2002-2003 Operating Budget and
Budget Planning for 2003-2004
Report by Rodney A. Erickson to the University Faculty Senate
October 22, 2002
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Slide 1 - Title Slide, Budget Presentation
Thank you for the opportunity to speak to the Senate again this year. I’m going to share some highlights about Penn State’s current operating budget and summarize the University’s budget plan and appropriation request to the Commonwealth for the next academic year.
Slide 2 - 2002-03 Budget Priorities
This year’s budget–approved by the Board of Trustees last July–again gives priority to attracting and retaining the highest quality faculty and staff. Personnel costs are the largest part of our budget and reflect the people-intensive nature of higher education. Competitive salary increases continue to be a special concern.
Employee benefits are another arena in which we must stay competitive, and the cost of health insurance is rising rapidly all over the country.
We also want to maintain the resources that enhance the educational experiences of our students. We have provided support for the School of IST, technology initiatives, and the interdisciplinary programs in life sciences, environmental studies, materials science, and children, youth, and families.
The capital improvement program begun three years ago will be continued to provide for renovations and high priority new buildings, and we will continue to commit funds for deferred maintenance in existing buildings.
Slide 3 - 2002-03 State Appropriation
Let me start by summarizing the state appropriation for this year.
The total appropriation is $322,592,000, or roughly $12 million less in net funds than last year. This is a decrease of 3.65 percent.
This is only the second time in recent years that Penn State’s appropriation has been decreased. As we all know, the Commonwealth is facing a difficult fiscal situation. This situation is not unique to Penn State or to Pennsylvania – unfortunately it has become the norm for public higher education this year.
Slide 4 - 2002-03 State Appropriation (continued)
We received a 4.2 percent decrease in our Educational and General budget.
We were pleased that previous Commonwealth funding of $5 million for the School of Information Sciences and Technology was folded into our E&G line.
The funding for agricultural research and cooperative extension was cut $334,000 from last year’s level. This represents a decrease of less than one percent.
Funding for the College of Medicine remains at last year’s level.
Other line items were reduced by five percent.
Slide 5 - 2002-03 Total Budget - Income
The state appropriation is just one piece of Penn State’s budget. The total budget for this academic year is $2.4 billion. The activities on the left side of this chart are all self-supporting budgets. These include the medical center, which represents 21.4 percent of the total budget, and restricted funds – primarily research grants and contracts – which represent 17.8 percent. Auxiliary enterprises comprise 9.8 percent.
The items on the right side represent the general funds portion of the total budget. Tuition contributes 31.8 percent of the total budget and the state appropriation contributes 13.4 percent.
Slide 6 - 2002-03 General Funds Budget - Income
(Excl. Hershey, Dickinson School of Law and Penn College)
Let’s look more closely at the general funds budget of $1.05 billion. This is the budget that supports the University’s basic academic and administrative activities and maintenance of the physical plant.
The state appropriation represents only 28.1 percent of our general funds budget this year, a record low. Student tuition and fees contribute 65.6 percent. “Other” income, such as recovery of indirect costs, departmental services, and income on investments, contributes 6.3 percent.
Slide 7 - One Percent Increase Modules
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 this year costs about $6.6 million. On the income side, a one percent increase in the state appropriation, excluding Hershey and Penn College, yields about $3 million. A one percent increase in tuition generates about $4.9 million in revenue.
The important point here is that a one percent increase in state appropriation does not correspond directly with a one percent increase in salaries and benefits. The cost of a 3 percent salary increase would be roughly $20 million. Hypothetically, if we were paying for the $20 million out of our state appropriation alone, it would require a 6.5 percent appropriation increase just to cover a 3 percent salary increase. Or, if we were paying for the increase totally from tuition, it would require over a 4 percent tuition increase.
