University of Trent

I started working here six months ago, in July 1996, for the vice president of administration. On September 15, my boss, Carl Johnson, received a letter from the director of Financial Planning and Budgets, Harrison Fielding, about the $1,000,000 overrun in our budget. The letter said: ". . . Carl, we are very concerned. It is awfully late in the year to still have uncertainties of this size in our operations." Harry was right. I felt I had to do something about it. Now, here I am, six months later. My salary has nearly doubled. My data systems are off and running. And we seem to have our expenses under better control; but there are still many things left to do. I don't know if I want to be, or even can be, the person to do them. Chip Wise was talking intensely, in his slow Southern drawl, about his experiences at the University of Trent. He was in his early 30s, an ex-Navy supply officer, and an MBA. He had chosen his job carefully and deliberately. "I always wanted a public sector career. And I know I have a lot to contribute. Not only my experience in the Navy and my training, but more importantly, the kind of person I am. I want to do a good job. I expect other people to do the same. If they don't, I deal with that issue. I not afraid to be tough. I don't expect everybody to love me. "Mainly, I want to do a good job here and to have a good life. I got my B.A. at this school. It was one of the greatest periods of my lifebeing a student here. And I'd like to show my thanks now. But I don't know if I can stay, there are so many problems.

The Budget Situation

He continued: "The University has had a deficit in three of the past five years (see Exhibit 1). And although revenues have grown, the expenses have grown even faster. The university is going on a big fund drive, but it also has to control expenses to show donors their funds will be well spent.

"My own area has not helped the problem much. We have a budget of about $24 million. And, as you can tell from the letter from Fielding, we've had trouble in controlling it. "Under the vice president of administration are separate units for the Bookstore, Dining Services, Construction, Personnel, Real Estate, Physical Plant, and Security. On top of them we have an additional $12 million utility budget. All together, we employ 300 people. Carl Johnson and I, as well as one administrative assistant and a secretary, are sitting on top of this big budget. "When Harry Fielding's letter first arrived, I started looking at the activities of each of these different units and managed to effect significant changes in the operations of the bookstore, the dining services, and the physical plant. Let me tell you what I did in each of these areas."

The Auxiliary Enterprises

"The Bookstore and the Dining Service are two auxiliary enterprises. They are supposed to break even, but they hadn't done so in quite a while. The Bookstore's deficit was understated, because they had a large amount of obsolete inventorycameras, clothes, out-of-date textbooksthat wasn't written off. Also, a discount bookstore had opened just down the street from our main store and it had a much larger paperback collection and had managed to sign a contract with the University of Trent Press to buy all its seconds. Well, the seconds were in pretty good shape, they were being sold at a very low price, and our store was taking a beating. "I told them to hold an inventory sale. It was a big success. And I carefully monitored their expenses and lopped off some odds and ends. They are running a small profit this year and we have them budgeted for $150,000 profit next year. But that's not the long-run solution. We have to spin them off; set them up as a separate corporation, and free them of any kind of subsidy. Maybe I can convince somebody to do it. "The dining services are a much more complicated problem. First of all, a couple of years ago we built a big dining hall and we also built apartment-style dormitories with a kitchen on every floor. And the Dean of Students put all freshmen on a voluntary meal plan. "Simultaneously, the total costs of the dining service went sky high. And so a contract was signed with Chuckwagon Services, a big food-service outfit, to provide food services. But the food service was still losing money hand over fist. "I looked into the situation and found we didn't have the volume to cover rapidly accelerating costs. The contract with Chuckwagon was something elsea guaranteed management fee and no provision for sharing losses, only for sharing profits. Chuckwagon was making quite a profit; it sold us food at market price (not at their cost) and it charged us full cost every time one of their staff visited us. The profit sharing agreement couldn't have meant that much to them. "So, I got rid of them and put in our own management. But the employees are all unionized, and the contract is one-sided. Everybody gets paid for a full eight-hour shift, despite the fact that actual working hours are much lower. And the wages are very high. When the school closes for vacation, they all go on unemployment insurance, which gets charged to the university in this state. Nobody has ever thought of turning down their claims. "Anyway, by getting rid of Chuckwagon, I saved a few hundred thousand, but we're still losing money. I appointed a sharp guy as head of Dining Services. And he's doing good things. He put in a salad bar, they've got natural cereals for breakfast, and there's a make-your-own sundae line. And he's got a good catering business going. Our revenues are picking up, but with the voluntary plan and our big fixed costs, it's hard to make ends meet. Next year, the dining services are still budgeted to lose money. Of course, we keep raising our fees. "Unless I can convince the dean to change his voluntary meal plan or to close some of the dining halls or some of the kitchens in the dormitories, I don't know what else to do. Also, I have to live with the results of those past union negotiations."

