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Joint Report of the Council and the General Board on resource allocation: introduction of a Cambridge Resource Allocation Model

The COUNCIL and the GENERAL BOARD beg leave to report to the University as follows:

1. Following extensive consultation over several years with University authorities, principally the Councils of the Schools, a Cambridge Resource Allocation Model (RAM) is now ready for adoption by the central bodies as a tool to inform resource allocation and budgeting. The present model is described in annexes to this Report, one prepared by Professor A. C. Minson, Pro-Vice-Chancellor (Annex A), and the other prepared within the Planning and Resource Allocation Office (Annex B). The Council believe that the Regent House will wish to be informed about the adoption of the principles in the model.

2. The Council wish to record their thanks to successive Pro-Vice-Chancellors involved (Professor D. H. Mellor, Professor M. J. Grant, and Professor Minson) and supporting officers of the Planning and Resource Allocation Office (originally Dr M. S. Edwards and more recently Mr N. J. Wilson).

3. The Council wish to emphasize the following points:

(a) the proposed Cambridge RAM has been the subject of extensive consultation, and has been adapted to Cambridge's circumstances;
(b) the Cambridge RAM is a tool to assist decision-making within the University, not in itself a decision-making mechanism; it will provide the basis for the Council (who work in co-operation with the General Board and the Planning and Resources Committee) in preparing the University's annual budget (the Allocations Report, which is being broadened to include University income and expenditure beyond the Chest); moderation within the RAM will as far as possible safeguard priority academic disciplines and teaching areas where income raising potential is limited;
(c) because it makes transparent the assumptions about notional attribution of income and expenditure, use of the RAM will help Schools, and Faculties and Departments and other institutions, to take greater control of budgetary processes which affect them;
(d) no satisfactory mechanism has been found to determine the appropriate level of funding, through the RAM, for academic services and other 'non-school' institutions. However the model proposes that changes in Chest allocations to the Schools, representing changed levels of activity (and therefore central costs), should be reflected in proportional changes in the funding of those services and other activities;
(e) the University's long-term viability and academic vitality depend on the availability of sufficient resources and good decisions about expenditure; the RAM will inform the Council and the General Board about considerations the University needs to take into account in putting itself in a strong position in this regard; but the RAM does not itself enable the University to do so; this is a major task for the University and its supporters;
(f) the RAM will be amended and adjusted in the light of experience.

4. It is intended to use the RAM to inform the preparation of the Allocations Report for 2004-05. Schools and other institutions should be developing their plans using the model.

17 November 2003ALISON F. RICHARD, Vice-ChancellorB. J. BRINDEDD. LOWTHER
 S. H. ADELMANWILLIAM BROWND. W. B. MACDONALD
 SARAH AIREYD. A. GOODJAMES MATHESON
 R. J. ANDERSONDAVID S. INGRAMMARTIN REES
 Z. BARANSKIIAN LESLIEG. A. REID
 RICHARD BARNESA. M. LONSDALELIBA TAUB
 JOHN BOYD  

 

11 November 2003ALISON F. RICHARD, Vice-ChancellorN. O. A. BULLOCKD. W. B. MACDONALD
 SARAH AIREYH. A. CHASEROGER PARKER
 JOHN BELLJESSICA CHILDSKEITH PETERS
 T. J. BLUNDELLANDREW CLIFFS. J. YOUNG
 WILLIAM BROWNM. J. DAUNTON 

Annex A

The Resource Allocation Model (RAM)

Attempts to introduce a RAM in Cambridge have been ongoing for some eight years. The 'RAM' now has a very high profile and the expectations of what it can deliver are inflated. We must be clear that the RAM is not an answer to the University's financial problems. Nor is it a rigid mechanism by which resource can be allocated to Schools, Departments, the Unified Administrative Service (UAS) and other institutions. The value of the RAM is in providing Schools and institutions with an understanding of their sources of income and their costs, thus allowing budgetary devolution and rational planning.

The RAM 2002/2003

In January 2002 a proposed Resource Allocation Model was presented to the Councils of the Schools and comparable bodies for consultation. The key element of this model was that all income (including discretionary income) was distributed to Schools, and all 'non-schools' institutions (e.g. Museums, University Library, Botanical Garden, Computing Service, UAS) were funded by a 'tax' on Schools income. A further characteristic of that model was that a 'politically acceptable' outcome (i.e. to each School) was achieved by modifying the income/expenditure parameters (e.g. teaching subject weighting; space weightings). The consultation exercise resulted in a very wide range of responses but the recurring themes were:

The potential threat of a RAM to minority subjects (particularly in Arts and Humanities) and hence to the shape of the University.
The exposure of museums and collections (particularly those embedded in Departments) to budget cuts.
The means by which appropriate levels of 'non-schools' expenditure would be determined such that 'RAM discipline' would be imposed on 'academic services'.

Some of these concerns are re-iterated in the Eighth Report of the Board of Scrutiny.

In reviewing and developing the 2002 model the RAM Development Group considered these issues but were also confronted with two further factors. Firstly, changes in the HEFCE funding methodology for research (introduction of 6* category, reduction in '4' funding) resulted in significant changes in the outcome of the 2002 model. What was politically acceptable in January 2002 ceased to be acceptable in October 2002, and, since the model distributed all available income to Schools as a starting point, no income remained which could be used to manage change. The futility of designing the model to achieve acceptability become apparent. Secondly, in parallel with the development of the RAM, the University was engaged in TRAC (Transparency Review Approach to Costing) analysis and in the development of a financial model. It became clear that the RAM would be discredited if quite different data and weightings were used to populate these different exercises.

As a result of these issues the model now recommended to the Council differs in a number of key respects from the January 2002 model.

1. Discretionary income (General Income) is not distributed to Schools. Instead it is used transparently to support activities which are of strategic importance to the University:

- Museums, University Library, Botanic Garden (i.e. non-school institutions which cannot be simply regarded as 'academic services' but which are crucial to the mission and reputation of the University).
- The remaining general income is not all distributed to Schools by formula as in its earlier model but is used (50/50) to support teaching (which in Cambridge could not be sustained by HEFCE funding) and to provide residual funds for strategic use to 'moderate' the School allocation (the latter sum is currently ~£5m). These residual funds are available for strategic development (in good times) or to protect 'at risk' Schools and institutions and manage change.

