REPORT OF THE TUITION TASK FORCE APRIL, 2002          This document provides a summary of the work of the Tuition Task Force. It is presented in a "bullet" format, and divided into seven sections: Charge to the Tuition Task Force; Background Information and Analysis; Five-Year Budget Projections and Tuition Requirements; Possible Tuition Models; Conclusions and Recommendations; Prospective Tuition Levels; and Summary. Additional information is provided in the attached exhibits, which are referenced at appropriate points throughout the report.       CHARGE TO THE TUITION TASK FORCE (Exhibits, Tab A) The Tuition Task Force was asked by President Spanier to consider realistic projections of a range of tuition increase options that may be necessary over the next five years to support the continued competitiveness of the University as a premier institution. BACKGROUND INFORMATION AND ANALYSIS Commonwealth appropriations have become a progressively smaller share of Penn State's budget for several decades. This situation is also typical of public universities in other states. Public sentiment is generally reflected in policies and practices that keep state taxes low in the face of rising costs for high-priority and mandated needs. Public perceptions have shifted in recent decades from a view of higher education as a social good toward higher education as a private investment with high returns to the individual. Funding in Pennsylvania and many other states has shifted toward need-based direct support of students rather than base institutional support. The University has faced significant cost increases for salaries, benefits, capital improvements and maintenance, information technology and library resources, regulatory compliance, and other cost drivers. Despite significant and continuing cost-cutting measures, Penn State has had to increase tuition for many years in order to remain competitive with peer institutions in terms of the quality of educational experience it provides. All three of these trends are likely to continue for the duration of the next five-year planning period. Despite current economic challenges in their states, many of Penn State's Big 10 counterparts are making significant investments in new faculty positions and launching new initiatives to enhance the competitiveness of their academic programs. These initiatives are being supported through substantial increases in tuition. Academic Quality and Resources        Comparative rankings of universities are difficult, if not impossible, to determine with precision. The methodology of most rankings strongly favors private universities, particularly those that are highly endowed and have far more financial resources to spend per student than the typical public institution. Although we may regard the methodologies and specific outcomes of particular rankings as debatable, there are elements of the data and findings in these reports that should not be ignored.        U.S. News and World Report's America's Best Colleges, 2002 Edition is one of the most widely followed publications which includes rankings for national doctoral universities in overall academic quality. Three important components of these rankings are: (1) academic reputation; (2) faculty resources – a constructed measure of faculty compensation, percent of faculty with terminal degree, percent of full-time faculty, student/faculty ratio, and class size; and (3) financial resources – the average educational expenditures per student. Data from the report show the following: None of the top 50 national universities had nearly as wide a gap between its rankings of academic quality and faculty resources as did Penn State. Only six (none of them Big 10 public institutions) had wider gaps between the rankings of academic quality and financial resources. In this survey, 19 of the top 20 universities are private institutions, reflecting the greater weight given to institutional wealth as measured by endowment, spending per student, faculty salaries, and annual contributions from alumni and others. The highest-rated public institution, the University of California at Berkeley, is ranked number 20. Penn State's overall ranking is 46th among the top private and public doctoral universities in the nation. Only three other Big 10 public universities – Michigan, Wisconsin, and Illinois – are included in the top 50. Among public institutions only, Penn State ranks 14th. Penn State's rank for academic reputation is even higher than its overall ranking, in a tie for 37th. At the same time, Penn State ranks 188th in faculty resources, and 81st in financial resources. In fact, Penn State operates with fewer financial and faculty resources than any of its counterparts among the top 50 institutions. In contrast, rankings for the other Big 10 universities included in the top 50 are: Michigan ranked 25th in overall quality, 52nd in faculty resources, and 42nd in financial resources; Wisconsin ranked 32nd in overall quality, 63rd in faculty resources, and 57th in financial resources; and Illinois ranked 36th in overall quality, 127th in faculty resources, and 66th in financial resources. These large gaps between Penn State's high academic ranking and poor rank in resources are strong indicators of efficiency; i.e., they demonstrate that the University maintains high academic quality with relatively few resources. On the other hand, they also demonstrate that the university cannot hope to improve its standing with respect to academic quality without a commensurate increase in resources. Indeed, Penn State will probably have difficulty sustaining its current ranking with existing levels of resources.   