Penn State passes two budgets to cover uncertain state funding

New Kensington, Pa. - Facing an uncertain funding situation from the Commonwealth, Penn State's Board of Trustees today (July 10) approved two possible budget scenarios with different expenditures and varying tuition rates. Both budget plans are dependent on the outcome of Pennsylvania's appropriation process, which has been stalled by an impasse between the governor and legislators.

While Penn State's two budget scenarios have different bottom lines, both plans have the following components in common: 1) both keep tuition at the lowest possible level without sacrificing quality; 2) salaries for faculty and staff in both plans are frozen at current levels; 3) both provide funding for increases in health care, fuel and utilities, building maintenance and operations, and for a limited and highly select group of strategic initiatives; and 4) significant internal expense reduction.

In addition, both scenarios assume that Penn State's Milton S. Hershey Medical Center will experience a 6 percent reduction ($864,000) in state and federal medical assistance funds.

"The downturn in Pennsylvania's economy has touched all of our campuses and employees and has become a serious concern for parents and students," said President Graham Spanier. "We are facing fiscal challenges unlike anything we have seen in our lifetimes. We had hoped to be as sensitive as possible  by implementing the lowest tuition increase in modern history. But the current situation has forced us to undertake something we have never done in our history - namely, approve two possible budgets."

In June, Gov. Ed Rendell proposed a $61 million cut in Penn State's appropriation. This 18 percent cut from the University's original 2008-09 appropriation of $338.4 million would reduce Penn State's direct appropriation to $277.5 million - the same level it received in 1997.

This latest proposal is dramatically different from the governor's first proposal in March, which included an estimated 6 percent reduction in direct state appropriation offset by $20 million in federal stimulus money for a total of  $338.4 million for 2009-10.

The first budget scenario is based on the governor's March proposal. The operating budget for 2009-10 under the more favorable scenario increases tuition 3.7 percent for out-of-state undergraduates and 4.5 percent for in-state residents at University Park. For students at the Commonwealth Campuses, an increase of 3.9 percent would be adopted for both resident and non-resident students.

The largest source of income for the University remains tuition. Under Scenario 1, the state appropriation would represent less than 9 percent of the total operating budget.

The second scenario presented to the Board of Trustees is based on the governor's June proposal of a $61 million cut in Penn State's appropriation with no stimulus funding. This is considered "the worst-case scenario" budget.

Under this scenario, the total operating budget for Penn State would be $3.7 billion. The state appropriation would represent 7.4 percent of the total operating budget under this scenario.

Scenario 2 would increase the tuition rate for lower-division Pennsylvania residents at the University Park campus by 9.8 percent, while tuition for lower-division non-resident students at University Park will rise 7.9 percent. For the Commonwealth Campuses, the tuition rate increase for both lower-division resident and non-resident students would be 4.9 percent.

Both plans include internal expense reductions of $17.8 million. An increase of $3.5 million in non-tuition income is also projected in both plans for 2009-10. Combined with the internal budget reductions, this amounts to the equivalent of $292 per year in tuition for each student, or 2.3 percent in avoided tuition increases.

In addition, both scenarios freeze wages for faculty and staff, resulting in a $30 million savings, and both fiscal plans include funds to cover the increase in employee contributions to health premiums that would have otherwise been implemented in January 2010. Funds also are budgeted to offset the increases in parking fees for faculty and staff. In total, $3.9 million has been budgeted to cover these additional expenses.

Under Scenario 1, Agricultural Research and Cooperative Extension receive the same funding as last year, but under Scenario 2, appropriation support will be reduced by $10 million in these areas.  On the expense side, reductions totaling $1.3 million in these programs will be required under Scenario 1, while under Scenario 2, reductions of more than $11 million will be needed. Spanier said reductions of this magnitude would have a profound effect and fundamentally change the missions of these two programs.

Another difference in the two budget plans is in the amount of funds allocated for increases in the benefits program. Under Scenario 1, the University's benefits program will increase by $20.6 million, while under Scenario 2, that increase will only be about $18.5 million, with employees covering the remaining $1.5 million through an increase in co-payments.

Also, under Scenario 1, funds in the amount of $14.7 million have been included to position the University against future unanticipated financial pressures. Under Scenario 2, this contingency fund is eliminated.

Both plans also set aside $1 million in additional permanent funding for need-based student aid; $11.3 million for facilities and maintenance; and $7.2 million for strategic initiatives and program commitments.

"This budget presentation is unlike any I have delivered. We are unsure of our funding levels and we wait for a resolution from Harrisburg," Spanier said. "In light of the unprecedented circumstances and uncertainty we face, I believe we need to take a unique approach to our budget approval process this year."

University officials hope that Penn State's appropriation level will be known by July 17, the date that the University must finally set its fall tuition. If the Commonwealth is able to enact a budget by then that includes appropriations for Penn State at the original 2008-09 level, then the Board of Trustees has authorized the University administration to implement the 2009-10 tuition increase at the levels indicated in Scenario 1. If the state budget impasse continues beyond the date when fall tuition rates need to be set, but state officials subsequently implement a budget at a level more favorable than the governor's current proposal - and if this occurs before Nov. 9, when spring tuition bills need to be processed - Penn State will implement a mid-year reduction in tuition reflecting the appropriation and budget situation.