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Case for change

Incremental Budgeting (What We Have Now)

Ohio University has traditionally used incremental budgeting. In incremental budgeting, a unit’s historical budget is the basis for subsequent budget development. In periods of increasing funding, a university can continue to achieve its goals using incremental budgeting, because there is enough money to accomplish most activities. In the face of declining
funding, universities have begun to regard incremental budgeting as an inadequate strategy.

Incremental budgets reflect past assumptions and priorities, and often do not reflect current needs.  Disadvantages of the traditional incremental budgeting approach include:

  • While academic authority is fairly decentralized, authority for financial planning, execution, and control are vested in executive management  
  • Movement of resources within the budget becomes a political process.
  • No incentives for improvement (cost reduction or revenue enhancement).  
  • No encouragement of a shared sense of responsibility. 
  • “Use it or lose it” mentality. 

The centralized, incremental approach to budgeting simply does not work well in situations requiring flexible, creative responses to financial problems. It tends to favor the status quo with dwindling resources, a situation that pleases no one.  Instead, the budgeting system and financial management practices should encourage the generation of new resources and the efficient use of current resources while allowing sound programmatic trade-offs consistent with an overarching University mission. Ironically, due to the shrinking proportional contribution of State appropriations to our budget, the portion of budget revenue over which the University has more control is growing. In addition, the lean financial condition of the University makes it imperative that our resources and programs are better aligned for the future.  


Responsibility Centered Management Budgeting (What We will Have in the Future)

By understanding the relationship between revenue generation and cost, the university can maximize resources within established quality constraints.  By maximizing revenue while meeting quality expectations, more resources will be available for investing in both additional revenue generation and in academic priorities that enhance quality without necessarily generating more revenue.

Responsibility Centered Management creates transparency where academic units are in a position to rationally compete for resources and discuss the appropriate balance between academic and non-academic resource allocation. 

In the current system there is no basis for reallocating resources other than guesswork or politics so allocation devolves into a non-strategic, across-the-board process that avoids major conflict but satisfies no one.  

The current incremental system forces administrators to make budget decisions based on very little information as opposed to academic units being able to make rational arguments based on metrics. Without this information, reallocation among units, particularly between academic and academic support units, is very unlikely. 

Decisions about resource allocation can involve the academic units where there is a better understanding about the relationship between revenue generation and quality and the authority to make changes to influence this relationship exists.  Under the current system, budget decisions are implemented at the central level where the understanding of the relationship between revenue generation and quality is more diffuse and the ability to implement changes to influence this relationship is limited