Penn State leaders provide overview of budget allocation model at town hall

UNIVERSITY PARK, Pa. — During an informational town hall on Dec. 7, Penn State President Neeli Bendapudi and select members of the University’s budget allocation model working group discussed Penn State’s efforts to modernize and transform its budgeting process.

A full archived recording of the informational town hall discussion can be viewed at https://liveevents.psu.edu/.

The new budget allocation model will be used to determine the amount of funding — primarily from tuition and state funding — that Penn State provides to administrative and student support units, colleges and campuses.

“This is a data-driven model that was designed with the idea of reducing unpredictability and making sure changes are not abrupt,” Bendapudi said. “It’s something that will evolve over the years and help Penn State to advance and grow our mission.”

During the discussion, University leaders stated that any units slated to receive a budget cut will not experience a decrease of more than 4% per year for the 2024 and 2025 fiscal years. Strategic funds will be available to the president, provost, and vice president for Commonwealth Campuses to direct toward specific unit needs and strategic priorities.

“There’s going to be increases and decreases to the central funding that we provide to units,” said Sara Thorndike, senior vice president for Finance and Business/treasurer. “We were really careful not to make those decreases any more than we possibly needed to for any single year.”

Thorndike said the effort to develop a new allocation model and multi-year budget process dates back to 2018.

“The University created a strategic task force that’s been working on this before I arrived,” she said. “With all of the recent challenges we’ve talked about in many different venues — the pandemic, enrollment changes, inflation, stagnant state funding, tuition freezes — we had to accelerate creating the budget allocation model.”

The panel tackled a number of questions — previously asked in meetings hosted by the working group with budget executives, Faculty Senate and University Staff Advisory Council — about the budget allocation model and Penn State’s goal to balance its budget:

What the budget allocation model is, how it works, why Penn State needs it

Each year, the University provides an allocation to each campus, college and unit, which budget executives use to develop their area’s budget.

“It’s essentially a spreadsheet,” said Tracy Langkilde, Verne M. Willaman Dean of the Eberly College of Science, describing the budget allocation model. “We wanted to make sure that it was simple and transparent and easy to understand. It takes Penn State’s income — largely tuition and state allocations — puts it through a series of formulas, and then comes out with a unit allocation based on these decisions and data points. This spreadsheet allows us to be responsive to change because we can update the input values.”

Bendapudi said feedback from deans, chancellors, unit leaders, financial officers, Faculty Senate, University Staff Advisory Council and other stakeholders from across the institution was a crucial part of the process.

John Cheslock, professor of higher education, said input from these groups was invaluable in helping to guide the working group’s discussions in how tuition dollars should be allocated, balancing credit hours versus headcounts, allocating administrative costs, research incentives, support for Commonwealth Campus and academic colleges, and discretionary funding to support areas not fully reflected by the model.

Penn State’s previous budget model, called an incremental budget model, made small changes year over year and is not informed by current data.

“Our current model is outdated,” Thorndike said. “Many of our peer institutions have moved away from incremental budget models to something that’s more data driven, like we’re moving toward.”

The new budget allocation model — which will be shared with the Penn State community early next year — will be implemented in July 2023 for the upcoming fiscal year, and is part of a broader effort by Penn State to achieve a balanced budget by 2025.

The model won’t inherently balance the budget but will help the University in long-term planning and in prioritizing key priorities such as student success; research; diversity, equity, inclusion, and belonging, and more.

Determining allocations for units and campuses

To determine a unit’s budget allocation, the model uses activity-based data including student head count — which is the number of degree-seeking students enrolled in a college or campus — student credit hours, tuition and research expenditures, among other factors.

“A three-credit class with 25 students would produce 75 student credit hours for that unit — 25 students times three credit hours,” Cheslock explained.

The model also provides funding for administrative and student support units that support the University’s mission in important ways.

Margo DelliCarpini, chancellor at Penn State Abington, said, “Any increases or decreases in allocation is based on the various types of data that were input and that are used to run the model." She added that the working group made sure to consider the needs of Commonwealth Campuses as it developed the model.

To advance the land-grant mission, University leaders said Penn State plans to invest in its Commonwealth Campuses, identifying the campuses and the 24-campus model as an area of growth for the University.

“We realized that we had to pay close attention to make sure that we were valuing and recognizing the role the campuses play,” DelliCarpini said. “There’s an additional allocation to the vice president for Commonwealth Campuses and executive chancellor. He’ll continue to play this critical role in making sure that the individual campus budgets are allocated in a way that supports each of their individual missions, strengths and needs.”

Recent changes, and potential cuts and layoffs

Bendapudi said Penn State has no plans to consolidate campuses or colleges, and no plans for mass layoffs.

“Are there plans to consolidate, combine or unite any other campuses or colleges? I want to answer that, and it is ‘no.’ There are no plans to do this for any other colleges or campuses,” she said. “The second question is, ‘Are there going to be mass layoffs?’ The answer again is ‘no.’”

