody’s (Aaa)

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Core Financial Principles

Disciplined operating budget strategy

Sustained focus on cost control

Continued diversification of revenue streams

Adherence to long range capital plans, with emphasis on infrastructure renewal

Manage endowment distributions over time

Conservative utilization of debt

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Budget Model GoalsEncourage schools/units to set priorities and develop new activities

Create incentives at the unit level to make efficient use of resources

Provide sufficient discretionary resources to the Provost to support cross‐unit collaboration and fund highest priorities of President and Board of Regents

Assure that central administrative and service units have sufficient resources to carry out their missions

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FY 2011 Budgeted Revenue (in Millions), Total = $5,582M

$2,508

$259$1,016

$315

$212

$116

$339

$817

Health System

Other Auxiliary

Tuition and Fees

State Appropriations

Sponsored Programs (ICR)

Other

Sponsored Programs (Direct)

Gifts and EndowmentDistribution

The Financial “Big Picture” at UM

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Challenges to Budget DevelopmentFuture Liabilities

Deferred maintenance of buildingsPost retirement health benefitsIncreasing future debt service

Other Major ThreatsVolatility of capital marketsEconomic climate for Michigan & the nationRising health care costsContinued energy cost pressureCompetitive pressures

– Faculty recruitment/retention – Financial aid/Student access – External research funding in light of federal deficits

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OpportunitiesFinancial challenges also pose opportunities

Central and Unit Level Reserves to Cushion Volatility“Slack Resources” provide breathing room to innovate an investChallenges facing peers are often more significant which can motivate action on your campusForces prioritization of resources and challenges the wisdom of old habits

New buildings and the allocation of existing spaceOrganic staffing growthSunset organizations that no longer serve missionEmphasis and investments in environmental sustainability

Coping with deferred maintenanceRenewed emphasis on “All Funds” budgeting

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Agenda

Taxonomy of Budget Balancing Strategies2

Overview of Mulit-Year Financial Planning1

Budgeting Context, Challenges & Opportunities at UM3

Tips and Traps for Budget Balancing Plans5

Effectiveness of Budget Balancing Strategies at UM4

Question & Answer6

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Guidelines for Budget BalanceProtect core educational and research missions/qualityRemain competitive for faculty/staff/studentsMaintain high quality essential servicesLeverage UM’s size and scale (e.g., procurement)Eliminate duplicate and lower priority activitiesShift costs off the general fund, where appropriateAvoid short‐term reductions with long‐term cost and/or quality implicationsSeek out opportunities for Shared ServicesOutsource (and even in‐source), where appropriateTake advantage of technology enablementExamine public‐private partnership opportunities to enhance revenue

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Cost Containment in 3-Year ModelRecurring budget reductions for General Fund: $157M (FY04 to FY10)In anticipation of a sharp drop‐off in State appropriation, the 3‐Year modeling intensified cuts after FY10Reductions and reallocation within the 3‐Year model total $100M in recurring fundsWe have a plan in place to achieve the $100M:

Initiatives put in place (~$21M)Efforts in progress (~$70M ‐ $80M)Provost’s task forces (~$5M ‐ $10M)

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Major “Sustainable & Transformational”Balancing Strategies

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Shared Services

for Finance & HR/

Other Restructuring

Strategic

SourcingIT Rationalization

Energy

Efficiency, Facilities &

Space Allocation

Non-Traditional

Revenues

Health Benefits

Cost Containment

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Average Annual GF Growth(FY99 to FY11)

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Agenda

Taxonomy of Budget Balancing Strategies2

Overview of Mulit-Year Financial Planning1

Budgeting Context, Challenges & Opportunities at UM3

Tips and Traps for Budget Balancing Plans5

Effectiveness of Budget Balancing Strategies at UM4

Question & Answer6

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Tips and TrapsSponsorship – Alignment on messaging between President, CFO, Provost, Deans (and their staff)

Why are we implementing specific cost reduction strategies? What is the impact on the financial plan? What is the impact on your unit? etc. 

Project Management – Progress tracking on “Gap Closing Actions” need to be run like a “real project” (PMO staff, stakeholder engagement, communications, timeline, etc.)

UM Academic Program Group (APG) Budget and Operations Committees

Financial Futures Working Group

Communications – repeated need to communicate “why we are doing this?” and frequent project status updates to unit level budget administrators and managers

Need for Outside Support – be realistic!  Utilize consultants for expertise and skills youdon’t have in‐house. Relying on them for “staff augmentation” or expecting them to drive an efficiency agenda for you, simply won’t work.

Costs are Important But So Is Service!!! – many cost reduction strategies can reduceservice; some strategies can also improve service. Be honest about impact.

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Agenda

Taxonomy of Budget Balancing Strategies2

Overview of Mulit-Year Financial Planning1

Budgeting Context, Challenges & Opportunities at UM3

Tips and Traps for Budget Balancing Plans5

Effectiveness of Budget Balancing Strategies at UM4

Question & Answer6

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