Underfunding – Penn State's Most Serious Problem (Exhibits, Tab B)        Penn State is seriously underfunded in comparison with its peers, both nationally and within the Commonwealth of Pennsylvania. This underfunding manifests itself in virtually all University activities, from the number of faculty in the classrooms to the number of staff who support the academic enterprise. It is a testimony to the efficiency with which Penn State operates that it is able to provide a high quality education despite the following resource-based conditions:        Extent of Underfunding In 1970-71, the Commonwealth appropriation represented 36.5 percent of Penn State's total budget, and tuition represented 20.8 percent. By 2001-02, the appropriation had declined to 14.6 percent, and tuition had increased to 29.4 percent. The University's general funds budget supports most of the teaching, research, and service activities as well as academic and administrative support functions and maintenance of the physical plant. The two primary sources of income are the state appropriation and student tuition. The change in the proportions represented by each source are even more dramatic in the general funds budget than in the total budget. In 1970-71, the appropriation represented about two-thirds of the general funds budget and tuition income represented about one-third. In 2001-02, the appropriation now represents only one-third, while tuition represents about two-thirds. Penn State's appropriation per full-time-equivalent (FTE) student is significantly lower than that of any other public university in Pennsylvania. Penn State's appropriation per FTE student is the lowest in the Big 10. One of the best comparative measures of overall resources available to an institution is total expenditures per full-time-equivalent student. Penn State's total expenditures per FTE student are the lowest of any of the Big 10 public universities.       Consequences of Underfunding Penn State's tuition rate is the highest of the Big 10 public universities. Penn State has the highest student-faculty ratio and the highest average undergraduate class sizes of any public university in Pennsylvania. In comparison with peer institutions, Penn State's average faculty salaries have slipped substantially since 1995-96. Compared with Big 10 public universities, Penn State's rank at the professor level dropped from 2nd in 1995-96 to 5th in 2000-01. At the associate professor level, our rank dropped from 2nd to 6th, while at the assistant professor level, it moved from 8th to 7th. In addition, Penn State's average faculty salaries are considerably below the private institutions belonging to the Association of American Universities (AAU), and the gap is growing. At the professor level, for example, the gap of $13,600 in 1995-96 has grown to $19,900 in 2001-02. Similar changes have occurred at the associate and assistant professor levels. An increasing number of the University's faculty positions are fixed-term faculty – those faculty hired on temporary appointments, usually one year in duration – or part-time faculty. The University has made it a priority in its budget planning over the past five years to increase the number of faculty positions. Although a total of 601 net new full-time faculty positions have been added since Fall 1996, three-fourths of these added positions have been fixed-term faculty, rather than tenured or tenure track positions because sufficient funding and funding flexibility have not been conducive to long-term commitments. The University Libraries at Penn State rank 8th out of 10 among the Big 10 public universities in number of professional staff per student. Penn State lags behind its peers in providing modern laboratory and classroom space for its academic programs. The University has the lowest overall space per FTE student of any public university in the Big 10.        The Need for Additional Funds    Maintaining the quality of education that Penn State delivers while having the fewest resources available per student is an indication of the University's overall efficiency and effective management at all levels. This low level of resources per student is not a benchmark point, however, to which the University should aspire.  The University's current and future efforts to enhance the quality of its teaching, research, and service missions will depend largely upon the ability to secure sufficient financial resources. Failure to do so would undoubtedly preclude us from improving – or even maintaining – Penn State's standing as a world-class university. Additional program investment funds are required for:   Faculty: – to hire additional full-time, tenure-track faculty to reduce class sizes and the student/faculty ratio; – to provide competitive start-up packages and "bring-to-market" salary augmentation for filling vacated faculty positions; Facilities: – to modernize classroom and laboratory facilities; – to address growing deferred maintenance needs; Academic and Support Programs: – to sustain the University's critical academic and administrative support programs and systems; – to seed and stimulate emerging new areas of education and research, including the adequate support of interdisciplinary initiatives; Libraries and Technology: – to further develop library resources; – to provide life-cycle funding for necessary technology improvements in teaching and learning, research, and