Resourcing the Mission: The New Internal Financial Model A new internal financial model is being developed that will enable us to better fulfill our mission and increase our capacity to teach, discover and serve by aligning the academic capital of the University with the financial resources of the institution. Our new financial model will empower us to be innovative, effective and collaborative, because incentives will be built into the system to encourage and reward such work.

Why Create a New Model? Changes in the Environment Greater competition Economic and fiscal realities Pressure to grow Expectations for accountability, transparency and efficiency There are both academic and financial imperatives for this change. The University of Virginia exemplifies quality teaching, research and service, yet it is harder than ever to achieve the level of excellence that has characterized this University and to align sufficient resources to achieve our aspirations, especially as our peer set changes to better endowed private institutions. There are core pressures on all of our revenue streams: Tuition prices and the demand for aid make net tuition revenue growth difficult. Federal funding for research from NIH and NSF looks likely to face cuts in real if not absolute terms. Clinical reimbursements for patient care are under pressure. State appropriations have steadily declined. We expect the pattern to continue. We mean to do more than just sustain our work; we intend to grow and continue to be a leader in higher education. The good news is people want us to do more: We have a commitment to the Commonwealth to grow our enrollment. The Governor and others see research as a means to grow jobs and our economy. There is great demand for improving health outcomes through the research and teaching that goes on at the Medical and Nursing schools. This pressure to grow our mission puts pressure on the need to make informed decisions about how to grow responsibly in ways that support academics, student life, facilities and other components that are essential to doing this well. Our financial model must enable us to plan and organize in the best way to create our own future opportunities and to capitalize on them.

Why Create a New Model? Answering the Tough Questions Is UVa, as an institution, and are the schools individually, meeting our aspirational goals and potential? Are revenue streams being maximized? Are costs being managed in the best possible way? Are academic programs and centralized services adding value to those we serve? Are deans empowered to improve and grow their schools? Are schools and central administration collaborating and aligned? We increasingly need the help of others to do what we do and increasingly compete against the very best to do it. Great universities must demonstrate that they can: Communicate information and relationships transparently among revenues, expenses and outcomes Transcend organizational lines, fund and work flows to make them inconsequential to investors and customers Incent and behave entrepreneurially and collaboratively on mission and service activities Hold themselves to standards of accountability and performance that match or exceed those from whom we seek investment or help Students and their families, donors, state leaders and taxpayers, federal sponsors and others, all expect us to hold ourselves to the highest standards of accountability for using the resources invested in us. The new financial model MUST emphasize transparent decision-making, incentive-based allocations, and prudent stewardship of the University's resources. As we develop the model, we must begin by asking ourselves some very tough questions: How can we currently meet our strategic goals? Do we maximize our revenue and manage our costs in the most efficient way? Do we approach new ideas for programs with the acid test of best value added in alignment with our goals? Do our central services answer our needs and provide real value? Are our academic leaders – our deans – empowered to improve and grow their own programs and are the deans and senior leadership collaborating and applying our resources to our mission? In many cases, we have some areas of needed improvement. This is where we find opportunity for inclusive planning and empowering individual academic units to be both innovative and cost- efficient.

What is the current model? 2011-12 Budget Centrally collected and distributed tuition, state appropriations and unrestricted funds Incremental allocations to “base” budget Pockets of self-sufficient and revenue sharing activities Limited ability of schools and administrative departments to determine and fund their own priorities The current model reflects our history as a state institution with a state budget allocation system. It is allocation-based, with inconsistencies across the University, making it difficult to know the real financial status and capacity of each school and unit and equally tough to truly collaborate. Dean and faculty presently have limited ability to proactively fund innovative ideas or reallocate resources. The good news is we have pockets of experience that suggests the new financial model will produce results in terms of program quality and other measures: The Darden School of Business, the Law School and the graduate programs at McIntire are examples of self-sufficiency; a new dual degree program developed in partnership by Darden and the Curry School is an example of collaboration and revenue sharing. We can learn from these models and create a healthier, more interactive and sustainable financial framework across the university.