The Physical Plant

"The Physical Plant office is a big operation. My boss personally inspects their work on a frequent basis. He's got a fine sense of the importance of maintaining our historical campus in topnotch condition. "The physical plant unit accounted for $700,000 of our $1.0 million overrun. In looking into the situation, I found out why. Although they hadn't hired more people, the overtime, vacations, sick leave, etc., in this unit were way over budget.

"I did two things. First, I filled the vacant position of Head of Physical Plant with a guy who had worked his way up through the ranks. They used to hire engineers for this job, but I thought an insider would be better. Second, I put in an automated system which on the Monday after the end of the week prints out exactly how much overtime, vacation time, sick leave, etc., each person has put in for the week and cumulatively for the month and year-to-date. "We cut our costs by reducing overtime and laying off the temporary employees we normally used. Some of the things I found by reading the reports were amazing; for example, one person took his full sick leave allowance just before his employment anniversary date, took his next year's sick leave allowance just after the date, and then went on vacation. We had a little talk with him. "When I first put in this system, I used to go over every name with the head of the office. Now I just spend twenty minutes on it. I pick out the unusual cases and I call him about them. The system is really working. As you can see (Exhibit 2), the numbers are beginning to look a lot better. "Of course, there's still a lot left to do with this unit. I don't know how big the job backlog is for repairs and maintenancenor how the jobs are scheduled. I want to make sure that they've always got a number of useful projects on hand."

Buildings
"Since a big part of our budget is linked to the amount of space in the university, I looked into consolidation of the buildings. One particular building looked like a good candidate for closing. It was built for the university by the state. Its classrooms and lecture halls were in use only fifty percent of the time. If the buildings were closed, over $500,000 a year could be saved. And we had classroom space elsewhere. "But a study committee looked into it and decided the building couldn't be closed. It would be embarrassing to tell the state we didn't need their building, when we ask for more capital funds. And no one was willing to tell the faculty who were the primary users of the building that they would have to walk further from their offices to teach class. Anyhow, nothing got done about it."

Response to the 1996 Budget Crisis

"While the work I did with the auxiliary enterprises and the physical plant cut back on our overrun, two other things enabled me to balance the budget: 1. The health care inflation of the 1980s led the budget unit to increase our benefits budget by 8% every year, but the real increases are no longer nearly that much. But Harry Fielding budgets by last year's budgetsnot by last year's actual expensesso a positive variance from our benefits budget helped balance the overrun in other areas. 2. We have an account for special work that different users might want done. They pay us for it. We cut it back."

The 1997 Budget

"In preparation for the 1997 budget, Harry Fielding sent around a memo explaining ZeroBase Budgeting (ZBB), and urging us to apply it. It described ZBB as having two basic steps: developing decision packages and ranking them. A decision package was a discrete activity or function which was to be compared relative to other activities.

"The decision package was to include: the purpose of the activity, the consequences of not performing the activity, the measures of performance, alternative courses of action, and costs and benefits. The alternative courses of action were to include analysis of different ways of performing the activity as well as analysis of different levels of effort in doing so. These decision packages were to be evaluated and ranked in order of importance through benefit/cost analysis or other evaluation techniques. "I was very intrigued with this method of budgeting and went out and used it in three of our offices. (See Exhibit 3 for the analysis of one unit.) I did the analysis by talking to the managers of these different offices and expressing their ideas in ZBB terminology. I sent them to Harry and Carl, but I haven't gotten any feedback from them."

