I've been asked to report to the Senate about two related topics - the University's operating budget, and implementation of the new five-year strategic plan.
Beginning with the financial report, you'll recall that we began the academic year last summer without an appropriation from the Commonwealth of Pennsylvania. After a delay of 5 ½ months, Governor Rendell signed Penn State's appropriation bill on December 17th.
Slide 2 - Budget Summary
The downturn in Pennsylvania's economy has touched all of Penn State's campuses and become a serious concern for students, their parents, employees, the University administration, and our Board of Trustees. As a result, this year's operating budget was developed in a very conservative manner . Last July, we presented the Board of Trustees with two very different budget scenarios. The first used the estimated state appropriation and federal stimulus funds proposed by the Governor last February. The second scenario was based on a dramatically reduced appropriation that would have necessitated substantially increased tuition and even deeper cuts in the University's operating budget .
Slide 3 - Budget Plan
In late July, the University proceeded with the lower tuition increases based upon a scenario of a flat, no increase appropriation consistent with the Governor's initial budget proposal. We took this action, in part, because of the ruling from the U.S. Department of Education that Pennsylvania must include the state-related universities as public institutions in its federal stimulus funding application.
Our operating budget for 2009-10: (1) keeps tuition at the lowest possible level without sacrificing quality, (2) freezes salaries at current levels, (3) provides funding for increases in health care, fuel and utilities, maintenance, and very limited funds for strategic initiatives, and (4) includes significant internal budget reductions.
Slide 4 - 2009-10 State Appropriation
The total state funding appropriated for 2009-10 was $333.9 million. This figure includes $318.1 million from state funds and $15.8 million of federal stimulus funds.
The University will also receive nearly $17 million in one-time stimulus funding for 2008-09 to mitigate the effects of last year's rescission.
In combination, the funds appropriated this year total $350.8 million.
Slide 5 - Hershey Medical Center: Medical Assistance Funds
State and Federal Medical Assistance funds estimated at $13.5 million, representing a 6 percent (or $864,000) reduction, are being directed to the Medical Center through the Pennsylvania Department of Public Welfare. Federal stimulus funding was not provided to offset this reduction.
Slide 6 - Summary of State Appropriations
This chart shows the University's appropriation history since 2001-02, including our initial appropriations and, in three cases, mid-year rescissions. The light blue portions at the top of the bars represent the funds flowing to the Medical Center through the Department of Public Welfare since 2005-06. The appropriation amount for 2009-10 also includes federal stimulus funds, shown as the top purple section of the bar.
Over the last nine years, Penn State's base appropriation has increased by an average of less than one half of one percent per year, shifting more of the cost of education to students and their families.
Slide 7 - Changes - Total Budget
We see some growth in the total budget this year because of increases in tuition revenue and revenue from self-supporting units. We have budgeted for a General Funds increase of $52.3 million. Restricted Funds will grow by $26.2 million and Auxiliary Enterprises by nearly $15 million. The total increase is $93.4 million.
Changes of nearly $53 million are budgeted for the Hershey Medical Center.
Slide 8 - 2009-10 Total Budget
Penn State's total operating budget last academic year was just over $3.6 billion. With the changes shown on the previous slide, the total operating budget for 2009-10 is $3.76 billion.
Slide 9 - General Funds Budget
Penn State's General Funds budget is made up of five key areas: Educational and General (or E&G), Agricultural Research, Cooperative Extension, the College of Medicine, and Penn College. We're going to look now at some of the changes in the General Funds budget this year.
Slide 10 - Salary Increase Plan
Salary adjustments typically account for the largest component of the changes in the Educational and General budget because salaries, wages, and benefits account for approximately 75 percent of this core budget category. However, salaries for faculty and staff this year were frozen at current levels. Funds were included in the budget plan to meet an increase for technical service employees whom, I should add, ratified a one-year extension of their contract which includes a deferral of their scheduled wage increase to February 2010. Funds are also provided in the budget for promotions and some pre-existing commitments.
In total, the 2009-10 General Funds budget includes an increase of $2.9 million for salary adjustments and related benefits.
Slide 11 - Employee Share of Benefits and Parking
In light of the salary freeze this year, the budget includes $3.9 million to cover the increase in employee contributions to health care premiums that would otherwise have been implemented in January 2010. This amount also includes funds budgeted to offset the increases in the parking fees that had been planned for July 1, 2009.
Slide 12 - Benefits Cost Increases
Rising health care costs continue to create challenges. The University projected an increase of 12 percent, or $16.6 million, in health care costs for 2009-10. I should remind everyone that the University is self-insured-in other words, we pay the full costs for medical services and plan administration.
