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President’s Forum - Tuesday, February 22, 2011

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Al V. Diaz, Executive Vice President for Business and Finance, Treasurer

Slide02

Today Jim Almond, Ken Sandel and I will provide a status report on the current budget process for the next biennium -- the two-year period beginning July 2011. 

Budget Challenges

We will present in three parts.

  1. I will provide background on the construction of the budget, and describe the state budget process and our status.
  2. Jim Almond will provide a status update on the development of the budget with respect to planned cost constraints and reductions.
  3. Ken Sandel will discuss our specific needs for Repair and Rehabilitation (R&R).

Recently, there has been a lot of discussion in the state about the cost of health care. We are awaiting the results of our Blue Ribbon Health Care committee, which will be reporting its findings and recommendations in a few weeks.

Total Budget System

Starting with the overall Purdue System, the total operating budget from all fund sources is $2.2 billion.

$1.8 billion is associated with Purdue-West Lafayette.

Today we will focus on West Lafayette. The factors that affect the various campuses are different, and expanding the discussion would require more time than we have available.

The budget process for Regional Campuses is identical to that of West Lafayette, but their appropriations are considered individually and separately.

Total Budget (WL)

The General Fund -- the portion of the budget that funds the teaching mission of the university -- constitutes approximately half of the total West Lafayette operating budget. The balance of funding is derived from other sources.

  •  Restricted funds (26%) are derived from grants, contracts and gifts that have a specific purpose designated by the provider of the funds. This includes the federal and state governments that support research and donors who specify the use of funds.
  •  Auxiliary operations funds (15%) -- principally Intercollegiate Athletics and Housing and Food Service -- come in the form of specific payments from customers who are provided goods and services for their payment.
  •  Student Aid (9%) is from sources that require that these funds be spent on behalf of students.

In conclusion, the General Fund, which this year is $907.4 million, is what is available for operation of the university for teaching students.

General Fund Sources (WL)

90% of the General Fund comes from state appropriations and student tuition and fees. The portion derived from tuition and fees is more than twice what we receive from the state in the form of operating appropriations.

The remaining 10% is derived from several different sources, but the largest is the indirect cost that is recovered from sponsors of research (Facilities & Administration cost). The "Other Income" portion also includes interest income and administrative cost recovered from auxiliary operations.

  • It is important to note that at Purdue, auxiliary enterprises are self-supporting. Neither state appropriations nor student education fees are used to support them.
  • It is also important to note that the capital budget -- the portion of the budget devoted to making investments in our physical facilities for R&R -- is handled separately. What is included here is the debt service associated with paying the loans that are used to build academic buildings and infrastructure projects supported by the state (which is considered and appropriated separately).

It is worth noting that on the expenditure side, two-thirds of the expenditures under the General Fund are for salary, wages and benefits. That has been an important factor as we developed budget strategies for cost containment in the future.

Budget Planning Timeline

Our legislative biennial-budget process began in August 2010, when we submitted our budget request in response to guidance provided by the Indiana Commission on Higher Education (ICHE) and the State Budget Agency.

In October, our budget request was presented formally to the ICHE.

In November, we had a budget hearing with the State Budget Committee, a group made up of legislators and the State Budget Director (the head of the State Budget agency).

This group reviewed our budget in preparation for the beginning of the formal budget process, which began in December with the ICHE’s recommendation for all of higher education in the state of Indiana and a budget recommendation for each of the public universities in the state.

In January 2011, the legislative part of the process was initiated with the Governor’s budget recommendation for higher education in total, and for each of the universities and line items in the education budget.

Since then, we had a hearing with the House Ways and Means Committee, which is chaired by Representative Jeff Espich. The House Ways and Means Committee released its budget recommendation this past Friday.

We anticipate one more hearing on or around March 10 with the Senate Finance Committee, which is chaired by Senator Luke Kenley.

We expect a recommendation from the Senate Finance Committee shortly thereafter, with final resolution of our budget by the end of April when the Legislature adjourns.

Immediately following the adjournment there will be a series of activities that Jim Almond will discuss in a few minutes.

Legislative Budget Summary (WL)

This is a summary of the stages of the budget from our proposal in August 2010 to the most recent budget bill formulated in the House last Friday.

In August 2010, we proposed a budget that was directly responsive to the guidance from ICHE.

  • The proposed base operating appropriation was exactly the same as this year’s budget. As part of the Sustaining New Synergies (SNS) effort we worked for a year to develop budget strategies (cost constraints and operating budget reductions) that would allow us to operate at this level for the next biennium.
  • The only addition we requested was for Performance Funding, which was in response to formulae developed by ICHE several years ago.

