Rodney Erickson/Gary Schultz
Remarks to the Committee on Educational Policy
Board of Trustees
Thursday, July 13, 2000
Gary Schultz will be joining me in presenting this strategic planning and budget update. We developed this information for the Commission on Postsecondary Education for the 21st Century and presented it to Representative Krebs, Chair of the Commission, and his staff in March. We also shared it with Secretary Paese when he was on campus for Trustee Orientation in April. This will be helpful background information for Graham’s budget report later this afternoon.
Slide #2 – Strategic Planning and Budgeting
Through the strategic planning and budgeting process, Penn State has taken aggressive steps for many years to reduce costs and create more effective and efficient ways of operating, while at the same time preserving and enhancing academic quality. Specifically, the University has eliminated duplication in programs and services, moved resources to the most promising and effective programs, and shifted resources from administrative functions to support teaching, research, and service. Since 1992-93, 58 programs have been eliminated or merged.
Slide #3 – Penn State’s Strategic Planning Process
The first five-year strategic plans for all academic and administrative units at Penn State were developed in 1983. Beginning in 1992, a deliberate process of budget recycling and reallocation was incorporated into the strategic planning process.
The University’s current strategic planning process integrates planning, budgeting, and continuous quality improvement. This helps to ensure that the budget allocations will be based on sound and well-thought-out plans.
Slide #4 – ‘Top-Down’ and ‘Bottom-Up’ Process
Strategic planning at Penn State is both a ‘top-down’ and a ‘bottom-up’ process. As part of the ‘top-down’ process, a University-wide strategic plan was completed in 1997 for the years 1997 to 2002. We are entering the fourth year of this five-year planning cycle.
The University Planning Council, comprised of deans, faculty members, administrators and students, reviews the strategic plans of each academic and support unit, considers requests for resources, and recommends enhanced funding levels.
Slide #5 – ‘Top-Down’ and ‘Bottom-Up’ Process
The ‘bottom-up’ process includes five-year strategic plans developed by each of the 33 major academic and administrative support units. Academic departments and colleges review their program offerings, taking into account student interest, societal and Commonwealth needs, developments in the field of study, and faculty expertise. Strong programs and those central to the mission of the University are recommended for enhancement. Low enrollment programs are identified to determine if they should be continued, merged with other units, or eliminated.
Each unit’s strategic plan complements and supports the goals of the University-wide strategic plan. Annual updates are prepared to measure progress and refine goals.
Slide #6 – Strategic Indicators
Last year, we developed the first University-level strategic performance indicators. The indicators are tied to the six overarching institutional goals in the strategic plan and attempt to answer the question, "How well are we doing?" Strategic indicators will be tracked regularly to chart our progress in meeting Penn State’s goals.
Each college and administrative unit prepared its own list of strategic performance indicators that relate both to University goals and to unit goals and performance. I’ll give you some examples in the next two slides.
Slide #7 – Examples of Strategic Indicators – University Level (Graduation Rates)
These are a few examples of the data that are tracked to measure progress in achieving University goals. The graduation rate is an important indicator. At University Park, for example, 45 percent of undergraduate students graduate within 4 years, 75 percent graduate within 5 years, and 80 percent graduate within 6 years.
Slide #8 – Examples of Strategic Indicators – University Level (Student Employment)
When surveyed 6 months after graduation, 88 percent of baccalaureate degree graduates are employed and 10 percent are pursuing further education.
Slide #9 – Examples of Strategic Indicators – University Level (Research)
We also track expenditures for organized research. Last year, research expenditures totaled $393.5 million dollars. This is a 24 percent increase in the past 5 years.
Slide #10 – Examples of Strategic Indicators – Engineering (Faculty Quality)
I will mention three strategic indicators from the College of Engineering. The overall goal of the College of Engineering is to be one of the ten most outstanding engineering colleges in the nation. To reach this goal, Engineering needs to attract and develop an outstanding faculty, student body, and staff. One measure of faculty quality is the number of faculty selected as fellows in professional organizations. In the fall of 1999, 89 faculty had been elected as fellows in professional organizations and 2 faculty were members of the National Academy of Engineering.
