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6 Alternative Budget Models for Colleges and Universities

Carefully weigh these higher education budget model insights to promote both the financial and academic wellness of your institution.

In the fall of 2022, Dean Elaine Carey of Oakland University wrote a compelling essay detailing the struggle of finding a suitable higher education budget model in wake of the COVID-19 pandemic. She outlines the challenge of maintaining the “delicate balance” of managing financial urgency while supporting student and faculty initiatives. The answer to this issue requires careful consideration and even blending aspects of major and alternative budget models to maximize success

Higher education leaders can determine how to effectively organize their institution’s finances by thoughtfully weighing the benefits and considerations of various alternative budgeting models. To help institutions find the right fiscal path forward, here is an overview of six budget models or budget-related practices utilized in higher education:

  • Incremental Budgeting
  • Zero-Based Budgeting
  • Activity-Based Budgeting
  • Responsibility Center Management
  • Centralized Budgeting
  • Performance-Based Budgeting

Incremental Budgeting

Incremental budgeting is a traditional budget model in which budget proposals and allocations are based on previous year’s funding levels. Only new revenue is allocated. Budget cuts are made as a percentage of the institution’s historical budget and are typically across-the-board in reach.


Incremental budgeting has historically been attractive to institutions of higher education because it is easy to implement, provides budgetary stability, and allows units and institutions to plan multiple years into the future, due to the predictability of the model.


This model is limited in its vision, as it’s difficult to determine where costs have been incurred and how these costs contribute to revenue and value creation. Institutions are accountable for what they spend in the most basic sense.


The state of your academic program portfolio significantly influences your institution’s budget. Explore our Academic Assessment Suite to enrich your program budgeting journey. 


Zero-Based Budget

Zero-based budgeting clears the previous budget every year and each institutional unit reapplies for funding. This means that units or departments must continually justify their funding requests year over year.


Zero-based budgeting is an effective way of controlling unnecessary costs. Since departments and divisions do not automatically receive a certain sum each year, all money allocated to a unit has a purpose, keeping waste and discretionary spending to a minimum. Some administrators agree that zero-based budgeting forces units to continually re-align and articulate their objectives, outcomes, and indicators of success to help institutions directly attune programs to institution-wide goals and values.


Zero-based budgets take longer to prepare and may be too aggressive of a strategy. This model requires a lot of time, energy, and communication. It could also disrupt the professional climate of your institution, as some staff and faculty members may perceive zero-based budgets as a threat to their stability or autonomy.


Activity-Based Budgeting

Activity-based budgeting awards financial resources to institutional activities that see the greatest return, in the form of increased revenues, for the institution. Adopting this budget model may involve:

  • Developing activity groupings for budgeting, in coordination with campus leaders and constituents
  • Developing fund source groupings
  • Designing budget processes whereby campus leaders use activity taxonomy and allocation plans to align resources to institutional strategic objectives
  • Implementing an activity-based campus budget allocation process


This alternative budget budget model may allow administrators to streamline resources to meet broader strategic objectives.


Some faculty or staff labor unions present concerns regarding the risks of measuring programs based solely on revenue potential. Activity-based budgeting also does not fully allow for the budgeting of general programs such as campus security, disability services, veterans services, etc.


Increased student enrollment means a more flexible budget. Learn more about how to Drive Higher Education Enrollment with Cross-Departmental Collaboration.


Responsibility Center Management

Responsibility Center Management (RCM) delegates operational authority to schools, divisions, and other units within an institution, allowing them to prioritize their academic missions. Each unit receives its own revenues and income, including the tuition of its enrolled students. In this way, units effectively compete for students. Each unit is also assigned a portion of government support (where applicable). However, units are also responsible for their own expenses, as well as for a portion of expenses incurred by the college or university’s general operations.


RCM is an alternative budget model centralized budgeting. It is designed to support the achievement of academic priorities within an institution and allows for a budget that closely follows those priorities. Some administrators are turning to RCM as a solution to budgetary woes brought on by shrinking enrollment. Additionally, advocates of RCM claim that prompting individual units to advocate for their own funding may incentivize leadership to diversify revenue sources, increasing financial security.


Similar to activity-based budgeting, some faculty and even administrators believe that RCM may risk mission and values by launching units into a zero-sum game, pitting them against each other. In a five-year review of the Rutgers University RCM strategy, one administrator stated it “appears to discourage desired behaviors or impede mission-critical programs and initiatives, including those that relate to Ph.D. education, arts and humanities, diversity, equity, and inclusion, and those that support students or further the University’s public mission.”


Grantseeking is an invaluable tool to promote your institution’s financial health. Join us for the latest insights found in our webinar, Grant Seekers Guide to FY 2024 Budget Requests.


Centralized Budgeting

Centralized models create a central pool of revenue, made up of tuition revenue from all colleges or programs, state funding, and ancillary streams of revenue. This budgeting practice delegates decision-making powers to upper-level administration, who distribute funds to subsidiary units. Typically, colleges and universities combine aspects of centralized budgeting with decentralized budgeting.


Centralized budgeting can help institutions that have difficulty controlling allocations and managing known costs (such as computer equipment and software), especially in times of financial crisis. This model allows institution leadership to change course quickly without the additional steps needed to carry out a more de-centralized model (such as RCM).


Without an appropriate level of transparency or communication to subsidiary units, a centralized budget model could seem to err on the side of favoritism. This may weaken trust in the centralized body from certain areas of an institution, even if favoritism isn’t being done. Some opponents also claim that centralized budgeting stifles innovation by removing the competitive aspect of funding.

Performance-Based Budgeting

Whereas an activity-based budget awards funds based on the amount of revenue-generating activity a unit undertakes, a performance-based budget awards funds based on a number of defined outcomes and standards, rather than just the revenue potential alone. An effective performance budget will highlight how well dollars fund day-to-day functions and provide predictors on how likely certain functions and programs are to produce positive outcomes.


A performance-based budget should give an institution a good idea of how money may translate into results. This model also adds a level of transparency between administrators, faculty, and state funding bodies, making it easier to obtain government funding and fairly allocate resources. Program- or college-level units may also benefit from this increased control over their funding, as they may create plans to boost their chances of funding.


Launching this budget model may require a lot of time and energy to determine performance metrics and lay the groundwork for attaining those metrics. While the upfront time and energy will require the most commitment, institutions will need to ensure ongoing analysis and review of the performance metrics year over year. Institutions should also create a plan for units that struggle to perform, but still promote the institution’s mission and values. Relying solely on a performance-based approach risks putting valuable programs into a downward spiral as they’re given fewer and fewer resources to make up for their shortcomings.


Rejecting a One-Size-Fits-All Higher Education Budget Model in 2023-24

In the 2023-24 academic year, a myriad factors risk diminishing the funding power of higher education institutions, including the continued enrollment declines, increasing costs, and decreasing revenue. Finding a budget model that promotes financial stability without sacrificing institution mission or values requires careful consideration; it may seem like an intense balancing act to manage the needs of students, faculty, and the long-term financial health of institution. Some institutions will find success in using more than one type of budget, strategically combining alternative budget models to manage the inevitable weaknesses of each one. Ultimately, institutional leadership can only make constructive financial decisions once your institution’s fiscal standing has been brought into full view, while carefully weighing all data-based budgeting considerations.

Be sure not to miss the latest financial trends institutions are embracing in our 2023 Higher Education Trend Report.


Learn more about higher education budget options with these Hanover Research insights.

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