2000-2001 Operating Budget and Budget Planning for 2001-2002
Report by Rodney A. Erickson to the University Faculty Senate
October 24, 2000
Good afternoon. And thank you for the opportunity to present some remarks concerning Penn State’s budget. I am going to begin with some information that was developed last March for the Commission on Postsecondary Education for the 21st Century, chaired by Representative Krebs. This material was presented to the Board of Trustees in July and is included in your agenda for today’s meeting. I’ll discuss several factors that strongly affect the University’s budget planning and show you how Penn State’s budget compares with Big Ten and other Pennsylvania institutions.
I will also review the highlights of the University’s 2000-2001 budget and the University’s budget planning and appropriation request to the Commonwealth for 2001-2002.
Slide #2 – Big Ten Comparisons
Compared to the other Big Ten public universities, Penn State has the lowest Education & General appropriation per full-time equivalent student and the lowest total expenditures per FTE student. And, we have the unfortunate distinction of having the highest undergraduate tuition rate in the Big Ten.
Slide #3 – 1998-99 Appropriation Per FTE Student, E&G Appropriation Only
We can also compare Penn State’s appropriation per FTE student with public universities in Pennsylvania. Penn State receives roughly half the E&G appropriation per student than Temple receives and $1,400 less per student than the state system. You might be wondering why Penn State’s appropriation per FTE student is so low.
Slide #4 – Percent Change in E&G Appropriation 1977-78 to 1998-99
If we examine the percent change in E&G appropriation over the last 21 years for Pitt, Temple, and Penn State, we see that they are relatively equal. There are minor variations, but these mostly deal with special program issues and not the base budget.
Slide #5 – Percent Change in FTE Enrollment 1977-78 to 1998-99
However, enrollment over the same period has changed dramatically. Penn State’s FTE enrollment growth of 27 percent is well ahead of the other institutions. Temple has fewer FTE students today than it did in 1977, which explains why its current appropriation per student is so much higher.
Because of the relatively equal percentage increase in E&G appropriation for these institutions and the growth in enrollment at Penn State, Penn State has experienced the smallest growth in E&G appropriation per student over this 21-year period.
Slide #6 – Appropriation vs. Tuition and Fees as a Percent of the General Funds Budget
In the next series of slides, we will look at the relationship between Penn State’s appropriation and the level of tuition and fees over time.
In this graph you see that Penn State’s appropriation as a percentage of the General Funds Budget has declined since 1970-71. At that time, the state appropriation was 62 percent of the General Funds Budget and today it is 33 percent.
At the same time, tuition and fees increased as a percent of the General Funds Budget. Today, tuition and fees account for 60 percent of Penn State’s General Funds Budget, compared to 32 percent in 1970. The composition of the General Funds Budget has more than reversed and is almost a two-thirds – one-third proportion.
Slide #7 – Resident Lower Division Tuition Rates at University Park in Current and Constant Dollars
We can compare resident lower division tuition rates at University Park over the last 30 years in current and in constant dollars. Constant dollars have been adjusted to a base year of 1970 using the Higher Education Price Index or HEPI.
The HEPI measures the prices of goods and services purchased by colleges and universities and is a more accurate reflection of the inflation rate experienced by Penn State than the traditional Consumer Price Index.
This chart shows that tuition rates have increased significantly in current dollars, but that tuition rates adjusted for inflation have shown a much more modest increase.
Slide #8 – Educational and General Appropriation/FTE Student in Current and Constant Dollars
Here is the same kind of comparison showing the Education and General appropriation per FTE student in current and in constant dollars over the last 30 years. You can see that the appropriation per student has increased steadily in current dollars, but has actually decreased when adjusted for inflation.
Slide #9 – Tuition and E&G Appropriation Per FTE Student in Constant Dollars
This slide represents a combination of the two previous slides in constant dollars. It shows the steady increase in the proportion of funds provided by tuition and the corresponding decrease in the proportion provided by the E&G appropriation.
Just as importantly, we can see that the total funds available to the University per FTE student from these two sources–when adjusted for inflation–decreased in the 1980s and then rose slightly to a level not much higher than in 1970. In other words, the purchasing power of the University on a per student basis is virtually the same as it was 30 years ago. At the same time, we have been dealing with numerous factors whose tendencies are to push the costs of education progressively higher. This is a very remarkable set of facts.
Slide #10 – Cost Drivers
Penn State’s budget planning is affected by several factors.