2. All income is attributed to Schools and institutions 'as earned'. This may not reflect the University's value judgements but it does reflect our true sources of income and avoids arguments about value judgements.

3. Embedded Museums are supported by two streams of funding. One component from the allocation to the relevant School (reflecting the contribution of museums to the teaching and research activities of Schools) and a second component from General Funds (reflecting the broader remit of museums as a national and international resource). This arrangement is in accord with proposals from the Joint Museums Committee and has been discussed extensively with museum Curators. Similar funding arrangements are proposed for the Fitzwilliam Museum, the University Library and the Botanic Garden.

4. No satisfactory mechanism has been found to determine the appropriate level of funding for academic services and other 'non-School' institutions. Attempts to create a 'market' through service level agreements and complex charge recovery arrangements between Departments/Schools and individual components of the UAS would, in the view of the Development Group, be time-consuming, uneconomical and divisive. Instead the model proposes that overall increases/decreases in Chest allocations to the Schools representing changing levels of activity and therefore central costs should be reflected in proportional increases/decreases to the UAS and other non-School institutions.

A crucial difference between the 2002 RAM and the current proposal is the availability of General Income at the 'bottom of the model' for discretionary use. The Development Group does not wish to propose a specific formula for the distribution of these funds. In the current financial circumstances they could be used to assist Schools with the management of deficits or to protect Schools/institutions with large deficits from damage. For example:

- The funds would be distributed to Schools pro-rata with deficit such that the deficit of each School is reduced by an equal proportion.
- The funds could be distributed as above but with the proviso that no School is expected to achieve a reduction of more than X% in one year (the Oxford RAM uses 2%, for example). A mechanism of this kind would provide a method for protecting 'at risk' Schools - in particular Arts and Humanities.

The proposed model is not 'perfect'. Contentious issues remain. The space definitions and space weightings, for example, require further work as data become available but the Development Group is satisfied that they are the best that can be achieved at present. It is clear that the RAM should be kept under permanent review. Nevertheless, the proposed model has the support of the Chairmen of the Councils of the Schools, the Director of the Fitzwilliam Museum and the University Librarian. This is not to say that everyone is 'happy', but there is agreement that this is the best that can be achieved. Three final points need to be made.

1. In response to consultation in 2002 there were many requests for 'sensitivity analysis' of the RAM. It is apparent that elements of the RAM (T-weightings, space weightings) are sensitive. But this fades into insignificance by comparison with the effects of HEFCE policy and other external factors. The proposed changes in HEFCE T-funding for 2004 will have a significant effect on RAM outcome and the proposal for changes in 'R' funding will have huge impact.

2. The object of the RAM is to allow rational planning over the medium term, rather than the present system of 'annual savings targets' or 'annual new needs'. But structural change will require short-term resource to facilitate, for example, change in space usage or change in staffing structure. Funds will need to be made available to facilitate structural change.

3. The outcome of the current RAM (and the 2002 RAM and the disaggregation analysis) shows the Clinical School in substantial surplus. At first sight implementation of the RAM would result in a considerable transfer of funds to the Clinical School and an expansion of that School. It is important to recognise that this is not the outcome. The University has expanded its Clinical School through the funding of senior staff positions from short-term endowments and short-term personal awards from Research Councils and Medical Charities: hence the apparent Chest surplus which is currently used to support activity elsewhere in the University. During the next five years these salaries become a charge on the Chest. Many of the funds which would be transferred to the Clinical School by the RAM are required to allow the Clinical School 'status quo' to be maintained.

A. C. Minson

28 October 2003

Annex B

RAM Development Group: Report to the Council

Introduction

1. At the meeting of the Council on 9 June 2003 Professor Grant outlined the RAM proposals which were under discussion by the RAM Development Group. The Council agreed to consider at a later meeting a draft Report, or Notice, which would draw on the conclusions of the Development Group. The Council invited the Development Group to produce a draft of this document. [M 206]

2. The RAM Development Group under the Chairmanship of Professor Minson have now reached sufficient measure of agreement on the Resource Allocation Model (RAM) for a model to be proposed to the Planning and Resources Committee and the Council for use in guiding the Allocations Process in 2004.

3. The specification for the RAM is that it should:

be simple to understand and transparent in its operation;
be based on fair and objective criteria;
command widespread support in the institutions;
meet HEFCE expectations of accountability;
deliver the necessary resources to institutions to enable them to operate effectively and make an appropriate contribution to meeting the University's objectives;
where appropriate, allow for special factors to be taken into account, subject to this being achieved in a transparent manner;
provide outcomes which are relatively stable from year to year, with any changes being manageable;
provide central services with sufficient resources to enable them to deliver agreed services at defined levels;
not distort behaviour in unacceptable ways.

Background

4. The earlier phase of development of the RAM included an extensive consultation in January 2002 and consideration of the responses by the RAM Working Party in May 2002. The Planning and Resources Committee at their meeting on 23 October 2002 noted that the initial development phase of the RAM was drawing to a close to be succeeded by questions of implementation, and agreed with the suggestion of their Finance Working Party that the Working Party also deal with the RAM because of the congruence with its other strands of work. The Finance Working Party reported in February 2003 and, on their recommendation, the Planning and Resources Committee on 20 February 2003 established the RAM Development Group1 to continue development work which had been in abeyance during the life of the Finance Working Party, and with the target of the RAM being used to inform Allocations for 2004-05.

5. The earlier work had identified a number of issues which needed detailed study. The RAM Development Group established six sub-groups to assist them. The membership of these groups is given in Annex 1.

6. The Group's initial programme of work was to review the build of the Model to ensure that the treatment of income and expenditure was transparent and justifiable. This required reviews of the drivers, weightings and supporting data. It also required a review of the treatment of central costs and how the cost of University activities and services with significant public roles should be attributed in the RAM.

Main features

7. Key inputs for the RAM are:

HEFCE and TTA grant allocations
The Allocations Report
Expenditure and allocations from Estimates
Space data and weightings
Student numbers
Expenditure from the Accounts

8. All modelling has been conducted for the latest year for which all data is available, most lately 2003-04. Subject to agreement on the principles of the RAM, work can begin on rolling it forward to 2004-05, with the final components available in early March so that the outcome will be available during March 2004 to inform Allocations for 2004-05.

