Oxford University Gazette

• Introduction
• General principles
• Details of the resource allocation method
  • Determine amount available for allocation
  • Top-slice funds for specific purposes
  • Directly allocate income where appropriate
  • Allocate formulaic funds to divisions
  • Adjust for differential salary costs
  • Apply transitional arrangements (moderation)
  • Levy capital charge and redistribute funds to divisions
  • Levy infrastructure charge for service budgets
• Further development work

Introduction

1. This note provides an updated description of the University's Resource Allocation Method for 2004–5.

2. The paragraphs below set out the underlying principles, and main objectives, of the method, and give details of the formulaic and non-formulaic elements embodied within it. They also highlight any refinements to the method which have been made following the fourth year of its implementation.

3. Further details on any aspect of the method may be obtained from relevant staff of the Planning and Resource Allocation Section in the University Offices (and in particular Mr M.D. Sibly, telephone: 80303, e-mail: michael.sibly@admin.ox.ac.uk; Mr P.F. Clark, telephone: 70078, e-mail: paul.clark@admin.ox.ac.uk; or Dr R.E. White, telephone: 80317, e-mail: rachel.white@admin.ox.ac.uk). Details can also be found on the Section's Web site, at http://www/admin.ox.ac.uk/pra/.

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General principles

4. The RAM was introduced to complement the University's new governance and planning structures. It was intended to provide a transparent and consistent means of allocating the University's income to divisions, to whom responsibility for preparing academic budgets was devolved. Thus, whilst Council through the Planning and Resource Allocation Committee (PRAC) remains ultimately responsible for approving proposed divisional budgets, and for monitoring activity against them, responsibility for determining detailed spending decisions now rests with divisions. Details of the application of the method within each division may be obtained from the relevant divisional board secretariat.

5. Among other things, the design of the RAM is intended to encourage increases in the University's income, and its most efficient use. This is achieved by allocating as much income as possible directly to divisions and OUDCE, and building appropriate drivers into the formulaic allocation of the remaining funds.

6. Implementation of the RAM is also designed to link the allocation of income directly to planned academic activity, so that money flows according to the strategic academic priorities set by the University and the divisions. Operation of the RAM should be governed by these priorities, and the academic and managerial principles established by the University, rather than by the contingencies of a given financial situation. The RAM is concerned with the most effective and efficient distribution of the University's income. It is not concerned with monitoring expenditure or the costs of different activities, although this may of course inform the future development of the RAM.

7. The RAM takes account of the way in which income comes into the University, but it is not simply an `income as earned' model. The RAM thus also provides the University with a safeguard against fluctuations in the methods used externally to calculate the University's funding, and a means of mitigating the effects of external policies and methods of allocating funds which may not fit with its own strategic priorities. It gives the University the ability to move away, e.g., from the use of the HEFCE price bands and cost drivers in the distribution of income. It also allows the University to moderate the financial effects of external `market' forces, by redistributing funds towards activities which it deems to be academically desirable, but which may not be financially self-sustaining (e.g. the support of important minority subjects). Thus, the RAM is a flexible tool which the University can adapt to maximise the use of its resources in the future, and take best advantage of new opportunities and circumstances. It is up to the University to decide how best to use this tool. 8.Prior to discussing the structure of the RAM, it is important to note that the University has recently revised its Financial Strategy. Two of the revisions made to this strategy directly impact on the allocation of resources through the formulaic element of the RAM. First, the funds received by the University from the Oxford University Press (OUP) are now held in the University's Strategic Reserve: in previous years a proportion of these funds had been added to the sum of funding available for allocation through the RAM formula. Second, many of the elements previously met as a top-slice on the funds available for formulaic allocation, e.g. student bursaries, Clarendon Scholarships, are now met directly from the Strategic Reserve.

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The resource allocation method

(a) Determine amount of income available for allocation.

(b) Top-slice funds for certain specific purposes (including the College Fee Transfer which is determined by a separate group).

(c) Directly allocate income where appropriate.

(d) Allocate formulaic funds to divisions.

(e) Adjust for differential salary costs.

(f) Apply transitional arrangements (moderation).

(g) Levy capital charge and redistribute funds to divisions.

( h) Levy infrastructure charge for service budgets. Each of these stages is described in more detail in the paragraphs below.

Determine amount available for allocation

10. For funding in 2004–5, Council has modified its approach to the internal allocation of resources. Its overall objective has been to achieve a broad equity of treatment between the colleges, services, and divisions/OUDCE. For funding in 2004–5, the basic percentage uplift applied to the baseline allocations of these three sectors was 3.79 per cent. This uplift factor was derived from an analysis of the uplift in the non- earmarked elements of the HEFCE grant for 2004–5 compared to 2003–4.

