Each October I come before this group to summarize the University's current operating budget. This year, I've also been asked to discuss the University' s strategic planning process and update you on the work of the University Strategic Planning Council. I'll begin with the financial information.
Slide 2 - Goals for 2008-09 Budget
Penn State, like all public colleges and universities in the country, is facing sharply increased operating costs. In the face of significant budget challenges, there are two primary goals for this fiscal year. First, to maintain the high quality educational experience that students expect from Penn State. The second is to hold tuition increases to the lowest possible level given the constraints we face.
Slide 3 - Budget Priorities
The five major budget drivers this year are the same as last year. They are: modest salary adjustments, employee benefits costs, maintaining and improving facilities, supporting our most critical strategic investments, and internal budget recycling for all units of the University.
Slide 4 - Resources
As you know, there are two primary funding streams for the General Funds portion of the budget B our state appropriation and tuition and fees. Non-tuition income provides a relatively small revenue stream. Our General Funds budget is comprised of the Educational and General (E&G) budget, which represents the bulk of our instructional mission, and the Agricultural Research, Cooperative Extension, Hershey, and Pennsylvania College of Technology budget lines. Let's start with the E&G budget.
Slide 5 - One Percent Increase Modules (E&G Budget)
"One Percent Increase Modules" are the best way we know to explain the relationship between the two primary revenue streams in the E&G budget and the major expenses of running the University.
We calculate revenues and expenses in one percent modules to provide some general parameters in budget planning, and they also provide a good means of assessing budgetary tradeoffs. On the expense side, for example, providing a one percent increase in salaries and related benefits costs about $8.5 million. On the income side, a one percent increase in the E&G appropriation will yield about $2.6 million. And a one percent increase in tuition will bring in approximately $7.8 million in revenue.
So, thinking about the relationship between state E&G appropriation and salaries, the cost of a 3.0 percent salary increase would be three times $8.5 million or $25.5 million. Hypothetically, if we were paying for the $25.5 million out of our state appropriation alone, it would require a 9.7 percent appropriation increase to our E&G line just to cover the 3.0 percent salary increase. Or, if we were paying for the increase totally from tuition, it would require a 3.3 percent tuition increase.
Slide 6 - 2008-09 State Appropriation
The 2008-09 state appropriation provided only a 1.5 percent increase to our Educational and General line. Agricultural Research and Cooperative Extension received no increase, and Penn College received a 1.5 percent increase, bringing our total appropriation to $338,375,000 or a 1.2 percent increase overall. Penn State is also facing an increasingly likely rescission of part of the 2008-09 appropriation, which I'll talk about later.
Slide 7 - Summary of State Appropriations
This chart shows the University's appropriation history since 2001-02, including our initial appropriations and, in some cases, mid-year rescissions. Over the last eight years, our total appropriation has increased by only 5.4 percent or 0.7 percent annually on average.
Direct appropriations for the College of Medicine were eliminated from Penn State = s appropriation beginning in 2005-06. Since that time, these line items have been funded through state and federal medical assistance funds that are made available to the Hershey Medical Center through the Pennsylvania Department of Public Welfare. These amounts are reflected as the top portion of the bars for each year since 2005-06.
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 adjusted for the Higher Education Price Index or HEPI. IF the state appropriation had kept pace with the HEPI over this period, we would have $90 million more in our budget today.
Other things being equal, this could have meant a reduction in tuition of approximately 8 percent, or $1,150 per full-time equivalent student.
Slide 9 - 2008-09 Total Budget - Income
This pie chart presents the sources of Penn State's income. The largest slice represents tuition, producing one-third of the University's total income. The state appropriation makes up 9.4 percent of the total. Hospital and clinical revenue accounts for 26 percent. Restricted funds, primarily from sponsored grants and contracts, and Auxiliary Enterprises, such as residence halls and dining services, make up the other large pieces of the pie.
Slide 10 - General Funds Budget: Income
Focusing now on the General Funds portion of our budget, we see that tuition and fees make up 72 percent of total income. The state appropriation represents 20 percent, with other sources amounting to a little over 7 percent.
