2005-2006 Operating Budget and Budget Planning for 2006-2007
Report by Rodney A. Erickson to the University Faculty Senate
October 25, 2005
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Slide 1 - Title Slide
My report today will highlight Penn State's current operating budget and summarize next year's appropriation request to the Commonwealth. We received a very modest appropriation increase this year, and we have been able to meet escalating costs in a number of areas while still keeping the tuition increase to its lowest level in several years.
Slide 2 - Budget Priorities
Here are the budget priorities for the 2005-06 fiscal year. The cost of the University's benefits program has increased significantly over the last several years, with health insurance making up the largest portion of the increase.
Maintaining and improving facilities and providing competitive salaries to faculty and staff are other high priorities in the budget. We are also making some selected strategic investments in academic programs, and we continue our cost savings initiatives, which will produce nearly $11 million in cost savings and non-tuition income enhancements in the current budget year.
Slide 3 - Summary of House Bill 824
This year’s appropriation provided an increase of 2.5 percent to our Educational and General budget line; an increase of 3 percent for Penn College; no increase over last year for Agricultural Research or for Cooperative Extension, and removal of the College of Medicine budget lines from the appropriation, which I’ll explain further in just a minute.
The total appropriation is $312 million.
Slide 4 - College of Medicine Funding
Funding for the College of Medicine and the Hershey Medical Center has been the most difficult aspect of this year’s appropriation. This year’s state budget eliminated more than $11 million in funding for medical education, the Central Pennsylvania Psychiatric Institute and the Children’s Hospital. It proposed to replace those funds with payments directly from the Department of Public Welfare, consisting of a combination of Commonwealth appropriations to the DPW as well as Federal Medical Assistance funding. It remains unclear if this funding method is permissible. If it is, we could see an increase in funding over last year of $2.2 million.
Our research on the matter suggests that this funding method may not be permissible. If this proves to be the case and the funds are not forthcoming, the state budget would provide Penn State with funding for medical education and services at last year’s level—a zero percent increase.
Slide 5 - Summary of Appropriations 2000-01 through 2004-05
As this slide shows, there had been a steady decline in state funding going into last year’s budget. Even with the increase of last fiscal year, we received $17.6 million less than the initial budget of 2001-2002.
Slide 6 - Summary of State Appropriations (H.B. 824) 2000-01 through 2005-06
With the elimination of the state’s appropriation for Medicine, Commonwealth funding for this year would actually drop by $5.2 million, or a little over 1.6 percent.
Slide 7 - Potential Funding Including Federal Medical Assistance Funds 2000-01 through
However, if the Medicaid funding materializes, we will see a combined total of $323.6 million from Penn State’s appropriation and the Department of Public Welfare funds, an increase of approximately 2 percent in the current academic year budget.
Slide 8 - 2005-06 Total Budget - Income
But the state appropriation is just one piece of Penn State's budget. The total budget for this fiscal year is $3.04 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 makes up 33 percent and the state appropriation makes up 10.6 percent of the University’s total budget.
Slide 9 - 2005-06 General Funds Budget - Income
The remainder of my report will focus on the general funds budget which supports the University’s basic academic and administrative activities and maintenance of the physical plant. It has three primary sources of income: the state appropriation, tuition and fees, and non-tuition income enhancements, which include such areas as indirect cost recovery on research grants and contracts, and income on investments.
In this chart, you can see that tuition and fees now represent about 70 percent of income, with the state appropriation at a record low of 22.8 percent. The total amount for general funds, excluding Hershey, Dickinson and Penn College, is $1.28 billion.
Slide 10 - Appropriation vs. Tuition and Fees as a Percent of the General Funds Budget
We have often referred to this slide as the “X” graph. It shows the steady erosion of state funding as a percentage of our general funds budget and the corresponding increase in tuition as a percentage. The gap between the two continues to widen and the increasing financial burden on students and their families is of great concern.
Slide 11 - General Funds Budget
The general funds budget is comprised of our Education and General activities, Agricultural Research, Cooperative Extension, the College of Medicine, and the Pennsylvania College of Technology. I’ll give you more detail about these areas in the next set of slides.
Slide 12 - Benefits and Other Insurances
As I said at the beginning of my presentation, the significant increases in costs associated with benefits continues to be an enormous budgeting challenge for the University. At the Senate meeting last month, Darrell Kirch discussed some of the forces that are contributing to escalating healthcare costs in the U.S., such as aging of the “baby boomers,” medical advances and the increase in chronic disease conditions, and issues of healthcare safety and quality.
For Penn State, this has meant double digit annual increases in benefit costs in recent years. This year, the University’s share of increases in health care benefits for employees is more than $14 million. The increase for health benefits for Graduate Assistants is $1.1 million. For the second year in a row, the increased cost for health benefits is larger than the cost of the base salary increase. Without major changes in the health care system nationally and in the University’s approach, we will, as Dr. Kirch noted, come to a point where health care costs absorb most of our financial resources available for salary increases.
