University budget effort continues as units start work on individual budgets

UNIVERSITY PARK, Pa. — Penn State budget executives across the University have received their final budget allocations of tuition and state appropriations, and work has started on creating individual unit budgets for fiscal years 2024 and 2025. The work is the next step in Penn State’s effort to modernize and transform its budgeting process through a new budget allocation model.  

“We’re shifting to a data-driven model to help determine how Penn State provides funding to its administrative and student support units, colleges and campuses,” said Sara Thorndike, senior vice president for Finance and Business/treasurer. “The model improves our ability to plan for the long term and prioritize areas such as student success; research; and diversity, equity, inclusion and belonging.” 

University leaders and select members of Penn State’s budget allocation model working group hosted an informational town hall in December to provide an overview of the new budget allocation model. This effort complements the University’s multi-pronged approach to reduce costs, identify efficiencies and enhance revenues and will help the University balance its budget by 2025.  

As units begin developing their individual budgets, their budget executives and financial officers will meet with University leaders, including Thorndike; Justin Schwartz, interim executive vice president and provost; Michael Wade Smith, senior vice president and chief of staff; and Kelly Austin, vice president for Commonwealth Campuses and executive chancellor; for budget discussions and approval. 

“Throughout the process, the budget executives in each unit will still have ultimate control over how they allocate their budget and will decide what’s best for their respective unit,” Thorndike said. “We’ve also been very conscious that any cut — no matter how small — will impact units. As mentioned previously, the University has no plans for mass layoffs or closing colleges or campuses and is committed to working with units to work through needs and priorities and minimize impacts. No unit will receive an increase of more than 4.6% or a cut of more than 4% each year, and many cuts are along similar lines with previous annual budget recissions.” 

While base allocations are set for fiscal years 2024 and 2025, strategic funds are also available to the president, provost and vice president for Commonwealth Campuses to direct toward specific unit needs and strategic priorities. In addition, base allocations and strategic funds will be supplemented with other revenues that remain in the unit such as gifts, endowment income, grants, contracts, fees, and sales and services to produce a central allocation for each unit. In fall 2023, the model will be rerun with current data to calculate new base allocations for fiscal year 2026. 

Once unit budgets are complete and approved, Penn State’s budget and finance office will prepare the University budget in May and June for the Board of Trustees to approve in its July meeting.  

How the model works 

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

Penn State’s new budgeting model includes all tuition, as well as state appropriations and central investment income, as part of University-wide revenue.  

Broadly speaking, the model considers data such as student credit hours and student headcounts and uses three-year averages for each to calculate how revenues are distributed. Within the model, student credit hours are weighted using tuition rates to reflect cost of instruction and balance the number of students in a given college with the number of student credit hours taught by faculty in that college. These factors are used to calculate a unit’s share of tuition and state appropriations.  

Research is addressed in the model in three ways. First, the research incentive funds (RIF) provided to colleges and campuses are included using the same calculation as in past years. Second, all facilities and administrative (F&A) costs are now allocated to research so that the majority of the research enterprise is funded from F&A. Third, an additional research incentive is included in the allocation and provided to the colleges and campuses using a three-year average of their research expenditures. This research incentive calculation includes non-research expenditures from instruction and public service/outreach that recover F&A costs to encourage continued sponsored activities. 

Additionally, the land scrip funds that the commonwealth provides to the College of Agricultural Sciences are not included in this calculation or the budget allocation model. 

An initial budget allocation number emerges after the University deducts overhead costs — which go to support areas such as administrative and student support units — from a unit’s share of tuition revenue and state appropriations. 

The revenue allocation for the Commonwealth Campuses is aggregated, and Kelly Austin, vice president for Commonwealth Campuses, will work with each campus location to determine their individual budget allocations, as has been done in the past.  

Understanding the budget allocation number 

As Penn State shifts from an incremental budget model to the new budget allocation model, some units’ annual allocations will change compared to previous years. 

Thorndike reiterated that no unit will receive a central budget allocation reduction of more than 4% per year for the 2024 and 2025 fiscal years, which is similar to previous annual budget recissions, and central budget allocation increases will not exceed 4.6%. In some cases, units that have been operating with a deficit budget may need to balance their budgets in conjunction with the changes in their central budget allocation. 

“The budget model calculates the amount of tuition and state appropriations that will be distributed to each unit,” Thorndike said. “Budget executives will add these funds to other unit revenues such as endowment income and gifts to cover expenses and balance their budgets. The budget allocation model can’t possibly consider all the nuances and complexities of a university like Penn State, so we have also set aside strategic funds for Penn State leadership for strategic investments.” 

Penn State budget includes strategic funds   

The University’s new budget includes funding for strategic needs and investments. 

To continue Penn State’s commitment to research and maintain its reputation as a premier global research institution, additional consideration was given for research support during the development of the budget allocation model. 

• $28.5 million in research support: To protect and enhance research across the University, funds were set aside to incentivize research. This research incentive allocation is included in units’ central budget allocation calculations using a three-year average of research expenditures. All support for research is now funded through F&A, including the Office of the Senior Vice President for Research budget, research incentive funds, matching cost shares, faculty start-ups and other strategic research needs. Land scrip funds are excluded. 

Units may receive additional support from the provost and vice president for Commonwealth Campuses to provide support and strategic investments and to account for the unique operating needs of some units that may not be reflected fully in the model.  

• $30 million for the Office of the Vice President for Commonwealth Campuses (OVPCC): As part of the University’s commitment to the Commonwealth Campuses, their significant potential for growth and the critical role they play in recruitment for all campuses, $30 million was allocated for the OVPCC to distribute and invest in access, affordability, recruitment and operations of the campuses. These funds will be used at the discretion of the OVPCC to make strategic investments at the campuses. 

• $10 million in provost funds: Knowing that the budget allocation model does not fully capture and reflect every aspect of a unit, including cost of instruction, $10 million has been set aside to support academic units at University Park. Through the budget process, academic units will work with the provost to request funds. 

The University has set aside additional strategic funds that support strategic areas of need, potential growth and the mission of the University.  

• $50 million in strategic investment funds: Strategic funds of approximately 2.5% of net tuition and appropriations have been set aside for Penn State’s senior leadership to make investments that will enhance the University’s mission and support strategic initiatives and needs such as student success; enrollment; and diversity, equity, inclusion and belonging, among other priorities. In the first two years of the budget model, it is anticipated that these funds will be used in strategic ways to help alleviate the deficit, while supporting students, faculty and staff.   

In addition, the University has also set aside $10 million to address expenditures related to potential unforeseen circumstances or emergencies.  

Next steps 

Budget executives will continue to work with the provost, chief of staff, senior vice president for Finance and Business, and vice president for Commonwealth Campuses to develop their unit budgets for fiscal years 2024 and 2025, which will be presented in aggregate to the Board of Trustees for final approval in July.  

The group that created the budget allocation model is continuing to meet and discuss future enhancements for the model, assess its impact, and will continue to solicit feedback and ideas for future changes and enhancements in the coming years. 

To learn more, visit the Budget Allocation Approach website.