9. The RAM has developed in parallel with the Allocations process and is consistent with it. The overall deficit is therefore consistent with the estimated deficit for 2003-04 in the 2003 Allocations Report.

10. The RAM basis is to attribute expenditure and income as earned. Imbalances are shown as surpluses or deficits and reveal where earning power is greater or less than current direct and indirect expenditure, indirect expenditure being the attribution of central costs. It is important to emphasise that the introduction of the RAM and the method of dealing with the University's deficit are separate issues, but the RAM provides a new tool.

Use of the RAM in approaches to the University's deficit

11. The Development Group wish to emphasise that the RAM is a Resource Allocation Model not the future Resource Allocation Method. In a mixed economy like a modern university it cannot be expected that every activity and every component of every activity will balance financially. Cross subsidy is normal, but it is important to establish the cost and the source of funding to meet the cost. At the moment, the University is in overall deficit and is drawing on reserves as the method of subsidy. It is well understood that the continuing and accelerating need to draw on reserves in this way cannot continue. The Council has therefore set the financial target of break even in three years. The problem has been deciding where action needs to be taken and to what extent.

12. The RAM is a tool which identifies imbalances at School level between Chest income and Chest expenditure. The data on which it is based enables Schools to study the balances of income and expenditure at the level of individual departments and faculties. The University's current deficit inevitably leads to a RAM that is in overall deficit. No build of the RAM has so far produced an outcome in which every School's income and expenditure broadly balance, or where the difference in each School is the same. In other words, no build of the RAM provides income to all Schools (and to institutions outside Schools) to match levels of expenditure in the Estimates.

13. That is because the expenditure within Estimates has not tracked changing income and there are therefore in-built but un-reviewed subsidies. The subsidies incorporated within the current Allocations process must be examined and selectively reduced either by exploiting sources of income (without at the same time increasing costs) or reducing costs so that the total of the changes meets the Council's target.

14. The RAM shows that the School of Clinical Medicine has a balance of income over expenditure and is in surplus under the RAM. Expenditure within Estimates has also failed to track income; income attributable to the School is a subsidy to other Schools in RAM deficit.

15. None of this is new. The Disaggregation Analysis has regularly shown these imbalances, but has not provided the incentive for correction. Nor, when the University is in surplus, has correction been an imperative.

16. The means of future cross subsidy across the Schools is moderation, and the Development Group has spent considerable time discussing how moderation may be applied and to what extent. The application of moderation is not part of the RAM and it does not solve the problem of the deficit. There is insufficient funding without dipping deeper into reserves to continue to support all expenditure at the current level. Choices will have to be made. The RAM plus moderation will be part of the Allocations Report; the Council will need to decide how much moderation to include.

17. In addition to the mechanism for focusing on means to correct the continuing deficit there are two other benefits. First, there will be a delegation of financial responsibility to Schools. Much financial decision-making will be at the point where the impact is felt and where incentives operate. Second, the RAM will lead to a more transparent approach to the budgeting of central activities and institutions. The Development Group is aware that central activities must share the incentives and targets falling on Schools.

Description of the RAM

18. At the simplest, the RAM is in two halves and with two stages. One half includes the six Schools, and the other all support, service and academic activity not included in the first part. In stage 1, income, direct expenditure and some 'Blue Book' (Estimates) costs are attributed to both halves of the RAM. In stage 2, the total net cost of the second half (representing indirect costs) is attributed to the first half. The outcome is a surplus or deficit when the attribution of income is offset by the attribution of the sum of direct and indirect costs.

19. This paper will now describe how income and expenditure are attributed in the RAM.

Treatment of income

20. Chest income available for allocation in the RAM is as follows:

Composition fees (£45m)

HEFCE and TTA Teaching, Research and Special Funding (£147m)

General and Endowment Income (£19m)

The Chest share of overheads paid with research grants (£12.5m)

Topslicing

21. The figures above are net of the topslicing for particular purposes. Topslicing is kept to a minimum to ensure the maximum amount of income is available for distribution by the RAM.

22. £30m is topsliced for the 'College fee' transfer from T, R, and Special Funding in the proportions set out in the agreement with the Colleges.

23. The activities of the Fitzwilliam Museum, Hamilton Kerr Institute, Kettle's Yard, the University Library and dependent libraries, the Botanic Garden and departmental museums that contribute to teaching and research in the University are charged to the appropriate Schools. The balance - currently assessed at £8m but under review - which corresponds to their 'public' function or historic role is met by topslicing the general and endowment income. INSET (in-service education and training of teachers) funding is allocated intact to the School of Humanities and Social Sciences and Minority Subject Special Funding to the Schools concerned. There are a few other special arrangements of modest value but which must be kept under review.

24. The Non-Schools group considered if topslicing should be extended to the support of other costs which are not volume dependent such as the core cost of elements of the Unified Administrative Service (UAS) and the core administrative expenditure in School offices, but the approach was rejected.

25. Topslicing changes the incentives on institutions supported by this funding which would otherwise be funded only within their School. Their funding becomes a matter of interest to the wider University and there is a governance issue in relation to the management of topsliced funds.

26. There are no funds at present to support a topslice of a fund which could be allocated selectively for the support of strategic priorities, but that is a desirable goal and must remain an option.

27. Principle: topslicing for the College fee transfer; the support of the 'public/historic' functions of the University Library, museums and galleries; and for other specific functions.

Attribution of income

Composition fees

28. All composition fee income credited to the Chest is allocated to Schools but because actual receipt of composition fees is not necessarily the same as the ideal because of factors such as unpaid fees, the attribution based on fee levels and student numbers may be slightly pro-rated. A few elements of composition fee income not amenable to formula distribution are allocated manually direct to the earning School or other institution.

29. The Development Group modelled the effect of rolling up all composition fees (home and overseas) with Teaching Funding to produce a notional 'teaching resource' for allocation by total student load, but the results were not satisfactory and would dilute incentives to increase fee income where there is freedom to set fees. Rolling up home/EU fees and undergraduate teaching funding into a home/EU undergraduate teaching resource (but allocating overseas fees separately) was similarly not supported by the Development Group.