Retirement contributions, social security and grants-in-aid will increase by $4 million; when coupled with health care benefits, the result is an increase in total benefit costs of nearly $20 million.
We will also experience an increase in property and liability insurance expenses in the amount of $1.4 million.
Slide 13 - Facilities and Maintenance
Turning now to facilities cost increases, we have budgeted for several new buildings coming on-line this year, including the School of Architecture and Landscape Architecture building and the Smeal College of Business building at University Park, the Research and Economic Development building at Erie, and the library classroom building at York.
Maintenance and operation of our new facilities, along with our capital improvement program and deferred maintenance, requires a budget increase of more than $12 million.
Slide 14 - 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 five-year plan—now concluded—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, and our goal now is to retain our current standings.
Slide 15 - Average Faculty Salaries - Big Ten Salary Comparison
As you can see in this slide, between 1995-96 and 2000-2001 Penn State slipped from second to fifth among the Big Ten public university main campuses at the professor level. We went from second to sixth at the associate level, and moved from eighth to seventh at the assistant professor level.
Slide 16 - Average Faculty Salaries - Big Ten Comparison Progress
Penn State has made significant progress in restoring faculty salaries to a more competitive level. At the professor and associate professor levels, we've made steady progress and have returned to the second place position. At the assistant professor level, we are ranked third which is considerably ahead of where we started.
We also monitor our salary rankings against the universities in the AAU, which is the association of leading research universities in America. We have seen similar improvements in rankings with this group. However, we also compete for faculty with the top private research universities, and the salary gap between public and private universities has grown substantially over the past decade.
Slide 17 - 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 size of the overall salary increase pool was approximately 3.25 percent.
The budget includes $23.8 million to cover all salary increases and the related benefit costs.
Slide 18 - Program Adjustments
The budget also includes increases for program adjustments at University Park and the campuses. Funding in the amount of nearly $6.3 million is included for strategic investments, such as reducing the student/faculty ratio and converting some fixed-term faculty appointments to standing appointments. Additional support will be provided for K-12 educational partnerships and for programs in the arts, humanities and social sciences. Enhancement funds will also be provided for World Campus and resident instruction blended learning opportunities, fundraising infrastructure, student services, and student recreation programs.
Almost $3.2 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 19 - Cost Savings Task Force
For the past three years, Gary Schultz and I have been co-chairing a University Cost Savings Task Force. This year, the task force identified almost $11 million in savings and non-tuition income enhancements, which amounts to a tuition savings of $180 per year for each full-time student. Savings resulted, for example, from health care savings initiatives, administrative streamlining, and reductions in central Outreach budgets. Part of the savings resulted from budget recycling from all academic and administrative units and central reserves. We will see increasing income from the Facilities and Administrative costs—commonly called indirect costs—that are recovered through external grants and contracts. This increase is primarily a result of a more thorough cost accounting of those funds expended in support of research across the University over the past several years.
Slide 20 - Cost Savings Task Force 2003-04 through 2005-06
When combined with the recommendations from the last two years, the University will have accrued $31 million in savings and non-tuition income enhancements. This is the equivalent of $530 per student per year, or 5.5 percent in tuition increases that have been avoided. Cost-cutting strategies will continue to be a priority going forward, always with the caveat that the quality of a Penn State degree must be protected.
Slide 21 - Basic Tuition Rate Increases - 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.
For Pennsylvania residents, the tuition increase for lower-division students is $308 per semester at University Park, $283 per semester at Altoona, Berks, Erie, and Harrisburg, and $271 per semester at other Penn State campus locations. Graduate student increases are $335 at University Park and at Altoona, Berks, Erie, and Harrisburg, and $332 at the other campus locations.
This translates into a 5.9 percent increase in the benchmark tuition for lower division Pennsylvania resident students at University Park.
Slide 22 - Basic Tuition Rate Increases - Out of State
For non-Pennsylvania undergraduate students, the basic tuition increase is $462 per semester at University Park, which represents a 4.5 percent increase, $425 per semester at Altoona and Berks, and $407 per semester at other campus locations. For non-resident students at Erie and Harrisburg, tuition increased by $40 per semester to complete the multi-year plan to equalize these rates with tuition at the Altoona and Berks campuses.
Slide 23 - Agricultural Research & Cooperative Extension
I mentioned earlier that the appropriation from the Commonwealth included no increase for either Agricultural Research or Cooperative Extension despite increased costs. Since the loss of state funding cannot be offset by a tuition increase in the Agricultural lines, we have transferred slightly more than $1 million from the E&G line to these line items. These funds will cover salary and benefit increases, but to balance the budget, it will be necessary to reduce personnel and program offerings in agricultural research and cooperative extension by more than $1 million.
Slide 24 - College of Medicine
This slide shows the income changes for the College of Medicine, which totaled $5.25 million. As I described earlier, cuts in the state appropriation to the College of Medicine are offset by the proposed increase in federal medical assistance funds.