The Budgeting Process

"The budgeting process normally starts with very detailed budget estimates coming down from Harry's shop, based on guidelines which he gets from the budget committeethings like the allowable increase in student fees, the desired bottom line, etc. He then figures out what expenses ought to look like in order to meet the guidelines. "In the past year, his budget involved a decrease in our real budget (after adjusting for inflationary increases). He tells us what our total budget is going to be, and leaves it to us to allocate across different line items. I've put in a program budgeting system to help me in this process, and I did the ZBB. But I got little feedback on it. "I guess that's part of my problemno feedback. Carl is a great guy and well respected in the community. Everybody likes him. And Harry is an economist; he used to be on the faculty. He's got a staff of only four people and they tell us what our budget is going to be. Both Harry and Carl report to Larry Richman, our presidenta world-famous classics scholar. Larry is very busy with our big capital drive and will be for the next two years, since it's a three-year drive. He and all administrative people have been here for a long time. "The other administrative functions are straightforward: the comptroller accounts, the treasurer finances, the personnel office negotiates contracts and benefits packages and so on. Some administrative functions, such as running the residence halls, are under the provost's wingas in many other educational organizations. "Our board of trustees has some of the most powerful and inspiring members of the business community on it. They devote a lot of their time to the school, but they don't seem to get involved with our administrative issues. They raise money and study programs. I can't imagine that any of them would have let the kind of labor contracts we have get by in their own firms. "So I'm kind of in a bind. I get large financial rewards, but it's not enough, it's not why I'm working here. And I guess I'll have to leave."

Exhibit 1A A Five-year Review (years ended June 30, thousands of dollars)

1992 Revenues (by source) Student tuition and fees State appropriations U.S. government contracts and grants Investment income Gifts and private grants Sales and service of: Alexander Hospital Other educational and medical activities Other sources Auxiliary enterprises: Bookstore Dining service Other $ 30,295 13,131 31,749 11,760 8,069 29,015 4,599 5,250 3,087 1,837 9,107 $147,899 $ 34,696 13,826 34,195 13,570 7,496 29,555 5,657 5,836 3,003 1,600 8,465 $157,899 $ 38,211 14,468 37,430 10,535 9,930 34,656 7,820 6,950 3,257 2,122 9,269 $174,648 $ 44,154 15,060 43,668 11,130 11,598 43,272 12,963 5,636 3,578 2,565 9,949 $203,573 $ 51,810 15,991 49,539 10,449 10,780 53,193 16,979 7,046 3,853 2,726 11,463 $233,829 1993 1994 1995a 1996

Expenditures (by function) Instruction Research Libraries Other educational and medical activities Student aid Student services Alexander Hospital Operation and maintenance General expense General administration Auxiliary enterprises: Bookstore Dining services Other $ 39,420 24,600 3,946 7,991 2,470 3,888 30,245 7,457 6,161 4,726 3,127 2,874 10,906 $147,811 $ 43,979 25,184 4,326 8,771 2,612 3,789 31,492 8,361 7,748 5,741 3,164 2,242 11,111 $158,520 $ 47,575 27,187 4,872 9,661 2,836 3,905 37,589 10,011 9,106 6,293 3,327 2,533 11,949 $176,844 $ 48,661 32,648 5,252 17,002 4,406 4,476 47,589 12,077 11,571 6,411 3,790 2,898 12,507 $209,288 $ 54,412 36,864 5,583 22,209 7,066 4,474 55,620 12,252 8,514 6,311 3,839 3,009 13,203 $233,356

aRestated

and reclassified to conform to 1996 presentation.

Exhibit 1B Balance Sheet, June 30, 1996 with Comparative Totals as of June 30, 1995 (thousands of dollars)
6/30/95
a

6/30/96 Unrestricted Temporarily Restricted Investment in Plant $ $ 7,984 Permanently Restricted Loan Funds $ Endowment $ 873 31,456 29 1,722 $ 33,207 41 100,984 10,928 564 2,301 8,819 $124,510 239 2 694 $935 Similar Funds $

Totals Cash Accounts receivable, net of allowance for doubtful accounts of $3,977 Contributions receivable, net of allowance of $392 Loans receivable, net of allowance for doubtful loans of $570 Inventories, at cost Prepaid expenses and deferred charges Investments: Stocks and bonds Real estate, mortgages, etc. Invested in plant Interfund balances: Advances for plant Other $462,794 LIABILITIES AND NET ASSET BALANCES Accounts payable and accrued expenses Student deposits Notes payable, principally banks Long-term debt Advances on research contracts Deferred income Agency funds Reserves Net asset balances $ 5,863 1,295 19,993 63,013 3,759 2,796 739 1,524 363,812 $462,794
aRestated

Totals $ 2,803 26,062

Unrestricted $ 2,803 17,085

Unexpended Building $ 120

$ 1,866 25,017

30,584 2,851 6,220 102,113 11,598 282,545

34,570 3,219 7,266 130,340 12,551 296,290 $513,101

3,114 3,219 7,225 138 10,401 (38,818) $ 5,167

25,020 265 12,800 $ 38,205

295,726 (12,829) $282,897

4,097 1,189 127 14,783 $ 28,180

$ 11,662 1,342 5,780 94,717 4,365 2,929 935 2,228 389,143 $513,101

$ 10,351 1,342 2,000 2,874 1,065 (12,465) $ 5,167

$ 1,311 16,622 211 55 1,163 18,843 $ 38,205

1,337 78,095

4,154 24,026

2,443 30,764

$ 935 $935

203,465 $282,897

124,510 $124,510

$ 28,180

$ 33,207

and reclassified to conform to 1996 presentation.