We have included an additional $4.1 million in the budget in anticipation of a future increase in the employer contribution rate for the State Employees' Retirement System. Together health care and retirement cost increases total nearly $20.7 million.
As you know, Penn State provides a generous retiree health benefit to its faculty and staff. Without changes to this defined benefit retiree healthcare plan, the actuarial estimate of the liability increases by a cumulative $3 billion over the next 30 years. For this reason the University's new Strategic Plan recommended the implementation of a defined contribution retiree health insurance plan for new employees. Full-time employees hired on or after January 1, 2010, will be enrolled in the new Retirement Healthcare Savings Plan.
Slide 13 - Facilities and Maintenance
Turning to facilities costs, $778,000 has been budgeted for the maintenance and operation of new or newly remodeled facilities at University Park, Altoona, Erie, and the Lehigh Valley campuses.
Significant increases for energy costs will continue, so $5.8 million has been budgeted for projected increases in fuel and utilities costs at campuses included in the E&G budget.
A total of $2.7 million is included to help address the need for modern laboratory and classroom space through the capital improvements program.
Penn State's physical plant is aging, and deferred maintenance continues to be a critical challenge. During this decade, more square footage will reach the 35-year threshold, where major maintenance is required, than at any time in the University's history. At this point, the University has permanently budgeted $24.5 million for deferred maintenance. For 2009-10, additional support of $2 million is included for deferred maintenance.
This brings the amount budgeted for Facilities and Maintenance to $11.3 million.
Slide 14 - Program Adjustments
$3 million is included in the budget for a small number of initiatives that are of strategic importance to the University.
$1.2 million is earmarked for libraries and information technology. These funds derive from an $8 per semester increase in the student information technology fee. These funds will help us keep pace with rapidly expanding and changing student IT and information resource needs.
A total of $4.2 million is included for other program commitments, including high priority academic needs, instructional workload adjustments, and other support services, such as information technology services, environmental health and safety, research protections, and the university-wide parking and transportation program.
$1 million of additional permanent funding is included for need-based student aid, which will be used to leverage private donations for student support.
In keeping with our conservative approach to budgeting, the University plans to preserve as much flexibility as possible in light of the current economic volatility. Funds in the amount of $11.1 million have been included in this budget plan to position the University against future financial pressures.
Slide 15 - Internal Budget Reductions
Internal expense reductions in this year's budget total $17.8 million. This includes $15 million through a 2.0 percent across-the-board reduction in operating funds from academic and administrative units, as well as administrative cost savings of $2.8 million. This is the eighteenth consecutive year that the University has made internal budget reductions and reallocations.
An increase of $3.5 million in non-tuition income is also projected. Added together, internal budget reductions and non-tuition income enhancements total $21.3 million. This is equivalent to 2.3 percent in avoided tuition increases this year.
Slide 16 - Tuition Increases
Knowing that the current economic downturn has put added pressure on students and families, every effort has been made to keep tuition as low as possible. The tuition increase for lower division students at University Park was 4.5 percent for residents and 3.7 percent for non-residents. Both resident and non-resident students at the Commonwealth Campuses saw a tuition increase of 3.9 percent.
Slide 17 - Student Fees
An $8 increase in the information technology fee will generate additional income of $1.2 million to support student IT needs.
An additional $179,000 will result from a $2 per semester increase in the Student Activities Fee at University Park. There will be no increase in the Student Activities Fee at other campuses.
An increase of $50 per semester in the Student Facilities Fee at the University Park Campus will yield an additional $4.4 million. Increases ranging from $25 to $75 per semester are also included for students at the Altoona, Hazleton, Lehigh Valley, and New Kensington campuses.
Slide 18 - Other Income
Over the past several years, the University has made a significant effort to better account for costs in support of sponsored research activities. As a result, additional income of $3.5 million will be gained from increased facilities and administration costs recovery.
Slide 19 - Agricultural Research
Regarding Agricultural Research and Cooperative Extension, these budgets provide support for salaries, benefits and operating costs for each program. These units receive no tuition dollars, and depend entirely on some combination of federal, state, and county support.
On the income side, appropriation support and federal stimulus funds for Agricultural Research were cut by $342,000. Expense changes include $507,000 for salary adjustments and benefit increases, and $109,000 to cover the employee share of health care cost increases. This results in a $958,000 reduction in program funds.
Slide 20 - Cooperative Extension
In the case of Cooperative Extension, the appropriation support and federal stimulus funds have been cut by $405,000. Expense changes include $592,000 for salary adjustments and benefits increases, and $137,000 to cover health care cost increases. This results in a reduction of more than $1.1 million in program funds.