Slide #11 – Examples of Strategic Indicators – Engineering (Program Quality)
A measure of the quality of the undergraduate and graduate degree programs in the College of Engineering is the national ranking in U.S. News and World Report’s annual listing. Currently, Penn State’s undergraduate programs rank 14th out of 228 programs and the graduate programs rank 15th out of 221.
Slide #12 – Examples of Strategic Indicators – Engineering (Student Quality)
One measure of student quality is the average combined SAT score of first-year students in the College of Engineering. The average for the fall of 1999 was 1240.
Other budget units have developed their own performance indicators. Many are similar, some are unique, but all are tied to quality and efficiency in the use of resources.
Slide #13 – Budget Reductions and Reallocations
Given scarce resources, Penn State has turned to internal budget reductions and reallocations to fund strategic priorities and critical operating needs. Guided by the strategic planning process, colleges and support units have reallocated slightly more than 1 percent of their budgets per year since 1992-93, totaling $79 million dollars. This represents more than 12 percent of departmental operating budgets. The budget plan for 2000-2001 includes further budget reductions of $4.8 million to help cover projected operating cost increases and for modest reinvestment in new faculty positions and other selected areas of critical need.
Slide #14 – Examples of Administrative Streamlining
Here are some examples of how administrative streamlining is reducing costs. Penn State’s award-winning electronic approval system enables us to eliminate hundreds of thousands of paper forms as well as the associated costs of mailing, copying and filing. Computer imaging has streamlined record keeping in employee applications, graduate admissions, student aid, and in our financial systems. Using the new Purchasing Card has consolidated payments and substantially reduced paperwork. We have about 6,500 purchasing cards issued and active. Since the program began in October 1996, Penn State has processed over 500,000 purchasing card transactions.
23 percent of undergraduate applicants and 13 percent of graduate applicants to Penn State this year used the Web-based admissions application. This is up significantly from last year. Continued dramatic increases in the use of the Web for student applications are anticipated in the next several years.
eLion is an on-line system which assists students in making informed academic decisions. Students use eLion to check course availability, calculate their expected semester and cumulative grade point averages, and look up Penn State policies and procedures.
We can now bring up-to-date information about research grants to the principal investigators in an on-line format.
And, we estimate that more than 380 continuous quality improvement teams have increased customer satisfaction and saved millions of dollars over the past few years.
In contrast to many of our peer institutions, strategic planning and budgeting are closely linked at Penn State. Budgetary information is factored into the planning process to provide a realistic context for proposed changes and initiatives, and strategic plans are taken into account directly in budget allocation decisions.
Gary Schultz will now provide a brief overview of how Penn State is funded, focusing on sources of revenues and expenditures including major cost drivers affecting higher education in general and Penn State in particular.
Slide #15 – Budget Considerations
Thank you, Rod. In the next series of slides, we will look at the factors that have had major effects on Penn State’s budget planning over the years. In particular, we will look at what has happened to tuition and appropriations per student relative to inflation.
We will look first at peer comparisons in the Big 10 and Pennsylvania institutions. We will then show you how tuition and appropriations per student have changed over the last 30 years. Finally, we will describe some of the factors beyond inflationary cost increases that affect Penn State’s budget.
Slide #16 – Big Ten Comparisons
We’ve compared Penn State’s budget to two sets of peer institutions. This slide summarizes the comparison with 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. Regrettably, we also have the highest undergraduate tuition rate in the Big Ten.
Slide #17 – 1998-99 Appropriation Per FTE Student, E&G Appropriation Only
We also compared Penn State’s appropriation per FTE student with public universities in Pennsylvania. You have all seen this slide before. It comes from Joint State Government Commission data, collected annually. The question is, how did Penn State get into this position of having roughly half the E & G appropriation per student that Temple has or $1,400 less per student than the state system?
Slide #18 – Percent Change in E&G Appropriation 1997-78 to 1998-99
When you take a look at the percent change in Education and General appropriations over the last 21 years, the increases for Pitt, Temple, and Penn State have been relatively equal. There are minor variations, but these mostly deal with specific program issues and not the base budget.
Remember that the appropriation per student is an equation with both a numerator and a denominator. The numerator is the appropriation which you see here, and the denominator is the number of students. Enrollment at these institutions over the same 21-year period has changed much more dramatically.
Slide #19 – Percent Change in Enrollment 1977-78 to 1998-99
As you can see, with a 27 percent increase, Penn State is well ahead of the other institutions in FTE enrollment growth. Temple, in fact, has fewer FTE students than it did in 1977, which explains why its appropriation per student is much higher today.
