University Update: Budget-Building in the Face of Historic Cuts

To: Members of the University Community

From: Chancellor Mark A. Nordenberg

Date: July 8, 2011

A Year of Progress and of Challenge

The year just closed was another in an unbroken succession of years characterized by high performance and remarkable progress at Pitt. It was a year that saw inspiring examples of individual accomplishment emerge from within each of the University’s constituent groups. It also was a year in which key measures of institutional progress continued their dramatic climb.

Mark A. Nordenberg

Two telling examples convey a clear sense of our still-building momentum in education and research. We set yet another record in applications to the undergraduate programs on the Oakland campus and know that next fall’s freshman class will be the strongest in Pitt history. And though a precise calculation of research expenditures cannot be made until the books are formally closed, we already know that we will have smashed our previous record for research expenditures and will be at or near $800 million—an incredible sum that is important not only for our work but because of the nearly 3,000 jobs those funds support in the regional economy.

Despite these significant successes, though, both the past year and the year ahead almost certainly will be known mainly for the serious challenges they have and will present, particularly in terms of state funding. In opening his first budget address—delivered on March 8, exactly four months ago today—Governor Corbett noted that he had inherited a deficit of more than $4 billion and pointedly remarked, “A nation that once produced wealth beyond calculation has now produced debt beyond reckoning.” He went on to describe the process of dealing with that large deficit in everyday terms:

“In many ways what we need to do is the same as reviving an abandoned apple tree. If the tree isn’t tended and the branches pruned that tree will grow into a tangle of limbs and leaves. But it will bear no fruit. We need to take this tree, so long overgrown, and cut back what isn’t fruitful. And we need to do that essential pruning on all branches of government. We need to do the hard cutting so the tree can once again bear fruit. And that fruit is jobs.”

A Key to Individual Dreams and Collective Prosperity

From the individual perspective, public higher education has long been viewed as a critical avenue of access to the American dream—a dream that is built on the successful pursuit of meaningful and rewarding employment. Just this week, the Brookings Institute issued a paper provocatively titled “Where is the Best Place to Invest $102,000—In Stocks, Bonds, or a College Degree?” According to the authors:

“The answer is clear: Higher education is a much better investment than almost any other alternative, even for the ‘Class of the Great Recession’ (young adults ages 23-24). In today’s tough job market, a college degree dramatically boosts the odds of finding a job and making more money.

“On average, the benefits of a four-year college degree are equivalent to an investment that returns 15.2 percent per year. This is more than double the average return to stock market investments since 1950, and more than five times the returns to corporate bonds, gold, long-term government bonds, or home ownership. From any investment perspective, college is a great deal.”

The authors also note that the returns on a college degree extend beyond the significant benefit of lifetime earnings that are, on average, $570,000 higher than the earnings of a high school graduate, citing as examples that “college graduates are healthier and live longer than high school graduates” and “have higher job satisfaction than people with lower levels of education.”

The broader benefits to the collective good of a well-educated citizenry have been formally recognized since the time of Pitt’s founding nearly 225 years ago and were underscored when Pitt became a state-related university 45 years ago. Particularly in the innovation economy of the 21st century, it also has come to be recognized that university research sits at the heart of most commercial innovation and economic progress. Certainly, Pitt research has played a key role in the “rebirth” of this region’s economy. In fact, when it comes to jobs, Pitt can be viewed as a “triple threat”—a major educator of the current and future workforce, a major employer in its own right, and a major generator of the ideas that will spawn new industries, new companies, and new jobs.

To return to the Governor’s tree-pruning analogy, no one has suggested that the University of Pittsburgh is a branch that is not bearing fruit. Instead, as I indicated in my public presentation at last month’s meeting of our Board of Trustees, key dimensions of Pitt’s productivity can be seen in the 287,000 graduates it has educated and the $10.5 billion in research funds that it has expended since becoming a state-related university in 1966, as well as in its widely acknowledged impact as an engine of economic growth and job creation.

A Pattern of Funding Decline

It also is important to note that, as productive as Pitt has been, we also have been subjected to many years of budgetary pruning. Though a retreat from earlier levels of state support can be traced over an even more extended period of time, those budgetary pressures were particularly pronounced during the past decade. Our appropriation was cut in six of those 10 years, with the Commonwealth’s investment in Pitt’s appropriation, excluding federal dollars, standing at $9.3 million less in the fiscal year just closed than it was 10 years earlier.

General trend lines for the past eight years also are revealing. During that period, inflation rose by more than 20 percent; overall state spending increased by nearly 40 percent; state support for basic education climbed by more than 60 percent; but support for higher education remained flat. In 2008, the most current year for which comparative data is available, Pennsylvania ranked 46th among the 50 states in terms of per capita spending for higher education. Pennsylvania’s per capita investment of $185.12 stands in stark contrast to the higher levels of funding provided by such neighboring states as Michigan ($258.28), New Jersey ($259.73), Delaware ($278.47), Connecticut ($295.46), West Virginia ($309.87), Maryland ($331.45) and New York ($331.54). To express that range in a somewhat different way, neighboring New York spent nearly 80 percent more per capita on higher education than Pennsylvania did.

