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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 academic activities."

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 inaccurate picture.

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

Management Analysis

Return to:Almanac, University of Pennsylvania, March 24, 1998, Volume 44, Number 26