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An Open Budget Book

November 2017

By Matthew Gorzkowicz and Michael Nicolescu

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Using a multiyear approach to financial management, the University of Massachusetts leveraged its budget forecasts in ways that engaged campus leaders and facilitated understanding of risks, opportunities, and long-term financial health.

Colleges and universities across the country have faced numerous fiscal challenges in recent years, including yo-yoing state appropriations, seesawing enrollment numbers, and a wide variety of deferred maintenance and capital needs. In most cases, those familiar challenges drive board members and other leaders to make difficult decisions—and the most important tool for making effective decisions is complete, reliable information.

At the University of Massachusetts (UMass), the five-campus public university system in the Commonwealth of Massachusetts, we realized a few years ago that we were not doing a good enough job providing board members and other decision makers with all the information they wanted. We had lots of spreadsheets and budgets, but little analysis. Our work was primarily focused on gathering and aggregating large volumes of data, and we spent more time making sure that the formulas were right than understanding the data and how it could be used to support various decisions or outcomes.

For instance, board members might ask how a tuition rate increase is going to affect our bottom line in a few years, whether we should issue debt to complete a new facility, or how our budget will be affected if the current fundraising campaign isn’t as successful as hoped. The current year’s budget is not sufficient to answer questions such as these. Instead, we needed to adopt a financial model that would allow us to project our financial picture over several years, defining likely outcomes, opportunities, and challenges.

Traditionally, we focused on one year at a time. But in the current environment, it’s important to understand how decisions today will impact operating models into the future. When you start taking a long view, you really find that you start changing your behaviors as well as some of the decisions you make.

By implementing a process and system that allowed us to take that long view, we’ve found over the past few years that we are better able to answer questions accurately and make more-informed decisions. Leaders across our public university system are more tuned in and are discussing how everything that happens will affect our institutions for the years to come.

Getting Started

At its most basic level, financial forecasting is about being able to tell your financial story in a way that makes sense to and resonates with your audience. For example, one financial story might describe how the bottom line will be affected if tuition increases. Another story might center around how a new facility will impact the institution’s debt load, as well as how it will affect enrollment and tuition revenue. Different parts of your financial story will be more important to different audiences, and a strong forecasting system will allow you to easily manage the data and access reports and information that can illustrate and inform the stories each audience is interested in hearing.

In 2015, when it had become apparent that the University of Massachusetts needed to tackle multiyear forecasting so that we could better understand and communicate our financial story, our team decided that we shouldn’t waste time trying to develop the perfect solution. The goal, at first, was simply to get started. We could make tweaks and refinements along the way.

To make it happen, we partnered with PFM Solutions to adopt its legacy product, Future Perfect, a robust forecasting tool that allows us to easily make projections and analyze how various projections influence results. In this way, we can answer questions about how today’s decisions will affect tomorrow’s outcomes.

We implemented the solution in 2015 and, during the first year, our main focus was on simply getting away from spreadsheets. We wanted to get the data into the software so that different sets of data—for example, enrollment, residential versus nonresidential student, price structures, facility use, and courseload—could communicate with each other and form predictions about how various changes would influence financial results.

Once our data was input into the program, the financial model began to shift the conversation in a way that was a game changer. Rather than talking separately about state appropriations, tuition, and other revenues, we were able to see how they all relate to each other and how changes in one area would influence the others. Eventually, we were talking less about mapping and definitions and, instead, doing more analysis.

Four Significant Stages

Those higher-level discussions have become possible because of a focused, four-stage process to implement multi-year modeling.

1. Define strategy. In implementing a forecasting model, it’s important to start by developing an implementation strategy and designing a program that can work for your institution. That strategy should be dictated by the institution’s current state of affairs. It’s important to take time to understand your current data and to walk before you run—but make sure that you walk. Don’t allow the build of your model to stifle the process because every detail isn’t captured. The most important thing is to simply get started. We followed rapid prototype methodology, which simply means getting something up and running as soon as possible and making adjustments as you go along.

In addition to simply getting our program up and running in 2015, we also spent time during the first year developing standards. The goal was for each campus to develop a model that reflected how it gathers and reports data. That meant that each campus was able to set up its own standards, but from the system office, we established principles that apply across the board. For instance, state appropriations and cost-of-living increases are the same at every campus, but enrollment figures, capital projects, and tuition may be different at each institution. We wanted the tool to be used consistently but with the flexibility for each institution to make the process fit its individual needs.

In getting started, we reached out to all campuses to make sure that the assumptions we were implementing represented shared experiences. The design was guided by better education: We wanted to develop frameworks that would be comprehensive, so we evaluated past performance to help influence the projection.

2. Establish a baseline to understand current trends. A baseline projection is like the diagnosis a doctor gives you after a physical: It reflects your current condition, given the major underlying factors. Then the treatment recommends corrective action in response to that diagnosis. Before you can begin forecasting predictions for the future, you have to understand your status quo, or baseline.