Slide 11 - Appropriation vs. Tuition & Fees
This graph depicts appropriations as a percentage of our General Funds Budget. The gap at the right end of the graph continues to widen, not as a result of extraordinary increases in spending, but because of the overall inflationary increases seen in higher education and the declining relative share of state support.
Slide 12 - Salary Increase Plan
Salaries are the largest component of the General Funds Budget. The basic pool for merit-based salary increases this year was 2.0 percent. We also continued the President's Excellence Fund, with a 1.5 percent pool, to address special merit, market, and equity cases. Salaries increased by nearly $30 million in total.
Slide 13 - Benefits and Other Insurances
Rising health care costs continue to create challenges for both employers and employees B a trend that we expect to continue. We have budgeted for an increase in health care costs of 12 percent, or $13.9 million.
The budget plan includes an increase of $1.7 million for employee contributions to the TIAA-CREF retirement program, due to increased participation in that retirement option. An additional $750,000 is included for changes in the Social Security base.
No increase in rate was directed this year for the State Employees Retirement System or SERS. However, actuarial projections show the rates increasing significantly in future years, and we will continue to monitor the situation closely. Taken together, the increases in the Health Insurances and Retirement and Social Security lines total $16.4 million.
In line with national trends, we are expecting increases in property and liability insurances totaling just over $900,000.
Slide 14 - Facilities and Maintenance
Turning to facilities costs, we have budgeted $2.6 million for the maintenance and operation of new or newly remodeled facilities scheduled to come on-line during the year. At University Park, this includes operating funds for new or renovated facilities including the Lewis Katz Building, which will house the Dickinson School of Law, and for facilities at the Worthington Scranton, Schuylkill and Altoona campuses.
We budgeted $5.9 million for fuel and utility cost increases at all the campuses, expecting that marketplace trends would continue.
Insufficient or inadequate space continues to be a serious obstacle. Even with the new facilities constructed over the last several years, Penn State still lags behind our peers in the Big Ten in providing modern classroom and laboratory spaces. To help address this issue, we've set aside nearly $3.7 million for 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. The University has permanently budgeted $22.5 million for deferred maintenance, but considerably more needs to be done. This year, we included an additional $2 million in the budget to address the maintenance backlog.
This brings the total additional funds budgeted for Facilities and Maintenance to $14.2 million.
Slide 15 - Program Adjustments
In the category of program adjustments, $2.3 million is included for a select group of strategic initiatives. A portion of these funds will provide the second year of support for the Penn State Institutes of Energy and the Environment, which will be largely used to co-fund new faculty positions. In addition, funds will support modest faculty investments in teacher education, communications, and the security and risk analysis program. Enhancement funds also have been provided for high priority needs in a limited number of other academic programs and for the Huck Institutes of the Life Sciences.
A total of $5.5 million is budgeted for other program commitments, including new faculty positions and workload adjustments that reflect extraordinary enrollment changes in the colleges. This category also includes support services such as information technology, environmental health and safety programs, OSHA compliance, and the University-wide parking and transportation plans.
$1.4 million is included in the budget for libraries and information technology to help keep pace with student computing, telecommunications, and information resource needs. This funding will be provided through the Student Information Technology Fee.
And lastly, $1 million of additional permanent funding is included for need-based student aid.
Slide 16 - Internal Budget Reductions
Penn State's program of internal budget reductions and reallocations has been in place for 17 consecutive years, and while it certainly has become increasingly painful, it has enabled us to balance the budget and keep the tuition increases as low as possible. This year's General Funds budget includes internal expense reductions totaling over $7.2 million derived from a 1.0 percent across-the-board reduction in departmental operating funds from academic and administrative units.
We have budgeted for an increase of $4.9 million in non-tuition income from facilities and administration cost recovery on sponsored research grants and contracts, and investment income.
Budget reductions and income enhancements total over $12 million. This is equivalent to nearly $170 per student, or 1.4 percent in avoided tuition increases for this budget year.
Slide 17- Percentage Increases in Lower Division Tuition
As I've mentioned, every effort has been made to keep tuition as low as possible. The tuition increase for lower division students at University Park is 4.7 percent for non-resident students and 5.9 percent for resident students. For students at the Commonwealth Campuses the increase is 5.3 percent for both residents and non-residents.
