2004-2005 Operating Budget and Budget Planning for 2005-2006
Report by Rodney A. Erickson to the University Faculty Senate
October 26, 2004
Slide 1 B Title Slide
My report today will highlight Penn State's current operating budget and summarize next year's budget plan and appropriation request to the Commonwealth. The good news is that, unlike last year, we did receive an appropriation shortly after the start of the new fiscal year on July 1st, and even a modest appropriation increase. The bad news is that our appropriation has still not been restored to where it was some years ago.
Slide 2 B Appropriation History
Penn State's appropriation increase is approximately $9.3 million, or 3 percent on each line item in our appropriation. The total appropriation is $317.2 million, slightly over what the University received in 1999, and less than the appropriation in 2000, 2001 or 2002. Penn State has lost tremendous ground over the past 4 years in terms of support from the Commonwealth.
Slide 3 B Budget Priorities
Here are the budget priorities for the 2004-05 fiscal year. The cost of the University's benefits program has increased significantly over the last several years, and the trend continues in this year's budget. The largest increase in this area is in health insurance.
Maintaining and improving facilities is another high priority in the budget, as is our continuing effort to maintain competitive salaries. We have made important strides in the competitiveness of our salaries, and we don't want to lose momentum at a time of increasing competitiveness for top faculty.
Our budget priorities also include strategic academic program investments, and we are once again putting a heavy emphasis on cost savings initiatives.
Slide 4 B 2004-05 Total Budget B Income
The state appropriation is just one piece of Penn State's budget. The total budget for this fiscal year is just under $2.8 billion.
The income sources for the budget are shown in this pie chart. The activities on the left side are all self-supporting budgets. These include the Hershey Medical Center, Auxiliary Enterprises, 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. As you can see, tuition is at 33.7 percent and the state appropriation is 11.4 percent of the total budget.
Slide 5 B General Funds Budget B Income
Turning to the General Funds portion of the budget, you can see that tuition and fees now represent slightly less than 70 percent of income, with the state appropriation at a record low of 23.9 percent. The category of Aother@ income is made up of recovery of Facilities and Administrative costs incurred in the conduct of research, departmental services, and income on investments. The General Funds budget supports the University=s basic academic and administrative activities and maintenance of the physical plant.
Slide 6 B General Funds Budget
The General Funds Budget, which I will focus on for the remainder of my presentation, is comprised of our Education and General line, Agricultural Research, Cooperative Extension, the College of Medicine, the Pennsylvania College of Technology and the Dickinson School of Law.
Slide 7 B Benefits and Other Insurances
I mentioned earlier that the cost of the University's benefits program continues to increase significantly. For 2004-05, these costs increased by $19 million. Here is a breakdown of the costs. Employee health insurance costs are increasing by $13.9 million. We also see an increase in health benefit costs for graduate assistants of $700,000, and increases to retirement contributions, social security and grants-in-aid of nearly $4.6 million. Please note that the total benefits program cost increase is approximately two times greater than the total increase in our state appropriation. This year, the University's health insurance cost increase was higher than the basic salary increase. This increase has occurred despite the fact that we have worked very hard to keep health care costs down; our increases have been far lower than many other public and private organizations, and our insurance packages are not out-of-line with peer institutions.
We will also experience an increase in property and liability insurance expenses in the amount of $1.2 million.
Slide 8 B Facilities and Maintenance
Turning now to facilities cost increases, we have budgeted approximately $2.8 million for the maintenance and operation of new or newly remodeled facilities that are scheduled to come on-line this year, including the new building for the School of Architecture and Landscape Architecture and the Blue Band Building at University Park; the Training and Technology Center at Penn State Hazleton; and the Multipurpose Building at Penn State Fayette. This amount also includes provisions for fuel and utilities cost increases at all campuses.
Insufficient space has become a serious impediment to a growing number of Penn State's academic programs. Capital funds received from the Commonwealth are greatly appreciated, but are not adequate to meet the University's critical needs. As a result, this year's budget includes $6.1 million for the Capital Improvement Program to create urgently needed space for impacted programs.
Deferred maintenance for Penn State's physical plant remains a critical problem. The permanent budget for deferred maintenance was $14 million last year, but so much more needs to be done to maintain our buildings that we have included additional support of $2 million in this year's budget.
The total for the facilities and maintenance lines comes to $10.9 million.
Slide 9 B Salary Adjustments
Improving salaries at Penn State is a continuing priority. In fact, concern for the competitiveness of faculty salaries led the University to adopt a multi-year plan to reduce the gap between Penn State's faculty salaries and those at peer institutions. As a result, average salaries at Penn State have shown improvement in these comparisons over the past few years.
