2003-2004 Operating Budget and Budget Planning for 2004-2005
Report by Rodney A. Erickson to the University Faculty Senate
October 28, 2003
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Slide 1 - Title Slide, Budget Presentation
I have been asked again this year to share some highlights about Penn State’s current operating budget and to summarize next year’s budget plan and appropriation request to the Commonwealth. This year is unusual in that the University does not have a final appropriation approved by the legislature for the 2003-04 academic year. However, all indications from Harrisburg indicate that we will receive a 5.0 percent reduction, and that assumption was used in the budget that was approved by the Board of Trustees in July. I trust that the lack of an appropriation for this fiscal year has not affected your day-to-day activities.
Slide 2 - Context
The Commonwealth of Pennsylvania has been facing significant budget deficits for the past three fiscal years, and these deficits have significantly affected funding for Penn State. The painful process continues this year as legislators and the Governor seek a solution that involves a combination of program cuts and tax increases. Under the Governor’s budget proposal for 2003-04, Penn State would see a $16 million reduction in our base operating budget, resulting in a combined loss of $28 million in recurring funds since 2002-03. These base budget cuts and the mid-year recisions occurring during the past two fiscal years, along with reductions in various state agencies which fund Penn State programs, have resulted in a reduced flow of funds to the University that approaches $50 million.
At the same time, costs are dramatically escalating for everything from health benefits to library materials, technology, and maintenance of our physical plant.
Maintaining a high quality educational experience for our students will always be our highest priority, but in the context of current budget realities, we are seeing limited new initiatives and higher tuition.
Slide 3 - Budget Priorities
Here are the main priorities in this year’s budget. First, the budget includes funds for the rising costs of health insurance and other insurances. Nationally, health care costs have been rising sharply, and they are anticipated to increase by 15 to 20 percent per year for the next several years. Clearly, the University is affected by this trend.
The budget includes funding for the maintenance and operation of new and newly remodeled facilities that are scheduled to come on-line this year, as well as funds for our capital improvement program and for deferred maintenance.
Competitive salaries are critical to the University's ability to succeed in the coming years, and this year's budget, as you know, provided support for the salary increases our faculty and staff have been receiving.
This year's budget includes continuing funding for the interdisciplinary initiatives in Materials Science, Environmental Studies, and Children, Youth and Families. It allocates new funds for Information Sciences and Technology, Libraries and Information Technology, and for need-based student aid.
Penn State is consistently ranked as one of the most efficient universities in the country. Cost savings were a high priority in this year's budget, and I'll have more details on the recommendations of the Cost Savings Task Force in a later slide.
Slide 4 - 2003-04 State Appropriation
Although this year's state appropriation has not yet been approved, we based our budget on the Governor's proposed cut of 5 percent, which amounts to $16.1 million. That would make Penn State's total appropriation from the Commonwealth $306,465,000. This puts us at a level just slightly over the appropriation level from the state five years ago.
Slide 5 - 2003-04 Total Budget - Income
The state appropriation is just one piece of Penn State's budget. The total budget for this academic year is $2.56 billion. The activities on the left side of this pie chart are self-supporting budgets, including the Medical Center, Auxiliary Enterprises, Federal Agriculture funds, and Restricted Funds, which are primarily sponsored grants and contracts for research.
The items on the right side represent the General Funds portion of the budget. Tuition is at nearly 34 percent of income and the state appropriation now represents just 12 percent.
Slide 6 - 2003-04 General Funds Budget - Income
Let's look more closely at the General Funds budget of $1.13 billion. This is the budget that supports the University's basic academic and administrative activities and maintenance of the physical plant. The state appropriation–if it passes as the Governor has proposed–will represent 24.9 percent of our General Funds budget, another record low for Penn State, and one of the very lowest levels of state support among peer public universities across the nation. Tuition and fees contribute 68.9 percent. "Other" income, such as recovery of indirect costs, departmental services, and income on investments, contributes 6.2 percent.