One inescapable impact of this bottom-five funding pattern was prominently displayed in the “College Affordability and Transparency” lists released by the U.S. Department of Education just last week. Penn State and Pitt were ranked first and second on the list of highest-tuition four-year public institutions of higher education. In fact, because so many of Penn State’s branch campuses also made the list, 22 of the 30 highest-tuition institutions were from Pennsylvania. When public funding for public universities is reduced, cost burdens fall on students.

The impact of comparative under-funding also can be seen in institution-to-institution comparisons. For example, our state appropriation during the last fiscal year, before the deep recent cuts were imposed, represented less than 10 percent of our total operating budget. Most of the institutions that have been grouped with Pitt in the top cluster of public research universities in the annual assessment of The Top American Research Universities receive a state appropriation representing a markedly higher percentage of their total budgets: Berkeley, 26 percent; Florida, 32 percent; North Carolina, 22 percent; and Wisconsin, 18 percent. Within that top group, in fact, only the University of Michigan, at 7 percent, lagged behind Pitt, and with these recent cuts, Pitt has fallen to 7.7 percent.

Facing Historic Cuts

Even acknowledging the state’s budget challenges, given Pitt’s proven productivity and this record of pre-existing pruning, the Governor’s initial budget proposal was a shock to virtually everyone. That proposal recommended that our Education and General (E&G) appropriation be cut by 50 percent and that our four academic medical center lines—supporting important programs in the School of Medicine, Western Psychiatric Institute and Clinic, the School of Dental Medicine, and Graduate School of Public Health—be completely eliminated. Legislators from both parties appeared to be among the most surprised and quickly rallied to the cause of funding restoration. Everyone who cares about Pitt—or, more broadly, about public higher education—always will be grateful for their support.

Over the course of the following months, a campaign to secure substantial restoration of funding for public higher education was waged. The state budget enacted last week provides for a 19 percent reduction to our E&G appropriation and a 50 percent reduction to our academic medical lines. Our total reduction is 22 percent—or more than $40 million—a higher-percentage reduction than the other state-related universities because a larger portion of our appropriation traditionally had been allocated to the academic medical lines. Our 22 percent reduction compares to an overall reduction in state spending of 4 percent. Though our position did improve since early March, the cuts imposed on Pitt, then, remain deep and disproportionate.

To place these funding levels in context, current cuts take Pitt’s appropriation all the way back its Fiscal Year 1995 level. In fact, if federal matching dollars built into this appropriation are not considered, since no such matches were built into state appropriations in the mid-1990’s, the level of the state investment, takes us back to FY 1994, when many of our incoming freshmen were being born. Obviously, our operating costs have risen dramatically since then. In fact, from 1995 to the present, the Consumer Price Index rose by nearly 53 percent and the Higher Education Price Index, a more accurate measure of university costs, rose by more than 72 percent.

A High-Value Provider

These stark budgetary trends underscore basic lessons that already have been central to our institutional planning. One is that continuing to function as cost-effectively as possible—a priority publicly established by our Trustees in 1996—will be essential to our ongoing progress. Another, now grounded in years of experience, is that, with already low levels of state support being further reduced, Pitt can only compete as a high-value provider of high-quality higher education, lacking the support to compete as a true low-cost alternative.

That distinction is consistent with state master planning, which traditionally has assigned special, and more expensive, roles to Pennsylvania’s public research universities. Fortunately, Pitt has earned ever-growing levels of success as a high-value provider. That is seen most clearly in the strong demand from top students for admission to our programs. It also is reflected in such recent honors as Pitt’s recognition as a “best value”—a designation linked heavily to quality—both by The Princeton Review/USA Today and by Kiplinger’s Personal Finance.

In crafting annual operating budgets, then, we will continue to emphasize both this long-standing need to “do more with less” and a companion commitment to maintain tuition levels that are as competitive as possible. But we must also place a high priority on well-targeted investments in institutional quality and on support for the high-performing members of our faculty and staff whose work makes Pitt an attractive choice for talented and motivated students and for knowledgeable funders seeking the best possible research teams in an increasingly competitive marketplace. Striking the right balance never is easy, and it is especially difficult when cuts go far beyond anything that any of us, or others in higher education, have experienced.

A Commitment to Cost-Effectiveness

Key cost-cutting and cost-avoidance efforts to date have included reductions in central and unit-level spending, salary freezes, modifications to employee benefits plans, cost reductions through consolidated purchasing and channeled spending programs, and savings achieved through such varied initiatives as outsourcing, energy conservation, shifts to paperless systems, greater efficiency through technology, administrative streamlining, program closures, and targeted staff reductions. These initiatives have produced savings that, over time, will amount to hundreds of millions of dollars and have made Pitt, by almost any standard of measure, an operationally efficient organization. However, as we face this year’s deep cuts in state support, paired with expense increases and essential investments, further efforts of this type will be required.

