Rodney A. Erickson Remarks
2006-2007 Operating Budget and Budget Planning for 2007-2008
University Faculty Senate
October 24, 2006
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Slide 1 - Title Slide
Each year I come before this group to summarize Penn State's current operating budget and next year's appropriation request to the Commonwealth. My report today will highlight the changes in this year’s budget and discuss how the University is meeting escalating costs while keeping tuition increases as low as possible.
Slide 2 - State Appropriation
Let’s begin by looking at the state appropriation. This chart shows the University’s appropriation history for the past six years, including our initial appropriations and, in some cases, mid-year rescissions. For 2006-07, we received an overall increase of 5 percent in our total operating appropriation over the previous year, including an increase of 4.5 percent in our Educational and General appropriation, which supports our core instructional enterprise. This is a larger percentage increase than we have received in many years. We are grateful for this increased support from the Commonwealth. In addition, the University received a significant commitment of funds for capital improvements, which will help support some major building projects across the University.
Following the same approach as last year, the Commonwealth has eliminated the line-item appropriation for the College of Medicine and substituted State and Federal Medical Assistance funds through the Pennsylvania Department of Public Welfare to the Hershey Medical Center. These funds increased 3 percent from last year.
Slide 3 – 2003-04 Appropriation/FTE Student, Big Ten Public Universities (Main Campuses)
When we compare Penn State to our Big Ten peer institutions, you can see that Penn State receives less than one-third the appropriation per student of the University of Iowa and the University of Minnesota, and less than half of essentially the rest of the Big Ten.
Slide 4 – Commonwealth Funding: A Plea from 1923
This pattern of underfunding has evolved over many decades. It is interesting to note that Penn State has been underfunded throughout most, if not all, of its history. The archives indicate that the University of Michigan’s appropriation from the state was nearly four times greater than Penn State’s back in 1923, when a special plea for funding was issued.
Slide 5 – 2003-04 Resident Lower Division Tuition and Fees - Big Ten Public Universities (Main Campuses)
As you can see in this chart, our historically lower appropriation results in Penn State having the highest in-state tuition among the so-called main campuses of our Big Ten peers.
Slide 6 – 2003-04 Appropriation & Tuition & Fees - Big Ten Public Universities (Main Campuses)
In this chart, tuition and appropriation per student are combined to show Penn State’s rank. You can see Penn State is in the lower half of the chart, trailing Michigan by more than $7,000.
I show you this comparison to illustrate that Penn State operates very efficiently in the process of educating our students.
Slide 7 – E & G Budget Changes 1996-97 to 2006-07
One way to understand more about the budget is to look at where we have seen increases over the last few years. When we look at changes to the Educational and General Budget since 1996, a little over 43 percent of the expense changes relate to salary increases.
Health care and other benefit cost increases represent nearly 20 percent of the budget changes over the same time period–a topic to which I’ll return later–while program increases represent about 15 percent of the changes. Program changes include new faculty positions, workload adjustments, the College of Information Sciences and Technology, and new academic initiatives such as the institutes for the Life Sciences, Materials, Environmental Studies, and Children, Youth, and Families. A significant portion of these program changes also results in salary and benefit commitments as additional staffing occurs.
Another 15 percent of our expense increases were for facilities costs and 6 percent were for other changes including insurance and financial aid for graduate assistants and fellows.
These changes are generally consistent with what we have seen nationally in other universities.
Slide 8 – Annual Percentage Change Higher Education Price Index (HEPI) and Consumer Price Index (CPI)
People often complain when Penn State’s tuition rises more than the Consumer Price Index. However, the Higher Education Price Index or HEPI is a better reflection of the increases in a university’s costs of doing business. As shown in this slide, the HEPI invariably rises higher than the Consumer Price Index, in large part because 70 percent of our budget is tied up in salaries and benefits, and the costs of technology, information resources, and other critically important components of higher education are increasing faster than the components of the typical family’s market basket of goods and services.
Slide 9 – Annual Percentage Change, General Funds Budget and HEPI
Penn State’s general funds budget has risen very much in tandem with the HEPI, although this year we are actually showing a lower increase than the HEPI. And Penn State’s budget increases are not at all extraordinary relative to our peer institutions.