outreach; Students: – to enhance student life and learning experiences; – to provide more competitive stipends to attract the very best graduate students; Outreach: – to improve educational programming, services, and technology transfer to citizens and businesses of the Commonwealth. Additional salary funds are required to stop the slippage in Penn State's faculty salary rankings and begin to recover lost ground. The University will continue its efforts to secure additional state support. However, the Commonwealth is facing significant cost increases for basic education, welfare and unemployment, Medicaid and health care costs, retirement system funding, and other items. It is not likely, therefore, that state appropriations in Pennsylvania will increase at a sufficient rate to provide the necessary resources needed to maintain or improve the University's academic quality. General Principles Regarding Tuition Policies and Practices        The Tuition Task Force was guided in its work by the following general principles regarding tuition policies and practices: In accordance with Penn State's land-grant mission, tuition should be held to the lowest level consistent with continually enhancing the academic quality of the University. The University should seek new ways to operate even more efficiently in order to help minimize the necessary tuition rate increases. Tuition increases should be devoted to achieving the University's strategic goals and should provide incentives for students to accomplish personal goals in a timely manner. Tuition increases should be sufficient to improve the University's competitive position for recruiting and retaining top-quality faculty and staff, maintaining first-rate facilities, and improving the teaching and learning environment for Penn State students. The University should be sensitive to the economic climate, but University tuition strategy should be principled and take a long-term approach. Tuition policies and practices should be set in the context of market considerations in higher education, policies of peer institutions, and the competitive environment of various Penn State campuses. Penn State should continue to maintain many points of student access through its multi-campus system. The schedule of tuition rates should be as simple and understandable as possible. The use of mandatory student fees should continue to be limited. Affordability should be preserved by maximizing the amount of grant, loan, and scholarship aid available to students. Student Demand for a Penn State Education (Exhibits, Tab C)  Student interest in a Penn State education is strong. Over the past three years, total applications for admission to Penn State have been at record levels – 75,051 in 1999-2000, 78,500 in 2000-01, and 76,167 in 2001-02. The yield rate for freshmen baccalaureate offers to paid acceptances for the University Park campus has been in the 39-41 percent range for each of the last five years, while the number of entering freshmen for summer and fall has increased from 5,224 in 1997 to 6,279 in 2001. The yield rate for freshmen baccalaureate offers to paid acceptances for the other campus locations has been approximately 42 percent for each of the last five years. The number of entering freshmen for summer and fall has been relatively stable over this period – 6,805 in 1997 and 7,006 in 2001. While the overall yield rate for the campus colleges has remained consistent at about 42 percent, the recruitment effort required to produce this rate is significantly higher at some campuses than at University Park. Total enrollment is on target with the University's enrollment management plan, with modest increases since 1997. In that year, enrollment at all Penn State locations was 78,956, while in 2001 it was 81,704 – a three percent increase over five years.   – At University Park, enrollment is virtually the same in 2001 (40,828) as it was in 1997 (40,471). – Modest enrollment growth has taken place at the campuses, with total non-University Park enrollment increasing from 38,485 in 1997 to 40,876 in 2001, or just over one percent per year for the five-year period. Tuition and Appropriation History (Exhibits, Tab D)  As shown in Exhibit D-1, Penn State has had to face significant tuition increases over the last 30 years. In 11 of the 30 years, tuition increases have been 9 percent or more. The conditions that led to these increases have varied over the years. Inflation was a factor in the late 1970's and 1980's, as was the fact that the state appropriation did not keep pace with inflation or with Penn State's enrollment growth. During the 1980's, tuition increases averaged nearly 10 percent. Since 1995-96, tuition increases have been more modest, averaging 5.2 percent per year. When adjusted for inflation, Penn State's tuition rate for undergraduates at University Park has doubled in constant dollars from 1970-71 to 2001-02. The state appropriation per full-time-equivalent (FTE) student, on the other hand, has decreased in constant dollars by over 46 percent. The combination of the tuition rate and the appropriation per FTE student represents a surrogate of the total dollars per FTE student the University has to spend. Since 1970-71, in constant dollars adjusted for inflation, this combination has increased only 4.9 percent. In other words, Penn State's purchasing power per student is virtually the same in 2001-02 as it was 30 years ago. This is a remarkable fact considering the higher expectations of students and parents along with the increased costs associated