"Penn State's Budget Planning Task Force"

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November 2012

Robert PangbornOn Friday, November 30, 2012, Interim Executive Vice President and Provost Rob Pangborn spoke to over 80 attendees representing five campuses. He discussed the Budget Planning Task Force (BPTF), which was called by President Rodney Erickson and is co-chaired by Provost Pangborn and David Gray, Senior Vice President for Finance and Business/Treasurer. Provost Pangborn’s presentation was intended to introduce the structure of the BPTF, and contextualize it within the series of recently undertaken planning exercises, which were initiated—in part—due to the proposed 50% cut in state appropriations for 2012.

The BPTF began work following the Academic and Administrative Services Review Core Council (Core Council) activities, which identified more than $25 million in savings achieved by energy savings initiatives, capping the subsidy to University Outreach, closure and streamlining of certain programs and departments, as well as advising expansion and creation of other programs and departments. Provost Pangborn explained that during the Core Council reviews, the decision was made to visit the question of how funds were allocated across the University because recycling was not seen as a sustainable option.

He then summarized several of the fiscal challenges the University faces. First, Pennsylvania state appropriations are expected to continue to decline. Although this trend is happening across the country, he showed that Pennsylvania ranked 5th from the bottom in terms of state support for higher education per capita in 2011-12 and noted that Pennsylvania is in a worse position than neighboring states such as New Jersey, New York, and Maryland. Second, high school graduation rates in Pennsylvania are expected to decline across the state, with some variation by region. Third, the great cost drivers—funding for post-retirement benefits, contributions to the state retirement plan, and utility costs—are all expected to increase.

Building on the work of the Core Council, the BPTF’s main task is to review alternatives in revenue generation, resource optimization, cost containment, and promotion of collaborative and innovative opportunities. Members represent the Board of Trustees, faculty, deans, and students from across the all campuses. There are six subcommittees looking at the following issues: budget models; tuition and fee structures; World Campus and online learning/revenue generation; campus structures and missions; research priorities, support and infrastructure; and agricultural research and cooperative extension. Each of these subcommittees is in a different stage of their work but all will conclude their work by February and will then come together to prepare the final report to the president in late spring.

The remainder of the presentation outlined the work of each of the subcommittees, focusing first on the Budget Model subcommittee because it has progressed the furthest in its work. Provost Pangborn explained the current incremental budget model starts by using the previous year’s budget to build the next year’s budget: “Each year you look at income sources and costs and you increment income to cover new costs.” Thus, the incremental model has a lot of stability in the base budgets. Another model that is in use by some of Penn State’s peers is the responsibility-centered model (RCM). The RCM model, in contrast to the incremental model, keeps revenues and costs at the unit level. Each unit is responsible for covering their own costs and generating their own revenue. They keep the remaining revenue and use it as they see fit within their own unit. Therefore, the RCM model opens an opportunity for entrepreneurship but it reduces incentives to pay for services that benefit everyone, reduces incentives to collaborate among units, and can increase redundancy. Those common services are paid for by way of a tax that is proportionate to the unit’s use of those services based on their size and needs.

The Budget Model subcommittee has agreed on several desired characteristics of a new budget model: it must protect core values, pursue broadly shared strategic priorities, incentivize entrepreneurial action, discourage redundancy, maintain stability, and reduce possibilities of “gaming the system.” Because the downsides of a pure RCM model are substantial, the subcommittee is expecting to recommend a hybrid of the incremental and RCM models. This is close to what is currently in place in some areas of University, as World Campus is mostly on an RCM model and the campuses are funded in a hybrid-type of model.

Robert PangbornThe Tuition and Fee Structure subcommittee is looking at options for adjusting the tuition and fee structure. Penn State has a differential tuition structure based on field of study, and campus, as do many of its peers. This subcommittee is considering ways to reduce tuition where possible and to increase tuition and fees where necessary. The provost said that the University has a lot of maneuverability in how it handles tuition and fees for various programs: some programs are more costly than others, and therefore, should perhaps charge more for their tuition. Another potential recommendation will be to increase fees for international students because there are additional costs associated with meeting their needs. The subcommittee is also considering whether differentials can be charged according to regional differences and whether there is reason to differentiate among the state population. All of these questions must be considered without compromising enrollment.

The four remaining subcommittees are in earlier stages of their work. The Campus Structure and Missions subcommittee is charged with considering whether and how to restructure the commonwealth campuses. Provost Pangborn noted that in 1997 the campuses were given the opportunity to develop 4-year curricula. Many campuses did so, with varying success. The Core Council suggested closure of 41 programs at the campuses and the BPTF is now looking at how to narrow or broaden those that remain.

The Research Priorities subcommittee is just beginning its work. They are considering questions related to research prioritization, and strategies for recruiting and retaining faculty at the University.

The subcommittee on World Campus and Online Learning/Revenue Generation will not focus purely on “online” learners, although World Campus has around 12,000 purely online learners and has grown about 20% per year. They are also considering questions of how to preserve market share, and the implications of the Massive Open Online Courses (MOOCs). Provost Pangborn highlighted the importance of World Campus in the BPTF’s planning. He mentioned that World Campus’s current gross revenues are around $80 million. Because World Campus runs on an RCM-type model, units across the University are trying to develop online programs in order to generate more revenue.

Finally, about $45 million of the state appropriation goes to agricultural research and cooperative extension; this area also lost 20% when funding was cut. With such a cut in funding, it is impossible to increase salaries. The Agricultural Research and Cooperative Extension subcommittee will consider how revenue can be generated to keep programming constant or growing.

Provost Pangborn concluded by reiterating the BPTF’s goal of having broad involvement in this process. Also, he noted that the strategic planning process has been delayed one year. This will allow the BFTF analysis to be completed before the next cycle of strategic planning begins in 2015-16, after the next president has been installed.

Audience questions focused particularly on the possible implementation of a more RCM-type budget. Although it is still unclear which units would be subject to the RCM-type changes, it is clear that a firm tax structure would need to be set up to cover the costs of the services and units that are centrally located and essential to the University’s mission. Another question related to tuition prices and the cost of technology. The IT budget is $250 million, 8% of the University budget. It is a significant cost that cannot be avoided. However, it is difficult to say how much of the tuition and fees go to cover the IT budget. The final question related to funds being released for undergraduate retention efforts. At present the amount of money that comes out of tuition dollars for student support is roughly equally split between undergraduate and graduate students despite the fact that their numbers are very different. Also, much of the student aid going to undergraduates is in the form of student loans, while institutional aid to graduate students is usually in the form of teaching assistantships and grants in aid for summer coursework. The goal, then, is to put more institutional funds into the undergraduate side to bring down their tuition.

View the PowerPoint slides from the presentation.

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