Rodney A. Erickson Remarks
Presentation to the University Faculty Senate, August 30, 2011
Slide 1 – Title Slide
I’m pleased to be here earlier in the academic year to discuss the University’s 2011-12 operating budget as well as our progress implementing the University’s strategic plan.
If you were following the state budget negotiations this spring and early summer, you know that there were some tense moments, but we’ve been able to construct a budget that is balanced, despite the largest decrease to our state appropriation in Penn State’s history, and have done so with a modest tuition increase.
Slide 2 – 2011-12 Budget Priorities
The financial environment for higher education continues to pose complex challenges following the economic turmoil of 2008. Both the federal government and most state governments are dealing with major structural deficits, the end of the federal stimulus funding, and confronting painful choices. Pennsylvania is no different.
Within this unsettled fiscal environment, we were guided by several priorities in assembling this year’s budget. To address the unprecedented cut of $68 million in Commonwealth funding, we have significantly reduced our expenses, with both across-the-board budget reductions in every unit, as well as targeted cuts through the Core Council review process, which I’ll discuss in a few minutes.
Slide 3 – 2011-12 Total Institutional Budget: Income
This pie chart presents the sources of Penn State’s operating revenues for 2011-12. The University’s capital budget is a separate budget; in this presentation I’ll be speaking mostly about the operating budget. Eighty percent of our total University revenue is generated by three primary activities—instruction, research, and patient care. The largest source remains student tuition and fees, producing over one-third of the University’s total revenue. Hospital and clinical revenues generated through the Hershey Medical Center account for 28.7 percent. Restricted Funds, primarily from sponsored research grants and contracts, account for 16.5 percent.
Slide 4 – Changes: Total Institutional Budget
For the fiscal year that began on July 1st, the total Penn State operating budget is $4.1 billion. Changes from last year’s budget are summarized here. The year-over-year operating budget increase of 2.7 percent is the smallest we have experienced in nearly two decades.
Slide 5 – General Funds Budget Components
On the expense side, Penn State’s General Funds Budget is made up of five key areas: the Educational and General; Agricultural Research; Cooperative Extension; the College of Medicine; and the Pennsylvania College of Technology.
Slide 6 – 2011-12 General Funds Budget Revenue Sources
The General Funds budget is supported by three sources of revenue—student tuition and fees which make up 78 percent, the Commonwealth of Pennsylvania appropriation which is just over 14 percent, and other much smaller sources that contribute the remaining 7 percent.
Slide 7 – 2011-12 State Appropriation
The 2011-12 Commonwealth appropriation to Penn State is $279 million, which represents a 19.6 percent cut in funding from last year. The individual line items included a 19.6 percent decrease for the Educational and General appropriation, which supports the cost of attendance for in-state students; a 19.6 percent decrease in the appropriation for Cooperative Extension and Agricultural Research; a 5 percent decrease for Penn College; and a 50 percent decrease in medical assistance funding for the Hershey Medical Center.
The net result is an appropriation amount that takes the University back to its 1995 level, a time when we were serving about 19,000 fewer students. Adjusted for inflation, the appropriation now has approximately half of its purchasing power from the mid-1990’s.
Slide 8 – E&G Expense ChangesSignificant focus was placed on cost-cutting in an effort to moderate tuition impacts on students and their families. One of the first measures was to suspend the General Salary Increase program, as we had to do just two years ago.
Health care costs have been the subject of significant cost-containment effort at Penn State for the past several years. We implemented a defined-contribution health care plan for new employees in January 2010 and made some adjustments to the health care plan for active employees this year, including a significant emphasis on wellness. These actions allowed us to significantly moderate the expected increases in the cost of providing health care benefits. We will continue to work hard to provide a competitive health care benefit within a responsible fiscal framework.
We’ve also scaled back our investments in capital projects. And, through both across-the-board and targeted expense reductions, we will achieve savings of approximately $30 million in comparison to last year’s expenses.
