A letter to the Penn State Community from President Graham Spanier

Jan. 7, 2009

The Economy and Penn State

By Graham B. Spanier
The downturn in the economy has presented our nation with financial challenges unprecedented in most of our lifetimes. Higher education shares in these difficult circumstances. The purpose of this letter is to outline how Penn State has been affected, how we are handling matters and how things might unfold for our students, faculty and staff.
Penn State has been conservatively managed throughout its history, and this philosophy continues today. Our financial status is sound, and we are taking steps to make sure that our financial stability will continue throughout this recession and beyond. The University's balance sheet reveals underlying strength for a university. Our external audits reveal no material weaknesses. We continue to have one of the highest bond ratings assigned by Moodys and Standard and Poors. We have sufficient liquidity (the availability of or access to cash) to meet our payroll and pay our bills on time. We have adequate reserves.
We do not anticipate resorting to any of the university-wide emergency actions being taken by scores of colleges and universities throughout the nation, such as mid-year tuition increases, hiring freezes, mandatory furloughs, administrative pay cuts, travel freezes, liquidation of endowment assets and loans to meet financial obligations.
At the same time, Penn State is by no means untouched by this crisis, and we will need to do a number of things to adapt. Let me set the context for our particular situation.
Some of Penn State's budget comes from the Commonwealth of Pennsylvania appropriations. State revenues through the end of December are 6.8 percent behind projections. Penn State has thus been informed that we will receive $21.2 million less than what was appropriated to us for this academic year. This is a 6 percent reduction in our appropriation. We are covering this rescission through a combination of central and departmental cuts throughout the University. We foresaw a modest reduction in our budget, and prepared for it, but a cut of this magnitude will be felt University-wide.
I have requested a meeting with Governor Rendell, hoping to make the case that Penn State be spared additional rescissions. In a university, where 70 percent of our expenditures are for people, it is nearly impossible to make significant cuts well into the academic year.
The governor's budget proposal for next year will be revealed in early February, and my appropriation hearing with the House of Representatives is scheduled for later in the month. Because we have been asked to give back 6 percent of this year's budget, a concern is that our appropriation for next year will fall well short of what we requested of the governor in our earlier planning for 2009-10.  We have two principal sources of income for our instructional programs -- tuition and Commonwealth appropriation. Given the circumstances our students and their families face, we do not feel it appropriate to plan on a tuition increase for next year significantly more than the levels already identified in our planning scenarios. Students are already approaching our Office of Student Aid in record numbers asking for additional assistance.
We also are concerned about two aspects of retirement funds. Over one-third of our employees are part of the State Employees Retirement System. This is a "defined benefit" program where retirement benefits are paid from investment earnings, employee contributions and contributions from employers such as Penn State.  We are bracing for a mandatory assessment from University funds in future years to deal with the dramatically reduced value of SERS balances. This should be of no concern to employees in SERS, but it will substantially impact the University budget. With TIAA-CREF, the situation is reversed. Those faculty and staff who are part of TIAA-CREF, a "defined contribution" program, have seen dramatic decreases in their retirement fund balances due to poor investment returns in the market. This is of great personal concern to TIAA-CREF participants. The University will continue its monthly contributions at the planned levels.  
Other areas of budget pressure are utility rates, insurance, patient care income at the Penn State Hershey Medical Center and deferred maintenance.
The confluence of these variables, along with the principle of not eroding the quality of our academic programs, lays the foundation for our approach. We will make every effort to avoid layoffs. We will reduce positions, when necessary, primarily through attrition. We will continue our long-standing efforts to look for savings in administrative operations; Senior Vice President for Finance and Business Gary Schultz and Executive Vice President and Provost Rodney Erickson will lead an effort to identify an additional $2 million in such savings.  We will expect all supervisors to step up their ongoing efforts to look for areas of savings and efficiency. Workloads will be reviewed to make sure that students are being well-served with existing personnel.  Deans and chancellors are being asked to review anticipated faculty and staff hiring and, where necessary, make adjustments to the planned size of departmental staffing. At the same time, deans and chancellors will continue to be able to fill positions as they are able and as needs arise, consistent with the resources available to them.
I regret to report that we must anticipate that there will be no salary increases on July 1, 2009. This is the first time in modern history we have been faced with such a situation, but I see no alternative if we are to follow the principles of job security, modest tuition increases, maintaining the quality of our programs, meeting our commitments and sustaining initiatives. Other universities are accustomed to ups and downs in the salary increase pool, yet we have been fortunate at Penn State to have had a steady salary increase pool throughout my presidency -- until now. The University will honor existing collective bargaining agreements, will provide funds for those being promoted and will honor existing commitments.
However, in the hope that no one will feel that they are taking a step backward, we will seek to budget both the employee and employer share of the rapidly escalating cost increases for health care. In other words, it is my goal to freeze employee contributions to health premiums for the increase that would otherwise be implemented in January 2010. In addition, we plan to freeze increases in parking fees. These combined costs will be absorbed through the University budget -- at a cost of about $4 million.

In addition, we will double the funding available through the Employee Special Assistance Fund. This fund was established about a decade ago, through private funds from donors, to assist employees in difficult circumstances. The Fund has been a life-saver for scores of employees and their families who face emergency financial challenges. Those who find themselves in such a circumstance should contact Billie Willits, associate vice president for Human Resources.
There are other areas where the nation's financial crisis is being felt at universities. Construction of new facilities has nearly come to a halt throughout the country. Even though Penn State is financially healthy and can meet our debt obligations, it is nearly impossible to borrow funds in the credit markets. At Penn State we have sufficient liquidity to see through those projects that are currently in the construction phase, although even some of those projects may unfold more slowly due to the pace at which funds can be borrowed through each stage of construction. Projects in the design phase will continue through design, but the start of construction is likely to be delayed for some months, perhaps longer. We do not expect to remove any projects from our current five-year capital plan, but timing will most certainly be affected.
Penn State is in the midst of a major fund-raising campaign. All multi-year campaigns witness fluctuations in the market, although not to this degree. It might seem counterintuitive to press ahead vigorously with the campaign, but this is what we intend to do. I have, in fact, been increasing my visits to donors. I am finding that our donors continue to be very committed to us. The number of gifts to Penn State is ahead of last year, although as one might expect, the amount received is off modestly. This is a time when stewardship of our donors is important and when our needs are greater than ever. We are being as sensitive as possible to each person's circumstances, and we are, of course, looking at the long-term perspective.
As with all endowments in higher education, ours has fallen with the current market drop. But we have a diversified portfolio, overseen by the Penn State Investment Council, comprised of dedicated external investment professionals and conservatively managed by our experienced staff. Unlike many of the wealthier private universities you have been reading about, Penn State does not rely on its endowment for any of its operating budget. This means that variations in market conditions will not adversely impact University operations.  We have, however, decided to reduce the endowment spending rate on July 1, 2009, from the planned 4.7 percent to 4.5 percent of a five-year average of endowment value. This will modestly affect special allocations that are supported by endowments.
In summary, our goal is to continue to operate Penn State as seamlessly as possible. I hope that if those of us with budgetary responsibilities pay enough attention to all of this, others within the University will be able to go about their work in as normal a fashion as possible. My colleagues in the administration are most appreciative of your understanding.  Please feel free to direct inquiries to your budget executive or to president@psu.edu.  We'll make sure that someone gets back to you.

View a video synopsis at /video/180720/2013/02/09/video-no-title online.

Last Updated December 14, 2010