Uniquely UVa Identify the guiding principles: Incentives, Transparency, Accountability, Simplicity, Innovation, Quality Focus on empowerment and decision-making. Communicate transparently; encourage participation. Align responsibility and accountability. Assess the readiness of all schools and units. Establish reliable, shared data source/ reporting system. Before developing our own, we've taken time to learn from similar models operating in universities like ours across the country (both public and private) – but we will adapt to create a model that works for us given the unique qualities of UVa. Private Examples: Duke, Harvard, Vanderbilt, Hopkins Mixed Examples (private with significant state funds): Penn, Cornell Public Examples: Iowa, Ohio State, Michigan, Minnesota, Indiana, Texas A&M) The Steering Committee (which is comprised of all academic deans and senior administrative and financial leadership) identified these guiding principles: Incentives; transparency; accountability; simplicity; innovation; quality As the model is developed, these points are important: Empowerment: the decision-makers are those with the most knowledge and who own the outcome and are closest to the action Open and engaged communication at all levels is paramount; providing opportunities to listen, learn and contribute to the process is a dedicated priority All schools and units assess their own readiness in terms of governance, systems, data and knowledge; the office of budget and financial planning is ready to assist.

Shifting the Budget Conversation Resource Planning Allocation Great universities are transforming traditional, appropriations-based budgeting …. …to an effective resourcing process engaging a broader community in collective strategic decisions about shared priorities. Focus on Central Financial Control Resource Planning Allocation Management Accountability The details of the new model are not yet determined in terms of precise rules for revenue and expense allocations. The most important and fundamental changes are not those rules, but instead the shift in process and engagement in collective decision making. Examples of what will change: Who is involved. The principles by which we make decisions. The culture of service. The awareness of our resources choices, including those choices to subsidize programs that are not self-sufficient from a resource perspective but add significant value to the University, schools, colleagues and those we serve. PRESENTER TO PROVIDE AN EXAMPLE HERE OF HOW A PROGRAM PROPOSAL MIGHT PROCEED IN THE CURRENT ADDENDUM PROCESS VERSUS THE NEW MODEL Money following enrollment growth as opposed to cost of that Incentives to propose new program to Dean and Provost (since resources would flow)

What is the new model? Resource Centered Management (RCM), Activity Based Budgeting (ABB), and similar models decentralize and align authority, responsibility, and accountability. Schools and administrative units (revenue centers) are responsible for generating their own revenue and managing their own expenses. Administrative service centers that are not revenue producers may be financed via subventions (charges to revenue centers) i.e., charges for information infrastructure, utilities, space, etc. Models such as these create incentives to control costs, improve productivity, and enable entrepreneurial activities. This new kind of model goes by many different names, such as Responsibility Center Management (RCM) or activity based budgeting (ABB) but what is most notable is the basic philosophy and values underlying the resource planning process. RCM is a decentralized budgeting and management system where an institution places the responsibility of revenue generation and cost allocations with the individual units. These units are responsible for generating enough revenue to cover the costs associated with running their operation. The system leverages incentives to control costs, improve productivity and pursue entrepreneurial activities. For example, a unit keeps the excess revenues it generates over the cost of running its organization.

What is the new budget cycle? Budget and Planning Assumptions Budget and Long-Range Plan Development Budget and Plan Approval Budget Management, Monitoring and Adjustment Fiscal Year Close, Analysis and Performance Assessment September to December July to September January to March The new model is designed around a resource planning cycle: Throughout the fall, Deans, Associate Deans and central administration will assess program performance from the prior year, the environment and outcomes. By November of each year, schools will be provided with guidelines for assumptions for major categories of revenue and expense. Based on these guidelines, Deans and their faculty and administrative leaders will develop proposed plans to align and sustain progress against aspirational goals for program and faculty quality as defined by Deans. These plans will come forward for consideration and approval to the President, Provost and COO in the spring before being consolidated into a University budget and long-range plan submitted to the Board in May or June. Ultimately the new model results in: Authority, responsibility, and accountability being shared more broadly among academic and administrative professionals, centrally and across grounds. Revenues and authority flowing to those whose activities generate them. Having shared incentives to thoughtfully invest, control costs, enhance productivity, manage subsidies and enable entrepreneurial activities. Greater access to information needed to make decisions and a more shared understanding of our choices and priorities. Year round Quarterly reporting and variance analysis April to June