As in past years, unit leaders will use the allocation to develop and make decisions about their area’s budget and planning and to inform decisions about strategic investments and other priorities.

Moving away from across-the-board recissions

In previous years, the University asked units to trim their budgets by the same amount. Justin Schwartz, interim executive vice president and provost, addressed why the University has shifted away from across-the-board cuts.

“Simple across-the-board cuts, while they may be easier and appear to be more fair, are not strategic,” Schwartz said. “Across-the-board cuts don’t address the evolution and changes in student needs, student demands and student interests. We have to align our resources with what the needs of our students really are.”

Strategic investments

“No model can capture the nuance and complexity of a university as diverse and strong as Penn State,” Thorndike said. “The allocation model is developed to really adjust the base unit budgets.”

She said funds have been set aside to strategically invest across the institution in colleges, campuses and units.

“We need to make sure we’re investing in the strategic areas that are critical to our long-term success,” Thorndike said. “It’s critical that we maintain our commitment to a robust research enterprise. We want to grow that. We have these pieces of the budget that are going to be used to help the campuses and the colleges do things that the model can’t quite capture.”

Limited cuts and increases

“We’re limiting any reductions to 4% per year so units have time to transition to the new model and make orderly changes,” Thorndike said. “Four percent is in the ballpark of annual budget decisions that have been done in the past, and we’ve thought about what can be a reasonable cut. We recognize that this cut has implications and this is why we spent so much time working and trying to make this model as good as possible.”

Thorndike continued, “Any units that are receiving increases based on this model will have no more than a 4.6% increase for FY24 and a 3.2% increase for FY25, so this is really a phased increase. It gives units time to determine how they’re going to ramp up and make sure that they’re creating capacity.”

She added that the model will be run annually, so future allocations (FY26 and beyond) may change as new data is incorporated into the budget model.

Maintaining and incentivizing research

Langkilde said the budget allocation model continues Penn State’s support and prioritization of research.

“This is mission critical for us, and we are very proud of our disciplinary and interdisciplinary research, scholarly and creative accomplishments,” Langkilde said. “This is incorporated into the model in several ways.”

She said the University will continue to provide research incentive funds to colleges and units, and that facilities and administrative costs (F&A) are completely protected for research in this model. The model also includes a measure of productivity and allocating funds based on research expenditures, public service and outreach.

“And finally, there are strategic funds set aside that can supplement and develop priority initiatives within this area,” Langkilde said.

Student success and support

Langkilde said one of the biggest challenges in developing the model was developing inputs for measuring and supporting student success beyond enrollment, credit hours and head counts.

In considering enrollment, the working group accounted for shifts in enrollment.

“What we don’t want is the budgets for any unit to fluctuate drastically from year to year. So what we did was use ‘enrollment smoothing’ within the model,” Cheslock said. “We use an average of the three most recent years for which we have data. So if a unit experienced a drop in enrollment, what would occur is that the budget would be gradually incorporating that drop over three years so there could be an orderly response to that change.”

He added that the model excluded data from the COVID-impacted 2020-21 academic year and used enrollment figures for 2021-22 twice for the three-year smoothing.

Langkilde said cost of instruction was challenging for the working group to incorporate into the model.

“We recognize that the costs of instruction vary greatly across our institution,” she said. “This is because of things like the amount and type of support that students require, whether it’s a lab, a studio, a clinical or a lecture experience, the class size, the faculty who are teaching these courses, and the number of contact hours. We really did our best to capture these differences in the model, given the available data.”

Langkilde said to help address this, the model will continue to be updated and revised to better integrate the cost of instruction, and funding has been set aside for the vice president for Commonwealth Campuses and the provost to allocate to support expenses related to instruction.

Strategic hiring freeze

Schwartz said the University strategic hiring freeze is not affected by the budget allocation model, and will remain until summer 2023.

“It was implemented as much to ensure we stay on track for this year’s budget as it was for anticipating transitions that we’re going to see with the new budget model,” he said.

Schwartz said that ultimately, budget executives will have the ability to make decisions on staffing for their individual units.

Impact on current efforts — Optimized Service Teams, Compensation Modernization

Schwartz said other University-wide efforts including the Optimized Service Teams (OST) or Human Resources’ Compensation Modernization Initiative are not directly linked to the work on the budget allocation model.

“The OST effort that we’ve launched is really separate from the budget allocation model. It is a significant initiative, and it’s going to take us a few years to work through each individual work stream,” he said.

Thorndike said Compensation Modernization Initiative, as well as changes in tuition and general salary increases for employees were also not included as part of the model.

Looking ahead

Thorndike said budget executives will receive their final allocations next week and that the model will be shared with the University community early next year.

“No decrease will be more significant than 4% per year, which we realize is still significant,” Thorndike said. “But units have reserves and we’ll be working with units to make sure they have this runway to make those adjustments over the next two years.”

After units develop their budgets in the spring, Thorndike’s office will aggregate the unit budgets in May and June in order to have a final budget for the Board of Trustees to consider at its July meeting.

Questions about the budget allocation model can be directed to budget@psu.edu.