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Home » Career Tools » HigherEdCareers » Are College Budgets More Debated than College Football This Summer?

We did not know that the economy we were facing this winter was the quiet that precedes the storm. Higher education budgets in the summer of 2009 have made this summer the most critical one in decades for our colleges and universities. This month, we are pleased to talk with two talented professionals and help us sort through these budget issues and their effects on your career.

After reading, we invite you to continue the discussion in our LinkedIn group or follow HigherEd Careers on Twitter.

Hibel: Dr. Baumgartner, could you generally describe the state of higher education budgets for public institutions for 2009-2010 and their similarities and differences from the budgets of private institutions?

Baumgartner: Generally, the state of higher education budgets at public institutions for 2009-2010 is highly constrained and vulnerable to continuing budgetary pressures. As you are aware, most states - including many of the most populous - have experienced significant declines in tax revenues. That affects not only the money available to support the operations of public institutions, but also the money available to support student financial assistance programs. Federal stimulus funds will help many public institutions weather the next year or two, but colleges and universities will still need to scramble to serve the increasing number of students who need their services - particularly community colleges, which are seeing increases in the number of traditional students looking for a more affordable way to begin their college education and increases in the numbers of returning adult students and displaced workers looking to enhance their skills or be retrained in a new career.

The federal stimulus funding available to public institutions really sets them apart from private institutions this year. To receive funds from the ARRA's State Fiscal Stabilization Fund Program, states must commit to maintaining state support for public institutions at 2005-06 levels and to using the SFSF funding to restore support to the greater of fiscal year 2008 or 2009 levels. In most states, that is preventing or reducing large cuts that would otherwise be taking place. In addition, public institutions are generally less reliant than private institutions on endowments and charitable giving, which have suffered during the recession.

Hibel: Dr. Tagawa, could you generally describe the state of higher education budgets for private institutions for 2009-10 and their similarities and differences from the budgets of public institutions?

Tagawa: Without question the economic downturn has required higher education institutions, just as other sectors of the nation have had to do, to reduce their budgets and in some cases make very drastic budget cuts. In our Economic Issues Task Force Survey, the highest level of institutional budget cut reported was 27.5%, and in HR, one department had to make a 40% reduction. When you make cuts of those magnitudes, it is no longer business as usual. While you asked about the private sector, my observation is that the budget problem is common whether the institutions are publicly-supported or independent schools.

Hibel: Dr. Baumgartner, your organization has as one of its responsibilities to recommend to the Governor and General Assembly budgets for operations and grants and for capital improvements for higher education institutions and agencies.¹ At the end of 2008, IBHE asked schools to retain 2.5% of their 2009 fiscal year budget in reserve to help the state make it through 2009 (all state agencies were required to do so). In addition, IBHE appeared to simultaneously put a new budget process in place that would help to align the new budget with the public agenda.² Could you describe this process in your state and how it may differ from previous years?

Baumgartner: The reserve requested by the Governor's office was an unfortunate outcome of the decline in revenues that Illinois experienced over the course of fiscal year 2009. The institutions were not alone in that reduction, however, as most state agencies and their programs were also affected by the reserves.

In spite of the difficult fiscal situation illustrated by the reserves, I'm pleased that the Board was able to begin to align its budget recommendations for higher education with the Illinois Public Agenda for College and Career Success. The Public Agenda was the product of a year-long process initiated by a joint resolution of the Illinois General Assembly and carried out by a public agenda task force made up of political, education, and business leaders from around the state. The Public Agenda, which was adopted by the Board of Higher Education in December 2008, is organized around four goals, each with various sub goals and implementation strategies. While the Board's budget recommendations continue to recognize the importance of adequately funding institutions to meet their missions, the recommendations also focus state resources on meeting the goals of the public agenda, such as encouraging university baccalaureate completion programs on community colleges campuses, providing early intervention funds that encourage at-risk students complete high school and pursue higher education, and providing research matching funds. We plan to move further down this path in future budget recommendations, with a particular focus on successful completion - e.g., increasing the number of degrees and certificates earned and rewarding institutions that find ways to increase the number of successful transfers from two-year to four-year institutions.