Slide 8 - Salary Adjustments
Salaries and related benefits are the largest component of the general funds budget, comprising over 70 percent of all general funds. Last year, I reported that Penn State’s average faculty salaries had slipped in ranking since 1995-96 in comparison to other Big Ten universities and the 22 public universities participating in the Association of American Universities Data Exchange (AAUDE). However, Penn State’s commitment to making salary increases a high budget priority has begun to show modest results, as we’ll see in the next two slides.
Slide 9 - Average Faculty Salaries Big Ten Public Institutions
In the most recent rankings for Big Ten Public Universities, using 2001-02 average faculty salaries, we have improved at two of the three professorial ranks.
We improved from 5th to 4th for professors, and from 7th to 5th for assistant professors. We remained in 6th place at the associate professor rank.
Slide 10 - Average Faculty Salaries 22 AAUDE Institutions
Here is the same comparison for the 22 public universities participating in the AAUDE data exchange. You can see the drop in our rankings between 1995-96 and 2000-01. However, in the most recent rankings, Penn State has moved up one position at the professor and associate professor levels, and two positions at the assistant professor level.
These ranks are still far below where we would like to be, but we have begun to see progress. We continue to hold competitive salaries as a high priority.
Slide 11 - Salary Increase Plan
This year, we set a salary increase pool of 3.0 percent for merit-based increases and for market, equity, and compression considerations. We continued the Faculty/Staff Excellence Fund for special merit, market, and equity concerns. In addition, the entire President’s Excellence Fund was used once again to supplement the salary increase pool to recognize our top-performing faculty and staff.
Slide 12 - Benefits and Other Insurances
This slide shows our employee benefits cost increases this year for the University’s Educational and General operations. The net increase is more than $11 million.
Cost increases for health care insurance represent $9 million of this total. Nationally, health care costs are expected to increase by an average of 20 percent or more. We have budgeted for a more modest increase of 16 percent.
We are incurring increased costs of $2 million in the TIAA-CREF retirement program due to the increasing number of University employees who participate in this program.
In addition to employee benefits, we have budgeted $1.5 million for the increased cost of property and liability insurances.
Slide 13 - Health Insurance Benefits for Graduate Assistants and Fellows
In recent years, the cost of purchasing health care has become prohibitive for graduate students. This year’s budget includes health coverage for graduate assistants, fellows, and their spouses and children. This will be helpful to our students and it will enable us to compete with other research universities for top graduate students.
The new health care coverage, similar to what is provided for faculty and staff, will cost $7 million, with $4 million coming from general funds and $3 million from sponsored grants and contracts.
Slide 14 - Facilities and Maintenance
Turning now to facilities cost increases, we have budgeted $8.8 million for facilities and maintenance. This includes $3 million targeted for maintenance and operation of new and newly remodeled facilities, such as the MBNA Career Services Building and the Pasquerilla Spiritual Center at University Park, an addition to the Franco Building at Penn State Berks, and an addition to the Commons Building at Penn State Wilkes-Barre. Also included are provisions for increases in fuel and utilities costs at all campuses.
We are continuing the capital improvement program begun three years ago to help address the University’s urgent space needs. We have set aside money for financing the debt on construction and renovation projects above and beyond those supported by the Commonwealth. $4.8 million is included as the 4th year of a six-year investment which allows us to incur an additional $180 million of debt for capital construction and renovation projects. It also provides the associated operating expenses for facilities that will be built from these funds.
An additional $1 million is included for deferred maintenance, bringing this budget to $13 million in permanent funding. Penn State’s backlog of deferred maintenance projects currently totals approximately $200 million.
Slide 15 - Program Adjustments
You’ll recall that we have been focusing on four interdisciplinary areas that address important societal needs – the life sciences; materials sciences; environmental studies; and children, youth, and families. We are continuing that investment this year with an allocation of $1.35 million.
A total of $1 million is included for the School of Information Sciences and Technology to continue its multi-year buildup, supplementing the $5 million previously provided by the Commonwealth on a separate line item.
