Gary Schultz and Rodney Erickson Remarks
to the Joint Meeting of the Committee on Educational Policy
and the Committee on Finance and Physical Plant
Cost Savings Task Force and Strategic Planning Report
Friday, July 9, 2004
10:30 a.m., The Nittany Lion Inn Boardroom
Gary Schultz begins:
Slide 1 - Title Slide, Cost Savings Task Force
As you know, Rod Erickson and I are co-chairing a Cost Savings Task Force that is seeking ways to reduce costs and increase our non-tuition income sources. The Task Force started as a group of six individuals which, in addition to Rod and me, included Eva Pell, Vice President for Research and Dean of the Graduate School, Dan Larson, Dean of the Eberly College of Science and then Chair of the Academic Leadership Council, Dick Althouse, University Budget Officer, and Steve Curley, Financial Officer in the President’s Office. We were joined this past year by David Monk, Dean of the College of Education and the current Chair of the Academic Leadership Council, and by Jim Dunlop, Director of Procurement Services and chair of an Expenditures and Operational Efficiency Team in Finance and Business. This group has been taking a wide-ranging look into University operations to see if we can identify additional cost savings and revenue enhancements.
Rod and I presented a report of our first-year’s activities to the Board last May and we are pleased to bring you a second-year report. I am going to discuss the activities and recommendations of the Task Force and then Rod will pick up and explain our future plans for cost savings and where we are in terms of strategic planning.
Slide 2 - Cost Savings Task Force Summary
I’m going to start with a summary of our results for this past year. You’ll recall that our budget plan and state appropriation request for 2004-05 included a preliminary target of $2.5 million in cost reductions and income enhancements. We have exceeded this target by identifying budget reductions of more than $4 million as well as income enhancements of $2.3 million. Putting this in terms that we can all appreciate, the amount of tuition increase avoided is 1.1 percent, or equivalent to $100 per year in tuition for each full-time student.
Let me review for you how we reached this level of cost savings and income enhancement.
Slide 3 - Cost Savings Task Force
Penn State is already an efficiently run university following many years of budget recycling and reallocation. We have recycled $113 million since 1992-93 and have moved most of these funds from administrative to academic functions.
We have systematically eliminated or merged existing academic programs as we have added new ones. Since 1992, 83 programs or majors and 14 academic departments have been eliminated or merged.
And, we have one of the most effective continuous quality improvement and re-engineering programs in higher education in the nation. More than 600 CQI teams have identified ways to improve processes, from using digital imaging to improve access to information to putting the admissions application online, saving millions of dollars over the past few years.
Slide 4 - Cost Savings Task Force
Penn State is committed to finding every possible way to reduce costs and enhance non-tuition income. At the same time, we recognize that continued across-the-board recycling will risk harming our best programs and damaging essential services.
This year, we did not require a one percent budget reduction from all units. Our budget cutting has become more vertical, affecting some programs and services more than others. This entails evaluating specific programs and services and the extent to which they support the University’s mission.
As I mentioned, our target for 2004-05 was to identify $2.5 million in funds to be captured centrally. We also recognized that there were opportunities for savings that could be retained within individual operating units. I’ll give some examples of these later in the presentation.
Slide 5 - Approach
The Task Force considered three categories of cost savings and income enhancements. First, there are funds, either in the form of selective budget reductions, non-tuition income enhancements, or central recycling, that can be captured centrally and used to fund necessary increases in the budget. Second, there are internal unit reallocations of funds that can be moved from lower to higher priority budget needs within the units. Third, there are initiatives which result in cost savings or cost avoidance within individual departments of the University. Savings of this type provide added fiscal flexibility for the departments in meeting their operating needs.
The next slide will look at the first category of funds that can be captured centrally.
Slide 6 - Budget Reductions and Income Enhancements Captured Centrally
We have significantly exceeded the target of $2.5 million and have identified $6.5 million in budget reductions and income enhancements that can be captured centrally to help offset cost increases in the 2004-05 budget. As I indicated earlier, this includes selective budget reductions of more than $4 million and income enhancements of $2.3 million.
