Incentives in the Budgeting System

After the first two questions posed in a previous article on budgeting and finance, namely identifying the sources of academic income and how the department’s budget is established, have been answered, the new chair should quickly align the answers to see if the department’s budget contains elements of the income it generates. For example, lab fees generate a good deal of income for laboratory-based departments and they rarely cover 100 percent of the costs. The chair should make a calculation of the percentage of the lab fee that is returned in the budget each year (check previous budgets) to make certain that it is available to the department in a consistent manner. Chairs should not expect a 100 percent return, as there are substantial institutional costs (for space and lab personnel) associated with offering laboratories.

The new chair should also make similar determinations for course fees that defray the cost of running tutoring or mentoring sessions for students; these fees should be returned at 90-100 percent if the department is shouldering the entire cost. Other potential income sources that can contribute to department income are grant overhead and research release (buy-out) dollars. Are these income sources components in the department’s allocation? Do they contribute in quantitatively proportionate ways? Together with student tuition income these factors (with supportive data!) will become important when having a conversation with the dean on ways that the department can increase its budget allocation.

These inquiries are designed to lead to an overarching question that a new chair might ask. That is, “How can I enhance my department’s budget?” The goal here is to find out if there are incentives built into the formula that will allow for more resources based on improved productivity. For example, if a department were to develop a state-of-the-art website that helped the department recruit more students, would the dean share in the proceeds resulting from the increased tuition? This assumes that a portion of the new income is credited to the school; if not the dean should schedule a conversation with the provost. At public institutions where finances are more transparent, a chair can calculate the amount of tuition and fee income a new student generates for the institution with reasonable accuracy. Assuming these students are handled largely “on the margin” (i.e. at no real additional costs), any fraction of the tuition would be entirely available for those additional things (new instructional equipment, student research grants, space renovation to house a student club) that could not be funded through the standard budget.  Similar outcomes could be possible for departments that improve student retention, which also results into increased tuition revenue and, over the long term, improves institutional reputation.

Finally, for research institutions, there is income from grant overhead and from research release (course buy-outs). Virtually all institutions return a percentage of the dollars equivalent to the overhead earned to the school with the school passing portions of it to departments and sometimes to the principal investigators. In this way departments and their faculty are incentivized to write more proposals. Returning research release (buy-outs) dollars to departments was discussed previously.

The three areas discussed in this third and final article on budgeting and finance for beginning chairs can result in win-win situations for all involved. Flexibility with budget categories allows for timely responses to threats and opportunities, carry-over allows for long-term planning for large acquisitions or projects, and incentives for improving performance benefit everyone from upper administrators to students. New chairs should make every effort to learn what is possible at their institutions and be prepared to coax further changes to improve the fiscal positions of their departments.

N. Douglas Lees, PhD, is associate dean for planning & finance, professor, and former chair of biology, in the School of Science at Indiana University-Purdue University Indianapolis (IUPUI).