Slide 10 B Big Ten Salary Comparison
As you can see in this slide, between 1995-96 and 2000-01 Penn State slipped from second among the Big Ten public universities at the professor level to fifth. We went from second to sixth at the associate level, and moved from eighth to seventh at the assistant professor level.
Slide 11 B Big Ten Salary Comparison Progress
Penn State has made significant progress in restoring faculty salaries to a more competitive level. At the professor level, we've made steady progress and have returned to the second place position. More modest progress has been made at the associate professor level, but at the assistant professor level we are considerably ahead of where we started. These data cover main campuses for comparison purposes. Data for other categories of campuses also show improvement among our peers.
Slide 12 B AAU Salary Comparison
The American Association of Universities is the association of leading research universities in America. This is a peer group of universities with whom Penn State is often competing for faculty. Looking at just the public universities in the AAU, you can see in this slide that Penn State experienced a similar drop in rankings from 1995 through 2000.
Slide 13 B AAU Salary Comparison Progress
As with the Big Ten comparisons, Penn State's initiative to increase the competitiveness of faculty salaries has also brought the University up noticeably when compared to the AAU public institutions. However, we also compete for faculty with the private universities within this group, and the gap between public and private universities has grown substantially over the past few years.
Slide 14 B Salary Increase Plan
This year's budget includes a 2.0 percent salary increase pool that has been used for merit-based increases, as well as continuation of the Faculty/Staff Excellence Fund and the President's Excellence Fund, which are used to recognize the University's top-performing faculty and staff, and to address market and equity concerns.
The budget includes $26.1 million to cover all salary increases and the related benefit costs.
Slide 15 B Program Adjustments
The budget also includes increases for program adjustments. In the last few years, Penn State has focused on four interdisciplinary areas that address important societal needs. A multi-year funding plan has been in place for initiatives in the Life Sciences, Materials Science, Environmental Studies, and Children, Youth, and Families. Last year's budget included the final planned installments for Life Sciences and for Materials Science. This year=s budget includes the final installments for Children, Youth and Families and Environmental Studies. $500,000 is also included in the budget for Information Sciences and Technology as the University completes its multi-year development plan for the School.
You will recall that more than two years ago, our Board of Trustees adopted a tuition increase plan that came to be known as the AFreshman Bump.@ Tuition for freshmen at University Park in 2003-04 and freshmen and sophomores in 2004-05 was increased by $250 per semester; at the other undergraduate campuses, these increases were $50 per semester. Increases were also included for upper division and graduate students as part of the plan. These bumps approved in July 2002 are in addition to basic tuition increases. Recognizing the declining levels of Commonwealth support, these tuition dollars from the bumps were meant to provide badly needed funds for strategic program investments.
Funding in the amount of $6.1 million is included in the 2004-05 budget for strategic investments at University Park and other campus locations. A portion of these funds at University Park will be used to reduce the student/faculty ratio and to convert fixed-term faculty appointments to standing positions in selected academic programs. Additional support will be provided for K-12 educational partnerships and programs in the fine and performing arts, humanities and social sciences. Enhancement funds also will be provided for World Campus and resident instruction blended learning opportunities, our University fundraising activities, student services, and student recreation programs. At our campus college locations, these funds will be used for the highest priority needs identified by each campus.
A total of $3.9 million is included for other program commitments, such as new faculty positions and for instructional workload adjustments that reflect enrollment changes in the colleges, high priority academic needs, research administration, information technology services and the university-wide parking and transportation plan.
A total of $2 million is included in the budget for libraries and information technology. This is being funded through a $15 per semester increase in the student information technology fee.
And lastly, $1.2 million is included in the budget for need-based student aid. These funds will be used to leverage additional private donations for student support through the Trustee Scholarship Program.
Slide 16 B Cost Savings Task Force
Gary Schultz and I are co-chairing a University Cost Savings Task Force. This year, the task force identified $6.5 million in savings and non-tuition income enhancements, which amounts to a tuition savings of $100 per year for each Penn State student. Savings resulted, for example, from administrative streamlining, budget reductions in Outreach, and increasing income from the Facilities and Administrative costs that are recovered through external grants and contracts.
Slide 17 B Cost Savings Task Force Two-Year Total
When combined with the recommendations from last year, the cost savings initiative has saved $327 per student per year, or 3.8 percent in tuition increases that have been avoided. While we are committed to ensuring the quality of a Penn State degree, we are equally committed to cutting costs wherever possible, and cost-cutting strategies B which have been a part of our strategic planning process for years B will continue to be a priority going forward.
Slide 18 B Internal Budget Reductions and Reallocations
One of the important budgeting principles for the University has been to reallocate resources based on new priorities. Over the past 12 years we have reallocated $113 million in our budget by eliminating programs and majors, merging academic programs, consolidating and streamlining administrative functions.
