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From the President and Provost

Economic Outlook: A Period of Economic Constraint

To the University Community:

During the last decade, Penn has gone through a period of unprecedented growth and development that has transformed our academic core and dramatically enhanced the quality of life on campus and in the surrounding community. We have tripled our research funding, our annual fundraising and the size of our endowment; launched a widely acclaimed neighborhood revitalization program; attracted and retained outstanding faculty and staff; matriculated Penn's most selective classes ever; planned or completed new buildings and major renovations in virtually every school and center; and expanded our international programs and collaborations. These are accomplishments we have achieved together with a clear strategy, wise investments, and hard work.

However, the weak economy of the past few years is causing reassessment of our future resources and growth rates. Many colleges and universities throughout the United States are experiencing similar financial challenges. While recent reports of an improving economic picture are encouraging, the financial challenges we and our peers face still remain very real.  In fact, with our five-year budget planning cycle, we have now identified significant possible deficits in future years.

Numerous external economic forces are putting this pressure on our operating budget and our balance sheet. Health-care costs, for both current employees and retirees, continue to soar at double-digit rates. As the recession has eroded household incomes, the demand for student financial aid has increased, outpacing growth in the tuition income that continues to fund part of our assistance. Utility costs have risen sharply, fueled largely by steep increases in natural gas prices. Since 1999, heating costs alone have nearly doubled. Revenues are increasing only modestly, if at all. Although our endowment has outperformed our peers, it has returned less than our spending pattern, resulting in fewer dollars available in the budget. These and other pressures mean that we must continue to take steps to reduce our operating costs if we are to avoid jeopardizing our academic mission.

Through careful long-term planning, several expense reduction strategies have already been implemented, allowing us to avoid some of the more draconian measures--such as hiring freezes and layoffs--being announced at peer institutions. Specifically, we reduced allocated cost funding to administrative service centers by 5% in FY03 and held administrative departments to 0% growth for FY04. We implemented a number of plan design changes to control benefits costs, including adjusting co-payments to give employees the incentive to enroll in less expensive medical plans and choosing a new group life insurance provider that is saving the University and the plan participants about $1.4 million per year. We have renegotiated large vendor contracts for deeper discounts and have prioritized IT investments, moving forward only with those that are mission critical. We refinanced long-term debt to reduce interest expenses and are making targeted investments in strategic areas that will generate additional revenue, such as the Office of Strategic Initiatives and Development.

It is now imperative that we also keep compensation-related expenses in check. As the largest private employer in the region, faculty and staff compensation represents 57% of our total expenditures. Fortunately, we will be able to provide a modest salary increase this year and are not planning any institution-wide layoffs. This is in stark contrast to many of our peer institutions, such as MIT, Yale, Stanford and Rice, which have announced layoffs, salary reductions and/or freezes and delays in construction projects.

For fiscal year 2005, which starts on July 1, 2004, and ends on June 30, 2005, a plan is in place to reduce our spending by about $20 million. While difficult, the expense reductions we are taking now are necessary to see us through this period of financial constraint.

For the coming year, we and all deans, vice presidents and senior officers will forego any salary increases. We will be able to provide a 2% salary pool for faculty and staff increases, with a range from 0 to 3.5% based on performance. However, discretionary bonuses awarded throughout the year and the end-of-year bonus program will be discontinued immediately while we develop a plan to more closely tie incentive bonuses to explicit and predetermined performance goals. Staff reclassifications and salary adjustments will not be approved unless they are needed to address significant internal equity issues, are required because of compelling market conditions or are part of a documented plan for restructuring approved in advance by the Division of Human Resources.

Despite the pressures of the current environment, we remain optimistic about Penn's outlook, especially because we have taken many steps over the two preceding years to rein in our expenses. But constraints on tuition growth, coupled with increased financial aid need, will continue to slow the growth of net tuition revenue. And our health care and utility expenses continue to increase dramatically. That is why we have taken and must continue to take steps to reduce expenses and find creative ways to generate new sources of revenue.

We could not have reached and remained at our current level of excellence without the dedication and effort of each and every one of you, and we rely on you still to carry this institution into an even brighter future. By making modest sacrifices now, we can continue to build boldly on the momentum of the past decade. Thanks to all of you, Penn is well positioned for the future.


Judith Rodin
Robert Barchi



  Almanac, Vol. 50, No. 18, January 20, 2004