Ways and Means Committee Budget Hearing - January 11, 2011

Good morning. I am France Córdova, president of Purdue.

Thank you to Chairman Espich and the other esteemed members of the Ways and Means Committee for inviting me to speak today. We appreciate the strong support of Governor Daniels, Lieutenant Governor Skillman, and our state lawmakers.

Today I will focus on Purdue's budget reduction efforts and our biennial budget request. Before I get to that, I will start with a few recent Purdue highlights that demonstrate that the state's investment in Purdue is paying off.

This slide features some of the high points of 2010.

The picture at the top left shows an historic moment with two Purdue alumni. Last November, Neil Armstrong presented Captain Chesley "Sully" Sullenberger -- the Hero on the Hudson -- with the Neil Armstrong Medal of Excellence.

In December, the Lilly Endowment awarded a $6.3 million dollar grant to Purdue's Military Family Research Institute (MFRI). MFRI designs and implements outreach activities that assist military families primarily within, but also beyond, Indiana.

Distinguished professor Dr. Ei-ichi Negishi won the 2010 Nobel Prize in Chemistry, and is pictured here (bottom) at the official ceremony in Stockholm, Sweden.

The quality of our faculty and academic programs is being recognized through enhanced national rankings. I won't repeat this list, but as you can see, it's a great one.

Purdue is the largest employer in the local area, the 5th largest employer in the state, has stimulated an estimated 54,000 jobs, and has an annual economic impact on the state that exceeds $4 billion dollars.

For example, Purdue's Technical Assistance Program (or TAP), supports performance improvement in Indiana companies and organizations through various programs in nine statewide offices.

Since its inception 25 years ago, TAP has contributed $750 million dollars in economic impact in Indiana. Along the way, it has:

• Assisted more than 8,900 organizations,
• Trained more than 9,400 employees,
• And saved or added more than 5,500 jobs in the state.

Additionally, across Indiana, Purdue's network of commercial incubators -- the Purdue Technology Parks -- provide high-tech companies with a platform to spur aggressive growth through entrepreneurship.

The network currently has 200 companies and just over 4,000 employees. Nearly half of these companies have grown from research conducted by Purdue faculty.

Nearly 85% of the startups in the Purdue Technology Parks are still in operation after three years and longer.

And Purdue's Extension Offices provide services in all of Indiana's 92 counties.

Purdue is committed to partnering with government and business to serve Indiana by providing a high-quality public education that delivers talented, educated, leaders for the workforce of today and tomorrow.

That success can be viewed as a life-cycle that starts with accessibility, affordability, and preparation ... then retention which, ultimately leads to more students crossing the finish line.

Every student in Indiana has a pathway to Purdue. That's accessibility.

Last year, Purdue received close to 12,000 applications from Indiana residents. Among those who completed the applications, all but 215 Indiana residents were offered admission to the Purdue System.

By design, regional and Statewide Technology campuses now represent 47% of Purdue's total system-wide enrollment, and they are growing.

Affordability is also crucial. Recently, there has been a lot of discussion focused on administrative bloat. At Purdue, we have achieved administrative efficiencies.

According to the Goldwater report, Purdue has the lowest number of administrative employees per 100 students -- at 6.7 -- among our peer institutions. Purdue also has the lowest among the top 20 public universities as ranked by U.S. News & World Report.

The number of administrative personnel remained unchanged over the past 10 years when normalized by the number of faculty. In 2009, Purdue was the lowest among our Big Ten/Peer comparison group.

Additionally, we offer scholarships to families of all income levels. Scholarships from the state, private giving, and Purdue help defray costs and make a college degree more affordable for students. And we appreciate the SSACI funding and federal funding that have contributed to this area.

According to a report from the U.S. Department of Education, Purdue has the second lowest "net cost" among all Big Ten universities.

Preparation is a prerequisite for admissions, and leads to increased performance success. Purdue is helping with this by developing the Pathway to Purdue program for under-prepared students to start at Ivy Tech and co-enroll at Purdue, and training quality science and math teachers for Indiana through our Woodrow Wilson Teaching Fellows.

Student retention is at an all-time high of 89% thanks to a superb weeklong orientation program, learning communities that provide shared academic experiences, and innovative technology that makes the large classroom environment more meaningful.

Our current retention success will be reflected in improved graduation rates a few years from now.

Last year, Purdue produced more than 13,000 total degrees system-wide. This is nearly 26% of the state's total degrees from public institutions.

