Rodney A. Erickson Remarks at the
Joint Meeting of the Committee on Educational Policy
and the Committee on Finance and Physical Plant
Cost Savings Task Force and Strategic Planning Update
Friday, July 15, 2005, 11:00 a.m.
Classroom Building, Room 203, Penn State Delaware County
Begin Slide Show (Adobe Acrobat required to view this slide show in PDF format.)
Slide 1 - Title Slide
I'm pleased to bring you an update on the work of the Cost Savings Task Force as well as a brief report on strategic planning at Penn State. As you know, Gary Schultz and I have been co-chairing a Task Force that is seeking ways to reduce costs and increase our non-tuition income. The current members of the Task Force include Eva Pell, Vice President for Research and Dean of the Graduate School, Doug Anderson, Dean of the College of Communications and current chair of the Academic Leadership Council, Judy Olian, Dean of the Smeal College of Business, Dick Althouse, University Budget Officer, Steve Curley, Financial Officer in the President's Office, and Jim Dunlop, Director of Procurement Services and chair of an Expenditures and Operational Efficiency Team in Finance and Business.
We are completing the third year of our focused cost savings effort. I'm going to begin with a brief summary of our results in the first two years, and then move on to the results for the current year.
Slide 2 - Background
As you know, Penn State has had a long-term emphasis on efficiency. Since 1992-93, the University has recycled nearly $127 million from departmental operating budgets. A significant majority of the funds have been shifted from non-academic to academic functions in this recycling process.
We have systematically eliminated or merged existing academic programs, as we have added new ones to keep pace with changing student demand, trends in academic fields, accreditation requirements, and new knowledge and pedagogy that is shaping the need for curricular reform. Since 1992-93, 98 programs or majors and 14 academic departments have been eliminated or merged.
And, we have one of the most effective and longest-running continuous quality improvement programs of any university in the country. More than 650 CQI teams have identified ways to improve processes and work more efficiently.
Higher education still faces a myriad of financial challenges, and Penn State remains committed to finding new ways to reduce costs and enhance income from sources other than tuition.
Slide 3 - Cost Savings Task Force Results 2003-04 and 2004-05
Here is a quick look at the Cost Savings Task Force results after our first two years of work. For 2003-04 and 2004-05, the Task Force identified almost $21 million in annual savings and non-tuition income enhancements. This results in real savings to students. The amount of tuition increase avoided is 3.8 percent, equivalent to $350 per year in tuition for each full-time student.
Slide 4 - Task Force Target for 2005-06
The University's budget plan and state appropriation request for 2005-06 included a target of an additional $5.9 million in cost reductions and income enhancements, which became the goal of this year's Cost Savings Task Force.
We also recognized that there were opportunities for savings that could be retained within individual operating units, and I'll give some examples of these later in the presentation.
Slide 5 - Task Force Results for 2005-06
I'm pleased to report that we have exceeded the target of $5.9 million and have identified cost savings and non-tuition revenue enhancements totaling more than $10.6 million. Specifically, we identified $3.4 million in centrally captured budget reductions and $3.5 million in non-tuition income enhancements; the remainder, $3.7 million, is made up of recycling from the University's 33 major academic and administrative budgetary units. Although we avoided central recycling last fiscal year, we found it necessary to recycle one-half of one percent across-the-board from all budgetary units in 2005-06. I should add that we recycle only from general funds, and we do not recycle from certain protected budgets such as student aid or library acquisitions.
The total savings of more than $10.6 million is equivalent to $180 per student per year. The bottom line is an avoided increase of 1.7 percent on tuition. In other words, the tuition increase we will be proposing later today is 1.7 percent less than it would have had to be to balance the budget if we were not engaged in this cost-cutting, revenue-enhancing activity through the Task Force.