At the University of Massachusetts, we started developing this baseline by capturing current conditions, such as the tuition rates, level of state support, endowment return, and cost of living. We tried to capture more detail than we thought we would use.

Your predictions will only be reliable if your baseline accurately reflects your current status: Is there a deficit? If so, is it a one-time problem or is it a structural problem? How are drivers of performance changing? When you’ve accurately reflected where you stand now, you can begin thinking about what changes can be made to improve the current story.

3. Quantify new initiatives and key elements. This stage is focused on analyzing the baseline and planning for known initiatives that will move the needle. For instance, we knew that UMass was going to undergo a capital plan, so we baked in scenarios that would reflect the results.

Once you’ve established the known initiatives, you can begin planning for the unknowns. For instance, what would happen if state appropriations were reduced? What would happen if we broke ground on a new facility next year versus three years down the road?

4. Engage stakeholders. At this stage, you begin communicating the forecasts with your audience. With multiyear forecasts that are based on reliable current data, you can begin telling your financial story with enough information and ammunition that stakeholders will listen, and the model will drive real change.

At UMass, we have found that a deeper understanding of the future impact of current decisions changes the type of discussions that take place. Traditionally, budget processes can be stressful because conversations about allocating scarce resources can lead to an “us-versus-them” mentality. But when we present the story from a broader, more long-term, perspective, it allows people to communicate our priorities and understand the trade-offs in supporting one priority over another.

This dialogue really brought to light the connection between our university system and our campuses. While each campus is different, we were able to identify many similarities across the system, allowing us to pursue strategies from which we all benefit. Using a uniform platform enables parties at both ends to have a better understanding of the process at all levels, which leads to more productive discussions. Every campus has access to the system, and they can use the model on their campuses with their own information. Although some of the assumptions are the same across the board, the model is not used in exactly the same way at every location—but each campus is benefiting from the detailed information available and the ability to answer questions about how various scenarios will impact finances.

The enhanced level of informed communication among all parties has been the most important benefit we have derived from multiyear forecasting. On a regular basis, throughout the year, we have conversations with the university’s senior leadership, its board of trustees, and other state officials that relate back to the multiyear forecast we presented at the fall meeting of the board of trustees. They are constantly asking how decisions we make or events that unfold through the year will compare back to the multiyear forecast.

Reaping Results

After launching the system in 2015, the University of Massachusetts team is not an expert at multiyear forecasting, but we get better at it every year. By 2016, we were able to identify areas where we could go deeper, such as studying our most significant cost drivers. For example, tuition and fees make up more than half of institutional funding, and are driven by enrollment, tuition rates, and financial aid. In addition, we began looking at compensation (which represents 58 percent of our expenses) and capital projects, which led to many discussions about debt service and how to best manage that. It’s easier to have an educated discussion about these topics when everyone involved can clearly see the potential financial impacts of various decisions.

In 2017, we are working to update our five-year model and all five campuses are using the system. We presented the five-year model at the September board meeting, which allows us to begin a dialogue with the board well in advance of our annual budget meeting in June. Having all the information available and easily visible puts us in a better position to communicate institutional needs to the Commonwealth and to other stakeholders.

Today, before the board makes a decision to change tuition rates or issue a certain amount of debt, it has more information and analysis to inform its decision. The board has access to detailed financial projections that show how each decision is likely to affect finances across the institution over the next several years.

Each year, we roll the forecast forward and revise projections for each of the coming five years. Unexpected events can still occur and throw our projections off, but we have a vast amount of information from which to determine how other adjustments could improve outcomes.

For instance, one of our biggest drivers of revenue is enrollment, and last year, we assumed 1.6 percent growth, which was actually lower than historic levels. However, this past year, our enrollment grew only .9 percent, requiring campuses to make certain adjustments to their budgets. Now, we can map those changes and show how they affect our finances. And the board can have more confidence in the information it is getting, so it can make more-informed decisions and has a better understanding of the consequences.

The multiyear forecast is not a once-a-year presentation that gets shelved until the following year. It’s a living, breathing model that we use throughout the year and it has allowed us to answer questions in a way that we had not been able to before. By leveraging a forecast to engage leadership and broaden understanding of risks, opportunities, and long-term financial health, the University of Massachusetts has taken strategic financial planning to a new level for our institution.

MATTHEW GORZKOWICZ is associate vice president for administration and finance at the University of Massachusetts President’s Office. MICHAEL NICOLESCU is a solutions specialist at PFM Solutions. LEEANN PASQUINI, director of budget and planning at the University of Massachusetts President’s Office, also contributed to the article.


Related Topics

The enhanced level of informed communication among all parties has been the most important benefit we have derived from multiyear forecasting.

The board can make more-informed decisions and has a better understanding of the consequences.