College Budgets: A Guide for Faculty

Most faculty pay little attention to their college’s budget—until a financial crisis hits. Budgeting isn’t simply an exercise in accounting; instead, budgets reflect a college’s values, priorities and power structures.

For example, the University of Arizona is still grappling with a $177 million budget deficit uncovered a little more than a year ago. The university overestimated the amount of cash it had on hand and was making strategic investments in athletics and purchasing an online, for-profit college. Since uncovering the deficit, the university has restricted hiring and capital projects along with imposing across-the-board cuts.

The budget crisis at UA is particularly bad, but the crisis extends far beyond this university. Many institutions of higher education are experiencing similar crises (see here, here and here for some recent coverage). Lingering effects of the COVID-19 pandemic, inflation and decreases in enrollment have combined to endanger higher education institutions. In 2024 alone, at least 16 mostly small nonprofit institutions closed their doors. As evidenced by the UA crisis, even large public institutions are struggling. And just last week, Moody’s downgraded the outlook for the entire higher education sector from stable to negative in light of recent and potential federal policy changes.

My own university, the University of New Hampshire, recently announced plans to cut $15 to $20 million for the next fiscal year. Now, faculty are very interested in budgets, and I’m fielding lots of questions from my colleagues.

When I started as a faculty member, I understood little of how budgets work at colleges. Then I joined the Faculty Senate and the finance and administration committee, which I now chair. As a result, I had to get up to speed very quickly—through a mix of readings, discussions and courses in accounting. Thus, I’m sharing my perspective as a faculty member interested in budgeting as opposed to a finance expert or academic administrator.

I’ve observed that many of my academic colleagues are relatively uninformed about the intricacies of their institution’s budgetary workings. This lack of awareness is perhaps unsurprising considering that most academics are trained in specific fields, often disconnected from financial matters. However, I argue that academics should comprehend their university’s budget for three compelling reasons.

Firstly, a university’s budget serves as a reflection of its overall and long-term health. Understanding the financial landscape provides valuable insights into the institution’s priorities, challenges and prospects.

Secondly, in a shared governance model, faculty members play a pivotal role in holding senior administration accountable for budgetary decisions. Awareness of budgetary processes empowers faculty to actively participate in discussions surrounding resource allocation and financial planning.

Thirdly, and particularly pertinent to faculty, the values of an institution are embedded in its budget. Consider a scenario where a faculty member proposes a new initiative to enhance the writing skills of first-year undergraduate students. To successfully develop such a program, they must grasp how decisions are made within the university, especially for the budgetary process.

As former president Joe Biden has quipped on numerous occasions, “Don’t tell me what you value. Show me your budget, and I’ll tell you what you value.” This statement underscores the profound impact of budgetary decisions on shaping the priorities and values of an institution. Therefore, for academics advocating for initiatives aligned with their values, a comprehensive understanding of the university’s budgetary landscape is an invaluable asset.

Understanding the inner workings of university budgets is essential, yet the intricacies can be surprising for those unfamiliar with the process. The construction and implementation of budgets vary significantly among institutions, contingent upon factors such as the type of institution (R-1 versus community college), its private or public status, and the overall size of the university. Broadly speaking, though, university budgets can be built in one of six ways.

1. Incremental budgeting: Small changes are made each year based on the previous year’s budget to reflect inflation, changes in enrollment or salary increases.
2. Zero-based budgeting: The budget goes to zero each year and each financial unit (e.g., department, center) has to rebuild and justify a new budget.
3. Activity-based budgeting: Dollars are distributed to the units or activities that are the most profitable.
4. Responsibility center management: In the most decentralized model, individual units are responsible for revenue generation and using the resources in whatever way they think is best. Units then pay a portion of their revenue, akin to a tax, to units and cost centers that are centralized (e.g., IT, upper administration).
5. Centralized budgeting: The senior administration doles out resources to individual units after collecting all revenue into a single pool.
6. Performance-based budgeting: Similar to activity-based budgeting, a budget based on performance goes beyond simple revenue potential. Instead, a unit sets objectives and is rewarded for meeting those objectives, even if the objectives are not focused on revenue.

Different university budget models come with distinct advantages and drawbacks. Centralized budgets, for instance, enable institutions to quickly adapt their priorities, but they also concentrate decision-making power in the hands of a select few. On the other hand, responsibility center management empowers unit leaders, though it may foster competition among units.

It is common for universities to adopt a hybrid budget model, incorporating elements from various structures. For instance, a university might allocate a percentage of its revenue to a centralized budget center, while the remaining funds operate within a performance-based budget model directly linked to a cost center.

Consider the earlier example of initiating a program to enhance first-year students’ writing skills. In a university with a centralized budget, the budgetary process is likely more influenced by external factors such as university rankings and government funding. Convincing officials in this scenario may involve demonstrating how improved writing skills contribute to metrics used by external groups, such as student retention. In an activity-based budgeting system, where revenue hinges on student credit hours, departments may have strong incentives to mandate specific courses offered by their department. However, in a performance-based budgeting model that is less focused on revenue generation, building new universitywide objectives that focus on enhancing first-year student writing may be more advantageous.

I encourage readers to explore their own university’s budget model. Some universities excel at transparency in budgetary processes (the University of California, Davis, is a good example). However, in cases where the budget model is not clear, faculty should ask questions of their department and college leaders. A solid understanding of the budget’s mechanics provides a clearer path to effecting meaningful change within your institution. If you want a deeper understanding of university budgets, check out resources like Dean O. Smith’s How University Budgets Work (Johns Hopkins University Press, 2019).