Slide #20 – Percent Change in E&G Appropriation Per Student 1977-78 to 1998-99
Because of the relatively equal percentage increase in E&G appropriation for these institutions and the significant growth in enrollment at Penn State, Penn State has experienced the smallest growth in E&G appropriation per student over this 21-year period. We are well below the percentage change for Temple and Pitt and lag slightly behind the state system.
Slide #21 – Appropriation vs. Tuition and Fees as a Percent of the General Funds Budget
The next few slides will show the relationship between Penn State’s appropriation and the level of tuition and fees over time.
Penn State’s appropriation as a percent of the General Funds Budget has declined since 1976-77. At that time, the state appropriation was 54 percent of the General Funds Budget. Today, it is 33 percent.
Slide #22 – Appropriation vs. Tuition and Fees as a Percent of the General Funds Budget
During the same time period, tuition and fees have increased as a percent of the General Funds Budget. Today, tuition and fees comprise 60 percent of Penn State’s General Funds Budget, compared to 38 percent in 1976. The composition has more than reversed and is almost a two-thirds – one-third proportion.
This graph clearly demonstrates the fundamental change in the composition of the University’s General Funds Budget that has occurred over the last 23 years.
Slide #23 – Comparison of CPI and HEPI Components
Two indices for measuring inflation are the Consumer Price Index or CPI and the Higher Education Price Index or HEPI.
The Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It includes major categories such as food and beverages, housing, transportation, medical care, recreation, education, and energy.
The Higher Education Price Index measures the prices of goods and services purchased by colleges and universities. Price change data are organized in eight divisions – professional salaries, nonprofessional salaries, fringe benefits, services, supplies and materials, equipment, library acquisitions, and utilities.
We have used the Higher Education Price Index in the next series of slides as being more indicative of the inflation rate experienced by Penn State.
Slide #24 – Percent Change Since 1970 CPI vs. HEPI
Because of varying economic pressures on the different market baskets, sometimes the HEPI is higher and sometimes the CPI is higher. In recent years, the HEPI has exceeded the CPI by one to two percentage points per year.
Over a 30-year period, the cost of the CPI market basket of consumer goods and services has increased by 314 percent, while the cost of goods and services purchased by colleges and universities has increased by 355 percent.
Slide #25 – 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 dollars and in constant dollars. Constant dollars have been adjusted to a base year of 1970 using the HEPI.
Although tuition rates have increased significantly in current dollars, tuition rates adjusted for inflation have shown a much more modest increase.
Slide #26 – Educational and General Appropriation/FTE Student in Current and Constant Dollars
Here is the same kind of comparison showing the E&G appropriation per FTE student in current and in constant dollars over the last 30 years. In this case, the appropriation per student has increased steadily in current dollars, but has decreased significantly when adjusted for inflation.
This simple chart shows why legislators and taxpayers point to their increasing support for higher education while universities worry about their declining financial resources.
Slide #27 – Tuition and E&G Appropriation Per FTE Student in Constant Dollars
This is probably the most important slide in the presentation. It represents a combination of the two previous slides in constant dollars. You can see again that the proportion of funds provided by tuition has risen and the proportion provided by the E&G appropriation has decreased.
Overall, the funds available to the University per FTE student from these two sources –when adjusted for inflation–are only slightly higher now than in 1970. In other words, the University’s purchasing power per student is virtually the same as it was 30 years ago. Given the increased demands that have occurred over the past 30 years, such as environmental compliance, ADA, major maintenance, technology, and the much higher expectations of students and their parents for services, this is a pretty remarkable fact.
Slide #28 – 1998-99 Actual Expenditures by Object - General Funds Only
Higher education is a very labor intensive business. 72 percent of Penn State’s General Funds Budget goes to salaries and benefits and 28 percent goes to department allotments, for such things as telecommunications, office supplies, travel expenses, maintenance and equipment.
Slide #29 – 1998-99 Actual Expenditures by Object - General Funds Only
We can break this down further and show you that actual salaries make up 56 percent of the general funds budget and benefits make up 16 percent.
