UCD Financial Model

Overview

The university generally plans to break even on recurrent activities of the core university, not earning a profit or a loss. Budgets in 2014/15 were taken as a baseline for each unit, with formulaic changes calculated each year. The baseline, adjusted by formulaic changes, is communicated as the Budget Targets for each unit each year. The Budget Targets represent the full allocation of planned income, i.e. planned expenditure matching planned income.

Additional Resources

For the university, the principal sources of unrestricted income for recurrent activities are State Grant Income and Fee Income. As is widely acknowledged, the current levels of State Grant Income are inadequate. Until there is a clear basis for expecting meaningful real increases in grant income, we budget on the basis of the grant remaining constant in real terms (i.e. matching the cost of pay rate increases of staff designated as Core-Funded under the Employment Control Framework).

The principal source of additional income to the university therefore is Fee Income. If we earn additional fee income we have scope for allocating additional resources; unless we earn additional fee income we don't have scope for allocating additional resources.

Research Income (whether direct or indirect) is restricted and subject to the rules of the funding agency. As such, research income and research expenditure are generally seen as operating side-by-side with the UCD Financial Model rather than being a component part.

Fee Income Incentivisation

Resources associated with additional Net Fee Income versus Budget Target are shared on a formulaic basis, providing clear incentives and expectations to schools. Because additional Net Fee Income leads to additional resources for a unit, the incentivisation is also called Performance Based Funding.

50% of net additional fee income is allocated to local units (school and college) and 50% to the university.

An individual school will receive 40% of its net additional fee income formulaically. 10% of the additional funding is allocated to the college, but the Principal may waive some or all of this in favour of the school, or may use it for the collective benefit of the schools in the college.

50% of net additional fee income is allocated to the university's Performance Based Fund formulaically. Distributions from this fund are made to academic and support units and for institutional purposes on a discretionary basis. 

Discretionary Reserves

Performance Based Funding and Net Direct Expenditure variances at year end are placed in reserve accounts for each unit. These accounts are described as Discretionary Reserves because the funds contained may be used at the unit's discretion.

Normally they will be used on a planned basis as identified during the planning cycle. Such reserves might provide an opportunity to spend in excess of the normal recurrent budget level, for example while a new program is being established, or to enable recurrent expenditure to be maintained even if there are temporary shortfalls in fee income. Sustainability is the key element of Five Year Plans - discretionary reserves can be used to smooth out peaks and troughs, but do not allow a unit to proceed on an unsustainable path.

Resources associated with additional Net Fee Income versus Budget Target are shared on a formulaic basis, providing clear incentives and expectations to schools. Because additional Net Fee Income leads to additional resources for a unit, fee income incentivisation is also called Performance Based Funding.

Model applies to All Net Fee Income

The UCD Financial Model applies to the totality of Net Fee Income - while budgets are set individually for levels such as Undergraduate and Graduate Taught, and plans are prepared for particular Majors, the incentivisation model is applied to the full set of fee income, not separately to each element, and not to specific elements only.

Further discussion of Fee Income, Gross and Net Fee Income, Attribution of Fee Income, Census Dates etc. is available here.

Sharing of Variances

Variances between actual Net Fee Income and the Net Fee Income Target are shared 50/50 between local (school and college) units and the central university. Formulaically the school receives 40% of the overall total variance, and the college receives 10% of the overall total variance - this is referred to as the standard allocation of variances. In some cases the College Principal will waive some or all of the college's 10% in favour of the school.

Favourable and Unfavourable variances

The UCD Financial Model applies both to increases in Net Fee Income and also to decreases. As discussed above, a general principle of the financial model is that current budgets are maintained, with grant income remaining stable in real terms. In the absence of other income, reductions in fee income for the university require reductions in expenditure.

For a school, sustained reductions in fee income would require reductions in expenditure. The model, applied in the context of Five Year Plans, provides the opportunity to develop sustainable sources of fee income to compensate for the lost fee income rather than reducing expenditure.

Just as a share of a favourable fee income variance is transferred to reserves, thereby increasing the school's discretionary reserves, the school's share of an unfavourable fee income variance is also transferred to reserves and so does not immediately and directly affect the school's expenditure budget. Such a reduction in reserves, and the prospect of lower levels of fee income in future years do require a planned response, but such a response is developed in the context of a sustainable Five Year Plan, not as a knee-jerk requirement to cut expenditure in the current year.

