Robert N. Pangborn Remarks
Presentation to the University Faculty Senate
2012-13 Budget and Strategic Planning Update
October 16, 2012
Slide 1 – Title Slide
I’m pleased to provide an update on the University’s annual budget. This year, in addition to sharing the usual financial information, I’ll briefly describe the ongoing deliberations of the newly formed Budget Planning Task Force, which is building on the foundation provided by the 5-year University Strategic Plan and the recommendations advanced by the Core Council.
Slide 2 – 2012 Budget Priorities
As many of you know from previous Senate presentations, the overall University budget operates on an incremental model – in other words, we start with the previous year’s base budget and identify budget increments that will be needed to address new or continuing strategic initiatives, meet unavoidable cost increases, and provide for faculty and staff salary increases that will keep us competitive with our peers. Then we identify the additional income resources and reallocations to address those increments.
A major contribution to available income is tuition, yet one of the key priorities of our land grant mission is to ensure accessibility by keeping the cost of a Penn State education as affordable as possible, without compromising academic quality. This year’s aggregate tuition increase is the lowest in 45 years.
After last year’s state appropriation cut of 19.6 percent, we were pleased that this year’s funding from the Commonwealth was at least stable. Because of budget constraints, however, we had to identify some expense reductions in order to move ahead on key strategic priorities.
Slide 3 – Factors Affecting Expenses
On the expense side, this year’s budget was again influenced by ongoing financial pressures associated with employee health care costs, mandated retirement contributions, rising energy costs, and facilities maintenance and modernization. These are major cost drivers that impact Penn State and all of higher education.
Slide 4 – 2012-13 Total Institutional Budget
Penn State’s total institutional budget is approaching $ 4.3 billion for this fiscal year. We expect to see an increase of $47 million from budget changes and $83.6 million in revenues from the Hershey Medical Center.
Slide 5 – 2012-13 Total Institutional Budget -- Income
This pie chart shows the sources of Penn State’s revenue. Nearly 90 percent of our revenue is generated from four sources – tuition and fees, hospital and clinical revenues, auxiliary enterprises (such as Housing and Food Services, Hospitality Services, and Intercollegiate Athletics), and restricted funds, which come primarily from sponsored research grants and contracts. Just 6.4 percent of the total budget comes from the Commonwealth.
Slide 6 – 2012-13 General Funds Budget – Income (Excluding Hershey and Penn College)
Income to the General Funds Budget makes up 40% of the total $4.3 billion operating budget, or approximately $1.7 billion, and pays for the core academic and instructional side of the University’s operation, including academic and administrative support as well as maintenance of the physical plant. Tuition and fees make up almost 80% of the General Funds income. The state appropriation accounts for 14 percent, and contributions from “other” sources, which include recovery of indirect costs, investment income, and sales and services by departments, account for the remaining 7+ percent.
Note that the University is not permitted to transfer funds from other income sources, such as the restricted category, auxiliary enterprises, or clinical funds at the Medical Center into the General Funds budget.
The next slides explore the General Funds income sources in more depth.
Slide 7 – Penn State’s 2012-13 State Appropriation
This year’s state appropriation of $279 million is the same as last year’s initial appropriation. To keep this in perspective, however, this is equivalent in absolute dollars to our appropriation in 1995 when the University enrolled about 20,000 fewer students.
Slide 8 – Summary of State Appropriations 2001-02 through 2012-13
This slide gives an historical perspective of the University’s appropriation since 2001. The Federal stimulus funding, shown in yellow, has expired and even the Medical Assistance Funds, shown in the light purple at the top of the bars, have been reduced from the levels of recent years. The dark blue bars represent years involving rescissions from amounts initially budgeted by the state, and last year’s appropriation (2011-12) was reduced by a five percent budget freeze owing to state revenue shortfalls.
Slide 9 – Percentage Increases in Lower Division Tuition Rates
As mentioned earlier, a key priority has been to keep necessary tuition rate increases to a minimum. The aggregate tuition increase this year was 2.4 percent and was one of the lowest percentage increases in the country. Commonwealth Campus students saw an increase of just 1.9 percent. At University Park, out-of-state students, who pay the full cost of their education, saw an increase of 2.4%, while the increase for in-state residents was 2.9%.
Slide 10 – General Funds Budget Components
Turning to the expense side of the ledger, expenditures from the General Funds budget comprise five key areas: Educational and General (or E&G), Agricultural Research, Cooperative Extension, the College of Medicine, and the Pennsylvania College of Technology. I’ll briefly describe each of these.
Slide 11 – 2012-13 Educational & General (E&G) Expense Changes
The Educational and General Budget is the largest category of the General Funds Budget expenditures, and it supports most of the University’s basic teaching, research, and public service programs.
Before any tuition increases were considered, internal expense reductions of $28 million were made through a combination of across-the-board reductions in departmental operating budgets (often referred to as recycling) and targeted savings identified through the Core Council process. These represent decreases in recurring costs that will lower budgeted expenses for this year and into the future.
This year’s budget included funds for modest salary increases for faculty and staff. It addressed only the essential increases for operating expenses and energy costs. No additional funds were budgeted for deferred maintenance or the capital improvement program.
