1415 PR.01 Allocating the Cost of University Services

Revision Date: 
February 6, 2012

1.     Base Calculation

  1. University Services Included in the Allocation Method (“Cost Pools”)
  2. Allocation Metrics
  3. Schools and Units Intended to Benefit from the Services (“Base Units”)

2.     Allocating Costs from the Base Calculation

  1. Allocating Costs to Certain Schools and Units to Improve Predictability
  2. Allocation to All Other Schools & Units

3.     Governance of the Method for Allocating the Cost of University Services

  1. Collaboration and Consultation Among the Officers and Deans
  2. Advisory Group
  3. Decision Regarding Updates to this Procedure

1.    Base Calculation

The Base Calculation described below serves as the “Single Transparent Method” for allocating the costs of University Services as described in the policy governing this procedure (see Policy 1415 Allocating the Cost of University Services). The Base Calculation has four major components: A) the services and associated costs included in the calculation (“Cost Pools”); B) the metrics for allocating these costs (“Allocation Metrics”); C) the schools and units intended to benefit from these costs (“Base Units”); and D) other aspects of the base calculation such as whether costs will be billed based on actual or projected costs. A description of each of these items is included below.

A.    University Services Included in the Allocation Method (“Cost Pools”)

The services and associated costs included in this allocation method are listed in Appendix A. This list may be updated from time to time as part of the natural evolution of the University’s operations and as further information becomes available.  Any updates will be made in accordance with the governance of the method described in Procedure 1415 PR.01.C Governance of the Method for Allocating the Cost of University Services. Costs have been grouped into “pools” of costs where different services serve similar populations, e.g., services intended to benefit all faculty and staff and services intended to benefit all people on campus (faculty and staff and students).

The University also allocates the costs of other services which are not covered by this procedure. For instance, at the time this procedure was drafted, the cost of providing fringe benefit costs and custodial services (among others) were allocated by methods not covered by this procedure or the associated policy.

B.    Allocation Metrics

The allocation metrics are used to provide a reasonable approximation of how much each service is intended to benefit each of the various schools and units. No perfect measure exists, however, through a series of analyses and discussions about the strategy and operations of the various units, a proxy for the intended benefit has been assigned for each cost pool. These are listed in Appendix B. This list may be updated from time to time as part of the natural evolution of the University’s operations and as further information becomes available.  Any updates will be made in accordance with the governance of the method described in Procedure 1415 PR.01.C Governance of the Method for Allocating the Cost of University Services.

C.    Schools and Units Intended to Benefit from the Services (“Base Units”)

The schools and units intended to benefit from the services are also referred to as Base Units. (This term is commonly used in other cost recovery methods where the “base” refers to the denominator over which allocated costs are spread.) The Base Units used for the Base Calculation are listed in Appendix C. This list may be updated from time to time as part of the natural evolution of the University’s operations and as further information becomes available.  Any updates will be made in accordance with the governance of the method described in Procedure 1415 PR.01C Governance of the Method for Allocating the Cost of University Services.

  1. Other Aspects of the Base Calculation

1.     Costs to be Allocated Will be Based on Actual Costs Incurred

In order to facilitate transparency, accuracy, and understanding, the Base Calculation will use the actual cost of providing services to schools and units.

To facilitate predictability, these costs will be allocated to schools and units in the second budget year following when the costs were incurred. For instance, Fiscal 2012 actual results will become available in early Fiscal 2013 when budgets for that year will already have been finalized. Allocating them during that same budget year might cause undue variability for schools and units. Instead, these Fiscal 2012 actual costs will be allocated to schools and units as part of the Fiscal 2014 budget which will not yet have been finalized at the time these actual costs become known.

2.     Allocating Costs to Support Units Which Would Then Re-Allocate these Costs to Other Base Units (“Step Down”)

Certain support units benefit from the services provided by others, e.g., the library utilizes the University’s accounting systems, ITS uses human resources services, all units benefit from police and security. In certain other allocation methods (notably, the Federal Facilities & Administrative Rate calculation), this situation is addressed by “stepping down” overhead costs. That is, overhead costs are allocated to other overhead units intended to benefit from them; these units then reallocate the costs to the ultimate payers or Base Units.

