Rodney A. Erickson Remarks
2007-2008 Operating Budget, Budget Planning for 2008-2009,
and Strategic Planning
U niversity Faculty Senate
October 23, 2007
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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. This year I've been asked to add some discussion about the next cycle of strategic planning. I'll start with the budget information.
Slide 2 - Goals for the 2007-08 Budget
There are two primary goals for the 2007-08 fiscal year. The first is maintain the high quality educational experience that students expect from Penn State .
The second is moderate tuition increases, and you'll see the resulting tuition levels shortly.
Slide 3 - Cost Drivers
Four cost drivers have the greatest impact on the budget. They are: providing salary adjustments, funding increased benefits costs, maintaining and improving facilities, and supporting our most critical strategic investments.
Slide 4 - Resources
As you recall, we have two primary funding streams for the general funds portion of the budget: our state appropriation and tuition and fees. Non-tuition income provides a relatively small part of the revenue stream.
Slide 5 - 2007-08 One Percent Increase Modules
We calculate income and expenses in one percent modules to provide some initial parameters in budget planning. On the expense side, providing a one percent increase in salaries and related benefits costs more than $8 million. On the income side, a one percent increase in the state appropriation, excluding Hershey and Penn College, will yield about $2.6 million. A one percent increase in tuition will bring in approximately $7 million.
The important point here is that a one percent increase in the 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 more than $24 million. Hypothetically, if we were paying for the $24 million out of our state appropriation alone, it would require a 9.4 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 almost a 3.5 percent tuition increase.
Slide 6 - 2007-08 State Appropriation
The 2007-08 state appropriation provided a modest 2 percent increase to each of the lines shown here: Educational and General, Ag Research, Cooperative Extension, and Penn College , bringing our total direct appropriation to $334,230,000.
Slide 7 - Summary of State Appropriations 2001-02 through 2007-08
This chart shows the University's appropriation history for the past seven years, including our initial appropriations and, in some cases, mid-year rescissions. Since 2001-02, our total state appropriation has grown by only 4.1 percent.
Following the same approach as the last two years, 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 Milton S. Hershey Medical Center . For 2007-08, we will receive $14.5 million through the Department of Public Welfare, an increase of 2.4 percent from last year.
Slide 8 - Total Appropriation Adjusted for Inflation
Here's another way to look at budget trends. The red line on the bottom shows Penn State's total appropriation for the last seven years. The upper blue line shows the same appropriation as adjusted for the Higher Education Price Index or HEPI. HEPI is a reflection of the increases in a university's costs of doing business, such as salaries and benefits and the costs of technology and information resources. If the state appropriation had merely kept pace with the HEPI over the past five years, we would have $73 million more in our budget today, which would mean a reduction in tuition of about $1,000 per full-time equivalent student.
Slide 9 - 2007-2008 Total Budget - Income
This pie chart presents the sources of Penn State' s income. Tuition produces one-third of the University's total income. The state appropriation represents 9.8 percent of the total. Hospital and clinical revenue accounts for slightly more than 26 percent. Restricted funds, primarily from sponsored grants and contracts, and Auxiliary Enterprises, such as residence halls and dining commons, make up other large pieces of the pie.
Slide 10 - General Funds Budget - Income
Focusing on just the General Funds portion of our budget, which finances the general teaching mission of the University, we see that tuition and fees make up nearly 72 percent of total income. The state appropriation represents 21.5 percent, with other sources amounting to less than 7 percent.
Slide 11 - Appropriation vs. Tuition & Fees
This graph will look familiar to many of you. It depicts appropriations as a percent of our General Funds Budget over time. The gap at the right end of the graph continues to widen. University spending has been consistent with overall inflationary increases seen in higher education, so the increasing gap does not result from extraordinary increases in University spending.
Slide 12 - Salary Increases 2007-08
Salaries are the biggest portion of our General Funds Budget. For several years, salary increases were influenced by a plan to bring Penn State' s salaries into a more competitive position relative to our peer institutions in the Big Ten and the Association of American Universities.
This year's salary increases were moderate, but should allow us to maintain our standing relative to peer institutions. The basic pool for merit-based salary increases this year was 2.25 percent. We also continued the President's Excellence Fund, with a 1.25 percent pool, to address special merit, market, and equity cases. In total, the salary line of the budget increased by $28.9 million.
