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7 Budgeting Methods

Updated on January 8, 2017
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Enthusiastic strategic manager skilled in budgeting, fundraising, grant writing and policy development. Master of Public Administration.

Responsible Budgeting
Responsible Budgeting

Funding for Education

Public funding for education has been hotly debated at the federal, state and local levels. Although most public officials and the citizens they represent desire funding for educational initiatives, the process, approach, and specifically what and how program areas of education receive funding tend to be contentious. This is no less true in the state of Iowa, one of the nation’s leaders in education where gambling proceeds are used in part to indirectly fund education. I will examine the educational budgeting methods of other states and universities and compare them to Iowa.

7 Budgeting Methods

Zierdt (2009) outlines 7 methods:

(1) Incremental. The most traditional and common, line-item approach.

(2) Formula budgeting. This method uses quantitative measures to distribute resources.

(3) Zero-based budgeting. This creates a budget from scratch.

(4) Program budgeting. This method applies specificity in how funds are to be spent.

(5) Performance-based budgeting. Employs an accountability and strategic planning process.

(6) Initiative-based budgeting. This method creates funding for new initiatives.

(7) Responsibility centered budgeting (RCB). This method uses cost centers to generate surpluses or deficits that would be allowed to carry over into future budget years, inspiring managers to control costs, be efficient, and increase revenue. The best result would allow the cost center the ability to fund/sustain its own initiatives from the accumulating surpluses.

RCB is relatively new but is being considered in the state of Minnesota which currently uses a hybrid of this method with incremental budgeting, a process they call “Allocation Framework.” What other educational facilities are using RCB?

State of Iowa Budget Priorities

The Iowa Department of Management (DOM) sets forth the priorities for the state budget. It is designed to integrate budgeting with planning to improve decision-making. Their mission is, “To lead enterprise planning and coordinate enterprise governance systems so Iowans receive the highest return on their public investment” (DOM, 2012). One of the clear priorities is early childhood education. However higher education for public universities is also addressed.

The State of Iowa Board of Regents makes specific funding recommendations to the legislature. They state that, “sufficient funding from State appropriations is critical to ensuring effective and quality education, research, economic development initiatives and other services from Iowa’s PublicUniversities and SpecialSchools (Board of Regents Annual Report, 2010). The key educational funding areas are: (1) Salary funding, (2) $493.6 request for higher education operating appropriation, (3) $98.1 million for higher education legislative special purpose appropriations, (4) $14.9 million for special school operating appropriations, (5) $5.0 million economic development operating appropriations request, (6) Full funding of Iowa Care Claims (no amount specified) and (7) $414,455 for Iowa Public Radio. The budget priorities and allocation types can be summarized as follows:

•Continuation of FY 2011 recurring appropriations of $465.7 million

•Incremental funding of $19.1 million to support new strategic initiatives

•Replacement of one-time funds of $8.7 million with recurring appropriations

In Iowa, the budgeting process for education is largely traditional incremental budgeting with recurring appropriations. What is the source of funding?

State of Iowa Funding Sources

Iowa’s lottery does not directly fund education. Lottery proceeds in Iowa have three main purposes: They provide support for veterans, help for a variety of significant projects through the General Fund, and backing for the Vision Iowa program, which was implemented to create tourism destinations and community attractions in the state and build and repair schools (Iowa Lottery, 2012). So if we follow the funding path, we can see that monies from the lottery flow to the General Fund. In turn, according to the Iowa Department of Management, 58% of the General Fund is appropriated to education. As stated above, the Vision Iowa program is also funded by the lottery and part of those funds go towards school repairs.

Source

Thoughts?

Should lottery proceeds be used to fund public education?

See results

State of Georgia Funding Sources

The State of Georgia uses lottery proceeds in part to fund public education. A closer examination of the state of Georgia’s lottery fund handling reveals some legitimate concerns about commingling of funds. “As lottery proceeds are realized for an earmarked function such as education, the temptation emerges to replace general purpose funding for education with the new special purpose funds and to shift general purpose funds to other state government functions. This practice is difficult to detect if general purpose and special purpose funds are commingled during the budget and appropriations process” (Lauth & Robbins, 2002, p. 90). To remedy this, the Georgia Constitution added the following: “Net proceeds after payment of . . . operating expenses shall be separately accounted for and shall be specifically identified by the Governor in his annual budget presented to the General Assembly as a separate budget category…” (Lauth & Robbins, p. 93). The State of Iowa budgeting procedures does not address commingling of funds. It appears that the State of Georgia has more adequately addressed this issue. What are some common budgeting tools used by states for higher education?

Ohio State and the University of Southern California

Both Ohio State University (OSU) and the University of Southern California (USC) have adopted RCB though the method is more established at USC. (Zierdt, 2009). OhioState’s previous budget method was highly historical and incremental and lacked links between revenues generated and the budget. “The key components of the newly adopted RCB model were budget rebasing of colleges, sharing annual changes in revenues, allocating annual changes in expenses, imposing a ‘central tax’ and monitoring for unintended consequences” (Zierdt, 2009, p. 349). This seems like a reasonable model to implement and follow.

At USC, the method moved from traditional incremental budgeting to RCB in 1983 (Zierdt, 2009). The results for implementing RCB include: (1) Budgets are developed and controlled at the unit level, (2) Revenue and expense forecasts are developed by each unit, (3) All funds are incorporated in the budget, including unrestricted and designated funds (grant, gift and endowment), and (4) Information is web-based and shared. The RCB method appears to be working well with this university. Should it be applied to all higher education facilities?

The University of Minnesota

The University of Minnesota is “infusing” the RCB method into their “Allocation Framework” (Zierdt, p. 350). Among the principles of this framework include financial planning driven by academic goals, an “equitable” distribution of funds and adequate funding based on institutional missions. All of these principles of RCB appear to be a very reasonable to traditional incremental budgeting. How can these principles be applied in Iowa?

Findings and Recommendations

Responsibility Centered Budgeting is a highly recommended budgeting method. The principles of RCB should be adopted in the state of Iowa. Further, Iowa should adopt the methods employed by the state of Georgia for better accountability of lottery funds in order to avoid commingling. The states in this report largely use elements of several traditional budgeting methods. None of the states or universities in this study addressed zero-based budgeting, a method that is largely being abandoned. All public universities should be open to integrating elements of the RCB method into their budgeting planning and implementation.

References

Iowa Department of Management. Retrieved from: http://www.dom.state.ia.us/

Iowa Lottery. Press Room: Where the Money Goes. Retrieved from: http://www.ialottery.com/Pages/Pressroom/WhereTheMoneyGoes.aspx

Iowa State Board of Regents. Annual Report 2010.

Lauth, T. P., & Robbins, M. D. (2002). The Georgia Lottery and State Appropriations for Education: Substitution or Additional Funding?. Public Budgeting & Finance, 22(3), 89-100.

Zierdt, G. (2009). Responsibility-Centred Budgeting: An Emerging Trend in Higher Education Budget Reform. Journal Of Higher Education Policy And Management, 31(4), 345-353.

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