Option to adjust Formulaic Budget Targets

Favourable or unfavourable fee income variances will not necessarily be repeated next year. They may arise for once-off reasons e.g. because a particular course was not run, because a course with declining popularity is being replaced by another which has not yet reached steady-state etc. As such there is no requirement to adjust budget targets in line with increases or decreases in fee income, but the convention is:

Unfavourable fee income variance - the budget target for the following year is not adjusted. Fee income target remains unchanged, expenditure budget remains unchanged. The assumption is that most schools will not want to reduce expenditure in line with a fee income reduction, that they will aim to put in place measures that will address the fee income shortfall and therefore wish to maintain expenditure levels.

Favourable fee income variance - the budget target for the following year is increased. Fee income budget target is increased, and expenditure budget is also increased proportionately. The assumption is that schools will generally want to maintain fee income at the higher level and will wish to incorporate associated expenditure into their plans/budgets.

The end result - for favourable and unfavourable variances - is the same for a school whether an adjustment is incorporated into the budget target or not because the formulaic model applies. Incorporating the increase into budget targets means that budget targets tend to be at more realistic levels, especially where there are cumulative increases over a number of years.

Elements of Net Direct Expenditure

Net Direct Expenditure refers to a unit's own expenditure. The 'net' term means that any direct income received by the unit is taken into account as well as expenditure.

The elements are:

Pay Expenditure. All forms of pay expenditure within the unit are included e.g. Salaries and Wages, Tutors, other Hourly Pay, employers costs such as PRSI and Pension where relevant.

NonPay Expenditure. Supplies and Travel and other non-pay items incurred by the unit are included.

Direct Income. Income that is not Fee Income and is not received into a project code such as a Research Account or a D Account is described as Direct Income.

Project Income and Expenditure. Projects - such as Research Accounts or D Accounts - are not part of the main set of financial activities of a unit, as recorded in cost centres. Therefore they are not included within Net Direct Expenditure. Please note however that there may be situations whereby an item from a project account may have to be transferred and charged against a cost centre of the unit. For example if there is a deficit at the end of a project, normally that shortfall would need to be made up by the unit.

Variance At Year End

A weakness of  annual cash budgets can be that people rush to spend at year end so that they don't lose funding. Expenditure can also be 'booked' early so that there is no underspend. In UCD we allow units to keep any underspends (and to bear overspends) so that there isn't an incentive to undertake wasteful expenditure or to 'window dress' accounts.

Sharing of Variance

There is no central share of Net Direct Expenditure variances, the full variance is retained by the unit.

As discussed above, variances between Actual Net Fee Income and Formulaic Target are shared. The Net Fee Income variance is shared 50/50 between the central university, and the local college and school. The standard sharing is shown below, and Principals may waive some or all of their share where they have the resources to do so.

For support areas, the V-P or Director has discretion to pool Net Direct Expenditure variances.

The local shares of variances are transferred to Discretionary Reserves of the relevant units and the central share of Net Fee Income variance is transferred to the University Performance Based Fund. Each of these is discussed further below.

As described above, Net Fee Income variances against Formulaic Target at year-end are shared between the school, college and university, with standard allocations as set out in the table below.

Two worked examples are discussed below.

In the first example, the actual Net Fee Income is higher than Target by €300k at year end. The variance of €300k is shared between the school, college and university, with transfers to Discretionary Reserves of €120k and €30k respectively for the school and college. €150k is transferred to the University Performace Based Fund.

The Net Direct Expenditure is €100k greater than Budget, and this is charged against (ie transferred from) the Discretionary Reserves of the school (-€100k).

The school's Discretionary Reserves therefore are increased by +€120k and reduced by -€100k, a net change of +€20k. The school Reserves Opening Balance of €300k is increased by the net €20k, leaving school Reserves Closing Balance of €320k.

In the second example, the actual Net Fee Income is lower than Target by €300k at year end. The variance of -€300k is shared between the school, college and university, with transfers from Discretionary Reserves of -€120k and -€30k respectively for the school and college. -€150k is transferred from the University Performace Based Fund.