Slide 7 - General Funds Budget
The General Funds budget consists of our Education and General line, Agricultural Research, Cooperative Extension, the College of Medicine, and the Pennsylvania College of Technology. The Dickinson School of Law is also included in the General Funds Budget, even though it does not receive any state support. The rest of the presentation will focus on changes to the General Funds budget.
Slide 8 - Benefits and Other Insurances
Our employee health benefit costs will increase this year by about 16 percent or nearly $12 million. Increases for health benefits for graduate assistants will increase by $720,000 and Penn State's contribution to the employee retirement accounts will climb by $4.4 million.
Our property and liability insurances will also increase by more than $2 million, which is in line with national trends.
Slide 9 - Facilities and Maintenance
Turning now to facilities cost increases, we have budgeted more than $15.7 million for facilities and maintenance. This includes funding for maintenance and operation of new facilities that are scheduled to come on-line this year, such as the IST Building, the Chemistry Building, and the Life Sciences Building at University Park, and the Workforce Development and Technology Building at Penn State DuBois. It also provides for increases in fuel and utilities costs at the campuses.
The budget includes funds for our Capital Improvement Program to create urgently needed space for impacted programs and for much needed renovations and deferred maintenance.
Slide 10 - Salary Adjustments
Improving salaries is a continuing priority for the University. In previous presentations, I've 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 universities in the Association of American Universities Data Exchange (AAUDE). In 2001, we started a multi-year plan to reduce the gap between Penn State and its competitors. Our rankings have improved, as you'll see in the next slides.
Slide 11 - Average Faculty Salaries - Big Ten Public Institutions
Between 1995-96 and 2000-01 among so-called "main campuses" where we have comparable data, Penn State slipped from 2nd to 5th among the Big Ten public universities at the professor level, from 2nd to 6th at the associate level, and we moved from 8th to 7th at the assistant professor level.
Slide 12 - Average Faculty Salaries - Big Ten Public Institutions (recent years)
More recently, we have been able to move Penn State's faculty salaries to the midpoint or even above the midpoint within the Big Ten. We want to continue this trend and keep Penn State a competitive institution for faculty salaries.
Slide 13 - Average Faculty Salaries - 22 AAUDE Institutions
Here is the same faculty salary comparison with the AAU public universities, again for main campus comparisons. Through the end of the 1990s, Penn State's rankings were falling.
Slide 14 - Average Faculty Salaries - 22 AAUDE Institutions (recent years)
Our rankings are also improving in this group of peer public institutions. In the most recent rankings, Penn State has moved up three positions at the professor and associate professor levels and two positions at the assistant professor level.
Slide 15 - Salary Increase Plan
This year, the budget includes a 2 percent salary increase pool that has been used for merit-based increases, as well as continuation of the Faculty/Staff Excellence Fund and the President's Excellence Fund, which are used to recognize top-performing faculty and staff and to deal with market and equity adjustments.
Just over $25 million has been budgeted to cover salary increases and related benefits.
Slide 16 - Program Adjustments
The budget also includes increases for program adjustments. You'll recall that we've had a multi-year plan to fund four major interdisciplinary initiatives that address important societal needs. The sequence of base funding increases for the Life Sciences Consortium, now called the Huck Institutes for the Life Sciences, was completed last year. This year's budget includes $1.1 million to be divided among the Materials Science, Environmental Studies, and Children, Youth and Families initiatives.
$1 million has been allocated for Information Sciences and Technology as we near completion of the multi-year development plan for the School, adding to the initial base of $5.3 million provided in a separate funding stream from the Commonwealth of Pennsylvania.
$2 million has been included for Libraries and Information Technology. An increase of $15 per semester in the student information technology fee is providing funds for student computing, telecommunications, and information resource needs.
