Q&A with Chip German

Q:        In the University Financial Model, my central service provider costs are allocated to other university units and schools. How will those allocations be calculated?

A:         Each of Melody Bianchetto’s units fits in one of three central service cost categories: Student Services, Support Services, or Business and Executive Management Services. Each cost category has a unique allocation formula. Here is a breakdown of cost categories and Melody’s associated units:

  • Student Services
    • Office of Student Financial Services
  • Research Support Services
    • Office of Sponsored Programs
  • Business and Executive Management Services
    • The Associate VP’s Office
    • Office of the university comptroller
    • Managerial Reporting Project

Q:        So how does it work?

A:         In general, start with the net cost. Any cost a unit generates, without a cost-covering revenue source or recovery, is a cost that must be covered through the cost-allocation process.

So for example, the Office of Sponsored Programs has net costs that are allocated to the units that use its services. A weighted formula based on the number of research awards and dollar value of research awards is used to determine each unit’s proportional share of the OSP costs.

OSP Formula (sample)
Unit’s associated costs = .5 (share of award count) + .5 (share of research dollars)

Let’s look at a simple hypothetical scenario:

If school A had 10% of the total awards processed by the OSP, and those awards reflected 8% of the total research dollars, School A would be allocated 9% of the OSP net costs as in this hypothetical example.

Units Awards #  Research $ # % $ % Share of OSP Costs
School A 100  $        800,000 10% 8% 9%
Other units 900  $    9,200,000 90% 92% 91%
Total 1000  $  10,000,000 100% 100% 100%

Q:        Do all of Melody’s units have their costs allocated by the same formula?

A:         As noted above, most of Melody’s units fall in the central service category of Business and Executive Management.  The formula for central Business & Executive Management cost allocation is a little more complex. Those costs are allocated only to academic schools and to specially-designated academic or public service entities (Miller Center, ROTC, Center for Public Service, museums, Virginia Film Festival, etc.). Each of these units is allocated the B&EM costs based on its proportion of direct expenditures for each entity as illustrated in the hypothetical example below.

Melody’s other units fit in Research Support Services (whose costs are allocated as shown in the previous example) and Student Services (with costs allocated to schools according to how many students are enrolled in them).  For other service areas of the University, there are other formulas—there are a total of eleven central cost-allocation formulas, and Melody’s areas use three of them.

Q:        Does the University Financial Model apply to all components of the University?

A:         It is important to understand that the University Financial Model applies only to the University Division (agency 207) and only to operating funds (not capital funds).  Two schools, the School of Law and the Darden School, are covered under a different arrangement.  They pay a flat tax for the central services they use under an agreement from more than a dozen years ago recognizing that they are “self-sufficient” schools.  They earn that description because they each generate enough revenue, largely through their market-rate tuitions, to cover the costs of the central services they consume.

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September 2014 Report: New Modeling and Reporting Environment, New Data

As of this writing, initial static views of school-specific data for FY 2013-14 (similar to those created in the previous model platform in Fall 2013) have been distributed to the University’s schools for initial review, and training on the just-implemented Hyperion reporting environment has begun for users from many areas of the University.  Work continues to complete the translation of the University Division’s FY14-15 budget into the terms of the University Financial Model.  As soon as that is complete, the budget office will distribute initial budget assumptions and begin coordination of the process to build the FY15-16 budget fully in the terms of the new financial model.

The FAQs/Issues tab of this blog is serving as a central point for sharing currently relevant implementation information to the teams working on various aspects of the model around the University.

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August 2014 Report: Transitioning to the UFM

In addition to the schedules noted in the July report, more detail is now available about the current state of methodology employed in the University Financial Model.  You can find those details in a document and a presentation both dated August 27, 2014, on the Resources page of the University Financial Model web site  (http://www.virginia.edu/resourcingthemission).

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July 2014 Report: Transitioning to the UFM

In addition to the implementation of the Hyperion Cost of Education tool that is now under way, teams have begun work on a set of enabling projects to ensure that we’ve largely implemented the University Financial Model by the end of October 2014. Those enabling projects include:

  • By August, establishing the process for distribution of the endowment administrative fee, which under the model goes fully to the holders of endowments (previously half of the fee was held centrally to help cover central services costs).
  • By August, establishing the process for distribution of the Facilities and Administrative (F&A) funding that is associated with research grants. Under the UFM, that funding goes fully to the entities that house associated research grants (previously a portion of that funding was held centrally to help cover central services costs).
  • By September, establishing the process for assessing the costs of facilities operations and maintenance (O&M) to University schools and units while ensuring that the revenues to cover those costs to those schools and units are available as appropriate.  Also at that time, completing implementation planning for direct billing for utilities for those units that previously had these costs covered by central resources.  Until the detailed process for this billing is fully in place, utilities will be included with the other facilities-related costs in depictions of the financial model.
  • By September, translating the budget for FY14-15 from the version that was built the traditional way into the terms of the University Financial Model. The effect of this translation will have no budgetary impact on the University’s schools and units (for every case where new expenditures are generated for schools and units, equivalent revenue will be allocated to cover them).
  • By September, development of a schedule for the budget process for FY15-16, which will be built from the outset in the terms of the new financial model.