Hibel: Dr. Tagawa, using Cornell as an example,³ how representative, and effective, do you feel the measures they have taken are?

Tagawa: With respect to the higher ed business model, the question is how are institutions addressing the issue of the most efficient use of resources. Perhaps we overbuilt during the good times. Now, in the area of institutional infrastructures, institutions are consolidating schools and colleges and services as well as revising policies and procedures.

Here's a great example: One institution went a step further. As we know, all institutions utilize an array of technology. This institution brought in their vendors to work with the institution to assure that the institution was using the technology optimally. In a human resource review, the vendor provided nearly 90 recommendations where "low-hanging" fruit could be picked because the institutions were not utilizing the capabilities of the technology. The result will be improved operational efficiencies and outcomes.

In certain parts of the country, on a wider scale, some higher education institutions have realized that forming collaboratives to obtain/provide services across those institutions is a way to provide better and more efficient services, and multi-campus institutions are centralizing services to gain economies of scale. Some examples include recruiting talent, training and development, security and police, libraries, and technology.

Again with an array of common providers of services, where policies and procedures for business functions are pretty standard, such an approach makes sense. It also gives the workforce a sense that they can have a positive impact, make that positive contribution, to help the institution and even more it forward.

Hibel: Dr. Baumgartner, over the years we have seen many different state budget issues. This year seems to have many states have more complex issues. Many of our customers have had unprecedented budget concerns and some schools have seen their budgets turned into headline news.⁴ Aside from the obvious, what factors are adding to the severity of this year's budget issues?

Baumgartner: For public institutions of higher education, it's impossible to get too far away from the obvious - unemployment, declines in the stock market, the bad housing market, and the overall decrease in business activity being the most obvious. With unemployment at a 25-year high, income taxes have dropped precipitously, and with people cutting back on their spending, sales tax collections are declining. The declines in the stock market - and very low interest rates on savings - have affected income tax collections; family funds available for tuition, room, and board; and, of course, endowment values and earnings, and contributions to institutions. Declines in business activity and outright business closures cost jobs and reduce corporate income tax payments. Of course, these events also cause an increase in the number of people requiring state services such as Medicaid and unemployment benefits, which increases budgetary pressures on states at the same time that revenues are declining.

Hibel: Dr. Baumgartner, CSU Northridge has posted a specific budget FAQ on its website that is mainly aimed at its employees.⁵ What would you recommend to public, and to an extent, private colleges and universities in communicating with its employees about budgetary issues for 2010?

Baumgartner: I would tell them to be open and honest about financial challenges they face, both short term and long term. That means, in part, being honest about what you don't know, but acknowledging that some contingencies are more likely than others. For instance, if furlough days are likely but not certain, it doesn't hurt to prepare people for that possibility, and if positions are going to be held open or deleted from staffing tables, affected parties should be notified. The Cal State Northridge webpage you cite is exemplary.

Hibel: Dr. Tagawa, private colleges and universities often rely on a strong endowment like public institutions rely on state support. Spending rates are endowments have been virtually flat for the past decade.⁶ How do you think endowment spending is going to be used in this next fiscal year in a broad sense and more specifically to keep jobs (like Cornell) and possibly create jobs?

Tagawa: In the current situation, significant declines in revenue sources - whether state support or endowments/giving or even tuition revenue in some cases - are hitting the higher education industry very hard. Thus, the problems are not isolated, but systemic. In such a situation, the issue of the business model for higher education may need to be addressed.

Hibel: Dr. Baumgartner, it does not appear that one state institution in the country has had increased state funding for their operating budget over the past decade.⁷ However, it appears that the states and the schools are working even closer than a decade ago. Could you offer some examples of the ways you feel that the states and schools are working well together?