Slide #30 – Salaries and Wages as Percent of Total Operating Costs by Sector
One of the reasons for breaking this out is that we have some national comparisons from data in the 1997 Statistical Abstract of the United States. This data is for salaries only and does not include benefits. Penn State’s figure of 56 percent for salaries and wages as a percent of general funds operating costs is shown on the top line. This is significantly higher than the other sectors. For the average of the 50 state governments, salaries and wages make up 33 percent of the total operating budgets. For transportation, the figure is 30 percent and for manufacturing it is only 25 percent.
Salaries and benefits are a much higher proportion of Penn State’s general funds budget than for most of the other sectors of the economy. When we experience an increase in either salaries or benefits, it is affecting a larger proportion of our budget.
Slide #31 – Percent Change in Employee Benefits Costs and Appropriation, 1987-88 to1999-2000
Now let’s look at benefits. Over the past 12 years, the cost of employee benefits has increased by 97 percent while our appropriation has increased by 52 percent.
If we look at this in terms of actual dollars, the benefits portion of our budget has increased by $73 million dollars over the last 12 years. While it is often difficult to compare programs, benchmarking with other institutions indicates that Penn State’s benefits are competitive, but not out-of-line with peer institutions or the Commonwealth of Pennsylvania.
I have summarized the major cost drivers that affect Penn State’s budget. Rod will take over at this point and discuss the importance of faculty salaries and some of the other factors that impact budget planning at Penn State.
Slide #32 – Average Faculty Salaries, 22 AAUDE Institutions
The competitiveness of Penn State’s faculty salaries at all of our campuses is of special concern. This slide shows Penn State’s rank for faculty salaries compared to average faculty salaries from the 22 Association of American Universities Data Exchange public institutions. All institutions report main campus salaries and, therefore, Penn State’s salaries are for the University Park Campus. Since 1995-96, we have dropped at every professorial rank, and at the assistant professor level have fallen farther down in the bottom half of these institutions.
Slide #33 – Average Faculty Salaries, Big 10 Public Institutions
This slide makes the same comparison for the Big Ten public universities for this past year and for 1995-96. As you can see, our faculty salaries have dropped from second to fifth at the professor level, from second to sixth for associate professors, and from eighth to ninth for assistant professors.
Slide #34 – Faculty Salary Increase Percentages
Here we are looking at the actual percentage salary increases that have been given by the 22 AAUDE universities over the last 5 years. Penn State lags behind the five-year compounded increase of 20.9 percent. We rank 17th in this comparison.
Slide #35 – Faculty Salary Increase Percentages
We can make the same comparison with the Big 10 public Universities. The five-year compounded increase for the Big Ten publics is 23.5 percent, ours is 18.7 percent. We rank last among the Big Ten public institutions and we are almost a full 5 percentage points behind the average.
These trends represent a serious challenge in hiring and retaining top quality faculty. Graham will provide further information on the salary increase plans of other Big Ten public universities for the current academic year in his budget presentation later this afternoon.
Slide #36 – One Percent Increase Modules
To explain the budgetary implications of salary increases, one set of figures that we use in preparing our budget is the cost of a one-percent increase for appropriation and tuition on the income side and for salaries and related benefits on the expense side. As you can see here, a one percent increase in the appropriation, excluding Hershey and Penn College, will yield $2.8 million dollars. A one percent increase in tuition will bring in approximately $4 million. At the same time, a one percent increase in salaries and related benefits will cost $5.7 million.
Slide #37 – 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 over $28 million dollars. Hypothetically, if we were to pay the $28 million out of our appropriation, it would require a ten percent appropriation increase. Or, if we were paying for the increase totally from tuition, it would require a 7.2 percent tuition increase. These are, of course, hypothetical calculations and not recommendations. These figures are meant to give you a sense of salary increase costs and what the revenue requirements would be.
Note that our 2000-2001 E&G appropriation increase is 3 percent or $7 million dollars. Therefore, for any appropriate level of salary increase, a fairly substantial level of tuition income is required.
Slide #38 – Factors Beyond Inflationary Cost Increases Affecting the General Funds Budget–New Academic Initiatives
There are several other factors that impact the General Funds Budget–beyond inflationary cost increases. Some examples include new academic initiatives such as our School of Information Sciences and Technology; and new consortial initiatives in the Life Sciences; Children, Youth, and Families; Materials Science; and Environmental Studies. We have invested $4.7 million in these initiatives since 1996-97. An additional investment of several million dollars is planned over the next several years.