We have responded to the increase in tuition with a $1.2 million increase in need-based student aid. This will provide matching funds for the Trustee Scholarship Program. Trustee Scholarships use University funds as leverage, matching the earnings from endowments given by alumni and friends. The funds are targeted to undergraduate students with the greatest financial need.
And lastly, $3.7 million is included for other program adjustments, for such things as new faculty positions and instructional workload adjustments that reflect enrollment changes in the colleges, high priority academic needs, the parking and transportation programs, and other support services.
Slide 17 - Internal Budget Reductions and Reallocations
Over the past 12 years, Penn State has reallocated more than $109 million. This year's budget continues this effort with more than $5.6 million in internal reallocations, based on the strategic plans of colleges and administrative units. Funds will continue to be moved from lower priority areas to the highest priority needs across the University.
Slide 18 - Cost Savings Task Force
Gary Schultz and I are co-chairing a task force that has been charged to recommend opportunities for cost savings and non-tuition income enhancements. The task force identified $14 million in savings, based on savings on energy costs and employee benefits, merging administrative units, increases in recovery of Facilities and Administrative costs on research, and across-the-board central recycling cuts to the University's 33 budgetary units.
The savings from these recommendations was equivalent to $200 per year for each full-time student, which translated to a 2.7 percentage point reduction in the tuition increase that would otherwise been necessary this academic year.
Slide 19 - 2003-04 Per Semester Increase – Tuition, Fees, and Room and Board
We are turning now to the income side of the budget. You'll recall that a differential tuition structure is in place that mandates different charges by location and for incoming students, upper division students, graduate students, and students in certain majors. While it varied slightly in some areas, the basic tuition rate increase for most Pennsylvania residents was 9.8 percent.
Room and board charges rose by 4.9 percent this year. The Information and Technology Fee and the Student Activity Fee increased by 9.6 percent.
The total cost increase for tuition, room and board, and fees was 7.9 percent for Pennsylvania residents, and 6.4 percent for out-of-state students.
Slide 20 - Big Ten 2003-04 Tuition and Fees
There is quite a large range of tuition and fee increases this year for the Big Ten public universities. Penn State's tuition and fee increase compares quite favorably with our peers, where double digit increases are common, although the absolute increase was no doubt painful for our students and their families.
Slide 21 - Agricultural Research
Turning now to Agricultural Research, you can see in this table that the state appropriation for agricultural research, which is a separate line item in the state budget, is expected to decline by $1.2 million. A loss of funding in this area cannot be offset by tuition or other funds, so when we receive cuts in the Agricultural Research line, we have no choice but to cut programming. This usually means a reduction in faculty and staff positions.
For this academic year, we've budgeted salary and benefit cost increases of $666,000. A reduction of $1.87 million in program funds will be necessary to bring the total expenditure reduction back to $1.2 million.
Slide 22 - Cooperative Extension
The Cooperative Extension situation is similar to Agricultural Research. The state appropriation cut is nearly $1.4 million. There are additional costs of $474,000 for salaries and benefit increases, which means that $1.853 million in program cuts will have to be made.
Between Agricultural Research and Cooperative Extension, we lost 85 positions with last year's budget cuts, and we expect a similar reduction this year. Without increasing state support, these programs simply cannot continue to function at the levels they have in past years.
Slide 23 - College of Medicine
The financial situation at the College of Medicine is another area of concern. We'd certainly like to lose the distinction of having a College of Medicine that receives less state support than any other public medical school in the country. Unfortunately, funding to the medical school was reduced again this year. The loss of state support will be offset by tuition and other income increases, with the total income increase totaling $1.72 million.
Slide 24 - Summary of Changes, General Funds Budget
Summarizing our General Funds budget for this academic year, we expect a $16 million cut in state appropriations. Increased costs in a number of areas will require an overall budget increase, despite significant cost cutting by the University.
