Monday, February 22, 2010

Revenue Sharing and Support for Branch Campus Growth

I have yet to visit an institution with branch campuses where the leadership did not refer to being “one university.” Because there is so little broad public discussion about branches, it always sounds to me as if they believe there is something distinctive about being “one.”

Moreover, institutional leaders nearly always maintain what I believe is a sincere desire to see their branch campuses grow in enrollment. (I’ve seen exceptions, where the president seems embarrassed by the existence of branches, but that is rare. I believe most presidents, at least, value their branches. Provosts typically do, as well, with a larger number of exceptions, and I know there are many college deans who wish their branches would vanish.)

Despite leadership support for branches, institutional practices often block legitimate opportunities for growth. The blocks may tie to our internal political behavior, as well as to the practical reality that presidents and others find their time consumed by whatever is right in front of them. Branches, by their nature, are not the central activity of the institution, and they most certainly are not “right in front” of the main campus administration.

A major obstacle to branch campus growth, however, may lie in the way we handle revenue and expenses. It is something we’ve done decently well, in Ohio, over the years, and it took me awhile to realize that our approach is not necessarily typical.

In Ohio, each university branch has a separate line in the state budget. Until the recent economic problems, state support was reliably tied to credit hour production, whether the credit hours were earned at a community college, a university main campus, or a branch. (I realize that private institutions have a different model, but the essential principles described below can be applied at any institution.)

Although each university with branch campuses has its own practices with regard to revenue, the common model is to credit the state support and tuition generated to the branch campus. Then, the branch pays overhead for services received, back to the main campus. The implication is that money flows from the branch to the main campus. Increased revenue at the branch typically implies that the overhead paid also will increase, so there is at least this incentive at the main campus to encourage branch growth. The exact percentage of income paid as overhead varies, but 6-12% is a reasonable range, depending on exactly what services are delivered by the main campus.

At Ohio University, we send money to the main campus in three ways: through overhead, as described, through other transfers to support some specific services we agreed to over the years, and through what we call “splits.” We have several ways of paying splits, but the essential idea is to share “profits” with the academic units that house courses delivered at the branch campuses. Through splits, we are able to provide relatively modest revenue directly to academic units, giving them a bit of a slush fund that lies outside of their regular budget.

Our approach is a very direct way of demonstrating that the branch campuses are a revenue boon to the University and not a drain. Enrollment and revenue growth do not in any way take away main campus resources. Unfortunately, I realize that many of our colleagues around the country work under a much less effective model.

What I have come to understand is that many institutions have financial models that actually discourage, rather than encourage, growth in courses and programs at branch campuses. The problem often begins with how the state funds its institutions.

In some states, institutions are funded through what I’ll call “direct allocation.” That is, there is no specific relationship between enrollment and funding. Oh, the president can and will argue for more support, as enrollment grows, but that puts the cart before the horse: grow and maybe you’ll get more funding. Recently, as we’ve seen, legislatures have tended to cut funding, with the result that some institutions, in turn, have moved to reduce admissions. Not a great model for economic development in the state!

In at least some states, there may actually be a tie between enrollment and state allocations, but the allocation still is to the institution as a whole, and the total allocation available is capped. So, in an example with which I’m familiar, because the main campus is at or near its cap, further enrollment growth may not generate any additional state funds. There is no incentive to support branch enrollment, unless a change can be made to create a state allocation directly to the branch. That may be dangerous ground for the branch, however, if the main campus leadership believes such an allocation would be at its expense.

States seem to handle tuition revenue in a couple of different ways. Some states do not allow institutions to keep the revenue from tuition. Instead, it returns to state coffers. Most, it appears, do at least allow institutions to retain tuition revenue, and that, of course, is one reason tuition increases faster than inflation, given reductions in state support. If the institution retains tuition revenue, there is at least the possibility of developing business models that can support enrollment growth. In fact, because of their lower infrastructure costs, growth at branches or through online programs may be a viable alternative to growth at the main campus.

Where does all this leave branch campuses? If I were advising presidents and provosts, I’d emphasize a couple of key ideas. First, assuming the institution is not practicing responsibility centered budgeting, and main campus units receive what I call “expenditure budgets” (annual allocations that create spending targets), please do not apply this approach to branch campuses. Instead, fund them as you would an auxiliary, crediting income generated by their enrollment directly to them. Create an overhead charge that is realistic, so that money begins to flow from the branch to the main campus, instead of the other way around. As enrollment and revenue grow, the overhead paid should be yoked to that growth.

Second, if you are making what I consider to be the most elementary of mistakes, and placing some or all of the funding for branch instruction in the budgets of your academic units, stop it! The surest formula for discouraging branch growth is to deny branches the ability to develop a course schedule that meets the needs of their students, while expecting main campus chairs and deans to decide which courses are needed on both the main and branch campuses. If you reverse the flow of dollars, so that revenue flows to the main campus, then adding classes at the branches to support growth will occur more naturally. (I’m not saying the academic units shouldn’t have some level of oversight regarding branch coursework and hiring of instructors, but that the direction in which money flows will tend to drive decision making.) Developing some type of revenue sharing model, such as our splits approach, will further incentivize academic units to support increased branch enrollment.

If there is anything I’m sure of about branch campus success, it is that course schedules must be set at the branch, where there is an understanding of the local market and a deep appreciation of the outreach mission. Assuring that revenue flows from the branch campus to the main campus, rather than the other way around, is an important tool to help everyone understand the financial benefit of having branches, as well as to encourage meaningful growth in enrollment.

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