This year's budget continues that effort, with more than $5.6 million in internal reallocations planned. These are based on the strategic plans of the University's 34 college and administrative units, and will allow us to move funds from lower priority items to the highest priority needs of the University.
Slide 19 B Basic Tuition Rate Increases B In State
We are turning now to the income side of the budget. You'll recall that a differential tuition structure mandates different charges by location and class standing. We have taken great care to keep tuition increases as low as possible. The basic increase for University Park students this year is 6.6 percent, and for students attending a Commonwealth College campus, it is 5.3 percent.
At University Park this means an increase of $306 per semester for in-state lower division students, $310 for upper division students and $329 for graduate students. In-state students at Commonwealth College locations saw an increase of $230 per semester for lower division, $242 for upper division and $267 for graduate students.
Slide 20 B Out of State Tuition Increase
For non-Pennsylvania residents, lower division tuition increased by $459 per semester at University Park. Upper division tuition for non-residents increased by $465, and graduate level tuition by $494. Commonwealth College locations saw increases of $345 for lower division, $363 for upper division, and $401 for graduate students.
Slide 21 B Agricultural Research
The state appropriation for agricultural research, which is a separate line item in the state budget, increased by $688,000. Unfortunately, this is not enough to offset increases in the cost of salaries and benefits for the program. To balance the budget, $326,000 in program reductions are necessary. Without tuition or other sources of income to help support this line item, the pattern of program reductions has unfortunately continued for many years.
Slide 22 B Cooperative Extension
The appropriation line item for Cooperative Extension was increased by $827,000, or 3 percent. Once again, the costs of salary adjustments and related benefits and benefits increases for Cooperative Extension personnel exceed the appropriation increase. To balance the budget, $443,000 in program reductions will be necessary.
Slide 23 B College of Medicine B Income Changes
This year we did have a small increase in the state appropriation for the Penn State College of Medicine. The tuition rate increase for Doctor of Medicine students generated additional tuition income and academic support payments from the Milton S. Hershey Medical Center increased. The total increase in income for the College of Medicine is just over $4.9 million.
Slide 24 B Summary of Changes to General Funds Budget
Summarizing our general funds budget for this academic year, we received a 3 percent increase in the state appropriation. The University faces increased costs in a number of areas of the budget, specifically increased benefits costs, costs associated with maintaining and improving facilities and competitive salaries.
On this slide, you can see the increases in the Educational and General line, agricultural research, cooperative extension, and the College of Medicine, as I just outlined. We also have increases in the budgets for Penn College and the Dickinson School of Law. Although budgets will be tight again this year, we're very pleased to have a modest increase in the appropriation and we believe that these budget changes will allow us to maintain the quality of a Penn State education and to fulfill Penn State's mission to serve the Commonwealth.
Slide 25 B 2005 B 06 Appropriation Request
I=d like to move on to a brief summary of the University's budget plan and appropriation request to the Commonwealth for 2005-06.
Slide 26 B Summary of Appropriations 2000-01 through 2005-06
We are asking the Commonwealth to restore Penn State's funding to the level that it was in 2001-02. Despite the very welcome increase in the appropriation this year, we are still over $17 million below where the University's funding was four years ago.
Slide 27 B Basic Operating Costs
In forecasting the budget for next year, we considered the same cost drivers that I just discussed in terms of this year's budget. We again expect to see increases in employee benefits and insurances, operating costs and maintenance of facilities, faculty and staff salaries, strategic initiatives and program needs. As we address cost increases, we will continue our budget reduction, cost savings and reallocation efforts.
Slide 28 B Strategic Investment Priority
The one major strategic investment priority in the appropriation request is for additional funding for the College of Medicine. As most of you are aware, our College of Medicine ranks dead last among the nation's 76 public medical schools in terms of its state appropriation for medical education. The average appropriation for other public medical schools is about $50 million. In contrast, Penn State's appropriation for medical education is just $4.8 million this year.
Because of all the changes in the health care industry, we can no longer rely on clinical revenues to provide support for medical education. An increase in state support is critical to the future of our medical school. We are therefore requesting a $10 million increase in funding for the College of Medicine, and we plan to request similar base increases in each of the next two years. You may recall that we made a similar funding request last year on behalf of the College of Medicine.
Slide 29 B 2005-06 Appropriation Request Summary
In summary, we are asking for a 5.6 percent increase, or $17.6 million. This would restore our state appropriation to $334.8 million, which is the level that it was in 2001-02. We are also seeking $10 million in additional funding for the College of Medicine, as I noted previously. These relatively modest increases in state support would allow us to hold tuition increases to the lowest levels they have been for many years.
And now I would be happy to answer any questions, if time remains.
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