Awareness: Opportunities Provides new potential to diversify and increase local revenue streams. Facilitates local participation in decision making. Enables effective joint ventures between deans and central administration. Provides a means to understand the true cost of services. Encourages efficiencies and competitive, valuable services. Provides a framework for the University community to embrace and align to school and institutional priorities. As the new model is developed, academic leaders (deans) and advocates have reached out to the community to discuss these changes and solicit from those affected their hopes and opportunities, risks and fears. PRESENTER to provide an example of their own raised hopes and ideas of opportunities that they have, which are inspired by the new model and to solicit from the group theirs.

Awareness: Fears and Risks “Us versus Them” Having a financial rather than academic focus. Misaligned incentives place department and school goals over University goals. Disparities in capacity to achieve goals or service standards. Inability to manage budget and new responsibility centers. How will tuition sharing work? Disincentives for interdisciplinary teaching and research. Duplication of courses across the institution for tuition generation. Fear of ending up with less fiscal capacity than today. As the model is being developed, these perceptions of fears and risks were shared in open conversations among the academic leaders . Conversations such as these are valuable in order to face potential barriers and return to the guiding principles of putting the University mission first. PRESENTER to provide an opportunity for discussion of fears and risks that they have observed or may perceive for the new model and to solicit from the group theirs.

A Roadmap for Change The shift will likely take 18-24 months, and consists of a planning and preparedness phase, a testing phase and an implementation phase. Assessment and Preparedness Policy and Model Development Communication and Consensus Building The transition to a new financial model is a careful and thoughtful process that anticipates stages of change management. The target for implementation is FY 2013-14. These are the phases: Assessment and Preparedness: An assessment of the current state of revenue and expense flows among campus units, of technology and systems, of people and roles, of processes and governance. BEGUN AT LAUNCH THROUGH SPRING 2012 Policy and Model Development: The development of principles and goals that guide change, translated into revenue and cost allocation policies (direct, administrative, facilities, etc.) as critical elements of understanding and creating incentives and transparency. This will be informed by modeling to enable simulation and informed evaluation of different allocation scenarios. SPRING THRU SUMMER 2012 Communication and Consensus Building: A communication plan that supports change by illustrating the benefits of using incentive-based models; the plan also provides the framework for consensus building. THROUGHOUT Building, Testing and Reporting: Beginning to adapt current processes to align with future; shadowing of current systems with incentive-based model in order for management reports to test policies and mitigate risks in transition; preparing and stabilizing reporting to ensure those accountable have what they need. FOLLOWING FALL THRU SPRING 2013 Adoption and Adjustment: The adoption of the new model, with support documents and policies, and selective training. Building, Testing and Reporting Adoption and Adjustment

Q & A www.virginia.edu/resourcingthemission Conversation starters: Rate effectiveness and identify criteria of University and school budgeting processes. Who is involved, how and why? Who is not that should be? Do discussions with units focus on both local and institutional revenues and expenses? Are restricted funds and current fund balances part of budgeting conversations? What are the levels of restricted fund balances and the expectations for using them? How are budget requests currently tied to strategic priorities? What kinds of incentives are involved and why? Is there revenue growth? How are expenses managed? Are there carry forwards? Are costs and revenues fully understood at the programmatic level? Do you engage in multi-year financial planning, and if so, using what kind of model? How do you manage and mitigate risks associated with programs and resource management? www.virginia.edu/resourcingthemission