Baumgartner: I can't speak to all the state institutions in the country, but I can say that Illinois public institutions have had a very tough decade with respect to state funding and the decline of state funding for public institutions is a long-term national trend. That said, I think state leaders generally recognize the value of higher education institutions - even if other budgetary priorities have pushed higher education lower on the state funding totem pole -- and institutions want to do what they can demonstrate their value to elected officials. In my part of the country, states and institutions are working together to address the economic stagnation that has beset the Midwest through partnership to take degree completion opportunities off campus to place-bound students; through new funding sources for high-need health occupations such as nursing; and through funding for research facilities and projects that tie in to state and local economic strengths. Oftentimes, institutions can persuade state officials to provide funding for economic development projects when funding for traditional objects of desire - like that new doctoral program in whatever field -- is hard to come by.

Hibel: Dr. Tagawa, an author suggests that an important part of the budget process is having the financial officer work in a trusting partnership with the unit leader.⁸ What are the essential elements of a successful partnership between the unit leader and the financial officer?

Tagawa: I was the chief budget officer in academic affairs a number of years ago at a major public research university. While funding was regarded as insufficient particularly in salaries for faculty, we were able to continue to operate with annual adjustments to sources of revenue as well as on the expenditure side where we targeted funds to leverage institutional priorities. Invariably, unfortunately we did lose some faculty because we were not able to offer competitive salaries. In organizations as well as other social institutions, the health of relationships are the critical variable. Employees develop their norms and attitudes from those with whom they work, and in many cases, the manager or supervisor can have major impact. Yet, it's not yet clear that, even though the Corporate Leadership Council put out the findings of a major study on employee engagement in 2004, determining that the supervisor/manager had major impact on employees' willingness to give discretionary effort, only 11% of employees were in fact found to be "engaged" in that study. What percent of employees would we say are "engaged" in the current economic downturn? It is critical that the supervisor/manager may well be a key to how institutions fare in the upcoming years.

Hibel: There are a number of different ways to create a budget in higher education.⁹ Dr. Baumgartner, could briefly explain the process of putting together a budget and the differences between an operating and a capital budget?

Baumgartner: I'll start with the easier part of your question. An operating budget pays for ongoing expenses such as salaries, utilities, communications services, insurance, leases, etc. These expenses are generally for things that are used up in the course of normal activities. A capital budget provides for the acquisition or construction of major assets with a useful life and value that extends beyond a single year. Buildings, furniture, fixtures, and equipment are examples of items that might be funded from a capital budget. Because capital projects tend to be very expensive and have a long expected useful life, states and institutions often borrow funds, typically through the sale of bonds, to acquire or construct building or other assets.

States develop operating budgets in several different ways, and they differ from institutional budgeting because they generally do not delve into the level of detail a campus budget officer would. Some state higher education operating budgets are done by formulas, which typically rely on cost studies that calculate the cost of producing a unit of something, generally a credit hour, for a certain type and level of educational programming - e.g., remedial mathematics, or Master's level engineering. Others are done by base or base-plus budgeting, which starts with the current year expenditures as a base and then adjusts the base to account for inflation and any changes in workload, measured by full-time equivalent students, additions to physical plant, and additional programs or services that an institution desires to provide. Some use a combination of the processes, including formula-based performance funding. Many states consider expected tuition revenues in their budget recommendations regardless of whether the state actually controls the rate, collection, or expenditure of tuition dollars.

Hibel: Dr. Tagawa, now that the budget is final for most schools, it appears that many have strong opinions on what it will mean for the academe over the next year.¹⁰ Can you discuss your thoughts on the psychological effects on employers and employees in the academe?

Tagawa: Understandably employees are distracted because of their concerns about themselves as well as their colleagues have suffered a decline in their morale. In many cases, employees divert their time and energy from their work, and productivity and services suffer. Because higher education has never faced a major budget problem like we have now, we may find ourselves struggling in the upcoming months and years. If we don't address the workforce's mindset, we will see a continuing spiral with further morale problems, less productivity. In the face of this kind of future, how we choose to manage our institutions, particularly how we treat our workforce, may well be crucial in the upcoming years.