$2 million is included in the budget for libraries and information technology. These funds are provided from the student information technology fee and are used for high priority student computing, telecommunications, and information resource needs.
The budget also includes $1.2 million for need-based student aid. Although we must raise tuition to offset shortfalls in our state appropriation and to meet necessary cost increases, we continue to work extremely hard to increase external donor support for student scholarships, and we want to make sure that a Penn State education is accessible to all students in the Commonwealth.
The $1.2 million we allocated this year and we expect to allocate in the following four years will be used to provide matching funds for need-based student aid with the new Trustee Scholarship Program that was announced in July. The Trustee Scholarship Program will raise at least $100 million in endowment, and the expendable income will provide ten to twelve million dollars of new student aid, including the University match, in five years.
And a total of $3.4 million is included for other program adjustments. This includes $1 million allocated for new faculty positions and instructional workload adjustments that reflect enrollment changes in the colleges. In addition, $900,000 generated from increases in laboratory and clinical surcharges and the third and final year of the Business Administration tuition differential has been allocated to the colleges that generated the funds. $1 million will be provided for high priority academic needs, as well as enhancements to classroom technology support and student-related administrative computing services. And, $400,000 has been allocated for other support services, such as the university-wide parking and transportation plan.
Slide 16 - Budget Reductions and Reallocations
Penn State is continuing a program of internal budget reductions and reallocations. A total of $5,639,000, or the equivalent of one percent in departmental operating funds, will be reallocated within each college, campus, and support unit to meet the highest priority needs that have been identified in their strategic plans. An additional $2 million will be reallocated from central budgets to help offset cost increases university-wide.
Slide 17 - 2002-03 Per Semester Increase, Tuition, Fees, and Room and Board
We are now turning to the income side of the equation. The tuition increase approved by the Board of Trustees last July was 13.5 percent. Our mandatory student fees increased 9.4 percent. When combined with a 6.8 percent increase for room and board, the University’s overall increase in the cost of attendance was 10.6 percent.
Slide 18 - 2002-03 Tuition and Fees Increases, Big Ten Public Universities
Penn State is not alone having to implement larger tuition increases this year than in recent years.
A poll of our colleagues at other Big Ten public universities makes it clear that everyone has taken rather large jumps in tuition, and that a number of them have considered a higher tuition increase for new students than for returning students. As you can see, three institutions are using the “freshmen bump” strategy of assessing higher increases for incoming students. Indiana’s Board has passed an additional $1,000 fee, effective in Fall 2003, for incoming students, on top of a 12.3% increase for Fall 2002. Overall, tuition increases in the Big 10 for this year range between 7.9 percent and 19 percent for continuing students, and from 19 percent to 34 percent for new freshmen at the schools implementing new tuition strategies.
Slide 19 - Tuition Task Force Recommendations
Last April, I appeared before the Senate to discuss the findings and recommendations of a Task Force I chaired that was studying budget issues and forecasting tuition needs. In July, the Board of Trustees endorsed and approved the recommendations of the Task Force. I will briefly describe the tuition increases that followed the Task Force recommendations.
Slide 20 - Tuition Model
You may recall that the Task Force endorsed the following recommendations–first, that the most promising alternative to meet the University’s budget requirements is a combination of increased tuition differentials by campus location and by student level, and incremental increases as needed.
Second, the Task Force concluded that higher tuition should be phased in beginning with incoming freshmen, rather than for all students. Freshmen will be advised of the increases before making their decision to attend Penn State.
Finally, with respect to student aid, the University should strive to insure that any student from the Commonwealth will be able to attend Penn State through a combination of federal, state, and institutional aid, supplemented by private philanthropy.
Slide 21 - Increases Beyond the Basic Tuition Increase
In addition to the basic tuition increase next year, freshmen at University Park will receive an extra tuition increase of $250 per semester, and freshmen at other campus locations will receive an extra increase of $50 per semester. The following year, 2004-05, freshmen and sophomores at University Park will again receive an extra increase of $250 per semester, and their counterparts at other campuses will again receive an extra increase of $50 per semester.
