By SUSAN JONES
As Pitt awaits approval of the state budget, the University’s schools and other revenue-generating units are waiting to see how their calculations under the new budget model will play out in the 2023-24 fiscal year.
Work on the responsibility-centered budget plan officially began in December 2020, and after more than three years of work, it will be fully implemented for the 2023-24 budget year.
But that doesn’t mean there aren’t still questions and concerns.
“We’ve gone through the budget process for everybody for ’23-24, where they come in talk about what their financial performance is and what their strategic plan looks like,” said Hari Sastry, Pitt’s chief financial officer. “What are you trying to do, what does your budget look like, and how are you going to make those two meet. Those discussions, I think, went very well. They’re not at the level of sophistication that they’re going to be at in year three or four, but I thought it was a really good start. And to be honest, the learning goes both ways. It is not just the units and the schools learning, it’s also us learning how to do that too.”
Sastry said there’s been a lot of work going on both in his department and at the unit level. “My team has been just doing some heroic work to try to get this operational, and all of the units, I think, have done a really great job of digging in and making sure they understand their areas.”
“We haven’t nailed down everything, and I don’t think we’re going to nail down everything till we get through this first year,” Sastry said. “We’re going to lay out the budgets. We’ll see how the performance goes, get to the end of the year, reconcile the books and then we’ll be able to say, ‘This is how it worked. Now we understand a lot more than the first year that was just in theory and then we can really start making some changes.’ ”
The new responsibility centered budget model (RCM) shifts revenue from tuition, fees and grants to the schools and gives them more decision-making power about how money is spent.
But it also makes those units more responsible for raising money, and charges each school a 16 percent “participation fee” — sometimes called a tax. That money goes back to the central administration to pay for University-wide initiatives, particularly those in line with the Plan for Pitt, and to reinforce the schools that currently aren’t breaking even — called subvention. In addition, the schools and other revenue-generating units have to pay for support services, such as Human Resources and IT (see related story).
Anthony Delitto, dean of the School of Health and Rehabilitation Sciences, said it’s probably a positive that Pitt’s incoming chancellor, Joan Gabel, has experience with an RCM budget at her current school, the University of Minnesota.
“We put a lot of time and effort into this and we have yet to see it truly come to fruition. There’s still some work to be done,” he said. “… I’m sure she’ll look at what everybody’s looking at, which is, it’s one thing to say we’re going to do it, and I’m really appreciative of the fact that we took the steps to do it, but there’s still a ways to go.”
Deans’ perspectives
Delitto said one of the best aspects of the RCM model is the transparency, not just in what everyone’s budget is, but also what part of the state appropriation each school gets. This became very apparent last year when the state funding was being threatened.
“It forced me to stop and sit down and say, ‘OK, if we don’t get the appropriation, I need to come up with $10 million,” he said. “Maybe I need to come up with more than that, because others can’t, but at least I have something that’s tangible.”
He said his school is likely to operate at a surplus under the new budget. Demand for programs in SHRS — particularly the highly ranked physical therapy, occupational therapy, speech language pathology, and audiology departments — means there are no shortage of applicants.
The advent of the tuition incentive program, which provides more money to schools with expanding enrollment, has been very beneficial to SHRS. “Probably more than most other schools at Pitt, we had a large proportion of our budget that was tuition incentive-based because of the expansion that we’ve had in our programs from around 2005-06 all the way up until 2020,” Delitto said.
“So about half of our budget roughly was from the older allotment, and then the other half of our budget was tuition centered. So we were used to something like an RCM — where the more tuition we brought in, the more ended up in our school.”
Delitto said he’s excited about the RCM model, but knows it will be a few years before Pitt knows if it’s working.
“If we truly do start seeing some turnaround in some of the schools with large subventions, that’ll be a positive,” he said. “I think it’ll also encourage more entrepreneurial endeavors. I think the idea is that if the deans are empowered and rewarded to become entrepreneurial, they will. I believe that will happen in some schools, because we saw it happen with the tuition incentive model.”
For Sanjeev Shroff, interim dean of the Swanson School of Engineering, the past year has given schools “good data of what is actually happening — the revenues in the past. It’s given to you very clearly, so everybody knows, nothing to hide.”
That information is good for planning how to reduce costs and increase revenues, Shroff said. And if the school were just calculating based on the tuition and research dollars they bring in vs. the expenses of faculty and staff salaries and more, then the engineering school would be “quite a bit positive” on its balance sheet, he said.