Slide 21 - Summary of Changes - General Funds Budget
To summarize the General Funds changes for Penn State's 2009-10 budget: our E&G budget has increased by $50.7 million; Agricultural Research and Cooperative Extension funding has been cut by $747,000; the Medical Center increased by $4.7 million and Penn College decreased by $2.3 million. Thus, the total increase in the General Funds budget is $52.3 million.
Slide 22 - 2010-11 State Appropriation Request
I'll now share a few comments about the University's appropriation request to the Commonwealth for 2010-11. Normally, we would have submitted our request last September for the coming year; however, that would have been difficult not knowing what our current budget would be. That request was approved by the Board of Trustees on December 18th and forwarded to state government.
Slide 23 - Appropriation Request Summary
We realize that the Commonwealth and national economies continue to struggle. Accordingly, we have requested the smallest percentage increase to our appropriation since 1964.
We have asked the Commonwealth to increase our appropriation, through a combination of state funds and federal stimulus monies, by $13.5 million or 3.9 percent. The vast majority of the additional funds would be used to moderate significant increases in health care costs and the employer contribution to the State Employees' Retirement System. $2.1 million would be used to offset further damaging reductions to Extension and Agricultural Research.
Slide 24 - Budget Plan Summary
Penn State's budget plan for next year includes substantial internal cuts and budgetary reallocations. This year, our faculty and staff sacrificed pay increases, but we believe we must plan for a competitive salary increase in the coming year. Colleges, campuses, and administrative units cut their operating budgets by at least 2.0 percent, and other targeted cost savings were implemented this year, but we believe we must engage in additional vertical, selective cost cutting in the coming year. Despite our aggressive actions, health care costs will continue to rise, and we are aware that employer contributions to SERS are projected to rise at an extraordinary rate. The increases in utility costs also show no signs of abating.
If we are successful in further controlling our costs, continuing a robust enrollment base, and securing the requested appropriation, Penn State will be able to keep tuition increases at moderate levels for University Park, and especially at the Commonwealth Campuses.
But I want to be very clear today that the longer-term financial challenges for the University are indeed great. As I noted earlier, a significant amount of the University's state appropriation is provided by federal stimulus funding, and those funds will not continue beyond next year unless Congress acts to provide additional assistance, which seems increasingly unlikely. As we look beyond next year, it is impossible to know what figure will be regarded in Harrisburg as the University's base appropriation for 2011-12. It will also be impossible to know the financial health of the national and Pennsylvania economies, the pressures of mandated spending that may crowd out higher education in the budget, or the spending priorities of a new governor and General Assembly.
Slide 25 - Implementation of 2009-10 through 2013-14 Strategic Plan
The "Grand Challenge" for Penn State and for our peers in higher education then is to devise ways to enhance student success and advance the frontiers of knowledge while significantly reducing the rate of increase in the costs of delivering that education. That question leads us directly to the University's new 5-year strategic plan that was adopted last May by the Board of Trustees and is currently in its first year implementation.
Slide 26 - Recap of Strategic Planning Goals
You will recall from my presentation to the Senate last year that there are seven major goals represented in the Strategic Plan. These goals are: 1) to enhance student success; 2) to advance academic excellence and research prominence; 3) to realize Penn State's potential as a global university; 4) to maintain access and affordability and enhance diversity; 5) to serve the people of the Commonwealth and beyond; 6) to use technology to expand access and opportunities; and 7) to control costs and generate additional efficiencies.
Slide 27 - Strategies for Goal 7
There are 38 total strategies and corresponding actions supporting the seven overarching goals. I've shown the respective strategies for Goal 7 on this slide. All of the 38 strategies are directed toward creating a more productive enterprise and sustainable environments, while focusing on our core educational and research missions.
Slide 28 - Strategy Implementation Matrix
One difference in this five-year strategic plan from previous plans is that key administrators or groups have been assigned primary or secondary responsibility for the implementation of each strategy. The Faculty Senate has a consultative and/or implementation role for one or more strategies in each of the seven goals. A Strategy Implementation Matrix lists the leadership responsibilities associated with the strategies. The Matrix also identifies the projected start date for various strategies ranging from Year 1 to Year 3, selected measures to assess performance, and a general indication of the fiscal impacts of each strategy. The complete plan, including the implementation matrices, is available online
Slide 29 - Plan and Implementation Matrices Website
Some strategies will result in cost savings. Some will make resources available for other uses. Other strategies are cost neutral. And some strategies will require new sources of funding as the economy improves and as we make resources available through our other funding choices. Some of the timelines for new strategic initiatives will undoubtedly need to be adjusted because of budget limitations, but we will still follow the priorities that correspond to Penn State's vision, mission, and goals.