While this practice provides a certain level of increased accuracy in the cost allocations, it also serves to obscure how much of a given service a school or unit is ultimately paying for (e.g., a school would pay for a portion of police and security directly but then also it would pay for a portion through what it might be charged for the library or ITS).

To facilitate transparency, the Base Calculation generally does not “step down” the costs of University Services except where it would lead to different and material management decisions. Analyses were conducted to evaluate the impact on the precision of cost allocations if “stepping down” were eliminated. A determination was made that “stepping down” provided relatively little benefit in terms of increased accuracy relative to the cost of lost transparency.

Please see Exhibit C for a list of exceptions, i.e., units where costs will be “stepped down.” This list may be updated from time to time as part of the natural evolution of the University’s operations and as further information becomes available.  Any updates will be made in accordance with the governance of the method described in Procedure 1415 PR.01.C Governance of the Method for Allocating the Cost of University Services.

3.     Confidential Payroll

In previous methods for allocating overhead the cost for certain school-specific faculty and staff, e.g., Deans, were charged directly to that school. This cost was embedded in the overall charge for University Services.  Since these Confidential Payroll costs are deemed confidential, the co-mingling of the cost of deans with the cost of University Services hindered the ability to share the cost of University Services openly. The cost of deans will no longer be included in the allocation of the cost for University Services. The President, in consultation with the deans, will determine alternate methods for allocating these costs to the schools or funding them in another manner.

2.    Allocating Costs from the Base Calculation

While the Base Calculation will serve as the “Single Transparent Method” for allocating the cost of University Services, the allocation of costs to schools and units will be done in two ways to strike a balance between accuracy and predictability.

A.    Allocating Costs to Certain Schools and Units to Improve Predictability

For each school and unit listed in Appendix D, the cost of University Services will be allocated as follows:

  • The Base Calculation will be used to calculate the amount of the costs to be allocated for the initial year (“Base Year”) listed in Appendix D.
  • After the Base Year and continuing for the time period specified in Appendix D (“Covered Time Period”), the allocated amount will be increased by the inflation factor (the “Allocation Inflation Rate”) also listed in Appendix D.
  • These amounts will not be adjusted for changes in relative size during the Covered Time Period.
  • In the year following the Covered Time Period, the cost of University Services will be allocated to these schools and units based on the then most current Base Calculation. A new Covered Time Period and Allocation Inflation Rate will then need to be defined in accordance with the governance of the method described in Procedure 1415 PR.01.C Governance of the Method for Allocating the Cost of University Services.
  • During the Covered Time Period the annual update to the Base Calculation will continue to be available to these schools and units in order to facilitate transparency and planning.
B.    Allocation to All Other Schools & Units

For all schools and units not listed in Appendix D, the cost of University Services will be allocated each year using the Base Calculation which will be made available as soon as possible after the actual financial results are complete for a given year.

The annual update to the Base Calculation will be done in a collaborative and transparent manner with the schools and units intended to benefit from them.

3.    Governance of the Method for Allocating the Cost of University Services

The method for allocating costs will need to be maintained on an ongoing basis for a variety of reasons. For instance, new services may emerge (e.g., Yale Shared Services); new information may come to light that may cause aspects of the method to be reconsidered (usage metrics); new opportunities may emerge to further streamline the process (incorporating costs currently being assessed by other methods). In addition the need for ongoing transparency and collaboration necessitates transparency regarding how the allocation will be administered.

A.    Collaboration and Consultation Among the Officers and Deans

The Officers and Deans will endeavor to collaborate and consult with one another on issues related to a) the efficiency, effectiveness, and evolution of support services; b) how this might impact the allocation of costs to the schools and units intended to benefit from them; and c) potential changes to the policies or procedures related to the allocation of cost for University Services.

B.    Advisory Group

The Responsible Official (the Vice President for Finance & Business Operations) will convene an advisory group to oversee the ongoing administration and maintenance of the cost allocation method. The advisory group should be comprised of senior administrative leaders with representatives from the Provost’s Office, the School of Medicine, the Faculty of Arts and Sciences, at least one other school, and at least one central administrative unit. The group will be responsible for

  • reviewing and recommending priorities among the list of issues that might emerge regarding the ongoing administration of the calculation, including importantly potential changes to the method. An initial list for consideration is listed in Appendix E for reference. Additional suggestions should be forwarded to the Responsible Official;
  • reviewing the quality and integrity of the annual calculation and its intended purpose; and
  • fostering improved awareness and transparency regarding the cost of administrative services and how they are allocated.