Slide 10 – Annual Percentage Change - General Funds Budget, Tuition & Appropriation
This next slide helps to illustrate the connection between the state appropriation and tuition increases. The red line shows the annual percentage change in the University’s General Funds Budget over the past decade. We can add the purple line showing the annual change we have seen in the appropriation. And the blue line shows how that has affected our tuition rates.
Back in the late 1990s, the General Funds Budget, appropriation, and tuition were very much in sync. But when the appropriation dropped in the early part of this decade, tuition had to rise sharply to offset the difference.
Slide 11 – Total Appropriation Adjusted for Inflation
Here’s another way to look at budget trends. If the state appropriation had merely kept pace with inflation as measured by the HEPI over the past five years, we would have $70 million more in our budget today, which would mean a reduction in tuition of about $1,000 per full-time equivalent student.
Slide 12 – Goals for 2006-07 Budget
There are two primary goals for the 2006-07 fiscal year. First, to maintain the high quality educational experience that students expect from Penn State. The quality of that experience brought us an incredible 94,500 applications this year, an unexpected increase in our yield of students, and a freshman class of unprecedented size.
Second, we have made it a priority to significantly moderate tuition increases. You’ll see the resulting tuition levels shortly.
Slide 13 – Budget Priorities
Here are the major budget drivers for the 2006-07 fiscal year. The cost of the University's benefits program has increased significantly over the last several years, with health insurance making up the largest portion of the increase. Providing salary adjustments to faculty and staff and maintaining and improving facilities are other high priorities in the budget.
We are also supporting the most critical strategic investments and continuing internal budget reductions for all units of the University.
Slide 14 – Summary of House Bill 2504
To summarize our appropriation for the 2006-07 budget, we received a 4.5 percent increase to our Educational and General budget line and to Penn College; our Agricultural Research line increased by 8.7 percent and Cooperative Extension increased by 7.2 percent. We are very grateful for the first substantial increase in Ag. Research and Extension in many years. The total increase was 5 percent, and this brings our appropriation through House Bill 2504 to $327.7 million, plus the funds that flow to Hershey noted earlier.
Slide 15 – 2006-07 Total Budget Income
But the state appropriation is just one piece of Penn State's budget. All the revenue sources for the budget are shown in this pie chart. The activities on the left side are self-supporting budgets. These include the Hershey Medical Center, Auxiliary Enterprises (such as Housing and Food Services and Intercollegiate Athletics), Agricultural Research Funds from the federal government, and Restricted Funds, which are primarily sponsored grants and contracts for research.
The items on the right side of the chart represent the General Funds portion of the budget. The largest piece of the pie is tuition, producing one-third of the University’s total income. The state appropriation represents 10 percent of the total.
The total budget for this fiscal year is slightly more than $3.2 billion.
Slide 16 - 2006-07 General Funds Budget - Income
The remainder of my report will focus on the General Funds budget which supports the University’s basic academic and administrative activities and maintenance of the physical plant. It has three primary sources of income: the state appropriation, tuition and fees, and non-tuition income, which includes such things as indirect cost recovery on research grants and contracts, and income on investments.
In this chart, you can see that tuition and fees now represent 71 percent of General Funds income, with the state appropriation at 22 percent. The total amount of General Funds, excluding Hershey and Penn College, is $1.37 billion.
Slide 17 - Appropriation vs. Tuition and Fees as a Percent of the General Funds Budget
We have often referred to this slide as the “X” graph. It depicts appropriation and tuition and fees as a percent of the General Funds budget. The gap at the right end of the chart continues to widen. University spending has been right in line with the overall inflationary increases seen in higher education, so the increasing gap is not the result of extraordinary increases in spending.
Slide 18 - Benefits and Other Insurances
I’m now going to turn to the major cost drivers of the General Funds budget. Significant cost increases associated with benefits, especially health care, continue to be an enormous budget challenge for the University.
Penn State has experienced double digit annual increases in benefit costs in recent years, a trend that is expected to continue. We have been able to moderate the increase for this budget year through continued cost containment measures. This year, we expect our health insurance costs to increase by about $13 million, or 11 percent, compared to annual increases of about 15 percent over the last several years. You don’t have to be a mathematician to figure out that, in the absence of significant change, health care costs escalating at such rates of increase are already forcing us to make hard choices between salary increases and health benefits, and this will only get much worse in the future. I trust you all realize that Penn State is self-insured, and pays all of our medical bills that we don’t pay individually as deductibles, co-pays, or in our share of premium costs.
