Faculty Senate Meeting
October 29, 1996
Dr. Charles Palmer Bean (presented by Dr. S. Waite)
Dr. Harold Faigenbaum (presented by Dr. S. Wiberly)
Dr. Sydney Archer (presented by Dr. M. Wentland)
Dr. Lyman Vane Racster (presented by Dr. S. Waite)
Admiral Lewis Barton Combs (presented by Dr. M. Jordan)
Dr. Arthur A. Burr (presented by Dr. G. Judd)
Dr. Mark Darlow (presented by Dr. K. Craig)
- All fund groups are now consolidated into one report.
- Real costs such as depreciation are reflected in the operating statement for the first time.
- Asset values (such as life income funds) are reflected on a more realistic basis.
- Cash flow is reported.
Despite these changes, the institute’s budgeting approach has not changed significantly in over a decade nor has it kept pace with changes in institute management practices or governance.
- Significant attention is paid to institutional issues such as undergraduate enrollment, financial aid, research funding, compensation and energy costs, etc.
- Schools and divisions are provided expenditure budgets and are expected to operate within these budgets.
- Divisional performance measurement is based upon adherence to expenditure budgets. Therefore, there are built-in disincentives to grow revenue which would require additional spending.
- Incentives tend to be ad-hoc, not well integrated, and confusing.
On the positive side,
Overview of the Contribution Margin Approach
Deans will manage the financial and programmatic aspects of their respective schools under the auspices of institutional guidelines set by the Executive Budget Committee (President, Dean of the Faculty, Vice President for Finance.) Accordingly, deans will be given autonomy to use resources their respective schools generate.
- Each school will be responsible for their respective direct revenues (net tuition income, research revenues, restricted gifts and restricted endowment income) and manage to set a contribution margin (defined as direct revenues minus school-specific direct costs including utilities and depreciation).
- Each school and departments will have different fiscal and programmatic goals. Accordingly, contribution margins will differ.
- Schools will contribute a financial share to cover administrative and infrastructure costs and a specified level of institutional investment.
Schools will propose and meet certain specific
and quantifiable metrics which incorporate
- Interdisciplinary activity (such as conducted through research centers, distance learning, etc.) should be integrated into the academic disciplines under appropriate sharing arrangements).
Business units with direct revenue responsibility should also be managed in a manner consistent with the responsibility model approach. Vice Presidents will be responsible for maintaining support service norms with set targets and standards. The new strategy will results in the generation of new revenues with strong departments operating within a strong university.
B. Jennings: Congratulated P. Lawler for his efforts. Asked whether we (
P. Lawler: Said that Penn was doing something like this, but
did so at the graduate level; tended to be separate from undergraduate expenses,
and other factors. He feels that
P. Lawler: Returned to a previous overhead to illustrate that the institute needs to bear the burden of the overall expenses, but noted that each School has some control over their direct expenses.
G. Judd: Noted that the process will provide each school with an initial budget performance goal that will be based on a range around their current budget numbers. Each school will be held responsible for meeting this goal. He emphasized that the goal is not a percentage.
B. Jennings: Wondered how this fits with undergraduate admissions; noted that this is not necessarily a controllable factor.
P. Lawler: Responded that this will require a great deal of coordination and cooperation among the schools. As an example, he cited B. Jennings aggressive efforts to recruit undergraduates in his department in a way that is consistent with the institute’s strategic mission.
P. Lawler agreed. Adding that these controls should be thought through carefully.
B. Jennings asked whether the projected numbers are volatile or stable.
P. Lawler responded that these numbers are fairly stable so far.
B. Jennings noted that these numbers could become volatile, but could change considerably, either for the good or for the bad.
P. Lawler related that the exiting system has its problems, too. There are some “screwy” incentives that are sometimes good for the institute overall, but bad for individual schools, and vice versa.
P. Lawler then turned to a discussion of forecasting.
Summary of 1995-1996 Financial Results
Despite significant budgetary challenges, the institute’s
financial condition remains strong.