30. The composition fee income attributed in the RAM is received in respect of HEFCE-fundable courses. The RAM does not at the moment reflect the considerable non-Chest and mainly part-time fee income earned by some institutions teaching self-financed courses.

31. Principle: composition fees attributed as earned.

HEFCE funding for Teaching

32. The attribution of HEFCE funding for Teaching (T) - net of the topsliced deductions - is based on a simplified version of the HEFCE funding model. HEFCE T is not incremental: there is no additional T for each additional student, but there is a sector-wide base price used with institution-specific weightings to calculate a notional level of 'standard resource'. If this notional amount is within a permitted range when compared with the previous year's actual T after adjustments for inflation and additional funded student numbers (the 'Assumed Resource') then funding rolls forward and the University receives the Assumed Resource. Incremental additions to Assumed Resource based on increased student numbers only follow successful bids for additional student numbers, as for the Graduate Course in Medicine.

33. The RAM does adopt an incremental approach by allocating T in proportion to HEFCE weighted student numbers - but with the postgraduate load weighted by an additional 1.25 to reflect generally higher costs. In the RAM, unlike the HEFCE model, the money for teaching research postgraduates in years 2 and 3 is also distributed through the teaching formula, not through research income (QR).

34. Additional student numbers in a School, unfunded by HEFCE, are funded by the RAM but if student numbers overall rise without additional HEFCE funding it follows that there is a general reduction in rates of funding per student.

35. Earlier models of the RAM two years ago adopted weightings which attempted to reflect the differential costs between Schools in Cambridge and were not those calculated by HEFCE. This broke a link between the RAM and HEFCE, which changed the nature of the incentives - attributions were no longer all in proportion to the external funding rates generated by the activity. In that different weightings led to different allocations across Schools it was also not possible to find weightings different from those used by HEFCE that commanded general support.

36. The 'College fee' topslice reduces by about half the funding rates per student flowing through the RAM as compared with HEFCE weighted base prices. Funding rates are clearly insufficient and decisions based on these rates could be unhelpful. Early models of the RAM redressed the balance by attributing on the T formula all the general and endowment income available after topslicing. For the reasons given below, the Development Group has changed this to 50% of the general and endowment income remaining after the topslicing for strategic support.

37. Rates of funding in each Price Group are still less than the weighted base prices. The way in which the various funds came together revealed an uneven reduction in funding across the four Price Groups, with Price Group A (Clinical Medicine) showing the largest reduction. The Development Group has therefore recommended that HEFCE Price Group weightings be re-weighted by small adjustments to equalise the reduction across Price Groups when compared with the relevant weighted base price.

38. The latest model of the RAM generates the rates of funding for each Price Group in 2003-04 shown in Annex 2.

39. HEFCE have recently issued a consultation paper on Teaching Funding. The paper proposes new Price Group weightings based on recent studies of relative subject costs. HEFCE claims that these reflect more accurately sector-wide distribution of costs. The adoption of these weightings in the HEFCE formula should not change the amount of T funding awarded to the University because although the new weightings will alter the total Standard Resource in the notional calculation, it will not change it so substantially - or so it is predicted - that the University will fall outside the contract range when Standard and Assumed Resource are compared.

40. The allocation of subjects to Cost Centres is also important because an allocation to a Cost Centre in a 'higher' Price Group leads to an increased rate of funding in the RAM (and at the general expense if there is no additional funding). HEFCE maps Cost Centres to Price Groups (and has proposed a re-mapping in the light of its other proposed changes). The University allocates subjects to Cost Centres and is from time to time invited by HEFCE to review its allocations. There has been no recent survey, but one may follow the current consultation. If so, there may be a case for the re-mapping of some subjects.

41. The adoption of the proposed weightings in the RAM would change the attribution of T between Schools. Nevertheless, the Development Group consider that the RAM should still reflect the HEFCE weightings. They have not been modelled in detail because the consultation period has not closed. It is unlikely that the effects can be accurately modelled until the 2004-05 grant letter is received in March 2004. Moderation is the key to ensuring that Allocations guided by the RAM are appropriate.

42. Principle: T funding (plus R funding for the supervision of postgraduate research students) attributed on HEFCE weightings, with two adjustments: (a) a weighting of 1.25 for all postgraduate students and (b) equalisation across the four Price Groups of the difference in funding as compared with HEFCE weighted base prices.

Research Income - QR

43. The HEFCE formula for calculating QR funds is transparent and easily followed for each Unit of Assessment (UOA). Some disaggregation of the data at UOA level is needed to ensure that the QR funding attributed to each School is as earned (less the amount topsliced for the College fee transfer) but there should be no controversy.

44. A proportion of the QR funding for each UOA depends on 'minor volume factors' surveyed annually (research fellows and assistants, postgraduate research students and income from UK Charities). The incentives to maximise these sources of income are therefore intact within the RAM, in so far as HEFCE continues to fund these minor volume factors and to increase funding in proportion. The recent HEFCE consultation paper on R funding proposes caps on the funding and the eventual elimination of the factors from the formula. The funding method after the next Research Assessment Exercise (RAE) is uncertain. The RAM will need to be kept under review.

45. Principle: QR allocated as earned.

Other general and endowment income

46. General and endowment income is not received on any metric that can be reproduced in the RAM for its attribution; the income therefore represents free funds for strategic allocation. This could be by some metric, or by an individual and selective approach.

47. In earlier models of the RAM general and endowment income was topsliced to meet the Chest expenditure of the Fitzwilliam Museum, the Hamilton Kerr Institute, Kettle's Yard and the Botanic Garden on the grounds that their activity levels were not directly related to levels of activity within Schools and the whole cost could not in fairness be attributed to Schools. It would nevertheless be possible to attribute the full cost to Schools and provide support for those additional costs by strategic moderation. The Development Group did not support the second option and have continued with a topslice.

48. In earlier models of the RAM all the general and endowment income remaining after the topslice was allocated on the T funding formula as a means of maintaining unit levels of funding per student.