with technology advancements, environmental compliance, ADA, increased student services, library materials, and major maintenance. The Governor's recommended budget for Penn State for 2002-03 includes a reduction in the University's appropriation of 5 percent, or $16.7 million. When adjusted for inflation, the Governor's recommended budget for next year would set Penn State back $35 million in purchasing power from the 1995-96 appropriation level. Comparisons of Big 10 Public University Tuition Rates (Exhibits, Tab F) Penn State's 2001-02 resident undergraduate tuition and mandatory fees of $7,396 are the highest among the Big 10 public universities, or 49.2 percent above the average of $4,958 for the other nine institutions. Penn State's 2001-02 non-resident undergraduate tuition and mandatory fees of $15,522 ranks 3rd in the Big 10, or 4.7 percent higher than the average of $14,832 for the other nine institutions. For 2001-02, tuition increased at the Big 10 public universities by an average of 10.0 percent, ranging from a high of 18.4 percent for freshmen at the University of Illinois to 6.5 percent at the University of Michigan. Penn State's increase for 2001-02 was 7.76 percent. Several Big 10 public universities have announced their intention to increase tuition in the 10-20 percent range for the coming year. Comparisons of Pennsylvania Public University Tuition Rates (Exhibits, Tab G) Penn State's 2001-02 resident undergraduate tuition and mandatory fees of $7,396 are comparable with those of the University of Pittsburgh ($7,482) and Temple University ($7,324). Tuition for other public universities in the Commonwealth is considerably less than that of the state-related universities. 2001-02 tuition and mandatory fees for institutions in the State System of Higher Education range from $4,671 to $5,204, with an average of $4,982. For 2001-02, the University of Pittsburgh increased tuition by 7.5 percent, and Temple University's increase was 4.9 percent. The State System of Higher Education increased undergraduate tuition by 5.9 percent, and graduate tuition by 11.2 percent. By comparison, Penn State's tuition increase for 2001-02 was 7.76 percent. Surcharges, Fees, and Differential Tuition   Laboratory surcharges were instituted for upper division and graduate students in engineering programs in the College of Engineering and the College of Earth and Mineral Sciences in 1985. Since that time, laboratory and clinical surcharges have been expanded to include the Eberly College of Science, Architecture, Landscape Architecture, and Nursing. The most recent surcharge, which was approved in July, 1999, is for upper division and graduate students in Information Sciences and Technology and related programs. The base surcharge is $538 per academic year, while the IST and related-program surcharge is $1,500 per year. For many years, Penn State had no mandatory student fees. In 1990-91, faced with rapidly increasing technology costs and limits on tuition increases imposed by the Commonwealth, an information technology fee was instituted for all students. The fee is currently $260 per academic year. In 1996-97, at the request of student government leaders, a student activities fee was approved, with the funds made available to student organizations and activities at the generating campuses. The fee, which varies by campus, currently ranges between $62 and $82 per academic year. Differential tuition by student level was introduced in 1997-98. Somewhat higher tuition rates for upper division undergraduate students and graduate students were implemented over a three-year period. The current differential between lower division and upper division undergraduate students at University Park is $356 per year. Differential tuition for upper division and graduate students in the College of Business Administration was approved in 2000-01. Student Aid (Exhibits, Tab H)   In 2000-01, Penn State students received a total of $482 million in student aid from federal and state grants, loans, and institutional and private sources. An analysis of full-time degree-seeking undergraduate and graduate students in Fall 2001 (excluding Hershey, Dickinson, and Penn College) shows that:   Undergraduate and Graduate (59,724 full-time students): – 55 percent (32,654) receive some tuition reduction from grants or scholarships. – 30 percent (9,903) of the 32,654 students who receive some reduction receive a full reduction in tuition. Undergraduate only (55,077): – 53 percent (29,369) receive some tuition reduction from grants or scholarships. – 23 percent (6,752) of the 29,369 who receive some tuition reduction receive amounts at least equal to their full tuition charges. – 50 percent (14,755) of the 29,369 who receive some tuition reduction receive a reduction of 60 percent or more. Graduate only (4,647): – 71 percent (3,285) receive some tuition reduction from grants or scholarships. – 96 percent (3,151) of the 3,285 graduate students who receive some reduction receive a full reduction in tuition.  