Following the release of the Governor’s proposed budget cuts in March, most of our colleges, campuses, and central administrative support units were bracing for as much as 5.0 percent central recycling on Educational and General budgets, but we were able to hold recycling to 2.0 percent this year because of the additional vertical cutting we did.
Slide 9 – Percentage Increases in Lower Division Undergraduate Tuition
Looking more closely at tuition rates, two-thirds of our undergraduate students are experiencing an increase of between 2.9 and 3.5 percent. The low 2.9 percent increase for students attending our Commonwealth Campuses will greatly benefit in-state students. Out-of-state students are seeing an increase of 2.9 percent or 3.5 percent, depending upon the campus they attend. In-state students at University Park are seeing a 4.9 percent increase. Our overall increase of 3.8 percent is one of the lowest percentage increases in the nation this year.
Slide 10– Agricultural Research and Cooperative Extension
This year’s budget, as I noted above, included a cut of 19.6 percent, or a total of $10.5 million, in appropriation support for Agricultural Research and Cooperative Extension. This includes a decrease of $4.8 million for Agricultural Research and a decrease of $5.7 million for Cooperative Extension.
Slide 11 – College of Ag Sciences Action Plan
Both Agricultural Research and Cooperative Extension are critical areas of the General Funds budget that are not supported by tuition revenue. With such a dramatic cut in state funding, balancing these budgets requires the College of Agricultural Sciences to identify significant expense reductions to bring their finances into balance.
We have been working with Dean McPheron and his team to assemble a plan that provides some cushion to the expense reductions that must occur. Anticipating less State funding last winter, the College leadership worked with the Office of Human Resources to offer a voluntary retirement incentive to 120 eligible employees. Two-thirds accepted the offer to retire last June, this December, or next June 30th. The net savings from this program in future year’s budgets will be about $5 million.
Although the voluntary retirement program was helpful in closing the gap, a substantial shortfall still exists. Dean McPheron has been working on a plan to tackle the balance of the deficit and to do so in a strategic manner that protects the core elements of our current and future programming. The net result, unfortunately, will be some reduction of positions that can no longer be supported with the elimination of almost one-fifth of the Commonwealth’s base funding.
Slide 12– Hershey Medical Center and College of Medicine
Moving on to the Hershey Medical Center and the College of Medicine, the overall budget is expected to be $1.4 billion. State support for the Medical Center will fall by $6.6 million. The Medical Center will also be closely monitoring developments in Washington as additional parts of the federal Health Care Reform legislation of 2010 take effect, and as changes to Medicare are debated.
Slide 13 – Summary of Changes General Funds Budget
To summarize, this year’s General Funds budget is balanced in spite of the sharp reduction in the state appropriation. Our tuition increase is modest, too, thanks to our advance planning for the loss of stimulus funds, the use of some reserves, the salary freeze, and our actions in reducing expenses.
We are well aware that national and state economies have not fully recovered from the deep recession, and that both state revenues and family incomes remain in the doldrums. So we are developing next year’s appropriation request to the Commonwealth in a conservative manner once again that requests a modest appropriation increase, proposes another very moderate tuition increase, and relies on further reductions in certain expenditures. We must, however, include salary increase funds for our faculty and staff who have now gone two of the last three years without a General Salary Increase. Let me add that I’ve been impressed with the way our employees have continued to deliver a great educational experience for our students despite these trying economic times.
Slide 14 – Strategic Planning
I’m going to move now to a brief progress report on the second-year implementation of the University’s five-year strategic plan and progress of the Academic Program and Administrative Services Core Council.
Slide 15 – Recap of Strategic Planning Goals
You’ll recall that there are seven overarching goals in the Strategic Plan. The goals begin with student success, build around academic excellence and our land grant mission, and conclude with strategies for operating more efficiently.
Slide 16 – Strategy Implementation Matrix
You may recall that the Plan includes a Strategy Implementation Matrix that identifies the administrator or group responsible for each of the 38 strategies, and also a start date, selected performance measures, and a general indication of the fiscal impact of each strategy. I’m pleased to note the exceptional cooperation and engagement from the various Penn State units, including the Faculty Senate, in our progress with implementation. Among other things, I want to thank the Senate and the Graduate Council for eliminating more than 1,200 courses that are no longer or only infrequently offered.