49. The Development Group's sub-groups have reviewed the approach and recommended that the cost of support for teaching and research in the University of the above group and of the 'embedded' or departmental museums and of the University Library be attributed to Schools. The remaining element represents the 'public' element of these institutions and, after the deduction of earned income or specific grant funding for particular roles (e.g. the HEFCE Special Funding for copyright libraries and AHRB museums funding) should be a first charge on the endowment and general income. The Development Group believes this is a sensible strategic use. The amount and purpose of the funding, and the opportunity to reduce the subsidy by the activities' exploitation of other sources of income, will be kept under very close scrutiny; general and endowment funding not needed for the support of these institutions is available for general University use.

50. The cost of support for University teaching and research has been assessed in consultation with directors and is in two elements: a share of the direct costs, and a share of the space, noting that in many cases the majority of the space is the consequence of the 'public' role. The costs are still being finalised and those in the RAM at present are provisional. There has also been a proposal that the West Road Concert Hall should be considered in the same way and this is being analysed. This programme of work must be completed for the 2004-05 RAM.

51. The University Librarian has proposed that half the cost of the whole Cambridge library system be considered to be in support of current teaching and research. On this basis, the full cost of the dependent libraries, plus the costs of the faculty and departmental libraries, is attributed to the relevant Schools; the remaining cost (about one-third of the cost of the main University Library) is to be charged 25/75 Science/Arts using a measure of size instead of the 12-year old usage data to attribute these proportions to Schools. The measure of size is 50/50 student load/staff expenditure.

52. Of the general and endowment income remaining after topslice, earlier RAMs (as noted above) attributed all on the T funding model, but this left none for strategic purposes including moderation. The Development Group has modelled RAMs in which all continues to be allocated on the T funding model; in which all is retained for strategic purposes; and varying proportions in between. Allocating all on the T formula has the problem of none being available for strategic support. The T formula is sensitive to change; fairly modest changes were potentiated under this model. Keeping back all of it reduced the rate of funding for each student to an unacceptably low level. The Development Group recommends the mid point: 50% after topslice for allocation as T, and 50% held back for strategic purposes.

53. Principle: the net 'public/historic' cost of the University Library, museums, galleries and Botanic Garden be met from endowment and general income (the cost of support for teaching and research being a charge on the relevant Schools); 50% of the remaining general and endowment income be attributed on the T formula; 50% be available for strategic support.

Chest share of overheads

54. The 'Chest share of overheads' is the proportion of research grant overhead swept into the Chest to meet Chest expenditure. The RAM attributes central Chest expenditure to Schools and attributes the Chest share of overheads to Schools as earned as one source of income from which they can meet these costs. The presentation is important as it enables comparison between the sums in the 2003-04 RAM and the Allocations Report.

55. The concept of a Chest share of overheads, the identification of the sum and the attribution to Schools will be discontinued on the introduction of the RAM. It simply has no relevance. However, to reduce total attributable Chest income by this amount would increase the notional RAM deficits. The summary sheet will therefore be amended to reflect research grant and contract income (which includes overhead contributions including the former Chest share) and will include direct expenditure on research grants and contracts. The difference between the two represents the amount at Schools' disposal to meet both School and University indirect costs.

56. Principle: the 'Chest share of overhead' is discontinued, with University costs being met from income available to Schools.

Expenditure

57. T and R income are distributed 'as earned'; the RAM includes data which enables accurate attributions. Expenditure is attributed 'as incurred' which requires further data. The RAM has no new data requirements but uses data collected and available for other purposes. The summaries in the RAM will be available to Schools for verification and for the information of those Schools that wish to use the data in internal attributions of income and expenditure.

Direct expenditure

58. Direct expenditure is the expenditure reported in Estimates: salaries and wages (the cost of the establishment) plus 'other costs' less a share of the estimated savings on vacancies, but with the addition of a share of the special reserve held for salary settlements. The cost of UAS staff in faculties and departments is added to the appropriate School direct expenditure. There are complications in this simple approach. The need to include Research Grant expenditure has been noted.

59. Appropriations in Aid within Estimates are treated as negative expenditure; direct expenditure is currently net of Appropriations in Aid. Appropriations in Aid include the former 'D08' targets for research overhead recovery, a relic of the original dual support transfer, but which ensure the maintenance of Chest expenditure formerly funded by the element of the HEFCE grant which was transferred to the Research Councils for recovery through overhead payments.

60. Including research grant and contract income in the summary of School income and expenditure while still treating this Appropriation in Aid as negative expenditure leads to double counting. The presentation of the RAM will therefore reflect all Appropriations in Aid as income at School level, matched by increased direct expenditure. These changes should be self-balancing and not affect outcomes.

61. Some other Appropriations in Aid are transfers of non-Chest income. For example, a proportion of M.B.A. fee income is attributed to Chest expenditure in this way but the remaining M.B.A. fee income and associated expenditure, being non-Chest, does not appear.

62. Estimates - the Blue Book - will be needed for 2004-05 to calculate direct expenditure. In future, direct expenditure calculated with reference to Estimates will be replaced by rolling School estimates.

Indirect expenditure

63. Indirect expenditure in the RAM is all central expenditure funded from the Chest revealed in Estimates. Estimates for 2004-05 will be needed to inform the RAM for 2004-05. A different approach will be needed in future.

64. There are two stages in the current RAM for the attribution of central costs. Both stages rely on the same set of 'drivers'. The drivers are volume measures. Each cost is attributed in proportion to the share of a particular volume measure or measures (for example an institution with 25% of the University's total space would be attributed 25% of the space-related costs attributed on the 'space' driver). The 'staff expenditure' driver now includes research staff expenditure because the volume of research was otherwise inadequately reflected in the attribution of costs.

65. The drivers and the proportions for the two stages of the attribution are shown in Annex 3.

66. The Space Sub-Group has reviewed the square area measures and the weightings applied to the five categories of space. The amount of cost to be attributed on the space driver makes it essential that there is wide confidence in these data. Some questions remain to be addressed before the data is used in the RAM for 2004-05.