The competitiveness of Penn State’s faculty salaries is a special concern. We regularly compare Penn State faculty salaries to average faculty salaries in the Big Ten and with other peers, sharing information through the Association of American Universities Data Exchange. Some of these charts are in your agenda materials. We have concluded that our salary rankings represent a serious challenge to hiring and retaining top quality faculty.
The cost of employee benefits, and health care benefits in particular, is increasing rapidly. In terms of actual dollars, the benefits portion of the University’s budget has increased by $73 million over the last 12 years.
New academic initiatives also impact the General Funds Budget. These include our School of Information Sciences and Technology; and the new consortia in the Life Sciences; Children, Youth, and Families; Materials Science; and Environmental Studies. We plan to continue our financial investments in these areas until our initial multi-year commitments have been met. Our investments are clearly paying substantial dividends.
To enhance academic quality, we have added about 300 faculty positions over the past three years, funded improvements in general education, provided for first-year seminars, and incorporated more active and collaborative learning in many of our courses.
Improvements in technology have required significant investments. We are continuing to invest in computer labs, in access to electronic information, in telecommunications infrastructure, and in other learning technologies.
In addition, we need to comply with various unfunded governmental mandates and maintain an aging physical plant.
Slide #11 – 1998-99 Actual Expenditures By Object - General Funds Only
Higher education is a very labor intensive business. 56 percent of Penn State’s General Funds budget goes to salaries and 16 percent goes to benefits. The remaining 28 percent goes to Department Allotments for such things as telecommunications, office supplies, travel expenses, maintenance and equipment.
Slide #12 – One Percent Increase Modules
Here is one way to look at the budgetary implications of salary increases. We calculate income and expenses in one percent modules to provide some initial parameters in budget planning. For example, on the expense side, a one percent increase in salaries and related benefits cost about $5.7 million last year. On the income side, a one percent increase in the state appropriation, excluding Hershey and Penn College, will yield $2.8 million. A one percent increase in tuition will bring in approximately $4 million.
Slide #13 – Salary Increase Costs vs. Appropriation and Tuition
This slide shows the cost of three different levels of salary increase–3 percent, 4 percent, and 5 percent. The cost of a 5 percent increase would be more than $28 million. Hypothetically, if we were paying for the $28 million out of our state appropriation alone, it would require a 10 percent appropriation increase. Or, if we were paying for the increase totally from tuition, it would require a 7.2 percent tuition increase.
However, our E&G base operating appropriation increase this year is 3 percent or $7.2 million. This comparison shows that, for any competitive level of salary increase, a fairly substantial level of tuition income is required.
Slide #14 – Transition Slide, 2000-2001 Operating Budget
With this background information in mind, let’s look at Penn State’s budget for this academic year.
Slide #15 – Summary of 2000-2001 State Appropriation
We can start with a summary of the state appropriation for 2000-2001. We received a total appropriation of nearly $332 million. This represents an increase of 4.2 percent or $13.3 million in new funds over last year. It also includes as a line item the $4.5 million for the School of Information Sciences and Technology that was funded last year through a grant from the Pennsylvania Department of Education.
Slide #16 – Summary of 2000-2001 State Appropriation (continued)
Looking at the other line items:
As I mentioned earlier, we received an increase in the E&G line item of 3 percent or just over $7 million.
The Agricultural Research and Cooperative Extension line received an increase of $2.2 million. This includes an increase of 5.8 percent for Ag Research and an increase of 3.5 percent for Cooperative Extension.
There is a $5 million dollar line item for program initiatives.
The line item we received last year for workforce development in the amount of $2.25 million was eliminated.
And, the line item for Penn College received a base operating increase of $306 thousand, plus an additional $2 million in workforce development funding for industrial technology programs.
Slide #17 – 2000-2001 Total Budget - Income
The state appropriation is just one piece of Penn State’s budget. This chart shows the total budget. The activities on the left side are all self-supporting budgets. The medical center and restricted funds each represent about 20 percent of the total budget. Auxiliary enterprises make up 10 percent.
The items on the right represent the general funds portion of the budget. Tuition contributes 28.4 percent of the total budget and the state appropriation, 15.4 percent. For 2000-01, the University’s budget totaled $2.15 billion.
Slide #18 – 2000-2001 General Funds Budget - Income
Let’s look more closely at the general funds budget. This is the budget that supports the University’s academic and administrative activities and maintenance of the physical plant.