We have an increase in the Educational and General line of $61.5 million; cuts in Agricultural Research and Cooperative Extension that reflect the loss of state appropriations in those areas; and increases in the budgets for the College of Medicine, Penn College, and Dickinson.
Slide 25 - Penn State's 2004-05 Appropriation Request
I'll move now to a brief summary of the University's budget plan and appropriation request to the Commonwealth for 2004-05. It is certainly a unique situation to be formulating next year's budget request before this year's allocation from the Commonwealth has been approved.
Slide 26 - 2004-05 Appropriation Request
We are basing our appropriation request for next year on the assumption that this year's appropriation will be reduced by 5 percent. So, as I indicated earlier, we are estimating an appropriation level of approximately $306 million for this academic year.
Slide 27 - 2004-05 Appropriation Request Summary
We are asking the Commonwealth to restore Penn State's funding to the level that it was in 2001-02. This would require an increase of $28.3 million.
And, we are asking for funding to support just one strategic investment – an additional commitment of funds for the College of Medicine.
Slide 28 - Basic Operating Costs
In forecasting the budget for next year, we considered the six major areas that impact our basic operating costs. These are the same areas that I just discussed in terms of this year's budget. We again expect to see increases in employee benefits and insurances, operating costs and maintenance of facilities, faculty and staff salaries, academic program needs, and need-based student aid. We expect to continue to focus on ways to reduce overall costs and identify significant budgetary savings that will hold down tuition increases for our students.
Slide 29 - Strategic Investment Priority
Let me provide some perspective on our lone request for special support next year. As the only academic medical center in Pennsylvania outside of Philadelphia and Pittsburgh, the College of Medicine and the Medical Center are important statewide resources. We train many of Pennsylvania's physicians and provide the highest level of care to more than a half million patients each year. In addition to being the primary source of health care for central Pennsylvania, the college and the medical center are huge economic drivers for the region.
The average appropriation for public colleges of medicine in the U.S. is just under $50 million, with some institutions–like UCLA and Texas–annually receiving well over $100 million each from their respective states. This year Penn State will receive less than $5 million from the Commonwealth. Not only do the other public medical schools in Pennsylvania receive more, all of the private medical schools within the state also receive more from the Commonwealth than we do.
We have historically supported the College of Medicine from clinical revenue generated by the medical center. However, changes in Medicare reimbursements, managed care, and operations have driven down the margin from the medical center to the point that it is impossible to support the college from these funds over the long term.
We are asking for an increase of $10 million in funding for Hershey and we plan to request similar base increases over the next two years, to try to bring funding for Hershey closer in line with peer medical schools around the country.
Slide 30 - University Faculty Senate Expense Summary
I also want to share with you some information about the cost of running the University Faculty Senate over the past four years. I've found that very few Senators have the slightest idea what the overall Senate budget is. This year, although I did impose a 1.0 percent central recycling requirement on the Senate for the first time since the early years of our reallocation program, we project that it will cost approximately $465,000 to fund Senate operations (not including fringe benefits and overhead costs). You will note that the rate of increase in the Senate base operating budget has been relatively modest in recent years, and for that I wish to commend George Bugyi–who is fishing somewhere on the Outer Banks if his place is still there after the hurricane–and current Executive Secretary of the Senate Susan Youtz, both of whom have implemented important cost-saving measures, including the significant use of technology to improve the communications, workflow, and efficiency of the Senate.
Slide 31 - Title Slide, Budget Presentation
I want to conclude my remarks on a positive note. These are indeed fiscally challenging times for higher education and Penn State is no exception. Those of us in University leadership positions have long taken the position that we will not compromise Penn State quality in the face of these challenges and, if you look around you, I believe you will concur that this University continues to make significant progress. We do so because of the incredible resource of talent we have in our faculty and staff, and the continuing confidence that students from across the Commonwealth, the nation, and the world place in us. I want to thank all of you for helping keep Penn State on the move.
And now I would be happy to answer any questions, if time remains.
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