First stage

67. The first stage is the allocation of Heads of central expenditure, including the direct costs of the central activities, to Schools and to central institutions. A wide range of purposes is covered by these various Heads and sub-Heads, mainly in Heads 1, 2, 3, 4 and 25, but including a few others. Each has been reviewed to ensure the selected driver is appropriate. Some of these Heads may no longer be needed or may become the responsibility of individual Schools. The Personnel Committee has been asked to advise on the future of various personnel-related costs, some of which are set annually by the Planning and Resources Committee and the Resource Management Committee as part of the bidding process.

Second stage

68. The second stage is to allocate to Schools the costs attributed to the central activities under Stage 1.

69. Principle: the two-stage attribution of central costs to Schools using a restricted range of volume drivers.

70. The cost to Schools per volume element in the current model of the 2003-04 RAM is shown in Annex 4.

2005-06 and beyond

71. Reliance on Estimates means that 2004-05 will be an interim year for the treatment of central costs in the RAM. During 2004-05 all institutions will be asked to develop full estimates for 2005-06 showing all income and all expenditure, with five-year forecasts and development plans. A component of the estimate will be the sum - the net cost of operation - that needs to be attributed in the RAM. This programme of work cannot be completed in time to inform the RAM in 2004-05.

72. There are governance issues to be addressed in terms of scrutiny and approval of budgets and plans. These matters were introduced at a seminar for 'non-School' institutions on Thursday, 3 July 2003.

73. The University Library, Botanic Garden, Fitzwilliam Museum, embedded museums and galleries are included in this process.

74. At the meeting of the Council on 9 June 2003, particular reference was made in discussion to the relative advantages of a topslicing approach for collective expenditure, or a taxing approach, with degrees of authority for Schools or institutions to opt out of the provision of a particular collective service. The Development Group has limited the amount of topslicing as described above.

75. By this process of requesting plans and estimates, bids for new needs and similar provisions can be rolled up in development plans; funding for new needs will be rolled up in budgets. There may be a continuing need for some central provisions to cover exceptional items of expenditure for which it would be inappropriate to require each small unit to make annual provision.

76. Principle: that all institutions be required to produce full financial estimates for 2005-06, estimates for the succeeding four years and accompanying development plans.

Non-Chest activity

77. The attribution of volume in the RAM is a reflection of activity that generates central costs and for which it is appropriate to attribute a central cost. There are some activities outside Schools generating volume and a cost, but, with no Chest income offset against the cost either directly or as an Appropriation in Aid, are consequently a charge to Schools. The non-Chest income they receive - some of which may include an element of overhead or should do - is not included. This area of the RAM requires further study to ensure that costs are not falling on Schools that should be met by other institutions from earned income.

78. Principle: to ensure that costs attributed to Schools do not include costs that should be met from other income.

Uncertainties

79. Uncertainties in data and methodology have been covered in the above description. The RAM remains work in progress even for 2003-04 and is currently being rebuilt ready for 2004-05. This operation is giving the opportunity to check the calculations line by line and to question any features persisting from earlier builds that no longer seem appropriate given later work. For example, the AHRB income received for museums is not yet adequately reflected in the revised approach to topslicing for public/historic roles.

80. The Development Group has undertaken some sensitivity analysis of changes to the underlying methodology of the RAM but it is in the nature of the RAM that some elements are sensitive to change. The major uncertainties, however, are external: possible revisions by HEFCE to the T and R funding methods.

81. A specific allocation could be made for contingencies. HEFCE issue a revised grant letter in July each year. The RAM will be run again at this time to reflect any adjustments to grant. These may be additions to grant, in which case there could be a supplementary allocation. There is a prospect of a reduction in funding in some circumstances, such as an error in the provision of data on which funding was calculated. It might be difficult to claw back an over-allocation mid-year and easier to use a contingency fund. Unused contingency can be allocated in the July recalculation, or carried forward to the next year.

Output

82. The output of the RAM is the balance of attributed income over the sum of direct and indirect expenditure. It is the projected size of these deficits and the perceived damage if these deficits were transformed into saving targets that has caused the greatest difficulty in settling the methodology of the RAM. It is not possible to make adjustments within the RAM that do not have an effect elsewhere. It is not possible to transfer funds to one School without reducing the funding for others. If, despite the outcomes, the methodology of the RAM for attributing income and expenditure is accepted, the key to ensuring the RAM enables the funding of Schools consistent with the University's mission is through moderation.

83. This is the point at which the RAM can be used to inform Allocations. The following sections discuss approaches to moderation, savings targets and planning but these operations are not within the RAM.

Moderation

84. Moderation is the selective application of funds. The Development Group has considered two approaches - permanent moderation and transitional.

85. An example of permanent moderation is the treatment of the 'College fee' transfer by topslicing instead of by some other means. Topslicing is an income tax, charged to all at the same rate. The Development Group is convinced that topslicing the fixed sum is appropriate because this reflects the agreement with the Colleges and the way the sum arrives in grant. If the College fee payment had been charged on student numbers the distribution would have been quite different, and the current approach delivers support for the Schools of Arts and Humanities and Humanities and Social Sciences.

86. The adoption of Cambridge specific weightings in the attribution of T funding was an attempt at permanent moderation, but without firm justification for the methodology, irrespective of the case for a departure from HEFCE methodology, the revised weightings were dropped.

87. If moderation is not possible within the formula, then adjustments should be possible below the line, after the RAM has delivered its outcomes. If all income has been attributed, there are no free funds for selective allocation without changing the outcome by extracting funding from one or more Schools - such as those in, or nearest to, a RAM surplus. This approach is open to easy objection by those Schools even if there are clear objective measures of the amount to be deducted and why.

88. The Development Group therefore modelled outcomes in which not all the general and endowment income was allocated and decided that 50% of the amount after topslicing should be reserved for moderation. The starting point for the distribution of this sum was that it should be used to support those most in deficit, but not those in surplus. This introduced very strong negative feedback into the RAM. It halved the RAM deficit, but it also had a marked effect on smoothing outcomes as other changes were modelled above the line. A much more consistent pattern emerged. There was a dampening effect even on the more extreme options. This was welcome, given the uncertainties.

89. The risks of the approach are obvious. There is an apparent reward for running a RAM deficit: the larger the deficit the larger the reward. The initial position in the first RAM, however, was not a reflection of School strategy. The approach could only be used once - as a means for establishing a line. The Development Group does not advocate this as an annual adjustment. It is, however, difficult to roll the RAM forward beyond 2003-04 even to 2004-05, and certainly for future years, so the implications of the method if adopted annually cannot be followed.