11. The total university income available for allocation through the 2004–5 RAM (i.e. the sum of directly and formulaically allocated income) is estimated at £424.8m. The two biggest elements of this are the non- earmarked elements of the HEFCE grant (c.£135.5m for 2004–5) and income from research grants and contracts (estimated at £162.2m for 2004–5). Other significant sources of income include monies from university composition fees and trust funds. The total income available for allocation also includes c.£2m of funding from the University's strategic reserve.

Top-slice funds for specific purposes

Directly allocate income where appropriate

(a) All research grant and contract income, including 100 per cent of overhead payments on such grants and contracts (totalling an estimated £162.2m for 2004–5). It should be noted that whilst the direct income associated with research grants and contracts is clearly earmarked and not available for other purposes, the overhead payments on such contracts are not earmarked. Although initially allocated directly to divisions (and relevant service units), these overheads are in part intended to support activities outside the departments or faculties which provide immediate support for research and therefore should be regarded as being available to contribute to the infrastructure charge for service budgets, dealt with below. Allocating all overheads to divisions/departments should act as a clear incentive to them to maximise overhead recovery rates.

(b) Various other earmarked or directly earned sums: these include, for example, income from a wide range of trust funds, earnings from trading activities, etc. A significant component of the funds under this heading consists of funds which are earmarked for or earned by academic services or other service units.

(c) Certain unearmarked general funds, which the University is free to allocate as it wishes, but which are nonetheless being directly allocated to academic units because it is felt that this is the most appropriate way to treat them. The most important elements under this heading consist of income from tuition fees paid by overseas students, or income from tuition fees which is for other reasons being allocated directly to the host department (and in particular OUDCE). The rationale here is that in those cases where the University is free to set the level of tuition fees itself, such fees should be directly allocated, so as to encourage divisions and departments to consider the level at which they are set, and to ensure all costs are recovered.

It is intended that the direct allocation to divisions, departments, and relevant services is not only simple, clear, and transparent, but will also act as a strong incentive to the relevant units to increase such income wherever possible, and to consider carefully how their costs relate to the income generated.

Allocate formulaic funds to divisions

15. The formulaic allocations are based principally on (a) teaching-related criteria and (b) research-related criteria. Allocations of funds on this basis involve a series of linked steps. The first is to decide how to divide available resources between those to be allocated on teaching criteria and those to be allocated on research criteria. For 2004–5 the agreed ratio is 40:60 between teaching and research, this ratio broadly reflecting the basis on which the funds are received from HEFCE.

16. Teaching related funds (approximately £42.9m in 2004–5) are then allocated pro rata to weighted full-time equivalent home/EU student load. The weightings primarily reflect differences in costs between different subject areas and in Oxford are: 4.5 for clinical subjects; 2.0 for laboratory- based subjects; 1.5 for subjects with a laboratory or fieldwork element; 1.0 for all other subjects. Oxford also gives a further weighting (of 1.25) to reflect the added costs of teaching postgraduate taught (PGT) students. It should also be noted that, because student load relating to postgraduate research students (PGR) in years 1–4 of their study is used both in the teaching component of the formula, and in the research component described below, there is de facto an additional weighting attributable to such students.

17. The teaching weightings used in the Oxford RAM are those originally used by HEFCE in its funding methodology. Although HEFCE has now revised the cost-related weightings used to derive the teaching component of the 2004–5 HEFCE grant, [1] in order to maintain internal stability the original weightings have been maintained in the Oxford RAM for 2004–5. However, the University will be examining the effect of adopting these new weightings in the RAM with recommendations on the weightings to be used in the 2005–6 RAM being presented to Council in Michaelmas Term 2004.

18. The research related allocations (approximately £64.4m in 2004–5) are more complex, but are designed to reflect both the basis on which funds are received by the University, and also the quality and volume of research activity in a particular subject area.

19. The principal component of the research-related allocation distributes funds pro rata to a measure of the volume of research activity, weighted to take account of quality (as reflected in the most recent RAE), and a relative cost band weighting (derived from HEFCE's own research-related cost band weightings). The core volume measure comprises numbers of staff returned as research active (`category A' and `category A*' staff in post), in the most recent RAE, who are funded from general income or NHS-specific funds (this provision chiefly excluding those research-active staff funded from research grants and contracts, and some staff funded from endowments) and PGR load (weighted at x 0.15). These numbers are then weighted by a quality factor derived from the most recent RAE ratings for the relevant department or unit, and by an appropriate HEFCE cost weighting, designed to reflect the differential costs of undertaking research in different subjects. The quality-related weightings used in Oxford are: RAE grade 4 = 2.0; RAE grade 5 = 3.0; RAE grade 5* = 4.0. Thus, no credit is given for RAE grades 3a or below (Oxford no longer has any such departments). The cost weightings are: 1.6 for high-cost laboratory and clinical subjects; 1.3 for intermediate cost subjects; 1.0 for all other subjects. In 2004–5 £45.8m was allocated by this method.