System-wide, 90% of resident baccalaureates remain in Indiana.

Like all universities, Purdue has been faced with fiscal challenges in a difficult and uncertain economic environment.

This slide captures our major budget challenges, including an 8% cut in operating appropriations for FY 2010-2011, the 2010 Governor's cut to higher education, and Purdue's projected budget shortfall as of last August, before we received the Commission's recommendation in December.

In the next few slides I will provide information about what we have done to address the reduction in funding. You have more detailed information in your handouts.

As you recall, in 2009 the governor announced a 6% cut in funding for Indiana's public higher education institutions. This amounted to approximately $150 million dollars in cash for the current biennium, of which Purdue's total share was $45.5 million dollars.

Purdue has been engaged in a yearlong effort to cut costs and improve efficiencies -- both to respond to the governor's cut and also to prepare for the next biennial budget appropriations process.

On this slide -- and detailed in your handouts -- is a list of cuts and actions taken by Purdue to achieve $45.5 million dollars:

• On the West Lafayette campus we achieved $36 million in non-recurring (cash) savings for 2010 through:
• Curtailed hiring,
• Deferred non-critical repair & rehabilitation,
• Implemented energy conservation efforts,
• And realignment of our Information Technology infrastructure.
• Our regional campuses and programs funded on state budget line items contributed the remaining $10 million dollars.
• Calumet reduced faculty support and deferred R&R.
• Fort Wayne curtailed hiring, cut operating costs, and deferred R&R.
• North Central deferred R&R.
• And we adjusted line items (reduced programs).

Cost containment is as important as cost cutting. Our goal is to be as well known for our operational excellence as we are for our academic excellence.

As we plan for the future, we anticipate continued cost increases -- some of which are out of our control. As a result, last year we projected a recurring budget shortfall -- assuming a flat-lined budget for the upcoming biennium -- of $67.4 million dollars for the West Lafayette campus.

To address this, we have been implementing cost-cutting measures, as well as looking for efficiencies, new revenues, and cost savings.

We identified nearly $28 million dollars in cost savings by:

• Rebidding term-life insurance,
• Reducing Purdue's benefit program costs through plan design adjustments,
• Reducing energy costs (production and consumption).
• Asking our colleges and operating units to plan for budget expense reductions of 4% over the biennium to save $20 million dollars. The college plans include:
• Reductions in Information Technology staff and services,
• Voluntary and involuntary staff reductions, and
• Strategic sourcing.
• And, more drastically for some colleges:
• Reduction in faculty hiring; reduction in the number of faculty and academic programs;
• Reduction in the number of class sections;
• Increase in class size, less counseling support;
• Fewer fellowships for graduate students.

We also identified $8 million dollars of new revenue opportunities by:

• Reallocating interest income,
• Generating additional facility and administrative cost recovery from research, and
• Recovering additional administrative and operating costs from auxiliaries.

We identified nearly $32 million dollars in cost avoidance:

• We limited planned salary increase expectations for employees from 3% to an average 1.5 % per year through FY 2013.
• This is following two years of no increases for faculty and staff.
• Senior administrators received no increases for three years.
• Increases were awarded based on merit and retention.
• We eliminated FY 2012 and 2013 supply and expense increases.
• We reduced planned strategic investments.

During this process we have been able to:

• Keep medical premium increases to 6% despite the national average of 12%.
• Reduce the institution's retirement contribution from 15% to 10%.

The picture is not all bleak. We've seen enhanced rankings, and significant gains in sponsored funding for research. We have been challenged, however, to retain our best people. And that is one of my greatest concerns.

Cost reduction and containment doesn't come without impact on the quality of the education we can offer.

Looking at the big picture, for the West Lafayette campus for FY 2011, Purdue's operating appropriation is within $1 million dollars of FY 2005 levels.

And as this slide shows, we know cost increases based on the Consumer Price Index (CPI) have grown over the same period. The Higher Education Price Index (HEPI) has grown at an even faster rate.

This is the economic climate in which we made our budget request to the Commission last August. In line with the Commission's budget instructions, Purdue requested:

• $20 million in operating fund base adjustments,
• $11 million in debt service, and
• $48 million in R&R support based on budget instructions.

The Commission responded in December. We appreciate that they placed an emphasis on performance at our regional campuses. The Successfully Completed Credit Hours Adjustments incentive is an evolution from enrollment growth and recognizes Purdue's impact on these regions.