90. It would be possible to take a lump sum from the 50% of the general and endowment income and allocate it to one or more Schools, and then distribute the rest by this method. The Development Group could not suggest any sum or such moderation or the recipient School or Schools because of the funding uncertainties.

91. There may be a good reason for bilateral exchanges. The teaching of medical students is shared by the School of Biological Sciences and the School of Clinical Medicine. There is a considerable difference in the weighting of pre-clinical and clinical students. The difference is set to be greater under the HEFCE proposals. The two Schools may wish to discuss if the RAM does deliver equity between them, or if there should be a transfer of resource.

92. Our approaches to moderation assumed that the overall deficit on the RAM should be no greater than the projected deficit for 2003-04. Clearly, if there was an additional draw down on reserves to fund additional moderation, no School need be in deficit. But this would be to eliminate any incentive under the RAM to increase income or reduce expenditure and would be contrary to the Council's financial target.

93. The amount and application of moderation is clearly a strategic decision for the Council. The approach to moderation has to be modelled in relation to the deficit. The greater the moderation, or the slower the pace of change, the longer and greater the deficit. The Development Group can only offer options, but does recommend whatever approach or combination of approaches is adopted that the year on year change be limited to a fixed percentage. Oxford has decided that budgets be moderated by ±2% per year (cumulative) over five years 'to allow time for adjustment … and to reflect the approximate nature of some of the decisions in the RAM.'2

2 David Hendry in the Oxford Magazine: 'All you wanted to know about the RAM - and were keen to ask'.

94. Principle: that 50% of the remaining general and endowment income be available to the Council for strategic support.

Savings targets

95. The Development Group considered how the outcome of the RAM could be combined with the Council's financial target of break even within three years and a return to surplus within five. The size of the unmoderated RAM deficits suggested an unacceptable rate of change if Schools were to achieve a balanced budget within that period. Even if moderated in proportion to deficits, the changes required to break even would be damaging.

96. The Development Group noted that, as with Oxford's RAM, decisions were approximate and that therefore it was not possible to take a firm position on where Schools should be financially two, three or more years ahead. The RAM did, however, indicate direction. One approach was to model a balanced budget by each School in ten years using the moderated deficit as the baseline. Schools in surplus would receive increases in funding at the same rate to the level of their higher baseline over the same period. This treatment of Schools in surplus releases additional funds for moderation.

97. The attribution of indirect costs is a factor in the size of School deficits. It follows that central cost reductions lead to lower deficits. University activities and services must be subject to the same financial discipline as Schools - to make savings or exploit other sources of income. The Development Group therefore modelled a reduction in overhead attribution at a rate which paralleled the rate of change in Schools.

98. The combined effect of these two changes can be shown to meet the Council's target of break even in just over three years as shown in Annex 5. The percentage in the last row shows the annual rate of change as a percentage of the saving over the estimated direct expenditure. With the exception of the release of funding to the Clinical School the annual rate of change is within 2%. These percentages nevertheless represent significant sums. The Council may wish to decide the rates to be applied generally or School by School.

99. It must be emphasised that this is a model for illustration only. The model is based on the 2003-04 baseline and does not take account of the increasing deficit in future years. The RAM has not yet developed to the point at which it can incorporate forecast data and simulate future years. Current forecasts predict that the overall deficit will increase. The overall savings target within this illustration - the deficit for 2003-04 - takes no account of the increasing deficit. Further, if the HEFCE reforms to teaching funding are implemented and reflected in the RAM then the changed distribution of teaching funding will lead to changed outcomes.

100. The illustration does show how funding can be released to the Clinical School at a rate which permits expenditure to increase (at 3.3% in the model). This is not a windfall and does not represent freedom for an unplanned increase in the volume of activity. The School has a number of forward commitments dating from the founding of the School and a consequence of the ending of fixed-term funding for a number of posts for which a condition of funding was appointment until the retiring age. Some solution to this problem would in any case have been required. Further discussion with the School is needed to ensure the forward commitments have been costed appropriately, but the release of funds would appear to be at the correct rate, and there is no reason why the other activities of the School should not be subject to the same financial discipline as other Schools.

Management of change

101. These targets could replace the attrition represented by annual savings within the current allocations process. If the gap is to be closed by additional funding, care will have to be taken that the increasing activity level does not lead to costs higher than the additional income - the problem of over trading. The tax rates will be helpful in showing the relationship between activity and indirect costs.

102. Central activities and services are to be asked to prepare estimates and plans. It is acknowledged that some parts of the administration are underfunded. The extent to which central activities can collectively meet the target has not yet been examined, but will be an urgent task for 2004-05. The Council may decide to limit the rate of change required of Schools. A similar degree of stability for institutions outside Schools could be introduced by the five-year planning process, accompanied by a rolling programme of three-yearly reviews of each activity, their purpose and role.

103. Schools will also need to plan to meet whatever financial targets are eventually agreed by the Council as part of the 2004 Allocations process. There is evidence that some Schools have already embarked on reviews of activity and organisation. The additional administrative support in Schools will be helpful, but Schools will need to consider the level of support they require for planning and financial devolution. The University's Financial Model may be helpful to Schools in modelling options for change.

104. The Council noted that major strategic decisions (such as to initiate inter-School activities, or to terminate a discipline, or provide for it in a different way) must continue to be taken through proper full processes of strategic and academic planning, and could not be left to budgetary decisions by the Schools, although budgetary consideration would inform the strategic planning.

105. If the Council agrees with the methodology set out in this paper then this can be the basis of a below-the-line presentation within the RAM for 2004-05.

106. The financial targets are shown as an annual reduction/increase at constant rates. Schools should be encouraged to plan change in the way that suits them best, which may mean saving a larger change for some point within the planning period. Transitional funding may be required to bridge the gap until the change can be made.

Incentives

107. The RAM introduces a number of incentives, which need to be carefully kept under review to ensure that any perverse features are minimised. For example, there is a direct incentive to increase fee income by the expansion of one-year Master's programmes - but this may not be an appropriate step.

