Slide 1 - Title Slide, Cost Savings Task Force
As you know, Gary Schultz and I have been chairing a Cost Savings Task Force that has been seeking ways to reduce costs and increase non-tuition income. The Task Force is a group of six individuals which, in addition to Gary and me, includes Eva Pell, Vice President for Research and Dean of the Graduate School, Dan Larson, Dean of the Eberly College of Science and Chair of the Academic Leadership Council, Dick Althouse, University Budget Officer, and Steve Curley, Financial Officer in the President's Office. For the past year, this group has been taking a wide-ranging look into University operations to see if we can identify additional cost savings and revenue enhancements. We are pleased to bring you a report of our activities and actions after a year of study.
Slide 2 - Summary
I"m going to start at the end of the story with a quick summary of our results. We have identified budget reductions of $11.4 million for the University"s 2003-04 budget, as well as income enhancements of more than $3 million. I"m pleased to report that the amount of tuition increase avoided is 2.7 percent, or over $200 per year for all full-time students.
Let me review for you the rationale for the Task Force, the approach that we took, and some of our specific steps for reaching this level of cost savings and income enhancement.
Slide 3 - Cost Savings Task Force
Penn State's emphasis on efficiency is not new. We have recycled $95 million since 1992-93 and have moved most of these funds from administrative to academic functions. We recently calculated that, if we had not recycled these funds, tuition would have needed to go up an additional 24 percent over this ten-year period.
We have systematically eliminated or merged existing academic programs as we have added new ones. Since 1992, 71 programs have been eliminated or merged.
And, we have one of the most effective continuous quality improvement and re-engineering programs in the nation. More than 500 CQI teams have identified ways to improve processes, from putting the admissions application online to using volume discounts to save money on travel, saving millions of dollars over the past few years through these CQI efforts.
Slide 4 - 1999 Cost/FTE Student Big 10 Public Universities (Main Campus)
All our benchmarking data with peer institutions nationally and within Pennsylvania indicate that Penn State is seriously underfunded. One of the best comparative measures of overall resources available to an institution is total expenditures per full-time-equivalent student. Penn State's overall expenditures per FTE student are the lowest of any of the Big 10 public universities, based on 1999 data.
This chart demonstrates the difficulty of our task. Penn State is already an efficiently run university following years of budget recycling and reallocation, and every year, there are fewer and fewer options available for reducing costs without damaging the academic quality and student life at Penn State.
Slide 5 - Appropriation vs. Tuition and Fees as a Percent of the General Funds Budget
We've shown you the "X" graph before. It illustrates the drop in appropriation support as a percentage of our general funds budget, and the corresponding increase in tuition as a percentage of the budget over the last 30 years. The lines crossed about 1984. That's when tuition and the appropriation supported relatively equal portions of the general funds budgetBabout 47 percent. As of 2002-03, tuition and fees now make up 66 percent of the general funds budget with only 28 percent coming from our state appropriations. This trend is obviously of great concern to us.
Slide 6 - Cost Savings Task Force
Penn State is committed to finding every possible way to reduce costs and enhance non-tuition income. At the same time, we recognize that continued across-the-board recycling will risk harming our best academic programs and damaging essential administrative and student services.
Our budget cutting now and in the future has to be even more vertical, affecting some programs and services more than others. This entails evaluating specific programs and services and the extent to which they support the University's mission. Some programs and services may be reduced or eliminated based on these factors. The Cost Savings Task Force was asked to explore all possibilities for additional cost savings.
Slide 7 - Cost Savings Task Force
Some cost savings measures can be put into place right now, but othersBsuch as program reductions or possible administrative reorganizationsBwill be longer term. We established a preliminary target of $2.5 million for selective budget reductions and non-tuition income enhancements for 2003-04, and we have exceeded that target. We anticipate opportunities for continued savings in the future.
Slide 8 - Approach
The Task Force considered three categories of cost savings or income enhancements. First, there are funds, in either the form of selective budget reductions or non-tuition income enhancements, that can be captured centrally and used to fund necessary increases in the budget. Second, there are recycling and reallocations which can be in the form of budget reductions across all units, recycling from central reserves or internal unit reallocations. Third, there are initiatives which result in cost avoidance or cost savings within individual departments of the University. Savings of this type generally cannot be directly captured centrally, but will provide additional fiscal flexibility for the departments in meeting their operating needs as well as their central recycling targets.
Slide 9 - Process
The Task Force started by identifying a list of potential areas where cost savings or cost avoidance might be achieved. In several areas, working groups were established to study the issues. These groups were staffed with key personnel who were most familiar with the areas in question.
The Task Force received a report from each of the working groups that included an analysis of the issue and recommendations for steps that we could take to save costs, avoid future cost increases, or produce additional non-tuition income.
Slide 10 - Budget Reductions and Income Enhancements Captured Centrally
We have significantly exceeded the target of $2.5 million and have identified $6.1 million in budget reductions and income enhancements that can be captured centrally to help offset cost increases in the 2003-04 budget. This includes selective budget reductions of $3 million and income enhancements of $3 million.
