At a university, PBB is simply a budget model that allows units to experience the economic impact of financial decisions and attempts to incentivize good financial decision making.
Revenue Cost Attribution Tool
The first step in evaluating our education and general funds budget model at PSU is to understand how these funds flow into and through the university. To accomplish this we developed a revenue and cost attribution tool. Using this tool we can gain insight into where revenue is generated and where costs are incurred and use this information to inform strategic decisions. The two principles that guided the creation of this tool are simplicity and that revenue and the associated costs must "live" in the same location.
History of Performance-Based Budgeting
Portland State University currently manages its resources using an incremental budgeting process, which during the recent years of declining state support has become more decremental in nature. This previously was a common, nearly universal, method of budgeting used in higher education with a centralized focus wherein academic and non-academic units present a budget proposal to the university’s administration that is incrementally either larger than the previously approved budget or smaller when overall resources decline. This model involves individual negotiation, with rewards not clearly related to the units’ performance.
Over the last two decades, there has been a growing trend in higher education administration to move to Performance-Based Budgeting (PBB), which connects the budget process with the performance of each unit. The “performance” is defined in highly individualized ways depending in large part upon the institution’s culture and strategic priorities. Rather than being centrally managed, resources flow to units based on various performance metrics that often include generation of student credit hours, the number of students with declared majors in the unit, or degrees granted, and for support units, formulas representing the volume of students or faculty served. Similarly, expenses associated with each unit are attributed with varying degrees of specificity and complexity ranging from a uniform overhead charge to direct application of each expense incurred. While the terminology and the specific operation of PBB at Higher Education Institutions vary, the underlying philosophy holds that each college or unit is rewarded for its generation of resources, net of the expenses required for their generation. Two key principles for PBB are a) that the process supports the academic mission and does not drive it and b) expenditures are aligned with the achievement of institutional strategic priorities.
At Portland State today, in an environment of declining state support, continued pressure to improve efficiency, and the need to improve student outcomes, the development, and implementation of PBB presents an opportunity to allocate resources in a logical, transparent, and efficient manner that rewards achievement of specific strategic initiatives. In June 2011 the Financial Futures Task Force, which had been tasked with evaluating the opportunities and challenges associated with the various resource allocation methods, recommended that the university adopt a new budget model incorporating the general principles of PBB. The President accepted this report and has created for the 2011-2012 academic year a working group and a steering committee tasked with the development and implementation of PBB for PSU. The working group was charged with assembling the data and developing the tools and options for the PBB and was co-chaired by Monica Rimai (Vice President Finance and Administration) and Kevin Reynolds (Vice Provost for Academic Fiscal Strategies and Planning). The steering committee was co-chaired by Monica Rimai and Sona Andrews (Provost and Vice President Academic Affairs) and was charged with directing the Working Group, and for making final decisions on the components of the PBB.