FROM: Institutional Priorities Committee

TO: University Community

FROM: Institutional Priorities Committee

DATE: February 3, 2003

SUBJECT: IPC Recommendations for FY 2004 Budget – Stockton Campus; This document is on the IPC webpage at www1.pacific.edu/IPC .

After a series of unit and division retreats, the Provost, Vice-Presidents, and Director of Athletics began presentation of proposed funding initiatives for the Stockton campus to the Institutional Priorities Committee (IPC) in October. During the past several weeks, the IPC has weighed each of these recommendations against the University’s mission, vision, priorities and available resources for the coming year. Because of the relatively poor economic climate nationally and regionally, uncertainty internationally, the impact of large state budget deficits on the Cal Grant program, and a freshman class in fall of 2003 nearly 50 students short of our goal, the IPC recognizes there is greater need for caution than in the past. We are proud of financial strength and stability the University now enjoys; they have contributed to the many, striking advances the University has made in recent years. It is essential that progress continue. Accordingly, some of the enrollment and other revenue projections have been more conservatively developed, while many of the recommendations regarding expenditures have been more cautiously implemented.

With this document, the IPC summarizes its proposed disposition of these recommendations and now requests you, the Stockton campus community, to respond to its proposed budget. After reviewing this document, you should plan on attending a “town hall meeting” scheduled for Thursday, February 6, from 4:00 p.m. to 5:30 p.m. in the Raymond Hall Common Room. There, members of the IPC will review the budget proposal and provide additional explanations for the choices reflected here. If you choose, written comments, suggestions and other responses should be sent to IPC (c/o Office of the Provost) no later than Friday, February 14. After review and due consideration of these comments on these preliminary recommendations, IPC will transmit final budget recommendations to the President for his decision and recommendation to the Board of Regents. The President’s budget decisions will be presented to the Regents’ Finance Committee in mid-March and submitted for approval by the Board of Regents on April 4, 2003.

Planning and Budget Assumptions:

The assumptions underlying the IPC’s planning and budgeting process are set forth in Appendix I of this letter. These assumptions are particularly key in establishing the projected resources for the budget cycle as well as in framing some of the expenditure choices.

Enrollment: Over the course of the past few years, there have been significant improvements in the academic quality profile of entering freshmen, including a 28 point increase in the SAT average for Fall 2002 as compared to Fall 2001 and a selectivity rate (percent of applicants accepted for admission) that has improved to 71% from more than 80% just a few years ago. Because these more talented students have more choices available to them, we expected the yield (percent of admitted students who enroll) to decline; however, just as the profile improved more than expected, yield dropped more than expected, from 29.9% in Fall 2000 to 26.5% in Fall 2002. This change resulted in a freshman class that was 50 students short of our goal. Even though the freshman applicant pool for Fall 2003 is larger than ever and, when closed, likely to be 10% larger than last year's pool, the IPC believes it is prudent to be cautious in planning next year's budget.

Further, while the Stockton campus’ undergraduate enrollment has increased in size and quality over the past five years, enrollments in graduate school have been flat to negative. The budget assumptions project professional enrollments (Pharmacy) to hold steady while undergraduate and graduate enrollment grows modestly. The overall Stockton Campus enrollment is expected to reach nearly 4500 students by FY 2005 and approach 4700 by FY 2008.

Tuition and Fees:Keeping its annual rate of increase markedly below the average for other similar institutions has helped improve Pacific’s competitiveness. The University has kept Stockton Campus tuition increases significantly below those of California comparison institutions.

FY 96 thru FY 03
CHANGE IN GROSS TUITION / Total Tuition Change / Average Annual Change
Pepperdine University (CA) / 36.9% / 4.6%
Santa Clara University (CA) / 58.7% / 6.8%
University of Redlands (CA) / 33.0% / 4.2%
Loyola Marymount (CA) / 48.7% / 5.8%
Univ. of San Francisco (CA) / 54.4% / 6.4%
St. Mary's College of CA / 46.6% / 5.6%
PACIFIC / 28.5% / 3.6%

For FY 2004, the increase in tuition and fees approved by the Board of Regents in January, 2003, provides for an increase of $1,000 in tuition or 4.5%. Overall, tuition and fees are slated to increase to $23,600 for FY 2004. The increase of 4.8% this past fall remains below most comparison private California universities.