The Vice President for Finance & Business Operations will serve as the chair of this group and will be responsible for bringing forward relevant information to the Officers and Deans for their consideration.

C.    Decision Regarding Updates to this Procedure

Decisions regarding updates to this procedure, including the Base Calculation, will be the responsibility of the Vice President for Finance & Business Operations. As noted above, these decisions will be done in consultation and collaboration with other Officers and Deans.

Decisions by the VP F&BO regarding this procedure may be appealed to the Provost.

Decisions by the Provost regarding this procedure may be appealed to the President.

Appendix A

University Services Included in the Allocation Method (“Cost Pools”)

The cost categories included in the Base Calculation as of 2/1/2012 are listed below.:

Additional detail, including the specific costs centers (“orgs”) and activity from each function are available upon request from the Finance office.

Overhead Costs Allocated Based on Underlying Direct Costs

Certain costs related to support activities at times are recorded outside the organizational unit providing that service. For instance, the cost of buildings related to information technology, finance, and human resources organizations have historically been recorded in the University General cost center. In these cases, the costs will be identified and then allocated based on the underlying direct cost, i.e., the cost of buildings occupied by Human Resources functions will be allocated based on the Human Resources allocation metrics irrespective of where the costs are recorded in the University’s financial systems.

Over time accounting practices should be adjusted wherever appropriate and practical so that all costs of a given support function appear in the same cost center.

Direct Charged Costs

In certain units some, but not all, costs are readily identifiable as benefiting a particular school or unit, e.g., varsity athletics benefit FAS, the Medical School library benefits the Medical School. These costs are included in the Base Calculation as “direct charged” costs. That is, the costs are kept separate from costs apportioned using a general Allocation Metric, and then these “direct charged” costs are added into the allocated costs to arrive at the total amount charged to a school as part of the Base Calculation.

The “direct charged” costs as of 2/1/2012 included in the Base Calculation are listed below for reference:          

  • Varsity and intramural athletics

o   Charged to the Faculty of Arts & Sciences (FAS)

  • Yale School of Medicine Security
  • School Library Costs

Office of Cooperative Research (OCR)

The costs of operating the Office of Cooperative Research are recovered from Yale’s share of royalties (i.e., excluding the inventor’s share of royalties) and before royalty income is distributed to either the Provost’s Office, the School of Medicine, or any other school or unit.

OCR costs are recovered from royalty income in the same year in which the costs are incurred.  Since the Base Calculation recovers costs based on a two-year lag and since the OCR royalty sharing allocation includes a number of other aspects that would not be practical to integrate with the Base Calculation, OCR operating costs are recovered by the year-end royalty sharing calculation administered by the Office of Cooperative Research. Consequently, OCR operating costs are not included in the Base Calculation. It is listed here for reference purposes only since the method for recovering these costs was discussed and clarified as part of the same process that led to the development of the Base Calculation.

Appendix B

Allocation Metrics

The allocation metrics used for each of the cost pools as of 2/1/2012 are as follows:

Cost Pool

Allocation Metric

Rationale

Transactional & Other “Direct” Services

% of Net External Revenue

Relative size as a proxy for transactional volume

Institutional Overhead & Leadership

Ladder Faculty + Student FTEs

Relative leadership “mind share”

Student-Focused Activities

% of Student FTEs

Relative share of students

Development

% of Gifts based on sum of the most recent five years (all sources, i.e., current use, endowment, capital, other)

Relative benefit of development activities

Employee Services

% of Faculty + Staff FTEs

Relative share of all employees (Faculty + Staff + Post Doc Associates)

Services that support all People

% of Total FTEs

Relative share of Faculty, Staff, Students, Post Docs

Research Administration

% of Sponsored Agreement Direct Income

Relative Share of Grant Activity

Shared Services & Business Operations

100% paid by central University unrestricted funds

Since these are start-up activities, they are not be allocated among schools and units at this time. A future evolution of the Base Calculation is expected to be to develop an appropriate method for allocating these costs to schools and units.

