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