Slide 25 - Summary of Changes to General Funds Budget
On this slide, you can see the changes in the Educational and General line, agricultural research and cooperative extension, and the College of Medicine, as I just outlined. Penn College also has an increase of $7.2 million. We believe that these changes are essential to maintain the quality of a Penn State education and to fulfill Penn State's mission to serve the Commonwealth.
Slide 26 – Impact of Enrollment on the Budget
A budget, of course, is a general blueprint for what we believe will be the revenue generated across the University and how those resources will be allocated among the major expenditure categories. The current year’s budget that I’ve just shared with you was approved last July by the Board of Trustees, and reflects our best estimates of revenue–several months ago–that would accrue to the University from all sources including tuition, which now makes up roughly 70 percent of our General Funds revenue.
As most of you are by now aware, enrollments at most of the campuses, including University Park, are below last year’s headcount. This change is due to several factors. At University Park, graduate enrollments have declined in the aftermath of 9/11, particularly among international students.
Despite enrolling the largest freshman class in the history of the University Park Campus, baccalaureate enrollments are also below last year’s levels. One of the main reasons is a good one, namely that students are now completing their degrees in a shorter period of time. For University Park’s freshman class that arrived in Fall 1997, 48.1 percent completed their baccalaureate degree within four years; for the Fall 2000 freshman class, 56.1 percent completed the degree within four years. This trend is mirrored at many of our peer institutions, and generally reflects the streamlining of degree programs, better advising, more careful attention to class selection by our students, and student interest in avoiding another semester of tuition. In addition, the number of change of assignment students from the Commonwealth Campuses has continued to decline slightly each year. The overall result of these factors is that we will have to refill the student pipeline more rapidly than we have done in previous years–at all of our baccalaureate-granting campuses.
At the Commonwealth Campuses, students are also completing at a slightly faster rate. In addition, most campuses have taken in a smaller number of freshmen in recent years. This is due in part to stepped up competition from other regional institutions. These reductions in the freshman class were offset in the earlier years following the 1997 campus reorganization by an increased number of upper-division students who stayed at the Commonwealth Campuses to earn their baccalaureate degrees. The combination of these factors has resulted in a net reduction of approximately 1,100 students in headcount at the campuses from last year.
We are now in the process of assessing what the impact of these enrollment reductions will mean in terms of the associated tuition revenues, and the impacts on current and future year spending. It is safe to say, however, that there will be budget reductions at all campuses except Dickinson, Hershey, and Penn College. The University Park campus will, of course, absorb a significant share of the cut. In the longer run, those campuses that can refill their student pipelines will resume the growth in their permanent budgets, while others than cannot sustain their enrollments must reduce their expenditures accordingly.
I believe it is imperative that all of our faculty and staff understand that for this academic year and surely those to follow, money will be tighter than it has been for the past several years, and that using our resources in a most conservative manner will be essential to maintaining our positive momentum. It also highlights the fact that student recruitment and retention are everyone’s business on every campus of the University.
Slide 27 - 2006- 07 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 2006-07.
Slide 28 - 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, maintenance and operating costs 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 29 - Campus Tuition Freeze Proposal
We have taken a new approach to our appropriation request with a plan that strengthens educational opportunity and economic growth for Pennsylvania. The centerpiece of the proposal is a tuition freeze at the twenty undergraduate campus locations outside of University Park. These campuses, which include Penn College, are major contributors to workforce development in every region of the state.
There are approximately 38,000 students enrolled at these undergraduate campuses. Over 10,000 of them are adult students, and 7,500 are enrolled in associate degree programs. Access to higher education for these students is a critical priority for the Commonwealth and for Penn State as the land-grant university for Pennsylvania.
Slide 30 - Campus Tuition Freeze Proposal (#2)
The budget cuts that we have experienced over the past few years and the increases in tuition that these cuts have forced, are putting a great deal of pressure on many families, and the affordability of our programs is a serious concern.
To improve this situation, we are asking the Commonwealth to join in partnership with Penn State and provide a ten percent increase in our E&G appropriation, plus increased funding for Penn College, so that we can implement a tuition freeze at all our undergraduate campuses outside of University Park. This will help us to keep tuition more affordable for families and to maintain access to Penn State.
Slide 31 - Tuition and Fees
With a ten percent increase in E&G funding from the state, plus the funds requested for Penn College, we would be able to freeze our 2006-07 tuition at current levels at these twenty undergraduate campus locations. We would hold the tuition increase for in-state students at University Park to 5.9 percent. We plan an increase of $12 per semester for the information technology fee.
Slide 32 - 2006-07 Appropriation Request Summary
In summary, we are asking the Commonwealth for an increase of $24.7 million, or 10 percent on our Educational and General line item, and an increase of $3.6 million for Penn College. We are also requesting $2.5 million for increases in other line items, including Agricultural Research, Cooperative Extension, and Medical Education. The total increase for all line items would be 9.5 percent or approximately $30.8 million.
We believe that Penn State’s unique approach to the Commonwealth is timely and essential in holding tuition rates to the lowest levels possible. And now I would be happy to answer any questions, if time remains.
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