Slide 12 – Agricultural Research and Cooperative Extension
Also contained within the General Funds budget are the appropriations for Agricultural Research and Cooperative Extension. These activities are dependent on the state for support and cannot draw from tuition revenue. In spite of stable funding from the Commonwealth, the need to meet inflationary increases for salaries, benefits, and program expenses will necessitate further reductions in programming.
Slide 13 – 2012-13 Budget College of Medicine, The M.S. Hershey Medical Center
This is a snapshot view of the entire $1.5 billion dollar budget for the College of Medicine and the Hershey Medical Center. The General Funds portion is $112 million.
Slide 14 – Pennsylvania College of Technology
The Pennsylvania College of Technology is a wholly owned subsidiary of Penn State, based in Williamsport. Strategic cost cutting and containment have reduced expenditures by almost $2.9 million. The total budget is $138 million, serving about 5,700 students.
Slide 15 – Summary of 2012-13 State Appropriation
In summary, the $279 million state appropriation includes a General Support line of $214 million; $13.6 million for Penn College; a total of $44.7 million for Ag Research and Cooperative Extension combined; and an estimated $6.5 million for the Hershey Medical Center from medical assistance funds made available through the Department of Public Welfare.
Slide 16 – Summary of 2013-14 State Appropriation Request
Looking ahead to next year, Penn State has submitted an appropriation request of $289.5 million, an increase of $10.6 million (or 3.8%) over the current year’s appropriation. This modest request will allow us to keep pace with inflation and offset a portion of what would otherwise need to be addressed through increases in tuition and fees.
Slide 17– (Strategic Plan Cover)
As noted at the outset, I’ll connect the budget update to the ongoing planning activities. Those include the current 5-year strategic plan, the “Priorities for Excellence,” which extends through the next academic year, the Core Council process that is now essentially complete, and the current Budget Planning Task Force deliberations.
Slide 18 – Key Strategic Goals
You’ll recall that there are seven overarching goals in the Strategic Plan, as shown here. A robust set of initiatives has resulted from this platform, including an enhanced commitment to new student orientation, retention and transition programs; consolidation of university-wide sustainability efforts; additional resources for the interdisciplinary research institutes; significant progress toward global engagement; increased emphasis on accessibility and diversity; advancements in technology-enhanced and on-line education; and innovative approaches to cost control and operational efficiency, including further trimming of under-enrolled courses and programs.
Slide 19 – www.psu.edu/president/pia/progress
Examples of progress on the goals of the strategic plan can be found at this site, which is updated regularly by the Office of Planning and Institutional Assessment.
Slide 20 – Budget Planning Task Force
This last spring, in response to the continuing fiscal challenges and difficult economic environment facing the University, President Erickson constituted a Budget Planning Task Force. We’re not undertaking this process because we crave more meetings, but because we recognize that the University’s fiscal foundation is shifting, and we need to adjust to new realities. Annual budget recycling cannot continue indefinitely, and significant increases in tuition rates are unsustainable.
The Budget Planning Task Force has been charged with undertaking a comprehensive study of our budget model, operations and structure. Senior Vice President for Finance and Business David Gray and I are co-chairing the Task Force, and members come from the Board of Trustees, the central administration, campus chancellors, college deans, faculty, and the student body.
The Task Force charge, building on the Core Council, comprises a structural and systemic review, not just a fine-tuning exercise. We plan to issue a report with recommendations by the end of fall or early next semester.
Slide 21 – Budget Planning Task Force – 6 Subcommittees
The Task Force is distributing its work across six subcommittees, to draw even wider input from the university community and external resources.
One subcommittee is focused on examining alternative University Budget Models. We’re looking at approaches that would provide for both expanded local control and offer incentives for collaboration among units.
Another subcommittee is exploring Tuition and Fee Structures. We need to strike a balance between assuring access and affordability for our students and the elasticity of demand relationship to tuition pricing. Regional economies and demographics, presence of other local institutions, disciplinary demand and cost factors, and other variables play into these considerations.
The World Campus has led the way for on-line education at the University and established itself as a potent new revenue center. Our programs have an excellent reputation, academic reach and quality, but we recognize that the competition is increasing almost daily. We also need to exploit technology through hybrid learning as it applies in resident instruction.
A subcommittee, focusing on Commonwealth campuses, is looking at both cost containment and revenue generation, including program and administrative sharing across campuses, and new organizational structures where it makes sense. Some campuses, for example, might specialize their programmatic mission to build on their strengths. Other campuses may require critical investments to expand their mission and reach in order to remain competitive in growth regions.
Two other subcommittees will focus on research priorities, support and infrastructure and Agricultural Research and Cooperative Extension.
Slide 22 – Revised Timeline for Strategic Planning
In order to accommodate the work of the Budget Planning Task Force and the initiation of the Presidential search, we’ve delayed the next strategic planning cycle by one year. This also allows the Blue & White Vision Council, announced by Board Chair Karen Peetz, to draw on the outcomes of the Budget Planning Task Force.
Slide 23 – Blue & White Vision Council
The Vision Council will be advised by Stan Ikenberry, former University of Illinois president and current senior scientist with the Center for the Study of Higher Education at Penn State. The Council’s work will inform the Presidential Search process.
Slide 24 – (Photo of Pattee Library in Fall)
And now, I’d be happy to respond to questions, as the chair permits.
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