Private fund raising has become increasingly important in providing student scholarship support. In 1996, 3,268 awards for $6.1 million were supported through endowed scholarships and annual giving funds. By 2000, these figures had grown to 4,632 awards for $12.1 million. Funds from endowed scholarships will increase significantly over the next several years as gifts through the Grand Destiny Campaign are received and activated. The Task Force analyzed the amount of student aid received and the unmet needs for full-time undergraduate students by family income level for 2000-01. Students were grouped into three categories: (1) Pennsylvania resident students commuting to one of Penn State's campuses; (2) Pennsylvania residents living in residence halls or equivalent housing in the immediate area; and (3) Non-Pennsylvania residents living in residence halls or equivalent housing. In this analysis, "unmet need" is the balance of the direct costs of tuition, room, and board after considering grants, scholarships, federal Stafford and Perkins loans, and the expected family contribution. As might be expected, the unmet need was greatest for families with reported incomes of $65,000 and under. There were, however, significant differences by type of student: – The unmet need for commuting students averaged $170. – The unmet need for resident students living on campus averaged $1,200. – The unmet need for non-resident students living on campus averaged $6,450.   These data indicate that campuses other than University Park continue to be important points of access to Penn State, especially for commuting students. They also indicate that if significant tuition increases are implemented, additional University student aid would be needed to help mitigate the increased costs for the neediest students. None of these figures include the possible benefits families could receive through tuition tax credits for higher education. The Hope Tax Credit and the Lifetime Learning Tax Credit, which were part of Taxpayer Relief Act of 1997, are geared to middle-class families to assist in making college affordable. Credits of up to $1,500 are available in the Hope program and up to $2,000 (beginning in 2003) in the Lifetime Learning Program. The Deduction for Higher Education was part of the most recent tax relief package passed in 2001, and will begin in the 2002 tax year. A percentage of the first $3,000 in tuition and fees is eligible for credit. The median debt for Penn State students who have debt upon completion of their baccalaureate degrees in 1999-2000 was approximately $17,125. A recent national survey regarding student borrowing, released by the American Council on Education (ACE), indicates that the median amount borrowed by bachelor's degree recipients in 1999-2000 was $15,375 at public institutions, and $17,250 at private colleges and universities. ACE has concluded that borrowing is still an excellent investment for students, considering the potential increase in their lifetime earnings with a college degree. The added lifetime earnings that accrue to the typical holder of a baccalaureate degree have been estimated at $1 million, while the added earnings to those with a graduate or professional degree can reach $3 million. Benchmarking Penn State's Efficiency          Benchmarking studies in virtually every administrative area show that Penn State ranks at the top of our peer group in administrative efficiency, delivering the same services for less cost. Some examples include:   The University's Facilities and Administration (F&A) rate for recovering indirect costs on research grants and contracts is the lowest in the Big 10, reflecting lower administrative costs at Penn State than most peer institutions. In a 1999-2000 survey of 136 universities receiving federal grant and contract funding, Penn State ranked 130th in the overall F&A rate and 132nd in the administration rate, a component of the overall rate. Another aspect of administrative costs is demonstrated by the ratio of the number of staff to number of faculty members in an institution. Penn State has a ratio of 2.6 staff for each faculty member, which ranks 9th out of 10 for Big 10 public universities. The average for the Big 10 is 3.2 staff per faculty member. The University Libraries at Penn State has increased access to information resources at a faster rate than the average of the Association of Research Libraries (ARL) institutions. From 1989-99, serials titles increased by 9 percent at Penn State while they collectively dropped by 6 percent in other ARL member libraries; book titles added increased by 29 percent at Penn State while the ARL average dropped by 26 percent; and access to electronic resources increased at nearly twice the rate as the ARL average, thereby providing a wealth of information resources to Penn State students and faculty on-line regardless of location. Penn State's costs to administer student aid programs on a per-student basis are the lowest in the Big 10. The industry standard nationally in higher education for cost per gift-dollar raised ranges from $0.08 to $0.16. Penn State's fund-raising cost per dollar is at the low end of this range at $0.10. Penn State uses its available space very efficiently. Among its Big 10 public counterparts, Penn State ranks 7th, 9th, and 9th respectively in the number of square feet per student for classrooms, instructional laboratories, and research laboratories. Penn State ranks 10th out of 10 in overall space per student. Penn State employs continuous quality improvement (CQI) to enhance administrative services and to reduce costs. Approximately 400 CQI teams have identified ways to improve processes and increase customer satisfaction, saving millions of dollars for the University over the past few years. Buying consortia and negotiated purchasing agreements save Penn State millions of dollars annually. Examples include: $2.3 million per year in software licensing agreements; $2.0 million in personal computers; $750,000 for express package deliveries; $515,000 for scientific and office supplies; $544,000 for travel and car rental; and $725,000 for audio visual equipment. Efficient Use of Current Resources          Through the strategic planning and budget process, Penn State has taken aggressive steps for many years to reduce costs and to create more effective and efficient ways of operating while preserving academic quality.   