I will provide details in the next series of slides.
Slide 11 - Summary of Selected Budget Reductions
For the coming fiscal year, we have identified a total of $464,000 in savings from major changes in several academic programs. These changes were approved by the Board in May and November 2002 and include the Mineral Economics program closure and the merger of the Business Logistics and the Management Science and Information Systems programs into the Department of Supply Chain and Information Systems in the Smeal College of Business Administration.
Budget reductions of $581,000 have been identified in the Division of University Outreach following a comprehensive review of all programs by Jim Ryan and his staff in consultation with the Task Force. Savings will accrue from program reductions or eliminations, reductions in subsidies, reductions in administrative support, and changes in fees for services. It should be noted that these cuts do not reflect any budgetary changes in Cooperative Extension which is funded separately by federal, state, and county appropriations.
Slide 12 - Summary of Selected Budget Reductions
Continuing with the summary, the budget will be reduced by $2 million through administrative streamlining in academic support and administrative units plus employee benefits changes. This includes consolidation of four separate teaching and learning activities into the Schreyer Institute, including the Center for Excellence in Learning and Teaching (CELT), University Testing Services, the Teaching and Learning Consortium, and previous activities of the Schreyer Institute. To recognize the expanded responsibilities of the Schreyer Institute, it was recommended to the Committee on Educational Policy earlier today that the name be changed to the Schreyer Institute for Teaching Excellence.
We are consolidating and administratively streamlining activities in the Division of Undergraduate Studies and International Programs. And, we have eliminated two executive positions. The Vice President for Administration responsibilities were assumed by the Vice President for University Relations, and the Dean for International Programs responsibilities were assumed by the Vice Provost for Undergraduate Education.
The last item, Employee Benefits, refers to modest increases in contributions from retirees, mandating the use of generic drugs when appropriate, and increases in the co-payments for office visits under HMO plans.
Slide 13 - Summary of Income Enhancements
Turning to non-tuition revenue income, we are projecting an increase in Facilities and Administration Recovery revenue of $2.9 million in 2003-04. This results from an increase in the F&A recovery rate for research contracts, negotiated with the Defense Contract Audit Agency, from the current 41 percent to 44 percent. For the first time, at least in recent history, this rate will be in place for two years rather than one. The increase in the University's F&A rate represents a significant and continuing effort to track down and more fully account for research costs, particularly departmental administrative costs in support of sponsored research activities.
We have also instituted an F&A surcharge of 5 percent on industry-sponsored grants and contracts. And, we are instituting new procedures which will enable us to recover partial F&A costs for the first time on small, unrestricted research grants.
For the past ten years, the University's auxiliary enterprise operations have paid an overhead charge to support centrally provided services. We will assess an additional $190,000 in overhead charges next year on auxiliary enterprise budgets.
Slide 14 - Recycling and Reallocations
Based on a projected reduction in the University's state appropriation for 2003-04, it will be necessary to implement an across-the-board budget reduction. A budget reduction of one percent for all units will generate $5.9 million. We hope that we do not have to recycle more than one percent. If the state appropriation situation were to become more dire, however, we would probably need to consider increased central recycling.
Slide 15 - Recycling and Reallocations
A budget reduction of one percent for all units, as I just discussed, will generate $5.9 million. We will also recycle $2.4 million from central reserves.
Combining these two amounts gives us a total of $8.4 million that will be available for 2003-04 through budget reductions from units and recycling from central reserves.
Slide 16 -Recycling and Reallocations
In addition to across-the-board budget reductions to help offset the loss of state appropriations, we believe that it is important to continue our strategic planning activities which move funds from lower to higher priorities within our academic and administrative support units, based on each unit's strategic plan. This process will reallocate $5.6 million in 2003-04 internally within each of Penn State's 33 major budget units.
Slide 17 - Operating Unit Savings and Cost Avoidance
As I indicated earlier, we established working groups to study various issues that had promise for reducing or avoiding costs. The working groups estimated savings or cost avoidance in the amounts shown on the screen. These figures, which total $4.8 to $5.5 million, represent estimated annual savings when the programs are in place. Implementation will take a year, or sometimes two, to complete.
First, an extensive study was conducted under the auspices of the Vice President for University Relations, and we estimate that we can save $750,000 to one million annually by improved management of communications through cost reductions in internal publications, greater use of electronic formats, changes in addressing and mailing of publications, and improved coordination of internal resources.
Our studies indicate that substantial savings could be achieved by implementing an electronic travel system to capture better travel data, provide enhanced contract pricing leverage, and streamline the employee reimbursement process. This system will have a modest up-front cost. However, when it's in place, savings should total $2.0 to $2.5 million on a recurring basis.
e-Procurement is another area that we feel has potential for significant annual cost savings. The estimate of $333,000 is based on efforts to convert the University' general stores operation to an electronic office supply vendor. Other e-procurement applications are also being considered.
The working group on cellular phone usage has developed a plan that estimates cost savings of $460,000 through a review of employee cell phone authorization criteria, improved selection of cellular rate plans, elimination of standard calling cards, expanded use of the University's 800 access system, and approving the use of pre-paid cards for international calls.