Slide 30 - Year 1 Strategy Implementation
Progress is already being made on Year 1 implementation. We have, for example, reduced future health care costs by implementing changes to benefits into retirement; we have retained the services of a highly respected consultant on higher education IT systems to advise on the appropriate balance between central and dispersed services; we have capped central allocations to Outreach; we are working on ways to expand the enrollment in the World Campus; we are building on the Framework to Foster Diversity, we are implementing a new strategy to build stronger research and educational linkages with partner universities in key global regions; and discussions are currently taking place around the need to improve instructional productivity by reducing the number of under-enrolled course sections and establishing transparent college and campus instructional workload policies. And there are many more examples I could cite regarding Year 1 implementation.
Slide 31 - Goal 2: Advance Academic Excellence and Research Prominence
Goal 2 of the Strategic Plan is to "Advance Academic Excellence and Research Prominence." There is one particular strategy for Goal 2 in which faculty will take a strong interest, and the Faculty Senate must play a key role, and that is Strategy 2.4, "Consolidate Academic and Administrative Programs through Targeted Reviews." After 18 years of internal budget reductions and reallocations, Penn State is a comparatively efficient University. Much of the "low-hanging" cost-savings have been achieved. But we will have to do even better in the future. We must think deliberately about the need to shrink, consolidate, or eliminate some programs or activities, in order to be able to invest in areas of existing strength or in promising new ideas. With more than 575 degree programs and well more than 100 research centers and institutes, it is increasingly difficult to argue that Penn State, or any other university for that matter, can continue to support this plethora of offerings at levels of quality, cost of delivery, and demand that is sustainable.
Slide 32 - Academic Program and Administrative Services Review Core Council
In order to implement this strategy, I am chairing a new group appointed by President Spanier last October, the Academic Program and Administrative Review Core Council, the membership of which is shown on this slide. The Council will select some academic programs and administrative services for formal review, initially based on performance criteria and data assembled by the Office of Planning and Institutional Assessment and other sources. The Core Council has been meeting over the past three months and reviewing some of these data, with many more sessions to come. I anticipate that the work of the Core Council will continue over at least the next 18 months.
Slide 33 - The Review Coordinating Committees
The Core Council will work closely with three coordinating committees that will tackle the nitty gritty of the targeted assessments in the realm of their charge, and whose assessments will feed into the overall recommendations of the Core Council. Each of these Coordinating Committees is chaired by a member of the Core Council and includes at least three members of the Core Council. The idea here is to promote considerable cross-talk among the Core Council and the Coordinating Committees.
The membership of the Coordinating Committees has been selected to include a broad cross section of administrators and faculty, including several current and former members of the Senate.
The Academic and Administrative Services Review Coordinating Committee has the huge task of assessing a wide range of support services provided by the University. This committee has been instructed to engage a number of subcommittees as may be needed to delve deeper into the provision of various services with the goal of improving quality, eliminating redundancies, and reducing costs. Overall, the Core Council has a target of identifying $10 million in permanent cost savings or non-tuition revenue enhancements over each of the next several years.
Slide 34 - Blooming Tree
There are a number of important elements to consider as the Core Council and Coordinating Committees undertake their work. The strategic plan itself, Priorities for Excellence, provides the framework of strategies and actions to achieve the relevant goals. The only way the University will have the resources to make future investments is to free existing resources through selectively reprogramming how we deploy those resources. The scope of the effort will be University-wide, and recommendations emerging from the Council will be data-informed and deliberate. The Council and the Coordinating Committees will focus on programmatic and process-based cost savings rather than across-the-board cuts. Both permanent, long-term budgetary savings and short-term cuts will be considered, as well as the impact that cost savings in one unit of the University may have upon other units. The goal is overall cost savings, not cost-shifting.
The performance criteria and the process for review of programs and services will be broadly communicated. Reviews of findings will be shared with affected programs or units, and additional perspectives may be sought before final recommendations are made. Recommendations for action will follow shared governance practices, including Faculty Senate and Board of Trustees review and approval as required.
Regular progress reports related to implementation of the strategic plan will be provided to the Board of Trustees, Faculty Senate, and other key stakeholders. I have indicated to the Senate Officers that I am most willing to provide periodic reports to Senate Council or the Senate as requested. The endgame here is to focus on strengthening the University, while building a stable and sustainable financial base for the future.
And now, I'd be happy to take your questions as time remains.
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Web page last modified September 30, 2011