Talk About Teaching
INSERT: Budgetary Policies & Strategic Issues
RESPONSE ON COST CONTANMENT
Authors' Note: This response comes from three members of the University
Cost Containment Committee, which meets regularly to discuss on-going cost
containment efforts. This committee also includes three faculty representatives.
Response to the Report of the Faculty Senate Committee
on Administration on Cost Containment and Allocation of University Resources
The Report on Cost Containment and the Allocation of University Resources
from the Senate Committee on Administration has been issued at a time when
higher education is facing a unique set of challenges: severe constraints
on tuition and fee increases, more pressure to increase financial aid, a
student body that requires access to state of the art facilities and technology,
and national concern about the growth and financial stability of academic
medical centers. Unlike many universities that have been caught off-guard
by these challenges, Penn has anticipated the current climate. In fact,
we have been working hard for the past several years to contain and reduce
administrative costs so that more of Penn's resources can be utilized to
support the academic mission of the University.
We welcome faculty scrutiny of our work and faculty examination of the
resource allocation decisions that have been made by the University over
the past two decades. However, we regret that our offices were not consulted
during the drafting of the Committee's report, particularly since the report
relies so heavily on budgetary and financial information that is assembled
and prepared by our offices. Such consultation on the part of the Committee
would have allowed for better information sharing, and we believe that this
might have altered some of the Committee's conclusions and recommendations.
We would have welcomed the opportunity to discuss with the Committee why
some of the trends described in the report occurred, and why those trends
do not support the conclusions that the Committee ultimately reached.
For example, we could have pointed out that the loss of the University's
General Instruction appropriation from the Commonwealth in FY1997resulted
in a $15 million reduction to the University's Subvention Pool. Any accurate
analysis of the University's resource allocations must be undertaken in
the context of this and other important facts about our operating environment.
We hope that publication of this response to the Committee's report will
be a productive step in the long-standing and continuing dialogue between
the University's administration and the Faculty Senate, the University Council,
and the several independent University committees that deal with issues
of resource allocation.
We take serious issue with the major conclusion of the Committee's report
that over the past two decades "there has been a real shift of resources
away from direct academic activities" at Penn. The data presented in
the report do not support such a conclusion. In fact, all budgetary indicators
suggest that Penn has directed increased resources toward the achievement
of the University's academic priorities in recent years, particularly since
the formulation of the University's current strategic plan, the Agenda for Excellence.
In the following paragraphs, we will respond to particular issues and
concerns raised by the Committee's report, in the order in which these issues
and concerns were presented.
On the issue of growth of the Health System, we agree with the Committee
that, given the uncertain and insecure regional health care marketplace,
the current pace of growth and development of our Health System poses some
risk to the University. The concerns raised in the report about the potential
for the erosion of health care revenues in the future are appropriate, and
the President and the Trustees, as well as the University administration
and the Health System administration, have been discussing and addressing
these same concerns. However, we must note that we do not agree that the
growth in the Health System has led to a shift in resources away from the
academic mission of the University. And, while we look forward to further
dialogue on this issue, we also want to emphasize the necessity of hearing
the views of the medical Faculty Senate and the Health System administration
during such discussions.
We also agree with the Committee's conclusion that the growth in financial
aid over the past eighteen years has placed an enormous burden on our school
budgets. It is an unfortunate fact that most of our peer institutions are
more heavily endowed to support financial aid than we are. Thus, the amount
of unrestricted dollars we spend on financial aid tends to be higher than
at other institutions, and the amount of aid we need to remain competitive
continues to grow. We agree that Penn needs to raise more endowment funds
earmarked specifically for financial aid. We must point out, however, that
over the past year, our Trustees have focused resolutely on increasing financial
aid endowment, and there is a special Trustee committee coordinating these
efforts. Equally important, we must note that we do not agree that the growth
in financial aid represents a shift of resources away from the academic
mission. On the contrary, financial aid exists so that Penn can recruit
highly qualified students regardless of their ability to pay. We would
hope that the faculty sees this objective as central to the academic mission
of the University, not as a diversion of resources away from that mission.
With respect to faculty salaries, we question the budgetary comparisons
used by the Committee and the Committee's interpretation of these comparisons.
The Committee's report notes that the ratio of faculty salaries to the total
University budget has been decreasing. It therefore concludes that resources
are being shifted away from direct academic activities. This is simply not
true, for two reasons.
First, faculty salaries are one of the investments the University makes
in academic activities, but certainly not the only one. Financial aid, expenditures
on the technology infrastructure needed to support continued excellence
in teaching and research, and investments in new and existing classrooms
and labs are among the many resources other than compensation that must
be invested in to support academic activities. Unfortunately, the Committee's
report ignores the fact that these other investments needed to be made over
the years to enhance the academic mission of the University.
The analysis in the report also does not recognize that increases in
nonacademic spending over the years may have been matched, or more than
matched, by concommitant increases in nonacademic revenue, leaving the true
academic budget with more resources rather than less. Examples of this include
the use of over $100 million in UPHS income in FY 1998 alone to build and
improve facilities for medical school faculty; the $4 million received from
MBNA Bank in our PENNCard contract which we have used to improve exterior
lighting of academic and other buildings on campus; and the anticipated
$26 million payment from Trammell Crow which we expect to use to upgrade
student residential and dining facilities, as well as help implement the
College House program. Our strategy for revenue generation calls for continued
innovative business ventures which will bring more non-academic revenue
to the University to be used for the support of our academic efforts. This
strategy could cause faculty salaries to constitute a smaller percentage
of the total Penn budget, but not because Penn's priorities are shifting,
but rather due to the success of our efforts to find innovative ways to
fund the University's strategic goals.