I will provide details in the following slides.
Slide 7 - Summary of Budget Reductions and Income Enhancements Captured Centrally
For the coming fiscal year, we have identified $2.6 million in savings in employee benefits by increasing some deductibles and co-pays for specialized services and self-insuring our HMO.
Budget reductions of $538,000 have been identified in Outreach in the second year of a three-year review started by Jim Ryan and continued by Craig Weidemann and his staff. Savings will accrue from program reductions or eliminations, aggressive expense management, and reductions in administrative support. It should be noted that these cuts do not reflect any budgetary changes for Cooperative Extension which is funded separately by federal, state, and county appropriations.
Administrative streamlining will save the university $451,000. We have decided to close the Capital office of the Pennsylvania State Data Center. With some additional staff training, we will be able to provide the same type of demographic and economic data and analysis through the State Data Center at Penn State Harrisburg. Other savings will result from a reduction in program funds to Eastgate Center in downtown Harrisburg, route changes in mail services, and the elimination of staff positions in administrative offices that were no longer deemed critical.
We have also identified savings of $600,000 in central recycling.
Looking at income enhancements, the income from Facilities and Administrative Recovery revenue has increased by $2.3 million. These are indirect costs that are recovered through external grants and contracts. As Rod indicated in our report last May, we have made a significant effort to track down and more fully account for costs in support of sponsored research activities. his year, we again spent considerable time documenting our costs for the facilities component of the F&A rate. We are currently negotiating a three-year F&A rate to start in 2004-05, and the data we have gathered will put us in a stronger position as we negotiate future F&A rates.
Slide 8 - Internal Unit Reallocations
The next category of savings, as I mentioned before, cannot be captured centrally but does result in fiscal flexibility for departments. Internal unit reallocations move funds from lower to higher priorities within the budget units. Funds are shifted based on the priorities developed in each unit’s strategic plan. For 2004-05, we have asked each unit to reallocate at least one percent of their operating budget, assuring $5.6 million for internal reallocations. This will be the thirteenth consecutive year that we’ve asked units to reallocate funds.
Slide 9 - Operating Unit Savings and Cost Avoidance
The Task Force has identified several projects where cost savings and cost avoidance can be implemented within operating budgets. For example, in Purchasing Services, “reverse auctions” have resulted in significant savings. Think of a big eBay arrangement where the lowest price wins. The University posts products and volumes that we need, and vendors electronically bid to provide the product at the lowest price. Ten such auctions were held last year, saving the university $758,000.
Various energy conservation programs have saved the university $2.3 million this year. These include the Guaranteed Energy Savings Program, changes in steam plant shutdown procedures and the steam trap management program, savings from more efficient lighting, and our Continuous Commissioning Program.
Changes in procurement of natural gas and electricity saved the university $925,000 this year. And reductions in labor, supplies and equipment saved $316,000 in the Office of Telecommunications.
Slide 10 - Operating Unit Savings and Cost Avoidance (continued)
Here are some other examples of operating unit savings. In Physical Plant, improved safety and operational efficiencies saved $381,000. For example, we significantly reduced the number of lost-time accidents and non-weather-related overtime.
Successful recycling programs have reduced waste disposal fees by $172,000 per year.
We turned to an outside vendor to operate our chemical stockrooms in the College of Science, saving $176,000 in labor and operating costs.
We have also implemented an owner-controlled insurance program for capital projects which saves approximately $500,000 each year.
Slide 11 - Improved Operating Efficiency
The Office of Human Resources looked into ways to offer more flexible terms for less-than-full-time, year-around staffing. Some employees desire to have more flexibility in their work schedules and some offices have work requirements that can be adapted to a less-than-40-hour work week. The result was a revision to Human Resources Policy 88, designed to be used for vacant appointments, but applicable to current appointments if the employee voluntarily accepts a reduction in work assignments and in salary.