The last item is energy conservation. We expect significant annual savings from our ongoing program of re-tuning or "re-commissioning" buildings to insure that all operating systems are working together to be as efficient as possible. Another energy program yields cost savings by replacing older, less efficient equipment with newer, environmentally friendly and energy efficient equipment. Annual savings of $1.2 million are expected from these two programs.
Slide 18 - Improved Operating Efficiency
We examined our year-end spending policies to ensure that they made the best use of the University's resources by not encouraging year-end spending beyond those necessary purchases that had been delayed because of uncertainty over funds availability as the fiscal year progressed. We found that, for the most part, the policies that we have in place are appropriate and functioning well. However, we did implement one change that will permit the carry-forward of funds to cover open purchase orders. We also found that there are different interpretations of the year-end spending policies in some of our budgetary units, and we will address this issue through better education of budget administrators throughout the University.
We also have made recent policy changes which will provide greater opportunities for employees to work less than 40 hours per week or less than 12 months per year on a regular basis in positions where it is appropriate. These changes will provide greater flexibility for employees as well as reduced costs for the University through salary savings and administrative efficiency.
Slide 19 - Summary
In summary, the steps that I have just described will have an impact of $14.5 million on the University's 2003-04 budget. This includes budget reductions and income enhancements of $6.1 million and unit and central recycling of $8.4 million.
Slide 20 - Summary
Budget reductions, and recycling and revenue enhancements of $14.5 million will have a considerable impact on the tuition increase for the next academic year. The Task Force effort will mean that, whatever tuition increase is ultimately approved by this Board in July, will be 2.7 percent less than it would have had to be in the absence of these cost saving and revenue enhancing actions.
Slide 21 - Summary
We can also look at the further impacts of savings and new income from the perspective of the operating units. Units will be required to reallocate $5.6 million internally and will benefit from cost savings/avoidance of $4.8 to $5.5 million.
Slide 22 - Employee Suggestions
In March, I sent a message to all Penn State faculty and staff requesting cost savings ideas. Over 230 responses have been received so far. These responses have covered a wide range of functional areas of the University including such items as energy conservation, purchasing, travel reduction, and administrative and policy streamlining. Suggestions have been considered by the Task Force, or forwarded to the appropriate working groups for review and recommendation. For example, all employee suggestions related to Finance and Business activities have been forwarded to the Key Initiatives Team on Cost Savings in Finance and Business for consideration.
Slide 23 - Next Steps
This coming year, the Graduate School, under the leadership of Eva Pell, will be conducting a comprehensive evaluation of the University's graduate programs as part of a three-year review cycle. We anticipate that some number of programs will be merged or phased out as a result of this review process.
We will also continue to look at our undergraduate programs to identify those that are no longer in significant student demand, and/or are not central to the undergraduate educational experience at Penn State. In addition, a number of selected, high demand courses will be transformed into web-enhanced versions for use by students at all locations. Based on courses previously transformed, we believe that improvements in student learning will occur as well as significant savings in the costs of course delivery. Courses that have already been completed include Biology 110, Statistics 200, and Meteorology 101. Courses with projects underway are Nutrition 100, Landscape Architecture 60 and Biological Sciences 4.
We plan to continue our review of potential cost savings and revenue enhancement strategies in University Outreach programs with Craig Weidemann, the newly appointed vice president for outreach.
Slide 24 - Next Steps
The five areas shown here represent areas where we believe additional cost savings can be achieved. I noted our ideas in energy conservation - re-tuning our buildings to insure that all operating systems are working together to be as efficient as possible, and replacing older equipment with newer, environmentally friendly and energy efficient equipment.
We feel that there are significant savings possible in e-procurement. As an example, one of the latest initiatives we will explore is the use of electronic "reverse auctions" which involve the use of electronic bidding and quoting tools in the procurement process.
We will continue to work on increasing our recovery of facilities and administration costs on sponsored grants and contracts. For example, the University currently receives no F&A recovery on most Commonwealth grants and contracts. This includes funds that are provided by the federal government, which come to the University through individual Commonwealth agencies. We believe there is potential to achieve additional F&A recovery in this area. Another example is the component of the F&A rate related to facilities utilization for research. We have implemented a new facilities information system through the Office of Physical Plant which will provide greatly improved utilization data. This data has the potential, over time, to lead to improved cost recovery in the facilities portion of the F&A rate.
The dramatic increases in health care costs are a special concern, and we will continue to pursue all methods of reducing costs.
Lastly, we feel that savings may be achieved by handling our capital projects in different ways, such as using the design-build process in which a single source has accountability for both design and construction.
Penn State has long been involved in cost cutting actions and has justifiably earned its reputation as one of the most efficient universities in the nation. We will continue these efforts. There is no ending date for the current approach through the Task Force on University Cost Savings.
Penn State already spends fewer dollars to educate a student than any of our peer institutions. We feel that the actions outlined here will permit us to maintain the high level of academic quality that the public expects from Penn State, while continuing to hold the line on increases in expenditures.
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Web page last modified September 30, 2011