20. A significant proportion of the research-related block grant received from HEFCE is generated on the basis of the volume of external research grants and contract income received from UK-based charities: under the RAM, this funding (some £12.4m in 2004- 05) is distributed pro rata to a two-year moving average of UK-based charity research income, weighted for RAE-derived quality ratings, and HEFCE research cost band weightings.

21. Two other smaller sums are distributed on the following basis:

(a) some £5.2m in 2004–5 is allocated pro rata to non-charitable UK research grant and contract income, again weighted for RAE-derived quality ratings and HEFCE research cost band weightings; and

(b) a further sum of some £948k in 2004–5 is distributed pro rata to the number of research fellows employed in a given department (using the same definition of what constitutes a research fellow as applied for the RAE 2001). This number is taken from the annual Research Activity Survey data return made to HEFCE, on the basis of which a part of the block grant for research is distributed. The number of research fellows is not weighted for either relative subject cost or quality.

22. The combination of these four components is designed to achieve an appropriate balance of incentives to generate additional research-related income, to reflect research quality, and to recognise differential costs. As with the teaching-related formula, use of externally derived quality and cost weightings is the subject of ongoing review.

23. For 2003–4, HEFCE awarded additional research funding (QR) to institutions with units of assessment which had attained a grade of 5* in both the 1996 RAE and 2001 RAE. This funding was referred to as `5 double star' (or 5**), and for Oxford resulted in an additional £4.4m of QR. For funding in 2004–5, HEFCE have expanded the definition of 5** units to include those units of assessment which attained a grade of 5* in the 2001 RAE without a loss in volume compared to the 1996 RAE. These funds have been renamed `best 5-star'. Although all of Oxford's 5* units are now eligible for this additional funding, there has been no corresponding increase in the amount of best 5-star funding awarded to the University and thus the amount awarded remains at £4.4m. This funding has been allocated directly to the earning divisions outside of the formulaic allocation of research funding [2] and in addition to those items noted at para. 21.

Adjust for differential salary costs

Apply transitional arrangements (moderation)

26. In essence, the transitional funding distributed to divisions once the RAM has been run is calculated by comparing the expected financial position in the current year with the projected position of the year for which allocations are being made. The additional funding to `gaining' divisions is capped at plus 5 per cent, and the funds released as a result are used to support `losing' divisions. As the funds released from `gaining' divisions are insufficient to support the `losing' divisions, an additional £1.15m of funding from the strategic reserve has been used in moderation.

27. Council has also agreed that the funding allocated to the Medical Sciences Division as a result of its successful bid to HEFCE for Additional Student Numbers (ASNs) should be excluded from moderation. Thus the 2004–5 RAM was run (a) including the ASNs and (b) excluding the ASNs. The cash difference between the two models was then allocated to the division as a lump sum.

28. It is Council's objective to phase out the process of moderation within the first five years of having implemented the RAM. The transition of the divisions to their ultimate RAM positions should therefore be completed by 2006–7.

Levy capital charge and redistribute funds to divisions

30. The funds generated by the capital charge (about £3.49m for 2004–5) are redistributed to divisions formulaically on the basis of total research active staff numbers in the 2001 RAE, weighted by research quality weightings, and student numbers (with 1.25 weighting for PGT students). This formulaic reallocation of funds shares some of the same features of the main allocation formula, but is deliberately different in certain respects, notably in that it includes all students (i.e., Home/EU and Overseas), adopts different factors for the research-related allocation, and excludes any subject weightings (teaching or research).

Levy infrastructure charge for service budgets

32. The total PRAC service budget for 2004–5 is £67.3m. £12.2m of the services budget is funded through the top-slice (paragraph 12). The remaining funds (£55.1m) are met by an infrastructure charge levied on total divisional income. This formulaic charge is based on a number of factors which are designed, in very broad terms, to represent proxies of usage of particular services. The principal drivers being used for 2004–5 are student load, staff load, and area occupied or maintained.

33. A summary of all the steps described in paragraphs 10–32 above is provided in the flow-chart [PDF file].

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Further development work

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Footnotes

[2] In 2003–4 this funding was top-sliced at 25 per cent prior to its allocation in recognition of the fact that the additional funding resulted in an above inflation in the Quantum. These funds were then used to offset the top- slice. For 2004–5, Council agreed that no such top-slice should be made.
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