Slide 6 - Approach
Our approach was the same as in previous years. We considered three categories of cost savings and income enhancements. First, there are funds that can be captured centrally and used for necessary increases in the budget. These may be selective budget reductions, non-tuition income enhancements, or budget recyclingBthe categories we discussed in the previous slide.
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 flexibility for the departments in meeting their operating needs.
Slide 7 - Budget Reductions and Income Enhancements Captured Centrally
Here is some detail about the first category of funds that can be captured centrally, as I noted previously, equal to $10.6 million. In the category of budget reductions, we identified savings of $2.5 million in employee benefits. This results from consolidation of two existing health plans into the Penn State Choice plan to achieve wellness-focused, managed health care coverage while consolidating risk pools. Additional cost avoidance was achieved through self-funding of the HealthAmerica HMO plan and the implementation of additional review features.
Budget reductions of $561,000 have been identified in Outreach in the final year of a three-year $2.0 million reduction plan started by Jim Ryan and continued by Craig Weidemann and his staff. Savings will accrue from program reductions or eliminations, reductions in administrative support, and increased cost recovery. These reductions have been achieved without hampering the core units of Outreach, including the World Campus, Conferences and Institutes, Continuing Education, and Penn State Public Broadcasting, while putting increased emphasis on initiatives in Economic and Workforce Development. It should be noted that these cuts do not reflect any budgetary changes for our outreach programs in Cooperative Extension, which is funded separately by federal, state, and county appropriations.
Administrative streamlining will save the University $390,000. We made some staffing changes in the Office of Planning and Institutional Assessment, made some adjustments to the summer session operations for the University Park academic colleges, and will be decreasing rental expenses at the Philadelphia Outreach Center.
In the category of non-tuition income enhancements, the income from Facilities and Administrative Recovery revenue has increased by $3.5 million. These are commonly referred to as "indirect costs" that are recovered in external grants and contracts for research, instruction, and outreach. We have made a significant effort in recent years to be even more vigilant in tracking down and accounting for our actual costs for the facilities portion of the F&A rate. To that end, we successfully negotiated a three-year F&A rate with the U.S. Office of Naval Research (ONR), our cognizant federal audit agency, that has enhanced our cost recovery.
A budget reduction of one-half of one percent for all units, as I just discussed, will generate more than $3.2 million. We will also recycle $433,000 from central reserves.
Slide 8 - Cost Savings Summary
If we add this year's totals to the savings from the previous two years, you can see a snapshot of our progress in cost savings and income enhancements. Over three years, we have saved more than $31 million, avoiding tuition increases of 5.5 percent. Although this is easy to summarize on a screen, I can assure you that it is the result of considerable work over the past three years.
Slide 9 - Internal Unit Reallocations
We're looking next at internal unit reallocations. Through this process, funds are shifted from lower to higher priorities based on the goals articulated in each unit's strategic plan. For 2005-06, we asked each college, campus, and support unit to identify at least one half of one percent of their operating budgets for internal reallocations, which amounted to more than $3.2 million. This will be the fourteenth consecutive year that we've directed units to reallocate funds internally.
Slide 10 - Savings, Cost Avoidance and Efficiency - Reverse Auctions
The next series of slides give some examples of initiatives resulting in savings and cost avoidance within individual departments. As I mentioned before, this category of savings isn't captured centrally, at least directly, but these savings do result in greater fiscal flexibility for departments. For example, the University's purchasing unit has realized annual savings of over $1.0 million from 14 reverse auctions over the past two years. In reverse auctions, the University posts the volumes of products that we want to purchase, and vendors electronically bid to provide the products at the lowest prices. For example, we saved $188,000 this year on purchases of audio-visual equipment and $70,000 on the purchase and installation of residence hall furniture.
Slide 11 - Savings, Cost Avoidance and Efficiency - Electronic Purchasing
Here is another example; it's a program that will be launched this fall. eBuy is a new technique for online purchasing by Penn State faculty and staff. It offers a streamlined approval process and higher preapproved spending limits than the Penn State Purchasing Card. We expect annual cost savings of approximately $1.4 million from improved contract pricing as well as salary savings from reduced staffing requirements.