Slide 18- Agricultural Research
Let's turn to the Agricultural Research and Cooperative Extension portions of the budget. These areas are funded through separate line-items 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 was cut by $1,000. Expense changes include $633,000 for salary adjustments and related benefits and $399,000 to cover benefit increases for Agricultural Research personnel, resulting in a $1 million reduction in funds available for programming.
Slide 19 - Cooperative Extension
The appropriation for Cooperative Extension remains at last year's level. Expense changes include $657,000 for salary adjustments and salary-related benefits and $518,000 to cover other benefits increases. Again, this means a reduction of nearly $1.2 million in program funds.
Agricultural Research and Cooperative Extension are two key areas of the budget that cannot be supplemented with tuition revenue or other University funding sources. The combined $2.2 million reduction in program funds represents a significant setback in the state's commitment to Penn State and to the citizens who benefit from these services.
Slide 20 - Summary of Changes - General Funds Budget
This slide summarizes the General Funds budget changes. We've discussed the increases for the Educational and General budget and for Agricultural Research and Cooperative Extension. Adding the budget increases for Hershey and Penn College, the total increase to the General Funds budget is $86.5 million.
Slide 21 - Update: Commonwealth of Pennsylvania
But the budget story doesn't end here. This is a staggering year in the financial world, and the struggling economy is affecting our overall state financial resources. The Commonwealth's revenue collections from corporate, sales, and personal income taxes came in significantly below projections in August. As a precaution, Governor Rendell placed $200 million of already appropriated funds into a budgetary reserve. We have been informed that 4.25 percent of Penn State's appropriation is being set aside, and it is increasingly likely that the money will be retained by the state.
Slide 22 - Impact on Penn State's 2008-09 Appropriations
Specifically what does this mean for Penn State's current budget? If economic conditions continue on the current course, nearly $15 million will be withheld from the monthly payment on our appropriation in June 2009. About $11.4 million will need to come from those units that share our Educational and General appropriation. We will recycle 0.75 percent of these units' total General Funds budgets as temporary or non-recurring dollars, and approximately $6 million will be drawn from central reserves.
Other line items, including Agricultural Research, Cooperative Extension and Penn College, will be assessed temporary recycling in accordance with 4.25 percent of appropriated dollars and past practices regarding recycling. Funding changes for Hershey will be handled through the Department of Public Welfare.
Slide 23 - It Could Get Worse
It's possible that conditions could worsen if the country slides into a deep recession. General Fund revenues to the Commonwealth came in even farther below projections in September, with a year-to-date shortfall of $281 million. We have advised our budget executives to continue to be conservative in making commitments for funds this year given the considerable uncertainty in the overall economy and in Commonwealth revenue collections. The caution should extend to both temporary and permanent commitments for the next budget year as well.
Slide 24 - 2009-10 Appropriation
I'm not going to take time today to provide a summary of the University's appropriation request for 2009-10, which was prepared during the summer and approved by the Board of Trustees in September. The proposed budget is, in many ways, an extension of the current year budget with the same drivers, but asking the Commonwealth for a larger increase than the meager ones we've received for most of the past decade in order to maintain our path of moderate tuition increases. I will provide a copy of that proposal for the Senate record or you may access President Spanier's presentation of the proposed budget on the University Budget Office website. Suffice it to say that 2009-10 will likely be the most challenging fiscal environment that we have seen in many, many years, but we are only at the beginning of the budget-making process now. We will continue to do our best to make the case that an investment in higher education and Penn State is one of the best investments that the Commonwealth can make in these difficult economic times.
Slide 25 - Strategic Planning Update
When I met with the Senate last fall, I discussed the guidelines for the next round of strategic planning as well as the formation of a University Strategic Planning Council that would review broad issues and report back this fall.
Slides 26 and 27 - USPC Membership
The Council is made up of 21 individuals, representing faculty, staff, students and University Trustees. We have met regularly since January, with some time out during the summer months. The Council has had an opportunity to discuss a wide range of issues affecting higher education and Penn State, and to immerse ourselves in the substance of our task.