Appendix C

Schools and Units Intended to Benefit from the Services (“Base Units”)

  1. The schools and units intended to benefit from University Services (a.k.a. “Base Units”) and used as part of the Base Calculation as of 2/1/2012 are as follows:
  • Beinecke Rare Book Library[1]
  • Chaplain’s Office
  • Faculty of Arts & Sciences
  • Institute of Sacred Music
  • Peabody Museum
  • School of Architecture
  • School of Art
  • School of Divinity
  • School of Drama
  • School of Forestry & Environmental Sciences
  • School of Law
  • School of Management
  • School of Medicine
  • School of Music
  • School of Nursing
  • Yale Art Gallery
  • Yale Center for British Arts1
  • Yale Press1
  1. In addition the following units are exceptions to Procedure 14xx.01.4b (Allocating Costs to Support Units Which Would Then Re-Allocate these Costs to Other Base Units (“Step Down”). The units below will be allocated costs from the Base Calculation which they will then incorporate into rates that are recharged to beneficiaries of their services:
  • Dining
  • Graduate Housing

Appendix D

Other Aspects of the Base Calculation

  1. Self-Support Schools and Units Which Will Be Charged Using a Method to Improve Predictability

The following schools and units will be charged using a method to improve predictability. Reference Procedure 14xx.02.1 (“Allocating Costs to Certain Self-Support Schools and Units to Improve Predictability”):

  • Institute of Sacred Music
  • School of Divinity
  • School of Forestry & Environmental Sciences
  • School of Law
  • School of Management
  • School of Nursing
  1. Covered Time Period and Allocation Inflation Rate

The initial Covered Time Period will be the six (6) years encompassing Fiscal 2012 thru Fiscal 2017.

The Allocation Inflation Rate will be set equal to the Higher Education Price Index (HEPI) as determined in calculating the endowment distribution rate per unit. The Fiscal 2013 rate is listed below for reference. These rates are for the current Covered Time Period only[2]:

Covered Time Period

 

Fiscal 2012

(for FY10 costs)

Fiscal 2013

(for FY11 costs)

Fiscal 2014

(for FY12 costs)

Fiscal 2015

(for FY13 costs)

Fiscal 2016

(for FY14 costs)

Fiscal 2017

(for FY15 costs)

Fiscal 2018

(for FY16 costs)

Base Year

Base Calculation

+HEPI (3.0%)

vs prior year

+HEPI

vs prior year

+HEPI

vs prior year

+HEPI

vs prior year

+HEPI

vs prior year

Base Year

Base Calculation

Appendix E

Future Considerations for the Cost Allocation Advisory Group

During the conversations related to the development of the cost allocation policy and procedure, a number of issues emerged that merit future discussion. A number of these are listed here for the Advisory Group to consider in in their deliberations about potential issues to explore:

  1. Base Calculation
    1. Library Direct Charge Costs – reviewing and updating the method by which certain shared libraries have been apportioned to schools and units

                                                  i.     SOM allocation includes a charge for the Social Science Library

                                                  ii.     Allocation percentages of other libraries (e.g., Sterling, Bass, Music libraries) – direct charge and amounts included in the general cost pool

  1. Developing an allocation method for Shared Services and Business Operations+
    1. Environmental Health & Safety cost allocation
    2. Development allocation for annual fund phone program
    3. Fringe benefit cost allocations
    4. Facility and space cost allocations
    5. ITS FTE, Telecom, and other cost allocations not included currently in the Base Calculation

Please contact the Vice President for Finance & Business Operations if you have additional suggestions for the Advisory Group to consider.


[1] Certain units may have donor restrictions that prohibit the units from funding administrative overhead costs incurred by the University even if those services benefited the unit. The Base Calculation treats these units as “Base Units,” i.e., calculates the amount of costs for services intended to benefit the unit irrespective of whether those costs can be charged to the unit. This is done so that these costs are not inappropriately charged to other units. Any costs that cannot be paid by the Base Unit as a result of donor restrictions are then paid for by the University’s central unrestricted or other funds as appropriate.

[2] Any future Covered Time Periods, i.e., Fiscal 2018 and beyond, may utilize Allocation Inflation Rates that are higher, lower, or equal to HEPI. Please see Procedure 14xx.02.1 1 Allocating Costs to Certain Schools and Units to Improve Predictability for further information.