ICHE developed the formulae to respond to specific performance parameters that are identified by them, including various graduation rate metrics. At West Lafayette, the formula is dominated by a research supplement that is specifically designed to fill the gap in indirect cost recovery that is a product of doing research.

Funding agencies typically do not fully fund this indirect cost. The state contribution is in recognition of the benefit that the state derives from the economic development that is a product of that research. We spend that money, in part, as an investment in the state economy.

In order to double our research expenditures over the last few years, we have had to invest more than ever before.

  • In addition, we proposed a level of R&R that is both consistent with the ICHE formula and our need. The commitment we made in August 2010 was based on an appropriation at this level (for operating and R&R), so that we would not need to raise tuition and fees.
  • This slide shows the sequence of actions that followed, none of which met the standard that we defined for no tuition and fee increases. The recent House Ways & Means recommendation is $20 million below our request in operating and the $0 in R&R is $20 million below our request and the ICHE formula. So ,we have some challenges and decisions ahead.

Appropriation History

To put these challenges in perspective, this chart shows the recent history of appropriations. It illustrates three points:

  1. The House Ways & Means recommendation is almost identical to the FY 2003-04 appropriation. That means the proposed appropriation for FY 2012-13 is the same as the actual appropriation a decade earlier.
  2. This proposed budget is 10% below our peak year appropriation, which occurred in FY 2008-09.
  3. Over the past decade, the Consumer Price Index (CPI) has grown approximately 20% and the equivalent inflator for higher education (the Higher Education Price Index) has grown by about 30%.

As we proceed forward in the near term and discuss everything from further cost reductions to possible tuition increases, I hope you recognize the source of the challenge.

Now, Jim Almond will describe what we have done to try to meet these challensges in the past several years and the process that will take us to the completion of this budget process.

James S. Almond, Senior Vice President for Business Services and Assistant Treasurer

Budgeting Today

As Al described, this is a big and complicated process. The fiscal and economic climate has required a multi-year approach for budgeting purposes. This slide reflects activity for the current biennium and planned biennium for FY 2012 and 2013.

The left column is a list of actions taken to reduce costs in the current biennium, at a time when state operating appropriations were cut 8% ($20.9 million) at the West Lafayette campus.

  • We have implemented cost avoidance measures by:
    • Eliminating salary increases in 2010
    • Implementing a mid-year merit increase of 1.5% in FY 2011
    • Providing no increases to supply and expense (S&E) budgets
  • We implemented cost reductions in the form of:
    • 2% budget reductions to units in FY 2010
    • Curtailed hiring
    • Developed energy program savings
    • Suspended special merit pay
  • Revenue also increased:
    • Base student fee increase of 5% for resident students, 6% for non-resident
    • Increases to administrative overhead recovery from auxiliary units
    • Increases to F&A recovery related to the growth in research that supports the General Fund

The right column is our action plan for the next biennium (FY 2012 and 2013). These recommendations, made by the SNS team, provide strategies to resolve a projected $67.4 million structural deficit. Additional details are in the SNS report on the BudgetLink website, which is accessible from the Purdue homepage.

  • Cost avoidance measures will total $31.8 million:
    • Reductions to planned salary and wage increases
    • Reductions to S&E budget increases
    • Maintenance of the current level of strategic plan investments
  • We are planning cost reductions of $27.6 million, resulting from:
    • Health care cost reductions
    • Continued energy savings efforts
    • Reductions in information technology expenses
    • Savings from strategic sourcing
    • Changes to the overtime policy
    • Savings associated with the Early Retirement Incentive Program, which was offered this fiscal year

Many of these strategies are incorporated into the annual budget reduction plans developed by the units.

  • Revenue increases will generate $8.0 million:
    • Funding from interest income
    • Continued increases from administrative overhead recovery from auxiliary units
    • Growth in F&A recovery

If state appropriations are reduced below current levels, contingency plans call for restrained increases in student tuition and fees in order to balance the budget. 

Operating Budget Plans

Planning for the university’s operating budget begins by establishing a set of priorities. For the West Lafayette campus we are committed to:

  • Fully incorporating the SNS recommendations
  • Phasing in the Student Fitness and Wellness Center fee
  • Restoring the research formula funding and addressing R&R funding to the extent possible while operating in an environment to restrain student fees

Regional campuses are also establishing strategic priorities based on their campus needs and recent growth in enrollment. 

Budgeting Planning Timeline

After the legislature adjourns in April, there is a significant level of activity necessary to finalize the conceptual budget plans for each of the Purdue campuses.

Between May 2 and May 5, conceptual budget plans for all campuses will be finalized with decisions made about student fee increases and salary policies. ICHE will also make its recommendations of fee increases at the conclusion of the legislative session.