Slide 13 - Benefits and Other Insurances
Rising health care costs continue to create challenges for both employers and employees across the country. Health care costs have escalated dramatically over the last decade B a trend that is expected to continue for the foreseeable future. We have budgeted for an increase of 12.5 percent, or $14.3 million.
Penn State has aggressively pursued efforts to mitigate its health care costs. Beginning January 1, 2008, the University will enter into a ten-year agreement with Highmark, Inc. As part of this new agreement, Highmark will be the exclusive administrator of all health plans offered to Penn State employees, dependants and retirees, allowing the University to offer a comprehensive benefits plan for our campuses across the Commonwealth. The partnership with Highmark will provide a joint focus, involving the Hershey Medical Center, the College of Medicine, the College of Health and Human Development, and the Mount Nittany Medical Center on the development of wellness and disease management programs, which should enable Penn State hold down the annual health care cost increases in future years.
The budget includes an increase of $2.2 million for employer contributions to the TIAA/CREF retirement program, due to increased participation in that retirement option. An additional $1.5 million is included for changes in the social security base.
Increases in the Health Insurances and Retirement and Social Security lines total nearly $18 million.
In line with national trends, we are expecting additional increases in property and liability insurances totaling a little over $1 million.
Slide 14 - Facilities and Maintenance
Turning to facilities costs, we have budgeted $1 million for the maintenance and operation of new or newly remodeled facilities scheduled to come on-line during the year. This includes operating funds for the new University Health Services Building, renovations and improvements at University Park, and the Academic Commons Building at Penn State Wilkes-Barre.
We budgeted nearly $4.2 million for fuel and utility cost increases at all of the campuses. We expect that significant increases will continue for electricity, coal and natural gas in the future.
Insufficient or inadequate space continues to be a serious impediment to Penn State's academic programs. Even with the new facilities constructed over the last several years, we lag behind our peers in providing modern classroom and laboratory space. To help address this issue, we have set aside nearly $3.7 million to support the University's capital improvement plan.
Deferred maintenance continues to be a critical problem. During this decade, more square footage will reach the 35-year threshold, when major maintenance is required, than at any time in the University's history. This year, we have included an additional $2.5 million in the budget to address the maintenance backlog.
This brings the total additional funds budgeted for Facilities and Maintenance to $11,334,00.
Slide 15 - Program Adjustments
Funding in the amount of $3.5 million is included for a select group of projects that are of strategic importance. A portion of these funds will provide initial support for a new strategic energy initiative through the Penn State Institutes of Energy and the Environment. In addition, funds will support modest investments in the new forensic science program, the security and risk analysis programs, journalism, and teacher education. Enhancement funds will also be provided for high priority needs in selected academic programs and for the Huck Institutes of the Life Sciences.
A total of $4.7 million is included for all other program commitments.
And $1.4 million is included in the budget for libraries and information technology to help the University keep pace with student computing, telecommunications, and information resource needs. This funding will be provided through a $10 per semester increase in the student information technology fee.
And lastly, a total of $677,000 is included for need-based student aid.
Slide 16 - Internal Budget Reductions
Penn State has had a program of internal budget reductions and reallocations in place for 16 consecutive years that has allowed us to reallocate funds from lower to higher priority initiatives. This year's general funds budget includes internal expense reductions of more than $10 million from a one percent across-the-board reduction in departmental operating budgets as well as central budget reductions.
We have budgeted an increase in non-tuition income of nearly $3.5 million from increased recovery of indirect costs from sponsored research grants and contracts and investment income. Budget reductions and income enhancements combine to total more than $13 million. This is equivalent to $220 per student, or 1.8 percent in avoided tuition increases for this budget year.
Slide 17 - Percentage Increases in Lower Division Tuition
Turning now to our tuition rates, we have made every effort to keep tuition as low as possible. The tuition increase for lower division students at University Park is 4.3 percent for non-resident students and 5.5 percent for resident students. For students at the Commonwealth Campuses, the increase is 4.5 percent for both residents and non-residents.
Slide 18 - Agricultural Research
The next items are Agricultural Research and Cooperative Extension which are funded through separate lines in the state appropriation that provide support for salaries, benefits and operating costs for each program.