The state-mandated employer rate for the State Employee’s Retirement System has increased this year, too. This is an area of growing concern, since a projected shortfall in the state retirement system could result in substantial mandated increases to this line item in the future. This year, we have budgeted for increases of $6.6 million to our retirement contributions, social security and grants-in-aid. This brings the total increase to the benefits and other insurances line to $19.6 million.
To give you an idea of the magnitude of this increase, covering an increase in benefits of $19.6 million requires almost an 8 percent appropriation increase OR a tuition increase of 2.9 percent, right off the bat.
In addition, we will experience an increase in property and liability insurance of $850,000.
Slide 19 - Salary Adjustments
Salaries are the biggest portion of our General Funds budget. As you’ll recall, concern for the competitiveness of faculty salaries led the University to adopt a five-year plan—now concluded—to reduce the gap between Penn State's faculty salaries and those at peer institutions in the Big Ten and Association of American Universities. The 2006-07 salary increase was more modest than in recent years, but should not result in any serious erosion of our standing relative to our peers.
Slide 20 - Salary Increase Plan
The basic pool for merit-based salary increases this year was 1.5 percent. We also continued the President’s Excellence Fund with a 1.5 percent pool to be used for special merit, market and equity considerations. Even this modest increase in the salary pool increased the salary line for the budget by $23 million, equivalent to an appropriation increase of nearly 10 percent OR a tuition increase of 3.3 percent.
Slide 21 – Facilities and Maintenance
Turning now to facilities cost increases, we have budgeted nearly $1.8 million for the maintenance and operation of new or newly remodeled facilities that will come on-line this year. This includes operating funds for new buildings, renovations, and landscape improvements; and for operation and maintenance of facilities across the University.
We are budgeting for fuel and utilities cost increases of more than $3 million. World events will likely continue to put pressure on this area of our budget.
Even with our recent growth in facilities, we continue to lag behind our peer institutions in providing modern laboratory and classroom space. To help address this need, we budgeted $3.65 million to support debt service for the University’s capital improvement program.
Deferred maintenance is another critical issue. We have a significant backlog of maintenance needs at all of our campuses. This year, we included an additional $1.5 million to continue addressing this challenge.
The total for new facilities, fuel and utilities, the capital improvement program and deferred maintenance comes to more than $10 million.
Slide 22 - Program Adjustments
The budget also includes funding increases in the amount of $5.8 million for strategic investments at University Park and the Commonwealth Campuses. This includes initiatives such as reducing the student/faculty ratio in growing programs and converting some fixed-term faculty appointments to standing appointments at University Park. Additional support will be provided for the arts, humanities and social sciences. Enhancement funds will also be provided for increasing online and blended learning opportunities, development activities, student services, and recreation programs at all campuses. Nearly half of these funds will flow to the Commonwealth Campuses, based on their upper division tuition differentials.
A total of more than $5.5 million is included for other program adjustments, such as opportunity funds for new faculty positions and instructional workload adjustments, required support services or government-mandated functions, and investments in other high priority academic areas.
$1.6 million is included in the budget for libraries and information technology. This is being funded through a $12 per semester increase in the student information technology fee.
And lastly, an increase of $682,000 is included in the budget for need-based student aid.
Slide 23 - Internal Budget Reductions
As most of you know, Penn State has had a program of internal reductions and reallocations in place for 15 years. This has allowed us to reduce or eliminate lower priority activities and reallocate funds to higher priorities. The General Funds budget for 2006-07 again includes internal budget reductions, this year of 2 percent for every general funds budget unit of the University. This is the highest level of internal reductions since 1994-95, and it will produce nearly $15 million in budget reductions. I realize this was a significant financial burden for both our academic and administrative units, and I most sincerely hope that we do not have to take such drastic cuts again for years to come.
We have also budgeted for an increase of $5 million in non-tuition income, from increased recovery of indirect costs on sponsored research grants and contracts and investment income.
Together, this produces a cost savings and non-tuition revenue enhancement of $19.9 million, which allows us to keep tuition 3 percent lower than it would otherwise need to be.
Slide 24 - Percentage Increases in Lower Division Tuition Rates
Turning now to our tuition rates, students attending the Commonwealth Campuses saw an increase of only 2.9 percent this year. At University Park, the increase was 5.6 percent for resident lower-division students and 4.4 percent for non-resident students. These are the lowest tuition increases in many years.