FY 2003 / FY 2004 / Change vs. FY 03
Current / Proposed / $ / %
Tuition (FT Undergrad) / 22,180 / 23,180 / 1,000 / 4.5%
Mandatory Fees:
Health Service Fee / 230 / 230 / - / 0.0%
ASUOP / 105 / 150 / 45 / 42.9%
Activity & Recreation Fee / 40 / 40 / - / 0.0%
Subtotal / 375 / 420 / 45 / 12.0%
Tuition and Fees Total / 22,555 / 23,600 / 1,045 / 4.6%

Although the amount of University funded aid continues to increase as tuition increases, the tuition discount rate (the university-funded aid as percent of gross tuition revenue) has steadily fallen during the past four years to less than 30%. Yet, in comparison to the private comprehensive California institutions above, Pacific’s tuition discount rate is relatively higher, making the net tuition cost to Pacific’s students much lower. This NET cost along with the strong faculty, improved programs and better facilities, increases Pacific’s value to students. Indeed, U.S. News and World Report improved Pacific’s "best value” ranking to 29th nationally, up from 31st the year before.

Tuition increases at the McGeorge School of Law are expected to place in the bottom half of California’s private accredited law schools. The tuition increase for the School of Dentistry leaves that School's tuition among the highest nationally, but, because it is a three-year program, the fourth-year tuition is, as Dean Dugoni points out, the lowest in the nation.

Gift Income: The importance of planned gifts, major gifts, and annual gifts to the University is becoming more widely known as the University begins the largest capital campaign in its 150 year history. The budget for annual gifts has been increased by $100,000 or 10% to reflect this. The alumni giving rate across the University has improved and is expected to continue to increase to 13% on the Stockton campus by FY 2004, to 19% on the Sacramento campus and to 21% on the San Francisco campus by FY 2005.

Endowment: While a stronger annual giving base is an important part of any strategy to reduce the University’s dependence on tuition income (and the vulnerability to changes in enrollment), the most effective long-term strategy for the University to reduce its dependence on tuition income is the development of an endowment large enough to contribute through investment returns a significant portion of the annual budget.

In the difficult investment market of the past couple of years, the University has experienced relative success in the management of its endowment. In FY 2001, the NACUBO survey of higher education endowments ranked Pacific’s nominal rate of return 2nd out of 611 respondents. In FY 2002, the University ranked 14th out of 656. While the contribution of major gifts to the endowment for scholarship, program and unrestricted support of the University is the best way for the endowment to grow rapidly, the University’s endowment will grow faster when its annual spending rate is reduced from the current relatively high 5.5% (of three year average balance). The Budget Assumptions and Planning Guidelines (See, Appendix I) set 4.5% as a spending rate target by FY 2007, but doing so in a way which mitigates adverse impact on programs heavily reliant on endowment-generated resources.

Unit Operating Budgets:As indicated in the University’s Planning and Budget Assumptions (Appendix I), no across-the-board increase in operating budgets is provided in the proposed budget. Increases in “selected” operating budgets are being recommended, particularly where increases due to program addition or other expansion are certain to occur. So, for example, increases are recommended in operating budgets to support expanded Physical Therapy programs, to heat, cool, clean and service the new Pharmacy and Dental Clinic and Learning Center, the expanded Baun Fitness Center, and the expanded OISR Building and to provide for additional requirements for new and renovated residential facilities. Technology investments in networks and operating systems required additional increases for OISR.