The University continuously and carefully reviews expenditures to minimize tuition increases to the extent possible. We are committed to following that practice in the future. Since 1992-93, Penn State has recycled over $87 million, or 12 percent of its departmental operating budgets, for reallocation to areas of higher priority or need. Throughout this ten-year reallocation process, the University has shifted funds from administrative functions to support teaching, research, and service; moved resources to the most promising and effective programs; and eliminated duplication in programs and services. From 1996-97 to 2000-01, about $3.75 was added to academic units for every $1.00 of budget recycling. This includes reallocated funds plus any additional program funds that were available during that period. On the administrative side, only $0.54 was given back for every $1.00 taken through budget recycling. Educational Costs by Location and Student Level        Periodically, the University undertakes a study to determine educational costs by location and student level. To assist the work of the Tuition Task Force, this study was completed in Fall 2001 using the latest available actual expenditure and income data from 1999-2000. Following are the major findings of this study as they relate to tuition considerations:    The total educational and general (E&G) cost per FTE student in 1999-2000, excluding the College of Medicine, the Dickinson School of Law, and Penn College, is $12,135. The E&G cost per FTE student at University Park is slightly higher, at $12,472. The cost per student at the other campus locations varies based on campus type. Harrisburg and Great Valley, with primarily upper division and graduate education missions, are somewhat higher than University Park. The other campus locations, with primarily undergraduate education missions, are somewhat lower than University Park. Non-resident students are more than covering the cost of their education through the tuition they pay. In 1999-2000, for example, out-of-state students at University Park paid an average of $13,596, compared with the University Park E&G cost of $12,472. When all campuses are included, non-resident students are paying an average of $13,076, compared with a total E&G cost of $12,135. Looking at instructional costs by student level, many state funding formulas across the nation use a ratio of 2:1 for the cost of upper division compared with lower division, and 5:1 for graduate instruction compared with lower division. Penn State's cost analysis shows ratios which are close to this norm: 1.8 to 1 for upper division instruction, and 4.5 to 1 for graduate instruction. FIVE-YEAR BUDGET PROJECTIONS AND TUITION REQUIREMENTS          To determine what level of appropriation and tuition increases might be necessary, the Task Force estimated the University's potential average annual expense and income increases over the next five years. On the expense side of the budget, the primary cost drivers behind the increases in the budget include personnel costs for salaries and employee benefits, facilities, program needs, information technology and library materials, and student aid. On the income side, the primary factors are the state appropriation and student tuition and fees.          To project the University's budget requirements, the Task Force developed a number of budget scenarios using the best estimates for each of several expense and income categories. On the expense side, certain projected increases, such as benefits cost increases, facilities costs, and critical academic and support program needs were common to all of the scenarios. The primary expense variable was the level of personnel cost increases for faculty and staff. On the income side, the Task Force considered varying projections for changes in the state appropriation. The level of tuition and fee increases required to balance each of the scenarios was then determined. Five-Year Budget Projections (Exhibits, Tab I)        EXPENSE CHANGES:  Personnel Cost Increases – the budget projections assume a continuation of the plan initiated in 2001-02. This includes base salary adjustments plus one percent each for the President's Excellence Fund and the Faculty/Staff Excellence Fund. The Excellence funds are based on the filled position salary base for faculty and staff. Three levels were tested and evaluated as to their possible effect on Penn State's faculty salary rankings with peer Big 10 public institutions, as follows: Peer average - a base salary adjustment of 3 percent plus 2 percent for the Excellence Funds, which would likely maintain Penn State's current ranking. Peer average plus 1 percent catch-up - a base salary adjustment of 4 percent plus 2 percent for the Excellence Funds, which would likely improve Penn State's current ranking over the five-year period. Further slippage - a base salary adjustment of 2 percent plus 2 percent for the Excellence Funds, which would likely result in further slippage in Penn State's ranking. Benefits and Insurances Cost Increases – health care insurance increases averaging approximately 16 percent over the five-year period are included. The budget projections also