The state appropriation represents one-third of our general funds budget this year. Student tuition and fees contribute 60 percent. The "other" category of 7 percent includes income on investments, recovery of indirect costs, and departmental sales and services. This year, the general funds budget totaled $911 million.
Slide #19 – E&G Expense Changes
The expense changes for the Educational and General Budget totaled $45.6 million. The largest item in this category was for salary adjustments. This reflects the people-intensive nature of the University’s work and the higher priority given to salary increases this year.
There were also increasing costs for employee benefits, facilities operating costs, base support for the School of Information Sciences and Technology, other program adjustments, and grants-in-aid.
Slide #20 – Salary Increase Plan
The salary increase pool totaled 3.5 percent for merit-based increases and for market, equity, and compression considerations. This required $17.4 million. In addition, the entire President’s Excellence Fund of $3.3 million was directed toward supplementing the salary increase pool. This year’s E&G budget allocated $20.7 million for salary increases. However, we will probably, at best, hold our own in the salary rankings among the Big Ten universities.
Slide #21 – Employee Benefit Cost Increases
This slide shows the benefit cost increases for the University’s education and general operations. The net increase is just under $7 million.
Health care insurance cost an additional $3.8 million, about an 8 percent increase.
We are incurring increased costs of $1.8 million in the TIAA/CREF retirement program due to the increasing number of University employees participating.
$3.2 million was required for increased employer contributions for retirement and Social Security related to the salary increases.
We budgeted $300,000 to improve the health plan for graduate students.
And, a savings of $2.2 million in FICA taxes was available due to federal legislation which exempts Penn State students and the University from payment of social security and medicare taxes for students who perform services for Penn State.
Slide #22 – Facilities Cost Increases
The next item under E&G expense changes is facilities operating cost increases. We budgeted $2.9 million for the maintenance and operation of new or newly remodeled facilities. In addition, we are continuing the capital improvement program begun last year. The $4 million shown here represents the annual investment necessary in each of the next five years to support the $180 million dollars of debt service and operating costs that are required to support the University’s capital improvements program.
Slide #23 – Information Sciences and Technology
Base funding support of $4.5 million for the School of Information Sciences and Technology has been included as a line item in Penn State’s appropriation this year. While this does not represent new funding for the School, we are pleased that the support has been included in the University’s operating budget.
Slide #24 – Program Adjustments
Program adjustments in this year’s budget totaled just under $4 million. The new expenditures were partially offset by $4.8 million from internal budget reductions, resulting from one percent reductions in departmental operating budgets at University Park.
We invested $1.3 million this year in the four interdisciplinary areas that address societal needs: the life sciences, children, youth, and families; environmental studies; and materials science.
Adjustments of $2.5 million were recommended for high priority academic program needs in the colleges at University Park and at other campus locations.
Just less than $2 million was included for libraries and information technology, specifically for high priority student computing, telecommunications, and information resource needs.
$1 million was budgeted for student activities, student support services, and expansion of the newspaper readership program to all students at 20 campus locations.
The final three items included funds for program enhancements in the support units, deferred maintenance, and funding designated in the state appropriation for the National Sea Grant College program at Penn State Erie.
Slide #25 – Grants-In-Aid - $2,530,000
The last major E&G expense change concerns grants-in-aid.
We allocated $800,000 to add approximately 40 new graduate fellowships. This will help us attract even more high-achieving graduate students to the University.
Also, $1.7 million was included for increased costs of the grants-in-aid, primarily related to the tuition rate increase.
Slide #26 – Tuition Rate Increases
The basic tuition rate increase this year was 5 percent.
In addition, the tuition increase included $31 per semester to support the capital improvement plan.
$7 per semester was included for student support services, which included $5 per semester for the newspaper readership program.
The tuition increase will generate an additional $29.2 million in income this year.
Slide #27 – Student Fee Increases
There were also two student fee increases. There was a $1 per semester inflationary increase in the student activities fee, which will generate an additional $184,000.
A $15 per semester increase in the information technology fee provides an additional $2 million.
Slide #28 – Summary
This year’s budget makes salaries a top priority. We have also addressed critical operating needs, supported academic initiatives, and enhanced student services. In doing so, we have stressed efficient and effective use of the resources available to Penn State.
Slide #29 – Penn State’s Proposed 2001-2002 Appropriation Request
Now I’ll move on to a summary of the University’s budget planning and appropriation request to the Commonwealth for 2001-2002. Let me emphasize that the University budget for 2001-2002 is very much a moving target at this point in time. There are many steps in the process that will need to play out both in Harrisburg and here before the Board of Trustees gives final approval to the budget next July.