On the income side, the appropriation line-item for Agricultural Research increased by 2 percent or $501,000 over the 2006-07 level. Expense changes include $610,000 for salary adjustments and $434,000 to cover benefit increases. With this modest level of additional state support, a reduction in program funding of $543,000 will be necessary.
Slide 19 - Cooperative Extension
Here we see that Cooperative Extension also saw an increase of 2 percent in its appropriation. Expense changes include $659,000 for salary adjustments and $570,000 to cover benefit increases. This means program funds will have to be reduced by $632,000 to balance the books.
Agricultural Research and Cooperative Extension are two key areas of the budget whose increases cannot be funded by tuition. Thus, some of last year's program gains will be eliminated by this year's small appropriation increases.
Slide 20 - Summary of Changes to General Funds Budget
This slide summarizes the general funds budget changes. We've discussed the increases for the E&G budget and for Agricultural Research and Cooperative Extension. Adding the budget increases for the College of Medicine and Penn College, the total increase in the General Funds budget is approximately $77 million.
Slide 21 - Appropriation Request Title Slide
I'm going to move now to a brief summary of the University's appropriation request for 2008-09.
Slide 22 - Budget Priorities
The proposed 2008-09 budget addresses several ongoing priorities - maintaining competitive faculty and staff salaries; responding to escalating costs for health care, retirement and insurances; providing for facilities cost increases, deferred maintenance and capital improvements; and addressing the University's most critical academic initiatives. We will continue our program of internal budget reductions and reallocations.
Slide 23 - Summary
Here is a summary of the appropriation request: an increase of $18 million is sought for Penn State's Educational and General line item, and $4.9 million for our other line items. An additional $1 million increase is requested in the Medical Assistance funding provided to the Hershey Medical Center through the Department of Public Welfare. This brings our total requested increase to $24.2 million, or 6.9 percent.
Slide 24 - Associated Tuition Increases
If the Commonwealth is able to fully fund our appropriation request, the tuition increase for Pennsylvania resident students would be 4.9 percent at our Commonwealth Campuses, and 5.5 percent at University Park . Out-of-state students would see a 4.9 percent tuition increase at the Campuses, and a 4.3 percent increase at University Park.
Slide 25 - Variables
The proposal we submitted to the State reflects a balanced budget plan. As is the case with any plan, there are several variables that will influence the projected budget. Among the major unknowns is our appropriation from the Commonwealth.
Another unknown is our ability to maintain our projected enrollment levels in Pennsylvania's challenging demographic situation, although overall enrollment data for the past two years are encouraging with respect to our ability to attract and retain students, particularly at the Commonwealth Campuses.
And we have little control over many mandatory expenses such as health care, retirement contributions, fuel and utility costs, insurance, and deferred maintenance.
Slide 26 - Strategic Planning
It should be clear at this point that the financial environment for higher education is a challenging one with rising costs and declining state appropriations as a share of university budgets. There is growing competition for top faculty and students, along with a pressing need for more financial aid to make it possible for students from lower income families to attend colleges and universities. The costs of competitive physical facilities and new technologies, including information technologies, continues to rise. In addition, the heightened regulatory environment surrounding higher education will undoubtedly add further to the costs of university operations.
Penn State's long-term strategic planning process has helped the University thrive amid such challenges. We use strategic planning to look to the future B it shapes and guides what the University aspires to be, what we do, and why we do it.
Slide 27 - History of Strategic Planning at Penn State
Ideas about university planning started percolating around the University in the 1950's and became more focused in the early 80's when a University-wide committee produced what was basically a "Plan to Plan." The first unit plans were submitted by colleges and support units in 1985, and budgetary recycling was first implemented systematically in 1992. In 1997, the first University-wide strategic plan was developed, followed by two other comprehensive plans.
This year we are developing unit strategic plans for a five-year period, from 2008-09 to 2012-13, and launching the overarching University strategic planning process that will take us through 2013-14.
Slide 28 - Penn State's Strategic Goals
Although the strategic planning process continues to evolve at Penn State, some things have remained the same. We remain committed to six overarching goals outlined in the University's current strategic plan. Shaped by the strategic plans of each of the University's budget units, by senior University leadership and the Board of Trustees, these goals represent Penn State's continuing commitments. Others may, of course, emerge as a result of the new round of planning.