include providing health care benefits for graduate assistants and fellows and their families that correspond with benefits provided to faculty and staff. Retirement cost increases reflect continued growth in the number of employees participating in the TIAA/CREF retirement program over the five-year period. In addition, provisions are made for possible increases in the SERS employer contribution rate. This would bring the permanent budget for SERS up to 11 percent, or the new "normal rate." (Note: the current SERS rate is 0.69 percent, but provisions are included in the current permanent budget for a employer contribution rate of up to 4.6 percent.) In line with national trends, significant cost increases are reflected for property and liability insurances. Facilities – the commitment to provide additional funds for deferred maintenance at $1 million per year is continued in each year of the plan. The current Capital Improvement Program has three full years and one partial year remaining to fund debt service for the planned $180 million capital program. Funds also are included for new and newly renovated facilities scheduled to come on line during the planning period, plus modest increases in fuel and utilities costs. Program Needs Academic initiatives - includes completing the funding commitments over the next three years for the Life Sciences, Materials Science, Environmental Studies, and Children, Youth, and Families consortia. Funds are also included at approximately the same modest level for future new initiatives as commitments to the current programs are completed. Program investments - funds totaling $6 million per year have been included for program investments. This level of program investment funding would permit the University to move forward modestly in its academic programs. The funds would be used for: new faculty positions; start-up packages and salary augmentation for replacement positions; more competitive graduate assistant stipends; seed funds to stimulate emerging new fields; funds for selected expansion of four-year degree programs at campus locations; facilities modernization; life-cycle funding for leading-edge technology improvements; enhanced outreach; and support for mission-critical academic and administrative support systems. School of Information Sciences and Technology (IST) – The budget scenarios include $1 million per year to complete the funding for the new School of IST. Note that the University's state appropriation request includes a request for additional funds for IST. If these funds are received from the Commonwealth, the amounts reflected in the scenarios would be reduced accordingly. Libraries and Information Technology – $2 million per year for library information resources and student computing and telecommunications needs will be provided from a $15 per semester increase each year in the Information Resources and Technology Fee. Other Priority Needs – $1.5 million per year has been included for continuing priorities such as President's Opportunity funds, instructional workload funds, and the parking and transportation program. Budget Reductions, Reallocations, and Enhancements – the equivalent of one percent per year in departmental operating funds will be reallocated within each college, campus, and support unit as part of the strategic planning process. Student Aid – a total of $1.2 million per year has been included for need-based student aid to help mitigate the effects of tuition increases.        INCOME CHANGES:   State Appropriation – Educational and General (E&G) appropriation changes from the Commonwealth are included at -5 percent, -3 percent, 0 percent, +2 percent, and +4 percent. No special line-item funding is assumed in the plan. Tuition – academic-year income from the tuition rate increases is included in each of the scenarios. Tuition - Summer Session – Summer Session income from previous year tuition rate increases is included in each of the scenarios. Information Resources and Technology Fee – includes an increase of $15 per semester for each year of the five-year plan. Enrollment-Related and Other Income Changes – this includes income from enrollment changes, increases in facilities and administration cost recovery (indirect costs), and/or investment income. Tuition Required to Balance Budget Scenarios          A total of 15 five-year budget scenarios resulted from using the income and expense assumptions listed above. In the table that follows, we summarize the average annual tuition and fee increases required to balance the budget scenarios at the 3 levels of personnel costs and 5 levels of state appropriation changes.    It can be seen from the table, for example, that average annual tuition and fee increases of 14.7 percent would be required if the appropriation was cut 5 percent and the personnel cost increases included a 1 percent catch-up with peer institutions. At the other end of the scale, if the appropriation increased by 4 percent and personnel cost increases were below the peer average, tuition and fees would need to increase by 7.8 percent. Mid-range scenarios, with either no change or a modest 2 percent increase in appropriation and personnel cost increases at the peer average, still require increases of 10 to 11 percent.    