108. Income and taxation rates reveal - for example - the incentives in releasing space, the indirect cost of recruiting staff, and the amount of resource for each student. These should be of great use in internal planning. They should also be useful in bilateral arrangements between Schools where they require an exchange of resource and need to agree the amount.

109. The Council noted that the RAM would have a relatively slow impact on space utilisation, unless other measures were taken, although it included incentives to schools to optimise the utilisation of space. It was important that such steps did not disrupt the good functioning of teaching. Oxford raises a capital charge of £20/m2 on space which it pays back to its Divisions in proportion to research active RAE weighted staff and student numbers. There is thus an incentive to release space and to use space more efficiently. The Development Group has not rejected this approach but considered it would be worth exploring if the incentives within the RAM did not have the desired effect. The Space sub-group has developed guidelines on the management of space.

110. The RAM space costs will also be used in business planning for new buildings.

Governance issues

111. It is essential if the RAM is to succeed that it should have widespread support.

112. As a model, it needs to be kept under review but not so as to destabilise the resource allocation process. There will be a natural annual cycle of refreshment and renewal, but the RAM could also be subject to an in-depth review on a regular cycle of three to five years covering both its methodology and whether or not it is fulfilling the specification.

113. Schools and their Councils and Chairs must be prepared for the delegations and empowerment that is an essential accompaniment of the RAM if the incentives are to operate in the intended fashion.

114. For institutions, services and activities outside Schools which includes - but is not limited to - all those activities within the remit of the Resource Management Committee's Sub-Committees A and B, some new organisational structure must be devised. The Development Group has noted a proposal of its Sub-Group under which three groups would be established: Academic Services; Staff and Student Services; and the UAS.

115. The point has been noted above that a new arrangement may be needed to manage the topsliced funding for the museums and galleries.

116. The scrutiny of rolling plans and budgets will fall squarely within a new funding and planning cycle.

Recommendations of the Board of Scrutiny

117. The Board of Scrutiny in their Eighth Report (Reporter, 6 August 2003, p. 1274) commenting on the findings of the Financial Working Party made two recommendations concerning the RAM: (1) in relation to financial targets for the central administration, (2) in relation to the support for small departments.

118. The Development Group believe that their proposals for budgeting and planning for all institutions and activities make it clear that the new financial disciplines apply to all activities across the University, including the central administration.

119. Schools must consider the support required for minority subjects in the light of their RAM allocations and any HEFCE Special Funding. The Development Group did not have the detailed information which will be available at School level.

Next steps

120. Development of the RAM for 2003-04 must finish and the model be released to Schools. There is a small amount of outstanding work before this can be done.

121. The School of Physical Sciences is modelling the development of internal budgets, the new financial disciplines and is identifying the data needs for implementation. The lessons will be shared with other Schools. A similar exercise will be conducted in institutions outside Schools when support for the exercise has been identified.

122. Any governance or management issues that would be a barrier to implementation need to be identified and solved.

123. The RAM will be rolled forward for 2004-05.

Implementation

124. Subject to the views of the Council, the project plan needs to be prepared for the steps leading to RAM-guided Allocations for 2004-05. It seems unlikely that the RAM will be available before mid March.

125. The RAM may need to be accompanied by a financial memorandum to Schools setting out the expenditure that is to be met from the Allocations and any conditions. This will be particularly important if, as expected, the Allocations roll up previously ear-marked central funds.

126. The RAM will need to be re-run after the HEFCE July grant letter.

Publication of the RAM

127. The published RAM will take the form of departmental data sheets and summaries of income; calculation sheets showing the attributions to Schools; the summary used to inform Allocations, and metrics showing rates of income and expenditure, and taxation rates.

October 2003

Annex 1

RAM Development Group Sub-Groups

Technical

Malcolm Grant (Chair) succeeded by Tony Minson on 1 August 2003
Jane Fisher Hunt (Oriental Studies)
Simon Virr (PRAO3 - now Department of Geography)
Shui Lam (School of Technology)
William Peterson (Economics)
Susan Wright (School of Physical Sciences)
Nick Wilson (PRAO)
Peter Deer (Personnel)
Andrew Reid/Bev Gander (Finance Division)
Convenor: Julian Evans (PRAO)

Space

Nick Bullock (Chair)
David Adamson (Estate Management and Building Service)
Malcolm Longair (Physics)
Tony Minson (School of Biological Sciences)
Karen Douglas (School of Biological Sciences)
Judith Drinkwater (Clinical Veterinary School)
Convenor: Mike Hall

Museums

Tony Minson (Chair)
Duncan Robinson (Fitzwilliam Museum)
Kate Pretty
Jeremy Sanders (Chemistry)
Joanna Womack (Treasurer)
Graham Allen (Academic Secretary)
Michael Akam (Zoology)
Convenor: Julian Evans

Schools group

Andy Cliff (Chair)
Milly Bodfish (Zoology)
Rachel Shapton (Student records)
Sally Pinnock (Clinical Medicine)
Donald Hearn (Bursar, Clare College)
William Peterson (Economics)
Celia Hewetson (School of Humanities and Social Sciences)
Peter Deer (Personnel Division)
Peta Stevens (PRAO)
Deborah Man (Finance Division)
Convenor: Nick Wilson

Non-Schools

group Kate Pretty (Chair) succeeded by Martin Daunton on 1 July 2003
Mike Sayers (Computing Service)
Peter Fox (University Library)
Andrew Scott (Institute of Continuing Education)
Anne Lonsdale
Alan Winter (School of Physical Sciences)
Tim Mead
Graham Allen
Mike Horne (Personnel Division) (cont.)
Rob Shepherd (Finance Division)
Convenor: Nick Wilson

Research overheads

Steve Young (Chair)
Ian Leslie
Caroline Baldwin (Head of Accounting, Research Services Division)
Dr Howard Jones (Departmental Secretary for Chemistry)
Alan Kirby (Departmental Secretary for Pathology)
Professor John Gray (Faculty of Education)
Professor Robert Haining (Head of Department of Geography)
Dr Paul Richens (Director of Martin Centre)
Deborah Man (Finance Division)
Convenor: Simon Jones

Annexes 2-5 [114Kb pdf]


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Cambridge University Reporter, 19 November 2003
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