Slide 12 - Savings, Cost Avoidance and Efficiency - Travel Costs
Another area we're looking at is travel management and reimbursement. We will pilot a new Electronic Reimbursement System this October. We expect savings from improved efficiency and processing, and by using new travel data to negotiate improved contracts with airlines and hotels.
In addition, we are promoting the additional use of videoconferencing and teleconferencing with the attendant opportunities to avoid travel expenses by using these technologies.
Slide 13 - Savings, Cost Avoidance and Efficiency - Computer Purchases
Penn State's Information Technology Services unit, in collaboration with the Purchasing Department, has perfected the practice of bundling orders from multiple units and using year-end purchasing as a special opportunity to negotiate the best possible deals from the vendor community. Bulk purchasing by coordinating orders has saved hundreds of thousands of dollars in each of the past several years, and more than $500,000 was saved this year alone on the purchase of certain high-end computing hardware, a reduction of approximately 50 percent from already discounted vendor pricing. Hardware and software companies appreciate the scale of Penn State's operations, and the demonstration effects of the national leadership position that Penn State occupies in the IT arena.
Slide 14 - Savings, Cost Avoidance and Efficiency - Other Projects in Progress
I'll mention three other projects that are in the works. The first is a Copier Management Program. We are currently moving forward to sign an exclusive arrangement with a major copy machine vendor, based on a cost-per-copy program using the latest equipment, rather than owning or leasing machines as our departments currently do. We expect cost savings of at least $1.25 million per year on a five-year, phase-in program as existing contracts come up for renewal.
We're also investigating the use of Master Maintenance Agreements for all types of University-owned equipment. A pilot program beginning in the Eberly College of Science will contract with Specialty Underwriters to guarantee cost reductions for equipment maintenance budgets. Savings result from using repair vendors on a "time and material" basis, rather than using annual service contracts. We see potential for cost savings of $350,000 per year to our units that are currently making use of annual service agreements.
We're also looking into a Print Management Program which would develop a print portal to competitively source all printing requirements, with estimated cost savings of $250,000 per year.
Slide 15 - Graduate Program Review
I mentioned in last year's report that the Graduate School and the Graduate Council, under the direction of Vice President and Dean Eva Pell, were conducting a three-year, comprehensive review of all graduate degree programs. I can now report that through this process, we have dropped 18 graduate degree programs and 47 graduate courses. Other program eliminations or mergers will occur in the future as "watch listed" programs are further evaluated. The resulting cost savings are mainly internal to the academic colleges and programs and are difficult to quantify, but we know that we are channeling our resources to more viable graduate programs.
Slide 16 - Cost Savings Summary
So we have completed a successful three-year run for the Cost Savings Task Force, and we will continue to look for new ways to save money and enhance non-tuition revenues. We will continue to pursue initiatives in energy conservation, e-procurement and electronic reverse auctions, administrative streamlining, and seeking ways to reduce costs in our health benefits programs. We will continue to update you each year on our activities as part of the annual budget report.
Slide 17 - Major Planning Initiatives
I'd like to turn briefly now to two major planning initiatives that the University completed during this past academic year. The first initiative is the reaccreditation review by the Middle States Commission on Higher Education and the second is the University's strategic planning process.
Slide 18 - Penn State's Planning Goals
First, let me emphasize that Penn State's planning process involves all our campuses and all academic and administrative units. It requires each unit to consider their challenges, future directions, strategies, and measures of performance.
In our planning activities, we continue to follow 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 finally
- Developing new sources of income and reducing costs.
Slide 19 - Focus on Enriching the Educational Experience
This past year, we chose to place particular emphasis on Goal 2 - enriching the educational experience of Penn State students - in both the Middle States reaccreditation review and in the strategic plans developed by each of our academic and administrative support units. By working through the reaccreditation process and by completing unit strategic plans on a similar track, we have focused extra attention on the importance of improving the educational environment for Penn State students and moving toward a more student-centered University.