Slide 25 -Summary of Changes to the General Funds Budget
To summarize the General Funds budget changes, the Educational & General line will increase by $56.3 million; Ag Research and Cooperative Extension will both increase by $2 million; the College of Medicine will increase by $3 million and Penn College will increase by $5 million, for a total increase of $68.4 million.
This budget represents our best attempts to deal with increasing costs while still maintaining the quality that students expect and deserve from Penn State.
Slide 26 – Impact of Enrollment on the Budget
Before I turn to the appropriation request, I’d like to discuss the impact of enrollment on the budget. The current year’s budget that I’ve just shared with you was approved in July by the Board of Trustees, and reflects our best estimates of revenue–several months ago–that would accrue to the University from all sources including tuition. Tuition, as you’ll recall, now makes up roughly 71 percent of our General Funds revenue.
Last year at this time, I reported to you that enrollments at most of the campuses, including University Park, were below the previous year’s headcount. This year, the news is far more positive. However, I hasten to add that our overall enrollment has only recovered to our previous high from several years ago. We still have to make up lost ground at many campuses from several years of enrollment declines. We need to pay continued attention to filling the student pipeline at all our baccalaureate-granting campuses and we need to ensure that student recruitment and retention are high on the agendas of all Penn State employees.
Of course, there are some added costs for all the new students. We added about 300 new course sections this fall at University Park, in order to handle the record freshman class of about 8,000.
Again, in spite of this year’s positive enrollment growth, it is important to remember that a big part of this year’s increase at University Park simply offsets the decrease of nearly 1,100 students between Fall 2003 and Fall 2005. The budget is still tight all across the University, and using our resources in a conservative manner will be essential to maintaining our positive momentum.
Slide 27 – 2007-08 Appropriation Request
I'd like now to move on to a brief summary of the University’s appropriation request for 2007-08.
Slide 28 - Basic Operating Costs
In drafting a budget for next year, we were mindful of the same cost drivers that I just discussed in this year's budget. We again expect to see increases in employee salaries as well as benefits and insurances.
While health care costs will account for the majority of the benefits cost increases, retirement and social security costs are also expected to rise. The employer contribution for the State Employees’ Retirement System is projected to rise again next year, and required contributions to TIAA/CREF will increase as the number of participating employees continues to grow.
In the facilities area, we have projected increases for the operation of new facilities, fuel and utilities costs, deferred maintenance, and the capital improvement program.
We have budgeted very modestly for new academic initiatives and special opportunities identified in the University’s strategic planning process, as well as for other program needs. And we have again included funds for need-based student aid which will be used to leverage additional private donations for student grant and scholarship support.
As we address cost increases, we must, in all likelihood, continue our budget reduction efforts.
Slide 29 - Appropriation Request
Penn State’s appropriation request to the Commonwealth for 2007-08 includes increases in the Education and General line and its other line items and for the Hershey Medical Center, as shown on this slide. The total increase requested from the Commonwealth is approximately $23.3 million or 6.8 percent.
Slide 30 -Tuition
Keeping tuition rates as low as possible is a high priority in the budget, despite the escalating costs that the University will incur. If the Commonwealth is able to provide the appropriation increase that Penn State is requesting, the tuition rate increase for Pennsylvania resident students at the Commonwealth Campuses would be 3.8 percent. For students at University Park, the increase would be 4.8 percent.
Slide 31 - Variables
Let me emphasize again that this is a DRAFT budget plan. There are many moving parts that can and will change over the next eight months or more. Among these variables is the extent to which the Commonwealth supports our funding request. On the cost side, there are variables over which we exercise limited control, such as health care costs, retirement contributions, insurance and deferred maintenance. Fuel and utility costs will continue to be volatile and dependent on global events.
Equally important is our ability to maintain our enrollment levels, or increase them in the case of some campuses, in a challenging demographic situation.
I mention all of these factors to give you a sense of what the University is up against in the current fiscal environment. We are facing some difficult future budget scenarios and our flexibility to adapt and cut costs is limited by years of budget recycling. At the same time, we are determined to keep tuition affordable for families and to maintain Penn State’s reputation for quality programs.
And now I would be happy to answer any questions, if time remains.
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