The Net Direct Expenditure is €100k lower than Target, and this is transferred to the Discretionary Reserves of the school (+€100k).

The school's Discretionary Reserves therefore are reduced by -€120k and increased by +€100k, a net change of -€20k. The school Reserves Opening Balance of €300k is reduced by the net -€20k, leaving school Reserves Closing Balance of €280k.

A unit's share of Net Fee Income and Net Direct Expenditure variances are transferred to a Discretionary Reserve of the school. The Discretionary Reserve is under the control of the Head of School and is available to supplement recurrent expenditure.

A Discretionary Reserve might be used over a number of years to supplement recurrent expenditure above the formulaic budget target. This might be appropriate where costs are expected to reduce in future years due to staffing changes, or where fee income is expected to grow with the establishment of new streams of fee income. Use of Reserves is an important part of Five Year Planning and a sustainable trajectory is required - a Plan will not be approved if it merely projects spending Reserves and then moving into negative Reserves.

In some cases it might be planned to use Reserves for particular once-off expenditure e.g. a Minor Works project or the purchase of particular equipment. If the timing is known in advance, this would be included within the Five Year Plan and Budget, but if the timing is unknown it might not be - the Head is still able to make use of the Reserves even if it has not been budgeted, provided it does not conflict with the agreed Plan.

While a modest level of Discsretionary Reserve can be seen to be beneficial - providing a level of contingency funding - it is not in a school's interests to continually build up Discretionary Reserves over a number of years without a plan as to how to utilise the reserves. Such reserves would represent missed opportunities - a school would normally be better off spending the reserves for a productive purpose.

While Discretionary Reserves may be used at the discretion of the Head of School, subject to complying with the agreed Five Year Plan, there may be reserves where there is no discretion over how the reserve may be used. These are referred to as Committed Reserves.

Typically Committed Reserves occur where funding is received for s specific purpose during a year, but are not fully expended by year end. Using the funds for another purpose is not permitted, so they are placed in a Committed Reserve. The funds may be drawn down the next year or in subsequent years and spent for the specific purpose.

Committed Reserves can be described as External, where the source of funding is external, or Internal, where the source of funding is Internal. There may well be legal restrictions over how External Committed Reserves are used, whereas there is usually no binding legal restriction over the use of Internal Committed Reserves. Rather an Internal Committed Reserve usually represents a decision to commit the funding to a particular purpose, for example a future accreditation exercise or the replacement of a piece of equipment in a number of years. By placing the funds in a separate Internal Committed Reserve they are 'set aside' for the indicated purpose and are not mixed up with discretionary funds.

Overview

The university's 50% share of additional Net Fee Income is calculated under the Performance Based Funding mechanism whereby schools receive extra resources by earning extra fee income. The university share is put into the University Performance Based Fund. While the vast majority of university funding is allocated on a formulaic basis as described above, the University Performance Based Fund (UPBF) represents a small level of funding that may be applied at the discretion of the UMT and President. 

First Call against the UPBF

While generally the UPBF represents funding that can be used for discretionary purposes, certain costs are regarded as being a first call on any funding:

Where the State agrees pay rate increases, UCD expects that the State will provide funding for the additional cost for faculty and staff designated as Core-Funded under the Employment Control Framework. As other faculty and staff are not designated as Core-Funded, we don't expect to receive additional grant to cover the additional costs. Schools operate under the Performance Based Funding model and have the opportunity to earn additional fee income and therefore to receive additional budget which can be used to cover the additional costs. However, Support Units have no opportunity to earn Performance Based Funding and so the additional cost of pay awards for Support Units is treated as a first call against the University Performance Based Fund.

Pre-Commitments

In the early years of the UPBF, a call to bid for funding from the UPBF was held each year in parallel with the annual planning cycle. However, in recent years a large proportion of the funding had been pre-committed for particular purposes e.g. for PhD Scholarships. Funding to be earned in future years is largely pre-committed to the Central Pool Academic Appointments scheme, supplementing other sources of funding.

Distribution of Funds

Where UPBF funding is approved for a fixed duration, the income is transferred each month for the agreed duration. Where UPBF funding is approved in perpituity (e.g. for the additipal pay rate costs of staff in Support Units, the funding is 'mainstreamed' into the budget each year.