However, there were significant reductions in the Commission's recommendations including:

• Reductions in operating funds of $3 million,
• Reductions in debt service of $2 million, and
• Reductions in line items of $4 million with an allocation of R&R of $17 million.

For the Purdue System, on an annual basis, the Commission's recommendations are $23 million short of Purdue's operating appropriations request and $16 million short of Purdue's R&R request. This is in addition to our internal efforts to meet the Governor's cut of $45.5 million and address a projected $67.4 million shortfall. We have four principal areas of concern:

One, no allowance for increased costs for current services (what the Commission calls "maintenance" -- or inflation) even though they are real costs. As I have detailed today, we will be able to address -- in part -- our needs through stringent cost containment efforts. The consequences of these efforts are that faculty and staff will have to be reduced, programs will have to be eliminated, and our national rankings may fall.

The second concern is the reduced Research Support Adjustment. As we said earlier, Purdue's research program is an economic engine for the state.

In order to secure additional external funding from sponsored research grants, we must expend resources in support of research, such as cost-sharing on sponsored awards, start-up packages to attract top researchers, support for core or shared facilities used in research, laboratory upgrades, and system or staff infrastructure.

Additionally, we have obligations as Indiana's only land-grant university to conduct additional research that benefits the citizens of the state. There is no allowance for recovery of indirect costs associated with these efforts.

In the current biennium, Purdue did not receive any allowance from the state to support research activities, and it is crucial that we receive full support for this activity in the coming biennium.

Purdue-West Lafayette's role is to attract sponsored research that can be grown into the products and businesses of tomorrow. Our achievements in entrepreneurship and commercialization demonstrate our success.

Our third concern is the Commission's recommendation for a 15% cut to all line items. Because of Purdue's land-grant mission, we bear the responsibility of administering the majority of line items, including Purdue extension in every Indiana county, the Technical Assistance Program, and Statewide Technology.

It could cause the closure of TAP offices, Statewide Technology locations, regional agricultural centers and Purdue Extension education programs. All of these closures would impact the citizens of the state.

Similarly, Purdue is the only organization authorized to deliver 4-H Youth Development programming in Indiana. A 15% reduction could mean that as many as 30,000 youth across Indiana would be denied the opportunity to participate in these programs.

The fourth concern is the level of R&R funding necessary to keep up with our aging campus needs, and lack of available resources to fund new capital programs. Safety concerns and critical facility needs drive many of our R&R decisions. We are doing what we can to mitigate the need for repair and rehabilitation, but that does not meet the sizeable needs of our aging infrastructures.

Due to historic shortfalls in this area, Purdue has reallocated significant levels of funding, and has fully implemented a student R&R fee to support repair and rehabilitation.

Replacing facilities is often a more effective way to address R&R issues than a direct investment in the repair or maintenance of existing facilities.

We have adopted an approach for a balanced capital program that replaces aged existing facilities when they have been deemed too expensive to renovate, renovates existing facilities where feasible, and adds new space only when needed to keep research and education at the cutting edge. This approach will:

• Make major strides in reducing our deferred R&R backlog.
• Cut down on new investments in operating costs.
• Eliminate old, inefficient space when we replace facilities, and will add newer, more energy-efficient space when we renovate and build new.

As our long-term plan evolves we will build responsibly, ensuring that our investments are part of a balanced capital program and sustainable.

• We will pursue all available sources of external support.
• We will continue to request state funding to supplement private giving and leverage external support.
• Our requests for state funding will be respectful of the state budgetary situation and will be focused only on our critical teaching and research space needs.

You have in your handouts a listing of our priority capital projects.

Cutting-edge facilities are absolutely necessary to attract and retain world-class faculty.

At the Budget Committee Hearing last November, Representative Welch asked how you could help us in lieu of additional money.

As you'll see in your handouts, we have a proposal to change Indiana's statutes covering the required approvals for university capital projects, leases, and real estate transactions.

Additionally, Purdue is open to pursuing the concept of a single state appropriation that combines the operating appropriation with the debt service and fee replacement appropriation.

In the end, it's about maintaining the quality of a public education. Last November we held a forum to discuss the value of public research institutions. It helped position the importance of state funding.

Here are highlights from that forum ...

Thank you to Chairman Espich and the Committee for the opportunity to speak today. We look forward to partnering with you and the Legislature to ensure a high-quality education for Indiana's students.