Each of these initiatives addresses critical needs of the Commonwealth and the nation with respect to workforce education and societal concerns.
Slide #39 – Factors Beyond Inflationary Cost Increases Affecting the General Funds Budget–Academic Quality
We have invested in several other initiatives to enhance academic quality. We have added approximately 300 faculty positions over the past three years, and additional funding has been provided for improvements in general education requirements, for first-year seminars for incoming students, and for incorporating active and collaborative learning in more of our courses.
Slide #40 – Factors Beyond Inflationary Cost Increases Affecting the General Funds Budget–Improvements in Technology
Dynamic growth in the use of technology stimulates the need for improvements and changes in technology. In 1990, Penn State had created 16,000 access accounts for students, faculty and staff. This year, we have 101,000 access accounts. In 1990, Penn State handled an average of 49,000 e-mail messages per day. How many e-mail messages do we handle per day this year? More than 2 million.
The number of personal Web accounts has increased from 300 in 1995 to 37,000 today.
And, consider that the first general use computer lab was installed at University Park in 1984 and it had 22 computers. Today, there are 44 general use computer labs at University Park containing 2,000 computers. And every Penn State campus now has substantial investments in computer labs and other learning technologies.
Penn State University Libraries are also increasing access to electronic information. In 1995, the Libraries subscribed to 3 electronic databases. By 2000, subscriptions increased to more than 300 databases, providing electronic access to thousands of journals. The number of public LIAS workstations likewise increased from 110 when they were first installed in 1983 to almost 700 today. And recently, more than 800 dataports were activated in the Libraries to allow laptop access to the Libraries’ collections and resources.
We are also building the communications infrastructure for the future by increasing intercampus bandwidth to meet growing demands for services and replacing outdated cabling between buildings.
Slide #41 – Factors Beyond Inflationary Cost Increases Affecting the General Funds Budget
In addition, we face important but unfunded mandates, such as the need to comply with the Americans with Disabilities Act, and environmental challenges, such as underground storage tanks and hazardous materials management.
Slide #42 – Factors Beyond Inflationary Cost Increases Affecting the General Funds Budget
The increasing maintenance needed by Penn State’s aging physical plant is becoming a critical problem. We have a backlog of deferred maintenance of over $192 million dollars. We have 1,274 buildings University-wide and the average age of these buildings is 28 years. There is an industry benchmark which finds that buildings require major renovation and renewal after about 35 years of service.
Slide #43 – Building Space Reaching 35 Year Renewal Benchmark
We can look at Penn State’s distribution of building space by gross square feet and the decade in which buildings reach 35 years of age. In the 1970s, about one million gross square feet of space reached the 35 year benchmark. By the 1980s, an additional 2 million gross square feet of space reached 35 years of use. During the 1990s, this doubled to 4 million, and in the next 10 year period we will see an additional 5 million gross square feet reach the point where it will require major renovation and renewal projects.
We have had a program over the last several years to provide additional funding for major maintenance. We have invested $3 million since 1996 to bring the total permanent budget for major maintenance to $9.5 million. We must continue to provide funds in this area to support our campus infrastructure needs.
Slide #44 – Conclusion
In conclusion, although tuition has indeed grown faster than inflation, the combination of tuition and appropriation per student has barely exceeded inflation since 1970.
Slide #45 – Tuition and E&G Appropriation Per FTE Student in Constant Dollars
As we saw earlier, the funds available to the University from tuition and from the E&G appropriation per FTE student–adjusted for inflation–decreased in the 1980s and then rose slightly to a level not much higher than in 1970.
To compensate, Penn State has reallocated funds, improved efficiency, and kept cost increases to a minimum, with the overall goal of enhancing academic quality.
Slide #46 – Summary of Factors Beyond Inflation
Gary outlined some inflationary factors that influence Penn State’s budget. In addition to inflation, several other factors contribute to the marginal increase of tuition over inflation. We need to offer competitive salaries to attract and retain faculty and to cover the increasing cost of benefits. We have begun several initiatives to enhance academic quality and improve access to technology. And we must comply with unfunded mandates and maintain an aging physical plant. We anticipate that these will be critical factors in Penn State’s budget planning process for the foreseeable future.
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