There are seventeen Year 2 strategies in which work has been progressing and, of course, the implementation of many Year 1 strategies continues in many cases. Time won’t permit me today to talk about implementation progress for each of the seventeen strategies. Rather, there are some comments related to the strategies that are included in the web version of my report, which will be available at both the Faculty Senate’s and my Provost’s Office websites.
Slide 17 – OPIA Progress and Performance Webpage
I want to direct you to the website where you can see more detailed reports of progress on plan implementation. Updates for the strategies can be found on the Office of Planning and Institutional Assessment’s website as shown here, clicking on the link to Progress and Performance.
Slide 18 – Year 2 Strategies
We have made considerable progress in our strategies to enhance students’ success through the growing use of the online student Early Progress Reports, and with the advocacy and ideas of the University Advising Council. Many more colleges and campuses are now offering workshops and discussions on ethics, many incorporating the Graduate School’s Scholarship and Research Integrity (SARI) program and the collaboration of the Rock Ethics Institute.
Penn State’s programs fared extremely well overall in last fall’s National Research Council doctoral assessment. During the past year, we were successful in two very large interdisciplinary grants, the Clinical Translational and Science Award from the NIH and the Greater Philadelphia Innovation Cluster (GPIC) Award from the Department of Energy.
Slide 19 – Year 2 Strategies, continued
During the past year, Penn State has concluded several new key international partnerships with Peking University, Dalian University of Technology, Freiburg University, and the University of Cape Town – all premier world class universities – that will enhance opportunities for our students and faculty, as well as those of our partner universities. The number of international study abroad experiences imbedded in our courses continues to grow significantly.
Slide 20 – Year 2 Strategies, continued
Goal 4 deals with access, affordability, and diversity. We are quite far along in our planning for the expansion of student housing at some of our Commonwealth Campuses, in addition to making new capital investments in their facilities. Despite the tough budget year, an additional $1.0 million was allocated for need-based student aid. We are moving forward with plans to mainstream our highly successful diversity planning process into the next round of overall strategic planning.
Slide 21 – Year 2 Strategies, continued
We are now delivering more Penn State programming using technologies such as the Video Learning Network, the eLearning Cooperative, and the World Campus. Several of our Commonwealth Campuses are now sharing administrative infrastructure and faculty, and more of the outreach programs we deliver are on a cost-recovery basis.
Slide 22 – Year 2 Strategies, continued
We are making investments in new concepts for teaching and learning with technology at the Knowledge Commons we’re building at several campuses, and we are in the midst of a major study with external expertise looking for the best balance between centralized and decentralized facilities and services across the University.
Slide 23 – Year 2 Strategies, continued
Finally, we have allocated fringe benefit budgets to each of our college, campus, and administrative units, so that hiring decisions are made in the full reflection of the costs to the University. We continue to search for ways to reduce the level of central recycling through vertical cost-cutting, and the University’s central allocation to Outreach has now been capped.
Slide 24 – Goal 2-Advance Academic Excellence and Research Prominence
I’d like to focus the rest of our time on Strategy 2.4. The Core Council was charged in late 2009 to review units across the University in order to identify cost savings and new resources that would help us remain competitive with our peers, reduce the rate of tuition increases, and provide funds for some limited new strategic investments.
Slide 25 – Review Coordinating Committee
The Core Council, which I chair, works closely with three committees whose assessments feed into the work of the Core Council. Each of the committees includes broad representation of administrators and faculty.
Slide 26 – Status of Academic Program Review and Actions by Colleges
Nearly all University Park colleges, schools, and academic support unit executives have now received recommendations from the Core Council that have also been reviewed by President Spanier. The vice president for Commonwealth Campuses has received a memo reflecting 10 recommendations for the aggregate of the 20 campuses in this unit. Each chancellor will receive a set of recommendations – some permutation of the overall set pertinent to his or her campus – within the next several weeks.
