Scarcity and Choice the School\'s

Scarcity and Choice

The school's budget needs to be cut dramatically. While there are $110 million in funding proposals on the table, there is only $65 million available to fund them. There are a few different approaches to balancing this budget. The first is to cut some programs wholesale; the second is to cut proportionally and the third is to make strategic cuts. This paper will analyze the different options and present a plan for the $65 million budget.

The first option of cutting departments wholesale is dramatic. To make the numbers work, a minimum of two entire departments would need to be cut -- and this includes instructional, without which the university cannot function. One of the issues that must be considered with this option is the nature of the budget shortfall. If the shortfall is temporary, then cutting entire departments is unwise, as such a cut would have to be considered permanent. For example, the school cannot cancel all athletic programs for a year and expect to pick them up the following year after all of the athletes and coaches have left. If the nature of the budget shortfall is permanent, however, then such permanent solutions may need to be considered.

The second option of cutting programs proportionally has intellectual appeal -- the suffering is spread evenly throughout the breadth of the school's programs. There are two main drawbacks to this strategy, however. The first is that the programs have different levels of fixed costs. Proportional cutbacks are valuable to the extent that the costs can be cut, and variable costs are easier to cut than fixed costs. Cutting into the fixed cots of programs may have the same affect as cutting the entire program. For example, if the football stadium is allowed to rot, then the entire football budget may as well be cut. The second issue is that the programs have different impacts on revenue. Cutting athletics, for example, will have an impact on the school's revenue whereas cutting fringe benefits may not.

The third option of strategic cuts allows decisions on cuts to be made on a case-by-case basis. This may result in administrators having difficult making the case for cuts in some situations, however. There may also be the perception that the process is not fair, since any program's worth can be argued and the effectiveness of the arguments may not seem to be objective. One of the benefits with the third option, however, is that it allows for the cuts to be made in the areas where cuts are easiest to make. For example, the administration may be unable to cut fringe benefits regardless of desire because of union contracts.

The first step is to realize that the target for cuts is (110-65) = $45 million. This equates to $5 million per program. For some programs, this is a steep but reasonable cut; for other programs such a cut would be disastrous. Therefore a system of priority needs to be developed. The top priority -- and therefore the minimum amount of cuts -- goes to the areas that are the most essential to the basic function of the school. The most important is Instructional. There is likely only limited flexibility in this aspect of the budget, as many instructors are on contract. There may be some flexibility to initiate a cut in the range of $4 million (15%) by reducing the number of courses taught by part-time and other non-contract instructors. Another essential program is the fringe benefits. These are likely to be in union contracts -- they can be negotiated downward at a later date when the current contract expires but they are likely fixed for the coming year. Likewise, operations contracts limit the degree of flexibility the school has with regard to maintenance. A $1 million cut here is symbolic as much as anything else -- anything more could result in safety violations or other such issues that would be costly in the long run.

The second level of priority reflects activities that are non-essential but contribute to revenues. Athletics contributes to donations, academic support, activities and student aid all help to attract students to the campus. All of these face cuts, but athletics and student aid are the largest components. These should be reduced. Student aid costs almost as much as instruction -- this program should be cut dramatically and replaced with efforts to bring in students who can afford the full ride, including students from overseas. For a school of 10,000 students, our current student aid funding is $2,200 per student, which is altogether too high. Some students will be grandfathered in with respect to their aid, but the amount of that aid will be reduced. Marginal athletic programs can be eliminated and minor cuts can be made to the major programs that are tied to alumni support. The latter category of program is essentially revenue neutral, while the former programs are a drag on expenses and of limited interest to the campus as a whole.