As has been noted, the distinguishing budgetary challenge of this fiscal year is the $40-plus million cut to our state support. We also face unavoidable expense increases in such areas as health insurance, facilities costs, technology investments and licensing fees, and the need to make additional academic investments, some driven by growing enrollments and others by the levels of quality that must be maintained to be competitive as a high-value provider. Putting to the side expenses that can be met through such alternative revenue sources as research grants, we expect these additional cost increases and investments to total about $30 million. When added to the $40-plus million cut to our state appropriation, the budget gap to be closed, then, is $70-plus million. Consistent with our expressed commitment not to place the entire burden of this year’s funding crisis on the shoulders of our students, we expect to cover 60 percent of that gap through a combination of central and unit-level budget reductions and adjustments.

A Tempered Tuition-Increase Plan in the Face of Historic Cuts

Given the magnitude of the challenges we face, however, our cost-cutting efforts must also be paired with tuition increases. These have been limited to the extent possible and compare favorably with increases at other institutions, particularly given the size of our state cuts, but are larger than we would have liked. The budget approved by the Executive Committee of the Board of Trustees today provides for a general tuition increase of 8.5 percent for in-state students enrolled in the programs of the Oakland campus, 4 percent for out-of-state students enrolled in the programs of the Oakland campus, and 4 percent for both in-state and out-of-state students enrolled in the programs of the Bradford, Greensburg, Johnstown, and Titusville campuses. Tuition in the School of Medicine, which suffered the highest percentage cuts to its state support, will be increased by 12 percent for in-state students and 6 percent for out-of-state students.

To focus on the example that typically receives the most attention, tuition for in-state undergraduates enrolled in the School of Arts and Sciences in Oakland will rise to $15,272, and tuition for out-of-state undergraduates enrolled in that same program will rise to $24,680. As is clear, then, a sizeable differential between in-state and out-of-state tuition remains, and there continues to be an enormous gap between either Pitt’s in-state tuition or out-of-state tuition and the $40,000-plus tuition charges commonly assessed by peer private universities.

Four important matters related directly to these tuition increases also should be noted. First, our financial aid budgets will be increased by $13 million, and more than $163 million in financial aid will be awarded by the University during the next fiscal year. Second, no increases to student fees were recommended or approved. Third, Pitt’s tuition structure, unlike some other universities’, does not include an automatic increase to the tuition charged to students moving from lower-division (freshmen and sophomore) to upper-division (junior and senior) status. And fourth, to underscore a point made above, lower tuition increases will be assessed on our regional campuses, as has been our pattern for a number of years.

A Provision for Modest Compensation Increase

In the midst of what came to be called the “Great Recession,” the University froze the salaries of its employees. Repeating that pattern this year would make the creation of a balanced budget easier and almost certainly would be politically popular in some quarters. However, we continue to live with lingering, negative consequences of that earlier action. Pitt salaries, which always have been at or somewhat below the mid-range of our peers, are less competitive than they were before that freeze. In the main, they also are lower than salaries paid by Pennsylvania’s other public research universities.

Also of real importance is the fact that we have no clear sense of when our budgetary circumstances will improve. It is one thing to ask employees to sacrifice for a year or two as an institution moves through difficult times. However, when the success of an enterprise depends so heavily on human talent, when employees are known for their hard work and dedication, and when demand for the services that they support continues to be high, it is more problematic to indefinitely defer all action with respect to compensation.

We have attempted to balance the budgetary challenges that we face and the needs of the members of our faculty and staff by creating a modest salary increase pool of 2 percent in this year’s budget. That pool will be allocated on the following basis—a 1.5 percent salary maintenance award for all employees who have received at least a satisfactory performance review for the past year, leaving 0.5 percent to be allocated on the basis of merit, market, and equity. All salary increase decisions will be made, as is customary, during the next several weeks. However, as a further reflection of our challenging circumstances, those increases will be retroactively effective to July 1 only for employees whose base earnings are $40,000 or less. Salary increases for all other employees will take effect on January 1, 2012.

Looking to the Future

The fact that we have been able to weather this year’s budgetary crisis is a tribute to all of the people of Pitt and to our many friends. When this institution and its important work were threatened, concerned alumni, faculty, staff, and students stepped forward as advocates. As noted, our case was well received within the legislature and also drew the support of many other friends, including leaders of the business community who know firsthand what an indispensable difference a strong Pitt has meant to the progress of this region.

But our ability to deal with the prospect of almost unimaginable cuts extends far beyond advocacy. We have achieved distinctive levels of academic quality and have become a more significant force for wide-ranging forms of good in the broader community, even as we have built internal financial strength. Absent that foundation, to which so many of you contributed, our ability to respond to the cuts ultimately imposed would have been far more limited.

As our home state confronted a daunting budget shortfall, we were asked to do far more than our fair share to help re-position it for an even brighter future. In looking toward that future, our shared quest, as described by the Governor at the close of his inaugural address, is to find “a true common wealth that allows this generation and future generations to dream with credible hope.”

For nearly 225 years, Pitt has helped position generations of Pennsylvanians to define and effectively pursue their dreams, in the process contributing to the Commonwealth’s collective strength. Our own, unchanged dream is to continue playing what has been a role of increasing impact as we build a better future together and to do so with support appropriate for our important mission.