Operating Reserve:Consistent with the standard of the planning and budget assumptions, a 1% operating reserve has been budgeted for each campus for the past four years. In addition to the operating reserve, the Stockton campus budget maintains an annual unrestricted reserve accumulation of $1.25 million to ensure greater stability and long-term financial strength. During the past year, Moody’s Investors Services cited this reserve as one of the factors influencing its decision to upgrade the University’s credit rating from A3 to A2. As in the past, a portion of unspent annual operating surpluses has been allocated for one-time priority needs.

Faculty/Staff Compensation:The President and the Board have a tradition of supporting competitive compensation for the University’s Enhancements for faculty, staff and administration. For example, in addition to the merit pool increase provided last year, the President recommended and the Board approved an increase in the employer’s contribution to all faculty and staff’s TIAA/CREF retirement plan equal to one-half percent of salary. On the Stockton campus, the commitment to begin in FY 2004 necessary adjustments to faculty and staff salaries to be more competitive in applicable markets. Despite the cautionary times in which most public institutions have seen serious cutbacks, IPC is recommending a series of compensation adjustments which combined will represent an average increase in total compensation of over 4.5%. These adjustments are the following:

1. Merit:The proposed budget provides for a salary pool to be allocated to all employees based on performance and merit. For FY 2004, the size of this pool is proposed to be 2.5% for the Stockton campus (Because of regional market differences, the pools for Sacramento and San Francisco are expected to be different.). As in the past few years, the effective date of this increase would be September 1, 2003.
2. Market Equity: In addition, the proposed budget begins a four year plan to improve the competitiveness of both faculty and staff salaries on the Stockton campus. Under the plan, average faculty salaries by rank and by discipline would be no less than the 60th percentile of the appropriate cohort group by FY 2007 and average staff salaries for most non-exempt and exempt staff pay grades would receive a supplemental adjustment in order to reach the appropriate market standard by FY 2007. Funds for faculty promotion and staff longevity are continued as in the past. As with the equity adjustments for the faculty pay plan completed two years ago, the effective date of these increases would be January 1, 2004.
3. Medical/Dental:As elsewhere, the costs of medical and dental benefits continued to rise. Even after strategic adjustments in the University’s medical plan (e.g. increasing co-payments for non-generic drugs), the overall premium costs rose by ten percent. As the University moved to a standard employer contribution (80%) across all plans, it assumed a larger portion of this increase, resulting in an average increase in employee contributions of only 2%.
4. Retirement:In FY 2002, the University, recognizing the importance of adequate retirement plans for a satisfied workforce and competitive employment package, increased the employer contribution for the first time in many years from 7 ½% to 8%. Based on the recommendation of the University’s Compensation Committee, the IPC has recommended an additional ½% to 8 ½ % be added to the University’s contribution to its employees retirement plan, effective September 1, 2003.

Facilities:Just as the facilities’ budgets for the current year were expanded to recognize the opening of newly renovated Hand Hall, those budgets for FY 2004 were increased to recognize adequately the costs of operating the new spaces opening no later than August, 2003: the expanded space Office of Information Services and Resources and Human Resources, the greatly expanded Baun Fitness Center, the additional operations of the renovated Theater in the McCaffrey Center, the 200 new beds provided in Brookside Hall, and the new 54,000 square foot Pharmacy and Dental Clinic and Learning Center. In addition, operating budgets have been adjusted for several of the residence halls which will have additional central air conditioning.

The pro forma budgets for FY 2005 include similar provision for the additional buildings slated to be opened by the start of that school year: The “Pacific Humanities Center” addition to Wendell Phillips Center and Stockton Campus Library expansion.

Energy Costs:

After the energy shortages and black-outs in the winter and spring of 2001, the University’s budget for energy costs rose. A large mid-year budget increase was needed for the balance of that fiscal year and an additional increase in FY 2002 was approved. The University instituted several energy savings measures, including replacement of inefficient equipment, thermostat settings and changes in room and facility scheduling. At the same time, the University negotiated longer term contracts for natural gas to reduce the uncertainty of future price changes.