Over several years, applying HR 88 to 237 positions has resulted in annualized salary savings of $1.7 million. This is an increase of $700,000 over the past two years. We expect that this program could grow over time to reach savings of $3 million per year.
Slide 12 - Improved Operating Efficiency (continued)
Here are two examples of improved operating efficiency using technology. We have partnered with SciQuest, Inc. for its HigherMarkets e-Procurement system. With this system, we expect first year savings to be $1.3 million, with savings eventually reaching $1.7 million per year when the system is fully implemented.
Also in development is an on-line system for travel management and reimbursement. Responses to our RFP to provide a new travel management system are being evaluated. We estimate that cost avoidance and discount rates will save the university approximately $2.5 million per year.
Slide 13 - Benchmarking Best Practices
One of the things that we’ve tried to do is learn from the “best practices” of others. This year, we’ve used graduate student interns from our Industrial Engineering Department in the College of Engineering to conduct a benchmarking study of “best practices” in cost savings at other colleges and universities as well as in business and government.
The interns identified and categorized 122 “best practices.” Many of the ideas involved using computer systems to alleviate paperwork and unnecessary communications. Other common topics were energy, transportation, and environmental suggestions.
Slide 14 - Benchmarking Best Practices (continued)
All of the ideas were categorized into four groups: ideas of high potential, ideas of possible or unknown potential, ideas already thought to be in practice at Penn State–the largest category–and ideas that were not feasible or applicable.
What we found is that Penn State appears to be on the cutting-edge of many of the “best practices” identified. The university is already performing, to some extent, 72 of the 122 ideas documented in this study. Further investigation of the high potential ideas could lead to expanded opportunities for cost reductions and efficiency improvements.
Slide 15 - Employee Suggestions
In our report last May, Rod mentioned that we had sent a message to all Penn State faculty and staff requesting cost savings ideas, and we had already received 230 responses. We have now received 310 responses. Of course, some of these are duplicate ideas. In total, we received 160 unique suggestions covering many areas of the University including travel, energy conservation, purchasing, and human resources. Forty-four suggestions have been implemented or are currently in review. Another 44 ideas are pending future review, and 72 were deemed to be infeasible.
Examples of implemented suggestions include using on-line travel booking systems, eliminating certain paper publications, offering refilled toner cartridges, consolidating mail to take advantage of greater bulk rates, and increasing use of conference calls and video conferencing to reduce travel time and expenses.
Slide 16 - Cost Savings Task Force 2003-04 and 2004-05
To summarize this section of our report, cost savings initiatives and income enhancements reflected in the 2003-2004 and 2004-2005 budgets total almost $21 million. About three-quarters of this amount or almost $16 million will come from cost savings and one-quarter or about $5 million will result from income enhancements. The real impact of this effort can be seen in the tuition increase avoided of 3.8 percent over the two-year period.
Rod Erickson will continue our report with a discussion of academic program reviews, the Courseware Initiative, and the next steps for cost savings and strategic planning.
Rod Erickson begins:
Slide 17 - Graduate Program Reviews
Thank you, Gary. As I mentioned last year, the Graduate School and the Graduate Council, under the leadership of Eva Pell, is conducting a comprehensive evaluation of the University’s graduate programs as part of a three-year review cycle. Over time, as we look at enrollment patterns, it becomes apparent that some programs should be merged or phased out.
The Graduate School has identified some programs that have undergone significant attrition and no longer exhibit the vitality they should. This coming year, we expect to bring a number of these programs to the Board with the recommendation that they be dropped.
The Graduate School has also identified a number of courses that are seldom offered because of low enrollments. We are encouraging the programs to drop them as well, or modify them in a way that increases enrollment. We intend to monitor course enrollments, and if the programs are unresponsive, we will be knocking on their doors again.
The Graduate School has had in-depth discussions with the Deans about those programs with marginal enrollments or other indicators of weakness. In some cases, the Deans will follow up with an external review to determine whether the programs are still viable or how they might be modified to make them more successful. In other cases, the Deans had already recognized the problems and started on a process to address the situation.