Once these five steps are taken (we expect that to be complete by September 1), the next three steps will follow in short order (current estimate is October 1):

  • Undergraduate tuition revenue will be allocated to the entities that earn it.
  • Central service costs will be allocated to schools and units.
  • Additional hold-harmless funding will be allocated to schools and units to ensure the budgetary neutrality of all changes.

With these steps, the University Financial Model becomes the budgetary model of record for FY14-15. Parallel with the last stages of those changes, the University Budget Office will have begun its work to prepare for development of the FY15-16 budget entirely in the terms of the University Financial Model. Important highlights of the early stages of that process include:

  • Development of initial budgets for central service providing-organizations, so that those allocated costs will be available for budget planning by the schools and units that receive them (needs to be complete by October)
  • Conversations between the deans and the Provost on what portions of this year’s hold-harmless funding would continue as hold-harmless in FY15-16, what portions would become base (ongoing) operating support, and what portions would become strategic (shorter term) operating support.
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A New University Financial Model: The Final Step from Concept to Reality

This year is the final stage of planning for the new financial model, and the University has constructed the academic division budget for FY14-15 with an eye to translating it into the new model’s terms in the earliest days of coming fiscal year.

The new model’s planning period has been long enough that the term “new” seems oddly inappropriate when applied to something we’ve been discussing for years now. So, you are likely to hear references in coming days to the “University Financial Model,” or UFM. That will be a good signal to us all that the concept is fast becoming real.

So where does this notion of a University financial model fit in the broader context of things we’re trying to do at the University these days? Is it connected to Organizational Excellence? What is its relationship to the Managerial Reporting initiative? Let me start my personal answer to those questions with a picture:

First, the University has established an ambitious Strategic Plan that sets a path to the future by specifically identifying areas on which the institution will focus its attention. It tells us where and what, but the plan wasn’t specifically designed to tell us how. The answer to how will come in many forms.  Those forms include new ways to maximize the effects of our financial resources (University Financial Model) and new ways to drive excellence in how we approach our work (Organizational Excellence).  Also, more effective navigation of the sea of data in which we are all immersed every day (Managerial Reporting) will provide the improved analysis and decision-making that we need to make progress in reaching the ambitious goals of this remarkable and challenging place.  All of these efforts are interconnected. For example, the first use of a new Cost-of-Education tool that is part of the Managerial Reporting initiative will be to develop scenarios that illustrate the University financial model.

Back to that University financial model: it enables leaders to more directly shape the financial destinies of the schools and units they lead while at the same time holding those leaders more clearly accountable for their performance. In the past, central leaders aggregated some of the revenues that those schools and units generated and allocated them in ways that weren’t always transparent to observers, while in the new model more revenue flows directly to the schools and units that earn it. At the same time, costs for central services that University leaders previously funded “off the top” of those aggregated revenues will now be allocated to schools and units by estimates of their usage of those services, based on such drivers as numbers of faculty, staff and/or students. Often for the first time, schools and units will see their entire financial picture and will be able to plan with a clear understanding of the financial implications of their plans.

The entire system is designed to reward academic-values-driven creativity while providing the transparency of financial planning and decision-making needed for everyone at the University to help ensure that we gain the maximum value from the financial resources we have. This model, as I’m fond of saying, enables the development of a cost-knowledgeable culture here at U.Va. I’m also fond of reminding folks that cost-knowledgeable doesn’t mean cost-driven. We should (and must) make decisions based on academic values. That’s why we’re here, after all.

Although the academic division budget currently being developed anticipates translation into the new model, it is the last that will have been assembled mainly using the University’s traditional processes and terms of reference. Schools and units will enter the coming fiscal year with the familiarity of a budget built the “old” way, but will participate in its conversion into the new framework. Few of our academic schools are able to directly generate more funding in a year than they spend, nor do University leaders expect them to do so. Because the institution has additional resources beyond those that the schools and units can provide themselves, such as unrestricted state funding and unrestricted private funding, the University will provide additional operating support. In the first year, that support will take the form of so-called hold-harmless funds, while in later years it will evolve into a combination of base operating support (ongoing) and strategic operating support (limited in duration).

As the academic division budget is translated into the terms of the new University financial model early in FY14-15, planning that is conducted exclusively in the new model’s terms will begin for FY15-16 and beyond. By October, the early steps of the budget-construction cycle for the next fiscal year, using those terms, will be well under way, and the transition to the new model will be complete by the spring when the FY15-16 budget is approved by the Board of Visitors. And the second year that our colleagues in the budget office coordinate the development of a budget in those terms, I’ll proclaim that, actually, Mr. Jefferson invented it. Which he probably did.

Chip German

[Note:  This post also appears in the blog of the Associate Vice President for Finance, http://uvaavpf.blogspot.com]

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