But then each school must figure in the cost of nine different support units. Again, Shroff said it’s beneficial now that deans can see what these units costs and what they are getting for that money, and also why they might need more money the next year. Even after the support unit costs, Shroff said the Swanson School is still in the black.
Last, the school must pay the 16 percent participation fee — 5 percent goes toward research initiatives and 11 percent to strategic initiatives and subventions. — which Shroff said ends up being “a huge number for us.”
Where he’s still confused is exactly what revenue is included when the 16 percent is calculated. Sastry, in response to questions from the University Times, said the participation fee, which was determined by the Budget ReSTART steering committee, is assessed on: Undergraduate and graduate/professional tuition (net of tuition discounts), student and other fees, Commonwealth appropriation, indirect cost recovery, investment income, and other entity revenues. It is not assessed on: Course fees, direct grants and contracts, gifts, endowment distributions, sales and services, and other restricted revenues.
Shroff said the Swanson School generates substantial income through research, but that research is also very expensive to operate. During the 2022-23 budget year, when all these revenues and costs were calculated under the new budget plan, the engineering school would have ended up in the red and in need of a subvention, which basically brought their balance to zero.
Subventions
Delitto said he thinks the next major phase of this process is taking a look at the areas that need subventions.
“Not everybody can get in the black. We all understand that,” he said. “But I think the idea is that some of these programs are going to be encouraged to try to figure out ways to either raise more revenue or cut costs. … Some hard decisions probably need to be made about programs that may not recruit a whole lot of students and and how important those plans of studies are. These are the kinds of decisions that I think Pitt has avoided making over the years and we need to do that.”
He also said schools need to look at how some of these programs align with the Plan for Pitt.
“I’m by no means one of these people who believes that everybody either needs to be in the black or they need to be closed down. I don’t think that’s the way any university should function. However, it doesn’t mean that people can just continually operate at huge deficits without somebody saying, how is this worth it to the University as a whole?”
Sastry said they’ve told units from the very beginning, “We’re a nonprofit school. We’re not here because we’re trying to get every unit to be profitable. That’s not how we work and that’s not how we should work. We know that we have to run a comprehensive university.
“Some units just don’t have the cost structure where they would ever end up in the black and some units have a cost structure where there will always end up in the black, and that’s fine,” he said. “Our goal here — and that’s one of the reasons why we have this subvention — was to put some transparency in the system to show everyone, here’s where the revenues and costs are by unit and then put the incentive on those units to improve upon that. We want you moving in a positive direction. Some people are going to be able to move fast. Some people are going to be able to move slow, some people are going to take two steps back to take three steps forward. All of that is fine. But we want to make sure people understand that your directional movement needs to be in a positive direction or you need to have a plan to get there.”
The process
All the primary responsibility centers submit their budget requests to the provost’s office and CFO’s office in February, but any calculations have to wait for the state to approve its appropriations to the state-related universities in late June and for the Board of Trustees to approve the final budget plan, which includes tuition rates and salary increases.
The schools won’t know the final numbers until November, which will include any surplus from FY2023 and the subvention numbers.
Shroff said he’s unclear how the actual budget for fiscal year 2023-24 “is going to be handed to us.” He predicts the engineering school will have a negative balance again for the coming year once all the fees and taxes are deducted.
“What will they give us? Will it be same as what they gave before — an incremental something? Then we are still in trouble,” he said. “Or will they use the subvention they mentioned to give us extra money? That part is not clear to us.”
Sastry said those who are in the black or in the red won’t be treated much differently. They will be held accountable to achieving the financial performance they predicted when making the budget.
If a school outperforms what it predicted, either by having a positive balance or by needing less of a subvention, or underperforms, Sastry said his office will “sit down and talk to you and try to understand what happened there.” And if it really is over performance, the school will get to keep a big chunk of surplus, he said.
“The question is do you then get to keep that revenue going forward? And what we’ve told folks is, this is early on in the model,” Sastry said. “We want to reward people who are having sustainable increases and sustainable improvement. But we can’t guarantee that they’re going to get 100 percent of that increase all in year one, because we want to see how this model works.
“As this model gets mature, … if you are generating that improvement in your financial position, then you do get to enjoy the fruits of that. But that might not be 100 percent right off the bat, just because we have to figure out how this entire model is going to land after the first couple years.”
Susan Jones is editor of the University Times. Reach her at suejones@pitt.edu or 724-244-4042.
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