Slide 29 - Some Things Haven' t Changed
Penn State has traditionally used a top-down, bottom-up model in which each planning unit defines its own approach to planning, strategy for implementation of changes within the unit, and identification of measures of performance. This model will continue to be a backbone of the next phase of strategic planning.
And, we are again asking units to identify strategic performance indicators that are appropriate for their particular unit-level goals. We will continue to monitor major University-level performance indicators, such as student retention and graduation rates, student satisfaction, and the growth in research, including interdisciplinary research.
Slide 30 - Some Things Haven't Changed (2)
In case you feel that we live in the worst of financial times, consider this cry of concern from 20 years ago - " . . . declining funding from the state was reflected in the regrettable but necessary underfunding of many programs at Penn State." In spite of limited funds, we' ve made great progress since 1986 in enhancing our academic programs, student services, research enterprise, and our influence beyond the University borders.
Slide 31 - Some Things Have Changed
There are a few differences this year. For one thing, the planning cycle has been extended from 3 years to 5 years to encourage more strategic thinking. We recognized that the last two cycles of planning were more "tactical" in scope, and we want to encourage longer-term, more visionary thinking about the future in this round.
For the past 16 years, units in the University Park cost center, including central support units, have recycled a percentage of their budgets B typically about 1.0 percent annually. Commonwealth Campuses have also recycled centrally in a few of those years, most notably the past two. These funds returned to central administration have been used to help fund basic cost increases and to move resources from lower to higher priority activities and to strategic initiatives. Strategic priorities have included such initiatives as the Life Sciences, Children Youth and Families, Materials, and the Environment. I should note that, since 1996-97, for every $1 the academic units have recycled centrally, they have received back in aggregate over $3 to support their programmatic needs, in addition to the regular salary increase pools. The academic and administrative support units have received a much smaller return on their recycling.
A third change is the formation of a University Strategic Planning Council that will begin meeting late this semester. This will be a small group, including members of the Board of Trustees, that will review broad issues such as the future of the Land Grant mission in the 21 st century, how we can become more student centered, the appropriate balance between our commitment to keeping tuition low and acquiring the funds necessary to maintain our momentum as a world-class university, the implications of new information technologies, the evolving mission of our respective campuses, and new opportunities for multi-disciplinary initiatives.
Slide 32- 2008-09 to 2012-13 Guidelines
Although there is no single way to do university planning, we have identified several elements that each plan should include. First, a vision of where the unit sees its future in 5 to 10 years, specific strategies for achieving the vision, and strategic performance indicators appropriate to the unit-level goals. Academic units should include a discussion of how they will perform student learning assessment and how they will review undergraduate and graduate degree programs.
Each unit will describe how the elements of the Framework to Foster Diversity are incorporated in their strategic plan. This is an opportunity to incorporate diversity into the larger context of the unit's vision and strategies.
Continued central recycling will almost certainly be necessary to balance the University's overall budget. So another element of each unit's plan will be a five-year recycling plan that describes the adjustments that would be necessary to recycle centrally up to one percent of its permanent operating budget each year.
And lastly, units should identify the strategic investments that would have the greatest impact in helping to achieve the unit's vision. We're asking each unit to consider three possible scenarios with different levels of funding - negative, neutral, and positive. This will encourage units to prioritize their goals and also to consider what bold and creative actions they could take with access to extra funding.
We have also provided longer lead time for completion of the unit plans, with a July 1, 2008, deadline.
Slide 33 - Office of Planning and Institutional Assessment's Role
If all of this seems like a daunting task, there is help available from the Office of Planning and Institutional Assessment. Louise Sandmeyer and her staff consult widely with individual units and can help guide them through the process. They share information throughout the University via publications, presentations, and their website.Strategic planning is not just about producing a report. Planning focuses our attention and our resources on a common vision for the University. Planning also guides hiring decisions, points to the need for curricular changes, and encourages flexibility and innovation. Most of our major initiatives over the last few years have emerged from the strategic planning process. The involvement of faculty is essential in shaping the unit's vision, identifying environmental changes and opportunities, assessing learning outcomes, and reviewing academic degree programs.
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