We expect some level of cost savings from this review that is mainly internal to the colleges and programs. But just as importantly, program review focuses extra attention on programs that need it and encourages reallocation of resources within departments.
We are launching a similar review of undergraduate programs to identify baccalaureate and associate degree majors that are consistently underperforming, and may be candidates for merger or elimination. Courses that are offered only infrequently or to very low numbers of students will be closely evaluated for possible restructuring or discontinuation.
Slide 18 - Courseware Initiative
The Courseware Initiative is an example of blended learning supported by Information Technology Services, Undergraduate Education, and the World Campus. This initiative is one of our eight areas of strategic investment for the next three years. We are transforming several high-demand undergraduate courses into web-enhanced versions, and we expect to see improvements in student learning as well as the opportunity to reduce the cost of course delivery.
As these courses are made available to students at multiple campuses, we give students the chance to complete courses not offered at every campus through resident instruction. Students also benefit from the flexibility to complete the course at a time convenient for their busy schedules.
Let me give you a specific example from Statistics 200, a foundation course that enrolls nearly 1,000 students per semester across many sections. The course was redesigned to reduce the number of lectures and add a series of problems and exercises that students could complete in a computer lab or at home. As in many of our large courses, Statistics 200 uses graduate assistants to lead discussion sections. After the redesign, we were able to reduce by 50 percent the number of graduate assistants needed to support the course–the cost equivalent of about $150,000 per year. We also found that student learning and satisfaction increased. Students were learning statistical concepts and skills better than in the old model because they were actively engaged and provided with richer feedback on their learning than was possible in a traditional lecture course.
A redesign of Biology 110 has also resulted in improved student learning. This spring, we piloted new versions of Nutrition 100, Biological Science 4, Landscape Architecture 60, and Accounting 211. Overall, this approach has the potential to improve the quality of the Penn State learning experience for students and to do so in a very cost-effective way.
Slide 19 - Future Steps
As we look ahead, the Task Force is committed to leaving no stone unturned as we seek to reduce costs and enhance non-tuition income. We see potential for greater cost savings in several areas. We will continue to conserve energy by re-tuning our buildings and replacing older equipment with environmentally friendly and energy efficient equipment. We feel that further savings are possible with e-procurement and electronic “reverse auctions.” And, we will continue to look for ways to reduce costs in providing health care benefits. Finance and Business is also planning to seek savings through a university-wide copier management program and a university-wide equipment maintenance program.
We also recognize the need to take a strategic overview of the four issues shown here. First, we need to take a strategic look at our enrollment management plans for all our campuses and review demographics in order to predict what is likely to happen at a particular campus and a particular part of the state in terms of our enrollments.
Second, we plan to look at the current cost center budget model to see if any adjustments are needed to reflect campus enrollment patterns that are emerging now and are likely to occur in the future.
Third, we plan to review faculty and staff productivity issues. Are we deploying our faculty and staff resources in the best way we can as we examine patterns of student enrollment in specific degree programs?
And finally, the cost of tuition is increasingly becoming a factor in students’ decisions to attend Penn State. You’ll recall that we completed a major study two years ago, the Report of the Tuition Task Force. We believe that we need to revisit our tuition policies on a regular basis to ensure that we are doing our very best to maintain access to Penn State while continuing to enhance the quality of the academic experience we provide for our students.
These are not easy issues for Penn State. But we are able to approach them analytically and rationally because of our extensive experience with strategic planning.
We’re beginning a new three-year strategic planning cycle this year. Strategic planning gives us tools for making the fundamental decisions that shape and guide the University. It has given us a road map to follow and a vision for excellence. In the next few slides, I’m going to bring you up-to-date with the University’s strategic planning activities.
Slide 20 - Strategic Planning at Penn State
Penn State has one of higher education’s longest continuing histories with strategic planning. The process was initiated in 1983, and it started as what you’ve heard described as a participative, top-down, bottom-up, annual process that connects academic planning and budgeting. Strategic planning involves all of Penn State’s locations and all academic and administrative units, and requires each unit to consider future directions, strategies, and measures of performance.