Exhibit 2

Monthly Analysis of SalariesShops Only

Yearly Budget (52) 4,332 334 334 397 221 178 57 6 859 14 5,539 1,108 6,647 July & August September (9) (5) 713 111 13 11 135 167 38 10 17 2 6 240 23 1,111 226 1,337 1,150 $(187) 432 77 19 5 101 43 28 7 17 1 6 102 635 124 759 639 $(120) October (4) 359 30 7 6 43 11 33 5 2 51 453 90 543 511 $(32) November (4) 353 14 1 3 18 12 28 3 1 44 415 81 496 511 $15 December (4) 303 13 2 5 20 14 23 6 37 80 403 79 482 511 $29 January (5) 342 21 1 5 27 16 41 6 74 137 506 99 605 639 $34 February (4) 330 15 1 7 23 8 29 5 1 1 (1) 43 (3) 393 79 472 511 $39 March (5) 407 16 4 4 24 7 41 5 3 2 (3) 55 6) 480 98 578 639 $61

Number of Weeks in Period Regular time Overtime: Timeandahalf Double time Shift differential Subtotal Other paid time: Vacation Sick leave Personal days Holidays Union business Other Subtotal Training Total payroll Employee benefits Total compensation Budget at average week Deviation from average

Exhibit 3

Zero-base Budget Analysis of Construction Division (CON)

CON 1. Provide coordination, inspection, and liaison on all major construction projects. 2. Provide engineering service to facilitate repairs and additions to mechanical and electrical systems. 3. Provide estimates for all construction projects of $100,000 or less; including both contracted and Physical Plant work. 4. Provide architectural, mechanical, and electrical design support for engineering services.

Identification Purpose/Function

Benefits:

Office required to assure compliance with specifications in construction contracts; to ensure repairs or additions to mechanical and electrical systems are compatible and appropriate; facilitates hundreds of minor construction jobs each year that require estimates. 1. Reduction of one-half ($16,000) mechanical designer from FY 1997 proposed in CON (6 of 6)a 2. Reduction of one-half ($18,000) electrical designer from FY 1997 proposed in CON (6 of 6)b 3. Reduction of one-half ($15,000) estimator from FY 1997 proposed in CON (5 of 6)a

Improvements:

Consequences:

1. Mechanical design staff will be reduced 50% so that development program work cannot be adequately done in-house, nor can existing Physical Plant minor construction projects be properly supported 2. Electrical design for development program and in-house Physical Plant projects cannot be accomplished. 3. Requests for estimates will be delayed an additional 7-14 days by 33% reduction (from 3 to 2); inspection of minor construction projects will become less frequent.

Alternatives/Consequences:

Eliminate officeIncreased costs from inadequate coordination, inspection, and liaison of major construction projects; inadequate planning and improper additions to major University systems which will be costly to correct. CON (1 of 6)Keep central office staff only, could not provide construction, engineering estimating, or design services in-house. CON (2 of 6)Add accounting function for transfer and control of funds. CON (3 of 6)Provide construction coordination and inspection of major projects over $100,000. CON (4 of 6)Provide engineering services for repairs and additions to mechanical and electrical systems. CON (5 of 6)Provide estimator/inspector for minor contracts and Physical Plant projects. CON (6 of 6)Provide in-house architectural, electrical, and mechanical design work for minor construction projects and in-house work.

Rank 1 2 3 4 5 6 7 8 9

Package CON (1 of 6) CON (2 of 6) CON (3 of 6) CON (4 of 5) CON (5 of 6) CON (6 of 6) CON (5 of 6)a CON (6 of 6)b CON (6 of 6)c

FY 1997 Gross $44,483 16,506 57,110 55,346 34,509 35,437 15,000 18,000 16,000

FY 1998 Gross $44,483 16,506 57,110 55,346 34,509 35,437 15,000 18,000 16,000

Cumulative Gross $44,483 60,989 118,099 173,445 207,954 243,391 258,391 276,391 292,391

Cumulative of FY 1988 Gross 15% 21 40 50 71 83 88 95 100