We are required by state statute to hold a public tuition and fee hearing, which must be publicized 10 days in advance. The current plan is to make the public notice on May 6, and schedule the hearing for May 16.

The conceptual budget will be presented to the full Board of Trustees on May 17. On May 18, the budget guidelines and allocations will be distributed to major units on campus, at which time the units will prepare their operating budgets.

All of this assumes the legislature will conclude its work at the end of April, and ICHE makes its fee recommendations at the end of the session.

Budget Planning Process

The following key policy decisions must be made as part of the conceptual budget for each campus.

Tuition and fee decisions for students must be established for two years, per state statute.

Each campus in our system has its own student fee rate.

A salary policy is determined for FY 2012.

Budget reductions or reallocations must be finalized based on appropriations and fee recommendations.

Assumption in the growth of health care budgets are established for the fiscal year. However, the health care plan provisions are made on a calendar year basis. We will also consider the findings of the Blue Ribbon Health Care Panel.

Now, Ken Sandel will give a summary of the current status of R&R.

Ken L. Sandel, Director, Office of Physical and Capital Planning

Repair and Rehabilitation

My comments are focused on the current issues facing our capital program -- primarily R&R.

As part of the budget planning timeline, ICHE, the Governor, House and Senate also review and recommend the funding for our capital request for new facilities and our annual R&R funding request. The decisions on funding are all made together.

This slide shows some background that will shed some light on our priorities for R&R funding.

  • R&R funding is used to support our academic and administrative facilities. These facilities have a current replacement value of $4.4 billion.
  • Our existing facilities have a deferred R&R backlog of $428.7 million. Laboratories, HVAC, mechanical and electrical systems make up 60% of our backlog.
  • We have recently conducted an assessment of our entire R&R program and reviewed the data for our facilities. We determined that it will take an investment of about $30.0 million of dedicated R&R annual support on top of the investments made by our maintenance department, departmental investments, and savings from replacing facilities to keep the deferred R&R backlog from growing.
  • Presently we invest $9.1 million annually -- over and above the funds we receive from the state.
  • Our State R&R formula calls for an investment by the state of $21.1 million annually.

The chart in the corner shows the recent history of state R&R support. The columns reflect the formula funding. The black line represents the level of funding. The state’s ability to fund us at the full formula amount has not occurred since FY 99-01, resulting in a gap of $93.0 million over this timeframe. This has been a contributing factor in our current backlog.

Our challenges in this area are:

  1. The state’s ability to fund Purdue’s R&R request
  2. Addressing the deferred R&R backlog

These are the issues and topics we are actively engaged in with the state. They are part of our internal budget planning discussions.

Al V. Diaz, Executive Vice President for Business and Finance, Treasurer

Summary

This slide shows a summary of the things we have discussed today.

Now, the President will close by discussing how we will take a longer view of our budget challenge.

 

President France A. C�rdova 

We have had a lot of successes in all sectors and we have much to be proud of.

Looking Ahead

We want to sustain that momentum.

We will always face challenges. The long-term trend for state appropriations is down, so we must think more expansively about the future.

Looking ahead to our future, we want to:

  • Achieve our strategic goals for excellence in research, learning, and engagement
  • Maintain our autonomy of governance by the Trustees
  • Expand our land-grant mission to the world

We will position Purdue even higher in quality, reputation, and impact. 

Decadal Funding Plan

For all the reasons reviewed by our speakers, I charged the campus to develop a decadal funding plan for Purdue that would identify new resource opportunities to enhance the excellence and reputation of all aspects of the university’s mission.

The funding plan would put Purdue on a course to double its revenues in the next decade. This would allow us to invest strategically in our mission for student success, research and engagement.

Among other things, the plan would expand resources from:

  • Research -- we’ve been on a doubling curve
  • Philanthropy -- we have a plan to be on a doubling curve
  • Commercialization of research and royalty income -- investing in faculty to bring discovery to the next level
  • Corporations and foundations -- increase our partnerships

We would develop plans that take into account transformations -- like the data/IT revolution and globalization -- that if incorporated into the delivery of our mission could catapult Purdue to the next level. Some examples are:

  • Information technology in both learning and research has changed the classroom, research and partnerships
  • Expansion of Purdue’s footprint nationally and internationally
  • More robust commercialization of research discoveries

And possibly other streams of revenue, like online and distance learning, and fees from more masters and professional programs.

 Final slide

We’ll be drawing on the wisdom of our faculty, staff and students as we move forward with the plan. I’ll be talking more about this funding plan as it takes shape.

Thank you.