Slide 22 - Increases Beyond the Basic Tuition Increase
Larger differentials for upper division students and for graduate students will also be implemented in 2003-04 and 2004-05. At all campus locations, a tuition increase of $90 per semester will be implemented beyond the basic tuition increase for both groups of students.
Slide 23 - 2003-04 Appropriation Request
The final portion of my remarks will take a look at the University’s budget plan and appropriation request to the Commonwealth for 2003-2004. There are no guarantees here, especially in this election year. Many steps in the process need to be played out in Harrisburg and here before the Board of Trustees gives final approval to the budget next July.
Slide 24 - 2002-03 Appropriation Request
This slide summarizes Penn State’s appropriation request for next year. It includes a 4.5 percent increase for basic operating costs, or $14,529,000.
In addition, it requests $10 million support for one area of critical need, the College of Medicine. I’ll explain more about this request in a minute.
The total increase requested is $24,529,000 and the total proposed state appropriation is $347,121,000.
Slide 25 - Budget Priorities
Our budget emphases are identical to this year’s priorities. We want to continue our progress in making up for lost ground in faculty salaries, meet the expected increases in health care and other insurance costs, and continue to emphasize facilities within the basic operating budget.
The three critical needs in the facilities category are funding and operation for new or newly renovated buildings, deferred maintenance, and the capital improvement program. Several projects are expected to come on line in 2003-04, such as the IST, Chemistry, and Life Sciences Buildings at University Park, Classroom Building at Altoona, Library/Classroom Building at York, and the Workforce Development and Technology Building at DuBois.
Slide 26 - Budget Priorities (continued)
Other large needs continue to be for libraries, student computing and telecommunications. These will be funded from a proposed $15 per semester increase in the information resources and technology fee.
We will continue to support academic initiatives and other program needs.
And, we have included another $1.2 million in the budget for need-based student aid to match the Trustee Scholarships that I mentioned previously.
Slide 27 - Cost Savings/Enhanced Income Initiatives
Penn State is nationally recognized as one of the most efficiently run universities and we are committed to cutting costs further and finding new sources of income. As I indicated last spring, Gary Schultz and I are co-chairing a Task Force to explore additional cost savings through strategies such as further consolidation of administrative units for greater cost efficiencies, reducing or eliminating some support services that are no longer in high demand, and examining low enrollment academic programs for potential mergers or closures.
This is a long-term effort, but we have targeted $2.5 million in central cost savings beyond the internal budget and reallocation process for 2003-04.
Slide 28 - Strategic Investment Priority
As I mentioned, we are focusing on a single investment priority in this year’s appropriation request to the Commonwealth–Penn State’s College of Medicine. Historically, the College of Medicine has received a much smaller share of its operating budget from Commonwealth appropriations than any similar university medical school in the nation. Penn State’s appropriation for medical education, which is $5 million for 2002-03, has for several years ranked 75th out of 75 public medical schools in the United States – dead last. The average appropriation for other medical schools is now approaching $50 million per year. In other words, Penn State’s appropriation is only about one-tenth of the average appropriation for public medical colleges nationally. One result of Penn State’s inadequate state appropriation is that the College of Medicine has had to rely on Hershey Medical Center revenues to provide support for medical education.
Due to changes in health care reimbursement, it is impossible to support a college of medicine solely on clinical revenues any longer. The University is requesting an increase of $10 million in appropriation for 2003-04 and plans to request similar increases in 2004-05 and 2005-06, for a total increase of $30 million in base appropriation for the College of Medicine over the next three years.
That concludes my report. Again, my thanks to the Senate for this opportunity to share information and perspectives on the Penn State budget. I’d be happy to take some questions if time permits.
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