Slide 28 - University Strategic Planning Council Charge
Here are some elements of the charge to the Council. The group was asked to think strategically, to seek input from faculty, staff, and students, Trustees, alumni, and others who care about defining Penn State's vision of the future. The Council was asked specifically to think about what the University can accomplish during the next five years and the strategies that are needed to accomplish those goals. The Council was challenged to think more broadly about where Penn State should be as a university in 10 to 20 years.
Slide 29 - Task Forces
The questions posed to the Council were broad and complex. What is the future of the Land Grant university in the 21 st Century? How does the University remain competitive in attracting high quality faculty, students and staff? What are the implications of new information technologies for enhancing University activities? What does it mean for Penn State students to be international citizens and globally literate?
The seven task forces shown on this slide were charged to address some of these key themes and make recommendations to the Council. To collect wider input from the University community, the Task Forces included many other faculty, staff, students, and Trustees who are not members of the Council. We have placed considerable emphasis on achieving academic excellence and ensuring student success, for we believe these will continue to be the foundation for achieving Penn State's vision for the future.
Task Force reports were due on October 1. The last of them was received a week ago today. Task forces were given a promise of confidentiality to enable them to "step outside the box" and make what might be considered controversial recommendations to the USPC. Nonetheless, I hope that, with the concurrence of the rest of the USPC and the task force participants, many, if not all, of the Task Force reports will be posted on the web eventually with relatively minor changes.
The University Strategic Planning Council is currently reviewing all of the task force reports and meeting with the task force chairs to explore the reports in greater depth. There are several themes that are emerging from the reports including overlapping recommendations that are sometimes emanating from more than one task force. For my part, I don't see major organizational changes and realignments emerging from the strategic planning process, but rather a focus on improving the quality of a Penn State education while finding new ways to control the costs of delivering that education.
Slide 30 - Unit Plans
And, of course, the USPC is also benefiting greatly from the unit strategic plans submitted by the colleges, campuses, and academic and administrative support units from across the University. To date, the USPC has received 44 of the 46 plans we expect to eventually receive. Many of the plans can be found online, linked from Office of Planning and Institutional Assessment or a college website. Those of us involved with the Council have been immersed in reading these plans over the course of the past couple of months. They are, for the most part, very well done. Most represent a significant effort to involve a broad range of constituencies including faculty, students, staff, alumni, and advisory board members. I will be meeting with the various unit budget executives during the course of the academic year to discuss their plans and how they fit into the context of the larger University strategies.
Although unit plans have largely been developed with a focus that is primarily internal and relevant to the major external drivers affecting their programming, there are many commonalities that are emerging from the plans including such themes as environmental sustainability and energy, entrepreneurship, STEM (science, technology, engineering, and mathematics) education, internationalization, healthy living, and breakthroughs on diseases. Similarly, many units wish to increase the online presence of their programs, to improve their learning assessment efforts, to increase undergraduate research opportunities, to enhance graduate education and graduate student support, and to recruit more students from emerging new markets.
If there is one difficulty I see emerging from the plans-and no surprise here-it is that there are far more ways to spend additional resources identified than ways to stem the increase in costs going forward. Given the budgetary scenario I've painted earlier in this report, the extent of that disconnect is probably apparent. It's safe to say, however, that the limited amount of new funds the University will have for strategic investments will have to be directed primarily to broad, cross-cutting initiatives.
Slide 31 - Next Steps
The Council will continue to assess the unit-specific strategic plans and the task force reports en route to producing a draft University-wide strategic plan by mid-January. I have indicated to Senate chair Ingrid Blood that I will be pleased to return to the Senate at your December meeting to share with you the outlines of what the USPC will be including in the draft plan for the University. We will use the Spring Semester to receive feedback from major groups of stakeholders, including, but not limited to, the Faculty Senate, student leaders, the Board of Trustees, and our Alumni Council. We will have time to finalize the document, receive approval from the Board of Trustees, and be prepared to launch the new plan at the beginning of the 2009-2010 academic year.
I can assure you that the Council and Task Force members have worked very productively on their assignments. The questions that we've asked them to address are very complex, and have no short or simple answers, but all the members have taken this responsibility very seriously. I am confident that we'll be able to craft a comprehensive, University-wide strategic plan that will guide the University for the next five years and beyond.
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