College of Education > News and Publications > News: Jan. - March 2011 > An Overview of How the College’s Budget Works at Penn State

An Overview of How the College’s Budget Works at Penn State

Dean Monk's column for Connections, March 2011

dean_monk.jpg

Dean's Message

(March 2011)

 

This is an opportune time to describe the basics of how budgets work at Penn State given all the discussion prompted by Governor Corbett’s recent budget proposal. I deal with budgetary issues on a daily basis, and it’s easy for me to assume people are more aware of how things work than is sometimes the case. I’ve tried here to explain the basics accurately but without getting too deeply into the weeds.

Penn State is set up so that tuition revenues as well as the Commonwealth’s appropriation revenues flow directly to the central administration of the University. These dollars, what I will call general fund dollars, are distributed by Old Main throughout the University. The general fund dollars coming to the College of Education amounted to approximately $17,220,000 for the current (2010-2011) budget. We use these dollars to support basic operations in the College. They support faculty and staff positions, travel, supplies, etc.

The general fund budget does not include things like the share of OPP services that we receive (e.g., heat, light, maintenance, etc). Nor does it include things like the cost of fringe benefits or scholarships for our students. The costs of fringe benefits have been covered centrally (but see below for more about a change being made with fringe benefits), and most scholarships come from the income generated by endowments established by generous donors.

Grants and contracts also constitute an important source of revenue for the College, but these dollars are all earmarked for specific projects. For the past several years, our grants and contracts awards have actually exceeded the general fund dollars we receive from Old Main.

You may have heard the terms “permanent” and “temporary” used in reference to the dollars in the College. The provost is quick to point out that there really is no such thing as “permanent” dollars, but dollars coming from sources like the World Campus are called “temporary dollars” largely because they are so sensitive to enrollment fluctuations.

The so-called “permanent” dollars largely come from the general fund and are permanent in the sense that overall enrollments at Penn State (and the related tuition revenues) and state support have been dependable over a long period of time. Yes, the state appropriation has not grown as rapidly as Penn State would like to see, but until this year for the most part we have been experiencing growth, modest though it has been.

There are at least two additional points to keep in mind about the state appropriation. First, what I am characterizing as “modest growth” is based on current dollars. If inflation is taken into account, the purchasing power of the state appropriation in the current budget is much lower than it was, say, 10 years ago. And second, the number of students at Penn State has been rising, so on a per-pupil basis even the non-inflation adjusted dollars on a per-pupil basis have been declining. A detailed chart showing changes in the Commonwealth appropriation over time can be found at pennstatermag.files.wordpress.com/2011/03/appropchart.jpg

I am also frequently asked about the relationship between the generation of resident student credit hours and the allocation of general fund dollars into the College. There is a relationship such that an increase in credit hours will lead to an increase in general funds, but the relationship is lagged and modest changes in credit hours do not translate into large changes in our general funds budget. There is a more direct relationship between World Campus and continuing education student credit hours and allocations of temporary revenues through revenue sharing.

In a typical year when we build the budget, we anticipate two adjustments: (1) the imposition of central recycling and (2) a general salary increase (GSI) program. Central recycling is a device the University has used in recent years to pull dollars back to the central administration. This is an across-the-board percentage reduction in permanent funding and in most years the percentage amount has been 1%, which for us translates into a reduction of $172,200. In my 12 years at Penn State, we have had central recycling every year, and in only two years can I remember the percentage being more than 1%. In both of these instances, the percentage was 2%.

In contrast to the reduction of our budget due to central recycling, the GSI program adds permanent dollars. Until recently, Penn State has had a tradition of having regular but modestly sized GSI programs, and in a typical year the pool has been in the neighborhood of 3%. It follows that in a typical year, the general funds budget has been reduced by 1% due to central recycling and increased by, say, 3% because of the GSI program—so that in the net the College’s general funds budget has been increasing. At our fall 2010 all-College meeting, I shared a chart showing a steady, but slowly rising general funds budget for the College. This slowly rising trend was disrupted when we did not have a GSI program two years ago.

When recycling occurs, we look carefully at how best to meet our budget reduction target. When the recycling target is 1% we can sometimes absorb the cut centrally and avoid having to impose reductions on the departments and other budget units in the College. But when the recycling percentage is more than 1%, it becomes impossible to absorb the entire cut centrally for the simple reason that almost all of the resources of the College are allocated out into the departments and other budget units. When we have assigned recycling reductions to the departments, these essentially have been across-the-board reductions.

We do not know what the recycling target will be for next year’s budget, but it is clear that it will be at least 2%. I have asked all of the department heads and other budget administrators in the College to work on the assumption that recycling will be at the 2% level for next year. The College will absorb 60% of the 2% reduction centrally, and we have apportioned the remaining 40% across the departments and other budgetary units. If the recycling turns out to be more than 2%, we will need to make further reductions, but we believe we can cushion the impact of these additional reductions by restoring temporary dollars, dollar for dollar, for whatever additional permanent dollars we will be collecting. These restorations will permit departments to make commitments now to the graduate students we are recruiting for next year. This is a very important source of stability for us, and a further advantage of the approach is that it buys us time to figure out ways to absorb the budget reductions for the longer term.

You have probably also heard the term “carry forward” used in reference to the budget. The University imposes limits on the level of funding that can be carried forward from one fiscal year to the next. The goal is to use resources wisely. Carry forward limits can give rise to a “spend it or lose it” mentality and we want to avoid situations where dollars are being spent simply because we are reaching the end of a fiscal year. If there are good reasons for a budgetary unit to carry extra funds forward from one year to the next for a special project of some sort (e.g., a renovation of space), we work with the unit to set aside the funds so that the dollars are not lost. More typically, our budgetary units work very close to the bone and there are relatively few dollars being carried forward. You also may have heard about changes being made in how the costs of fringe benefits are budgeted.

Historically, the costs of fringe benefits (e.g., employer-paid health insurance premiums and retirement contributions) have been handled centrally by the University. This will be changing for the next fiscal year and the resources being used to pay for the fringe benefits for all of our positions will be added to our general funds budget. For the future, when we create a position, we will have to budget for the cost of the fringe benefits along with the cost of the salary and related expenses. One of the rationales for making the change is to add some discipline to the system so that Colleges and other units take account of the full costs of a position in their strategic planning.

In a sense, this is simply a bookkeeping change and should not have a large effect on our operations. This will be true to the extent that those who are leaving the College because of retirements or decisions to be employed elsewhere are replaced by individuals such that in the aggregate the total fringe benefit cost is unchanged. However, if we are adding positions or are hiring people at higher salaries, we could find ourselves facing higher costs. The University is working closely with all of the financial officers to make this as smooth a transition as possible, and it becomes remarkably complicated quite quickly. We are proceeding carefully, and I think the transition will be seamless to faculty and staff members.

Over the past few weeks I have heard some wildly inaccurate rumors about what the reduction in state support would mean for the College. The impact will be real, but the College is fundamentally strong and resilient and our programs offer excellent value. We are working hard to minimize the adverse impact, and I have every confidence that our programs will continue to grow and improve.


I welcome questions about the points I cover in this column, and I hope you are enjoying these early days of spring.


David H. Monk

Dean