Because of the steps the University has taken and the stability in the energy markets during the past year, IPC is not expecting large increases in energy costs. However, the proposed budget for FY 2004 does provide for increases for utility costs, including electricity and natural gas, primarily associated with the additional facilities being brought on line during the fiscal year, e.g. the Pharmacy/Dental Clinic and Learning Center, expanded Baun Fitness Center, expanded OISR Building and Brookside Hall, or additional air conditioning installed, e.g. Physics building and several residence halls.

Summary of Budget Priority Recommendations

In addition to the Planning and Budget Assumptions, the University’s Planning Priorities continue to provide us all guidelines by which resources are allocated. (See, Appendix II). The following summarizes the IPC recommendations to receive resources in the budget for FY 2004. They are organized according to the Planning Priorities which served as the benchmark against which the IPC’s recommendations were measured.

1. Heighten Academic Distinctiveness:

Three expansions of academic programs have been targeted for additional resources because of their great potential to heighten the University’s academic distinctiveness in areas expected to be of especially strong appeal and importance in the future. These programs and the investments recommended are:

1. Bio-Engr. Faculty Position (annualized from FY03) $ 40,000
2. Management Information Systems (MIS) position in MBA $104,000
3. New Doctor of Physical Therapy (DPT) Program $175,000

1. Improve the Quality and Delivery of Academic and Students Services

The IPC has recommended several targeted enhancements of support services to the University’s academic enterprise and student activities. These recommendations will provide for a safer campus environment for our students, faculty and staff by expanding the corps of public safety officers; provide for additional training to enable better use of the University’s investments in information technology; ensure that the operations budget of the Thomas J. Long School of Pharmacy and Health Sciences are adequate to support the important array of programs it offers; respond to the need for better Banner support on the Stockton Campus; fund the learning assessment program; and meet the commitment for the second year of a four year plan to adjust the McGeorge administrative fee on the same basis as that of the School of Dentistry.

1. Two Additional Public Safety Officers to improve coverage $ 80,000
2. Provide train. staff position from OISR (annualized from FY03) $ 37,500
3. Increased IT Costs to Maintain North Campus Expansion $ 63,400
4. Enhance Support Budget for School of Pharmacy/Health Science $120,000
5. Fund Assessment Program $ 53,500
6. Enterprise Applications/Banner Staff $ 49,700
7. Continue commitment to adjust McGeorge Administrative Fee $125,000

1. Strengthen Competitive Positioning

Not surprising for a University that has a tradition and commitment to close personal attention to the educational and co-curricular experiences of its students, the salary cost of the University’s faculty, staff, and administration is the largest component of the University’s budget. Outstanding higher education is labor intensive. To ensure that the compensation of its faculty and staff is competitive to retain and attract the best possible employees, the University has made a series of commitments which are reflected in this budget.

All budgets reflect resources to continue to provide annual salary adjustments based on performance and merit. While the size of the average merit increase will vary from campus to campus, on the Stockton campus that average increase will be 2.5%.

In addition, this budget includes resources to address discrepancies between the market’s rate of pay and appropriate markets in which the University recruits. Two years ago, the first phase of a Stockton faculty pay plan was completed to ensure that average faculty salaries across that campus were at the 60th percentile of salaries paid to faculties at comparable institutions. For faculty, FY 2004 represents the first year of a four-year plan to ensure the average salaries of faculty by rank and discipline will be no less than the average of appropriate cohorts. A similar four year plan for staff on the Stockton campus has been developed to ensure that average staff salaries will be competitive. As with the first phase of the Stockton faculty pay plan, market equity adjustments would become effective on January 1, 2004.

The University recognizes that salaries represent only a part of the compensation provided to its faculty and staff. It is important that a competitive medical and dental program be maintained. Resources are provided to reflect the increased University share of premiums for all employees’ medical and dental care.

In addition, the IPC has recommended resources to increase the University’s contribution to employees’ TIAA/CREF retirement program from 8% to 8 ½%, effective September 1, 2003.