Indeed, the balance sheet is the strongest in
There is currently a $2 million deficit. Revenues continue to reflect external economic pressures.
· Net tuition revenue is significantly below budget due to lower than anticipated mid-year transfers and increases in financial aid.
· Graduate credit hours have stabilized but they are less than initially budgeted.
· Grant and contract activity is flat and is less than budgeted.
· Gift activity continues to be directed more toward capital improvement than operating needs.
Divisional expenses were tightly controlled and reflect no growth between years. Cost reductions in utilities and employee benefits, combined with budgetary contingencies, partially offset the somber revenue picture.
The challenges evident in fiscal 1996 remain:
· The impact of adverse net tuition revenue trends accelerated in FY96 continues to be problematic.
o Lower than anticipated enrollment continues into the current year
o Significant decrease in transfer students
o Departing students had smaller scholarships
· Overall financial aid discount rate continues to increase as a result of aggressive competition for qualified students. The result is declining undergraduate net tuition revenue.
· A smaller freshman class adversely impacts housing and food revenue.
· Graduate tuition revenue growth also appears less than forecast.
Summary: We need to identify new revenue growth opportunities and provide incentives to implement them.
END OF FORMAL PRESENTATION
G. Judd noted that it is important to consider how we are reporting the budget: our external reports reflect a strong balance sheet.
P. Lawler responded that our net tuition revenue for undergraduates is $5 million under projections. Added that this will be somewhat offset by the results of the voluntary separation. Graduate tuition is in a little better shape.
R. Gutmann wondered whether we have a record of underachieving or overachieving along a number of different dimensions.
P. Lawler answered that we have not met our budgets over the past few years. We have dealt with this by tightening our belts, sometimes mid-year.
R. Gutmann wondered whether we should re-evaluate how we are approaching the budgeting process.
P. Lawler agreed, suggesting that there has been massive change in the usual indicators, added that we haven’t done as good a job in our projections as perhaps we could.
L. Gerhardt raised issues of discounting tuition and wondered whether we should be moving more toward less-expensive possibilities.
P. Lawler noted that J. Tien has done a good job of mapping out strategies of meeting these types of financial challenges. Feels that strategies implemented over the past few years have not worked to the level predicted.
D. Haviland suggested that we are shifting the “mix” of the
P. Lawler presented figures depicting undergraduate tuition
revenue (both gross and net). The figures
illustrated the fact that our net tuition has not kept pace with inflation;
when this is paired with wage increases, it becomes a significant financial
challenge. He then presented data
B. Jennings asked for clarification on how percentages were derived and on our position regarding net assets. He wondered whether we should be spending more of our growing assets on operations.
P. Lawler responded that although our assets are growing, they are not growing as fast as those of our competitors, using Yale as an example: they give a higher discount rate than we do, but this is made up by their huge endowment, as is true of other competitors (e.g., Carnegie Mellon, etc.).
B. Jennings thinks that is may be penny-wise and pound foolish to put too much emphasis on asset growth. Need to maintain a careful balance.
P. Lawler noted that the Trustees are also concerned with this; cited the example of pulling $14 million out of our endowment to fund strategic initiatives.
L. Gerhardt: Given the picture painted by P. Lawler’s report, what is the solution?
P. Lawler feels that the solution is to identify new revenue
streams: cited the
J. Newell brought discussion to a close for next agenda item.
Report from Chair of the Faculty
The Chair of the Faculty gave his formal report identifying three major issues affecting the faculty: (1) the curriculum revision and implementation of the 4x4 plan; (2) financial constraints on the institute resulting in the voluntary separation; and (3) a re-examination of our long-term goals and vision.
Report from the President of the Faculty Senate
A. Desrochers provided an update regarding the President’s meeting on Institute priorities to be held on October 30th. This is an opportunity for faculty to provide input to this important process. There will also be a special faculty meeting on November 7th, sponsored by the Faculty Senate, to discuss Institute Priorities.
Adjournment at 4:00pm