The report also notes that academic salaries have declined as a percentage
of administrative and clerical salaries. The report then concludes that
this is "another manifestation of the change of resource allocation
away from direct academic activities." This is an inaccurate conclusion.
In fact, the University has made substantial improvements in faculty salaries
over the past ten years, and budget figures prove this. A 1991 analysis
done by the Executive Office of Resource Planning and Budget concerning
the size of the administration concluded that "academic salaries have
grown faster than administrative and clerical salaries and consumed a larger
proportion of the University's total payroll in 1990 than in 1980 (57.1%
in 1980 vs. 61.7% in 1990)" (see Almanac May 7, 1991). The Report
of the 1996-97 Faculty Senate Committee on the Economic Status of the Faculty
also concluded that the University had made noteworthy investments in faculty
salaries over the past ten years. That committee concluded that for the
ten-year period between 1986 and 1996, Penn salaries increased at a rate
better than the rates of increase at peer institutions, and better than
the CPI (see
Almanac May 13, 1997). Despite these data, we need to remain
vigilant about maintaining competitive faculty salaries, and we will. The
data do show, however, that we have not shifted priorities and invested
in administrative and clerical salaries at the expense of academic salaries.
The current report also fails to note that much of the growth in administrative
and clerical salaries over the past ten years has been an investment in
staff who work for faculty, including a large number of research staff.
It is inaccurate to characterize these positions as not supporting "direct
Finally, the report asserts that the sum of the unrestricted student
financial aid and the difference between Allocated Costs and Sub-vention
"amounts to a structural deficit built into the school budgets".
We do not believe that the schools have a "structural deficit."
First, financial aid is directly tied to tuition; if not for the higher
level of financial aid expenditures, we would not have been able to increase
tuition rates over the past ten years at the levels we did and still, at
the same time, maintain a world-class student body. Any discussion of financial
aid expenditures decoupled from tuition revenue presents an incomplete and
Further, it must be understood that there is no direct trade-off between
Allocated Costs and Subvention. Allocated Costs represent the cost of services
and facilities that are consumed or used, in large measure, by the academic
enterprise. During the past five years, the University has focused heavily
on containing the growth in Allocated Costs. While we agree with the report
that Allocated Costs presently consume a slightly greater proportion of
the schools' unrestricted budgets than they did a decade and a half ago,
we do not believe this statement alone tells the whole story. Budget data
show that once expenses related to the maintenance and expansion of school
facilities and the operation of the University Library are excluded from
Allocated Costs, the residual "University Overhead" now being
charged to the schools actually represents a smaller percentage of the schools'
total direct expenses than it did in the past. In FY 1987, for example,
the "University Overhead" charged to the schools represented an
amount equal to 15% of the schools' "Direct Expenses"; by FY 1996,
this figure had declined to 13%. The decline resulted from slower growth
in central administrative expenditures ovef the period, as compared with
the schools' own "Direct Expenses." (Note: Direct Expenses means
schools' spending on their own compensation and current expense, as supported
by tuition income, gift income, endowment income, sponsored program income,
and other unrestricted income.)
Subvention provides general program support to the schools, and is unrelated
to Allocated Costs. Subvention is used almost entirely to support academic
initiatives that are central to the mission of the University. But the revenue
streams funding the Subvention Pool have been constrained in recent years,
just as other University-wide revenues have been constrained. Since tuition
income provides the majority of the funding for the Subvention Pool, declining
growth in Penn's tuition rates has led to restricted growth in Subvention.
This, combined with the loss of the Commonwealth appropriation, unavoidably
has had a negative effect on the growth of the amount of Subvention available
to the schools.
However, limited growth in the Subvention Pool does not mean that total
school spending has been constrained. In fact, an analysis of school expenditures
over the past ten years shows that in the aggregate, the twelve schools
have averaged direct expenditure growth on their own programs of 7.3% annually
between 1987 and 1996. (This figure does not include Allocated Costs; it
only includes direct spending by the schools on their own compensation and
current expense.)This level of expenditure growth shows that there has been
a continued expansion in Penn's academic activities over the past decade,
not a reduction. By no means do we mean to suggest that the income of each
school is sufficient to offer and fund all desired programs; neither the
schools nor the University as a whole possesses the unlimited financial
capacity this would require. However, the figures do suggest that through
careful management of their direct income and expenses and the strategic
investment of available Subvention dollars, the schools are not operating
with structural deficits.
This response outlines some of our more significant concerns regarding
the conclusions in the report of the Faculty Senate's Committee on Administration.
We hope that through a continuing dialogue, we will work together with the
Faculty Senate to resolve the questions that both the administration and
the Committee have regarding the issues raised in the Committee's report.
More importantly, we look forward to a continuing collaborative relationship
with the faculty on strategic resource allocation decisions.
-- John A. Fry, Executive Vice President
-- Barbara Lowery, Associate Provost
-- Michael Masch, Assistant to the President
and Executive Director, Budget and
Return to:Almanac, University of Pennsylvania, March
24, 1998, Volume 44, Number 26