Looking at changes within academic units at University Park, we’ve asked the colleges to make difficult decisions to close or merge specific degree programs as well as some departments. Recommendations were based on factors such as enrollments, degrees awarded, faculty productivity, cost per student credit hour generated, and centrality to the core academic mission.
Some programs that are not thriving, but are still deemed important by the colleges, have been placed on a “watch list” for future decisions. In addition, the Core Council has recommended that the faculty of our colleges and campuses should build on existing strengths and priorities of the institution in outreach programming.
Slide 27 – Opportunities for Cost Savings
In addition to the majors and minors recommended for consolidation or elimination, other areas frequently mentioned in the Core Council letters to colleges include:
- Reductions in the number of under-enrolled sections and low-enrollment special topics courses
- Identifying areas for sharing infrastructure and services across colleges and other units
- Redeployment of faculty lines and faculty effort to areas of higher student demand
- And, a reduction of graduate student numbers in some fields.
Slide 28 – Opportunities for Cost Savings- Commonwealth Campuses
Recommendations for the Commonwealth Campuses will include consolidating or phasing out associate degrees with low demand, as well as eliminating some small, underperforming baccalaureate degrees. We are making recommendations for some new replacement majors that should have stronger appeal to students, for facilitating change of assignment to campuses other than University Park, and for additional articulation agreements.
The Core Council is also recommending a significant reduction in the number of developmental courses taught at the campuses in English and math, through better student advising and online learning, and for better assessment and more tailored teaching approaches.
The Core Council is recommending greater faculty and staff sharing within geographic clusters of Commonwealth Campuses.
We are also looking at re-calibrating base budgets for campuses whose program portfolios have changed.
Slide 29 – Opportunities for Cost Savings—Policy Changes
We have made or recommended several important changes to operating and administrative policies that will save funds.
We will continue to incorporate more consumer-driven principles in the provision of health care services, disease management, and wellness programming. And, we have eliminated tuition reimbursements for employees attending other universities.
Slide 30 – Opportunities for Cost Savings – Operations and Services
Within Finance and Business, other areas have been targeted for specific savings. We are seeking:
- Greater operating efficiencies in the Office of Physical Plant
- Additional energy savings
- Lower costs through strategic procurement
- Additional overhead recovery from auxiliaries, and a
- Streamlining of travel services
Slide 31 – Opportunities for Revenue Enhancements
We are not trying to balance Penn State’s budget solely by cutting expenses. The Core Council has also been interested in finding ways to enhance revenue:
- There is growing interest in programs in which students are able to complete both a baccalaureate degree and a master’s degree in five years. One example is the integrated Bachelor of Science in Special Education and master’s in Curriculum and Instruction in the College of Education. In another, students earn a Smeal College baccalaureate and a Master’s degree in Accounting as well as the necessary credits to qualify for the CPA.
- The World Campus is our major enrollment growth area. Professional Master’s degrees, along with professionally oriented undergraduate degrees, are the fastest growing markets in online education. The Core Council is encouraging colleges and campuses to develop programs responsive to these markets.
- We have implemented a new budget model for Summer Session which should provide increased revenue and better use of resources.
Slide 32 – Next Steps
We still need to identify the optimal balance and distribution of certain core services, such as Human Resources, Continuing Education, Career Services, and Information Technology. Study and discussion of these issues will continue into fall semester when we will wrap up the work of Core Council.
Slide 33 – Next Steps, continued
This fall, we will work on the third-year plan implementation strategies. We will continue to post information about our annual performance data at the URL shown here.
Slide 34 – (View of Penn State mall)
We were fortunate to have the strategic planning process and the Core Council already in operation when the substantial appropriation cut occurred this year. We were able to use the plan and the processes already in place to respond rapidly to new budget scenarios.
We’ve made good progress on Year 2 strategies and we’ve received excellent cooperation from the units in discussing and preparing to implement Core Council recommendations. I’m pleased that – from my perspective as chief academic officer – most of our cost savings are coming from administration and operations rather than from academics.
And now, I’d be happy to take your questions as time remains.
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Web page last modified September 30, 2011