My concern is that we have expended significant amounts of emotional energy on the budget reductions so that while we are fiscally re-balanced at a lower level, we may now have little psychological reserves to take us forward. Cuts are tough, but not as emotional as facing an upset employee. Those kinds of encounters/experiences take a toll on even the most experienced administrator, supervisor or manager.

The predominant approach seems to be that, if we can just get through the next few months or the year, we will adjust to the new circumstances and figure out how best to proceed. The problem is that we may not pay sufficient attention to the critical issue of the psychological well-being of our workforce. If we fail to do this, we may find ourselves with a workforce whose motivation/drive and willingness to engage and take on more with fewer colleagues and financial resources may fall short.

Hibel: Dr. Baumgartner, recently the Governor of Pennsylvania and four of the biggest state university presidents had a very public debate over funding which included stimulus dollars.¹¹ From the perspective of an employee, should these concerns create concern for your position with your employer?

Baumgartner: Unfortunately, yes, for employees at public institutions, but for two different reasons. First, in the Pennsylvania case, which I believe is unique, the universities left out would not benefit from the stimulus funds, which could leave large holes in their budgets. Second, the federal stimulus dollars won't be available forever - they can only be used in fiscal years 2009, 2010, and 2011, and when they go away, states may face what's being called a cliff in their funding. To receive State Fiscal Stabilization Fund funds, a state must commit to maintaining state support for public institutions at fiscal year 2006 levels. The SFSF funds are then used to maintain overall funding at the higher of fiscal year 2008 or 2009 levels. If, in fiscal year 2011, state budgets haven't recovered enough to replace the SFSF funds with tax revenues, public institutions may find themselves back at fiscal year 2006 levels of support or even worse: i.e., they may fall off the fiscal year 2009 cliff and land back in fiscal year 2006 or earlier.

Hibel: Dr. Tagawa, one of the most recent developments is the raising of tuition nearly 25% at a law school in Indiana.¹² The increase happened after the state increased higher education funding by $100 million and other schools were "pleased" with the state's funding.¹³ We don't want to jump to conclusions in this particular situation, but are schools cognizant of the risks they are exposing their workforce to of unnecessarily raising tuition and how do these risks factor into their budgetary process?

Tagawa: Yes, institutions will have to bring their new fiscal year budgets in line, with revenue reductions having driven expenditure cuts in programs and services with impact no doubt on the workforce where personnel costs - salaries and benefits - account for 75% if not more of the expense side of the ledger. 129 of the 205 institutions in our study reported giving 0% salary increases. And while those cuts have been put in place (or are about to), my sense is that we have only addressed half of the problem. What steps are taken, particularly with the care and nurturing of our employees - faculty, staff, and administrators - those who have survived the budget cuts, will be critical.

Hibel: Dr. Baumgartner, what is your best advice to a higher education professional looking to further his or her career today?

Baumgartner: My advice is pretty basic: be flexible, work hard, keep abreast of new knowledge in your field, and commit yourself to learning more than you need to know for your current position. The last three are just more of the same for people in higher education - habits likely picked up long ago -- but flexibility is particularly important in the current economic environment and long-term trends and outlooks.

Hibel: Dr. Tagawa, how do you feel relationships between management and employees have been affected because of the dramatic change in budgets? Are there lessons to be learned?

Tagawa: One of the important findings in our survey was that 46 HR units reported that they were "more valued" in their relationships with their institutions' leadership. Those offices were predominantly in institutions where 10% or greater budget cuts were made and the HR units responded creatively with such services as increased individual counseling, going to the workplace to hold discussions, increased manager and supervisor training - all in an effort o put a human face on a very difficult situation. Many institutions adopted furloughs - temporary reductions in work hours to generate savings - so that employees would not be laid off. While not as common in the same light, some institutions also have made reductions in benefits - contributions to health and retirement.

The bottom line of these efforts is that it sends a clear message - that the institution will take the steps it can to protect and to keep its people and to the extent that actions continue in that same spirit, those institutions more likely will experience less decline in morale and perhaps a workforce more willing to work and engage on behalf of the institution.