In 1992, lean budget years resulted in budget recycling being added to the strategic planning process. Recycling provided a means for colleges and departments to reallocate resources from administrative activities to academic functions and from areas of lower priority to higher priority.
1997 saw the creation of the first University-wide strategic plan.
And, in 1998, the university began producing an annual report of university-level strategic performance indicators that measure how well we are doing in reaching our goals. We collect data and track indicators such as graduation rates, numbers of students employed after graduation, and growth in research expenditures. All planning units incorporate a similar approach in their unit-level planning.
In 1999, we piloted Integrated Planning which has helped us better integrate academic planning with budget, enrollment and facilities planning at each of the campus college cost centers.
Slide 21 - Strategic Planning Goals
As we begin the new strategic planning cycle for 2005-2006 through 2007-2008, we are following the same five overarching University goals, which are:
– Enhancing academic excellence
– Enriching the educational experience of all Penn State students
– Building a more considerate and civil University community
– Serving society through teaching, research, and service, and
– Developing new sources of income and reducing costs.
The keyword for the next cycle of strategic planning is “alignment.” We have aligned the process with two other large assessment projects–the Middle States Self-study and the Faculty/Staff Survey.
Slide 22 - Strategic Planning Timeline
The Middle States Commission on Higher Education is conducting its ten-year reaccreditation review of Penn State this year. This involves our preparation of a comprehensive self-study document and site visits by Middle States representatives to several Penn State campuses this fall and to University Park next April.
In their strategic plans, budget units have been asked to explain how their unit-level goals address the focus of the Middle States Self-study which aligns with Goal 2 of the University strategic plan, to “enrich the educational experience for all Penn State students.”
The Faculty/Staff survey was conducted during spring semester of this year. It was designed to identify university practices that might be improved as well as strengths that should be reinforced or expanded. Results will be shared with departments and units in time for them to incorporate strategies for addressing survey results into their three-year plans.
Thus, strategic planning supports and integrates important University initiatives such as the Faculty/Staff survey and Middle States reaccreditation.
Slide 23 – Strategic Planning Benefits
Strategic planning has several major benefits to the University. It involves faculty, staff, and students in the planning process, creating greater consensus and awareness of Penn State’s mission and goals. It builds community through conversation and dialogue about what is important and valued, and it helps us measure progress toward our goals.
Strategic planning integrates academic planning with the budget and with enrollment and facilities planning. We know that it has improved Penn State’s efficiency and effectiveness in educating students, conducting research, and serving the public.
Over time, strategic planning at Penn State has become more flexible. Five-year plans have become more workable three-year plans. Units are encouraged to use planning approaches that reflect their unit’s values and culture. Strategic performance indicators have been identified and supporting data collected. A one percent internal recycling program as part of the strategic planning process continues to be the practice each year. Strategic plans are therefore fundamentally practical and tied to resources, and include specific strategies for improvement and assessment.
Slide 24 – Future of Strategic Planning at Penn State
The strategic planning process continues to evolve as we strive to enhance excellence in a time of increased challenges and diminished resources. You are all very familiar with the changing demographics, rising costs, growing competition, and declining state support that characterize the higher education environment today. Strategic planning helps the University make the most of our resources and keeps our focus on the programs and services that are central to our mission and goals. Penn State’s long-term emphasis on cost savings and strategic planning has led to our reputation as one of the most efficient universities in the nation.
One of the by-products of strategic planning is that our faculty and staff generally understand the University’s goals and have a shared terminology to discuss the important issues and challenges we face. As Gary mentioned, we’ve received many thoughtful cost savings suggestions from the University community. We’ve also implemented many creative ideas for improving processes at Penn State through the work of 600 different CQI teams over the past decade. I expect that continued cooperative efforts and strategic thinking will help to identify the resources to keep Penn State moving forward to even greater excellence.
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