Slide #30 – 2001-2002 Appropriation Request
We have requested a 4.25 percent overall increase in the state appropriation for our basic operating costs. Our top priorities will be to:
– improve faculty and staff salaries
– pay for escalating employee health care costs, and
– continue to support facilities improvement and deferred maintenance.
Slide #31 – Special Funding Requests
In addition to the request for basic operating costs, we have made three special funding requests.
Penn State’s School of IST has been very successful in attracting top scholars and students to the information sciences. We see great opportunities to partner with business, industry and government through the IST Solutions Institute. For 2001-2002, the University is requesting an additional base appropriation of $4 million for IST. The new funds will be used to hire additional faculty, deliver IST courses on the Web, and partner with external organizations to solve information technology-related problems.
We are requesting a $10 million increase in the base appropriation for the College of Medicine next year. This request is necessary because of changes in health care systems nationally. The College of Medicine can no longer be supported solely by clinical revenues. Similar base increases will be requested in each of the next two years.
The third special funding request is for environmental compliance. Penn State is requesting a special appropriation increase of $2 million as part of a two-year effort. Our activities will focus on improving air and water quality, hazardous materials management, and removing contamination on lands owned by Penn State.
Slide #32 – Salary Adjustment Proposal
As I mentioned earlier, Penn State’s ability to compete for the best faculty has become a major concern over the past few years. We are proposing a multi-year plan to incrementally make up for lost ground. Since we cannot look only to the Commonwealth for this increase, we are proposing to fund this special salary initiative through new tuition income.
Slide #33 – Salary Adjustment Plan
The Salary Adjustment Plan that we have proposed looks like this:
– A basic increase of 3.5 percent in the salary pool.
– A one percent increase to be used for adjustments for merit, market competition, and equity concerns from the President’s Excellence Fund.
– A one percent increase from the special salary initiative that we have proposed to fund from new tuition income.
Slide #34 – 2001-02 Budget Plan and State Appropriation Request (000's)
To summarize, the two income changes that we just discussed would yield $68.6 million on the income side of the budget next year. The requested base increase in state appropriation plus the three special initiatives would total $29 million.
We have included increases in the rate of tuition to support the budget plan. A base increase of 4.75 percent has been proposed, plus a one percent increase for the special salary initiative and a one percent increase for the capital improvements program. The total tuition increase would be 6.75 percent, and would yield $35 million dollars.
Slide #35 – 2001-2002 Appropriation Request Summary
This slide highlights Penn State’s appropriation request for next year.
It includes the 4.25 percent basic increase and the three special initiatives which total $29 million.
The total proposed state appropriation requested for Penn State is $361,288,000.
Slide #36 – 2001-2002 Budget Plan and Appropriation Request
If Penn State receives the full state appropriation that we’ve requested of 4.25 percent, then the required level of tuition increase would be 6.75 percent.
This slide shows the level of tuition increases that would be necessary with other levels of appropriation increase. For example, if the base appropriation increase is only 3 percent, then a 7.60 percent tuition increase would be necessary to fund the proposed budget plan. If the state increases our appropriation beyond the 4.25 percent level requested, tuition increases may not be as high.
Let me reiterate that we are still many months away from a final budget for 2001-2002.
Slide #37 – Long-Range Planning
The bottom line to my presentation this afternoon relates to long-range planning. Our goals are to bring faculty salaries to a level which compares more favorably with our peer institutions, to improve facilities, and to enhance academic quality. To reach our goals, significant tuition and appropriation increases will be needed in each of the next five years. The magnitude of tuition increases obviously depends directly upon the level of Commonwealth appropriations for Penn State in the form of base operating support.
We know that all the changes we anticipate cannot be supported entirely by increases in the state appropriation and in tuition. We will continue to seek ways to improve our efficiency and to streamline our operations. We will continue to pursue private giving and the $1 billion dollar goal of The Grand Destiny campaign–although everyone should be aware that these campaign funds are almost entirely restricted and therefore cannot be used for base operating support. And, in order to provide needed funding for program enhancements and for new opportunities, some other activities and programs may need to be reduced, merged, or even eliminated.
Expectations for Penn State are high–from our students, from the general public, from business and industry, and from the state. Our academic quality depends on the quality of our faculty. We are seeking the financial support necessary to recruit and retain the very best faculty and students that we possibly can in order to meet these expectations and to fulfill the potential of Penn State.
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