Slide 20 - Middle States Outcome
This spring, the Middle States Commission on Higher Education completed its ten-year reaccreditation review of the University. This process involved our preparation of a comprehensive self-study document and visits by Middle States representatives to University Park and several other campuses. On June 22nd, Penn State was formally notified that the University has been re-accredited for another ten-year period. The outcome of the Middle States review was very positive. We received a glowing report and confirmation that we are fully in compliance with all eligibility requirements.
Slide 21 - Integrated University Assessment Plan
One of the benefits of completing our self-study for the Middle States Commission was the realization that Penn State does not yet have a systematic, integrated, University-level learning assessment plan. Several excellent examples of learning assessment practices at Penn State were cited by the Commission's external review team, and the findings will be used to improve programs and services in the future. We realizeBand the Middle States review team agreedBthat assessment activities are now widely dispersed and important connections among them could be strengthened.
To address this issue, the University will move forward with the development of a comprehensive strategic plan for assessment. This effort will be spearheaded by a Coordinating Committee, chaired by Vice President and Dean Jan Jacobs. Possible areas we are exploring for assessment include our first-year seminars; the effectiveness of out-of-class experiences, such as study abroad, service learning and internships; evaluation of student learning in General Education courses, and the impact of student support services.
The Middle States review team indicated that Penn State was farther along than most other universities in its assessment practices, and we believe that Penn State, through its forthcoming assessment strategic plan, has the potential to be recognized as a national leader in this increasingly important aspect of higher education.
Slide 22- Unit Strategic Plans
Last year at this time, I advised the Board that we had begun a new strategic planning cycle for the three-year period from 2005-06 through 2007-08. Strategic plans have now been submitted to my office by each of the University's 33 major budgetary units. Faculty, staff, and students have been involved in the planning process of each unit, creating greater consensus and awareness of Penn State's mission and goals. I am currently meeting with deans and other budget executives to provide feedback on their plans. My initial assessment of the planning documents indicates that we have excellent plans in place to guide our activities for the next three years and beyond. These plans dovetail nicely with the University's five overarching goals and they will feed into revisions of the composite University strategic plan.
Slide 23 - Common Themes from Unit Strategic Plans
As part of our review process, the Office of Planning and Institutional Assessment has analyzed all the strategic plans and looked for common themes. The plans recognized that we are in a very challenging environment for higher education, characterized by adverse demographics, relatively high tuition, rising costs, and growing competition from other colleges and universities.
How can Penn State thrive in this type of environment? We found several common themes in the strategic plans, including . . .
- an enthusiastic focus on student-centeredness and the undergraduate experience,
- enhancing student opportunities in international programs, internships, and undergraduate research,
- the importance of maintaining the University's momentum in building a faculty of even greater eminence in emerging academic fields with great societal impact,
Slide 24 - Common Themes from Unit Strategic Plans, continued
- the expanded use of technology in teaching and learning,
- providing enhanced undergraduate scholarships and graduate support,
- conducting regular program reviews,
- and a new awareness of the essential need for greater collaboration between University Park colleges and the other campuses
Slide 25 - Summary and Next Steps
In the current environment for higher education, activities related to cost savings, non-tuition revenue enhancements and strategic planning undoubtedly will be long-term issues for the University. Over the past three years, the efforts of the Cost Savings Task Force have helped to make Penn State even more efficient. We seek to maximize the value from the resources we have, while enhancing the quality of a Penn State education.
We will continue to use strategic planning to guide our progress, knowing that the University as a whole benefits from the self-evaluation, goal-setting, and assessment activities.
And, finally, we will pursue greater University-wide assessment in order to ensure that our programs and activities are having the greatest positive effect on student learning outcomes.
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