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7 Budgeting Methods. Which One is Best?

Enthusiastic strategic manager skilled in budgeting, fundraising, grant writing and policy development. Master of Public Administration.

Budgeting

funding-for-public-education-should-we-use-responsibility-centered-budgeting

7 Budgeting 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. Revenues equal expenses.

(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.

Let’s examine 5 different states and their public education budgeting process.

Iowa’s Incremental Budget

In Iowa, the budgeting process for education is traditional incremental budgeting. The Department of Management (DOM) sets the priorities for the state budget. Their mission is to lead enterprise planning and coordinate enterprise governance systems so Iowans receive the highest return on their public investment. Their goal is to integrate budgeting with planning to improve decision-making. Early childhood education is a priority. 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 Public Universities and Special Schools.

The key educational funding areas are: (1) Salary funding, (2) Higher education operating appropriation, (3) Higher education legislative special purpose appropriations, (4) Special school operating appropriations, (5) Economic development operating appropriations request, (6) Full funding of Iowa Care Claims and (7) Iowa Public Radio.

Does the Iowa Lottery Fund Education?

Iowa’s lottery does not directly fund education. Lottery proceeds in Iowa have three main purposes: They provide: 1) support for veterans, 2) help for a variety of significant projects through the General Fund, and 3) backing for the Vision Iowa program that builds and repairs schools and creates tourism destinations and community attractions.

Monies from the lottery flow to the General Fund. In turn, 58% of the General Fund is appropriated to education. The Vision Iowa program is also funded by the lottery and part of those funds go towards school repairs.

funding-for-public-education-should-we-use-responsibility-centered-budgeting

State of Georgia and Lottery Proceeds

The State of Georgia uses lottery proceeds in part to fund public education. There are 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). 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).

Responsibility Centered Budgeting: Ohio State and USC

Both Ohio State University (OSU) and the University of Southern California (USC) have adopted RCB though the method is more established at USC. Ohio State’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).

USC’s method moved from traditional incremental budgeting to RCB. The RCB method:

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 works well at USC. Should RCB be used at all higher education facilities?

University of Southern California

funding-for-public-education-should-we-use-responsibility-centered-budgeting

Allocation Framework of the University of Minnesota

The University of Minnesota is “infusing” the RCB method into their “Allocation Framework.“ Principles of this framework include financial planning driven by academic goals, an “equitable” distribution of funds and adequate funding based on institutional missions. The principles of RCB appear to be a very reasonable alternative to traditional incremental budgeting.

Is RCB being used elsewhere?

Responsibility Centered Budgeting Recommended

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

Responsibility Center Budgeting

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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