Annual Tuition and Fees Increases Required to Balance 5-Year Budget Scenarios   Personnel Costs Appropriation Change Further Slippage Peer Average 1 Percent Catch-Up -5.0% 12.3% 13.5% 14.7% -3.0% 11.3% 12.5% 13.7% 0.0% 9.8% 11.0% 12.2% 2.0% 8.8% 10.0% 11.3% 4.0% 7.8% 9.0% 10.2% POSSIBLE TUITION MODELS         The Tuition Task Force studied the following possible tuition models as a means to generate the increased tuition revenues required over the next five years:    Incremental increases. One-time, significant increases for all students, followed by more modest annual increases. Significant increases for incoming freshmen, with more modest increases for continuing students. Expanded differential tuition by student level and by campus location. Advantages and Disadvantages of Possible Tuition Models         The following is a summary of some of the advantages and disadvantages of the four possible tuition models identified by the Task Force:   Incremental increases:    Advantages:   – tuition increases can be adjusted each year to meet economic conditions and University needs.   – no students receive disproportionately large increases in any one year.   – this option does not constitute a significant departure from historical practice.   Disadvantages:   – the incremental increases likely would need to be significantly higher than inflation.   – this option may not provide sufficient income to move the University forward.   – over time, annual higher-than-inflationary price increases would be a more significant problem for campus college locations whose competitors are local and regional institutions. One-time, significant increases for all students, followed by more modest annual increases:   Advantages:   – this option would provide immediate inflow of income to address the University's needs.   – it would accomplish the change in the tuition structure quickly.   Disadvantages:   – a large portion of the new funds would be generated immediately, while the best solution to addressing the University's program needs would be more gradual increments over a period of time.   – new funds would be committed initially, making it potentially difficult to keep to inflationary increases in future years.   – this option impacts current students more than the other options.   – it also has the greatest potential impact on access. Student aid becomes an even more significant issue.   – reaction by students and the public would likely be the most severe for this option.   – it would have a deleterious impact on the campus locations, and perhaps price them out of the market compared with their local and regional competitors. Significant increases for incoming freshmen, with more modest annual increases for continuing students:   Advantages:   – incoming freshmen can be advised of the increase before making the decision to come to Penn State.   – continuing students would experience more modest increases, similar to those they have experienced in the past.   – income from this plan would be spread out over a four-year period, providing more effective use of the funds.   – it can provide the funds to move the University forward if the freshmen increase and the following annual increases are sufficiently large.   Disadvantages:   – this option would have an impact on accessibility for new freshmen. Student aid would be an important issue.   – it could be a serious problem for campus locations, causing their prices over time to outstrip local and regional competitors. Expanded differential tuition by student level and by campus location:    Advantages:   – expanded differentials between University Park and other campuses would be the best solution to address the price competitiveness issues facing the campus locations.   – pricing at University Park could reflect the demand and elasticity of prices at that campus.   – further differentials by level would better reflect the costs of upper division and graduate education.   – the basis for further differentiation by location and level was established in the earlier study by the University Planning Council   – differentiation by level and location can be implemented in conjunction with any of the other three alternatives.   Disadvantages:   – expanded differentials could be an inhibitor to free movement within the Penn State system. For example, the tuition increase from the sophomore level at a campus to the junior level at University Park would be substantial.   – under the cost center budget model, it will be necessary to insure that each location covers its basic cost increases through tuition and appropriation increases.   – many times, students and parents do not understand the differences in cost among locations, often associating lower cost with lower quality.   – students also do not always understand price differences by student level. CONCLUSIONS AND RECOMMENDATIONS        Following an extensive review of the background information, potential five-year budget scenarios, and tuition income requirements, the Tuition Task Force has reached two primary conclusions: Strong student demand for admission and significant tuition rate increases by peer institutions suggest that tuition adjustments can be implemented, particularly at the University Park campus. Flexibility to adjust tuition is more limited at some of the campuses other than University Park due to local economic conditions, student demand, and the pricing policies of competing regional institutions.        Considering the advantages and disadvantages of several possible tuition models, the Task Force endorses the following two overarching recommendations:    The tuition model adopted by Penn State should be a combination of increased tuition differentials by campus location and by student level, and incremental increases as needed to generate the funds necessary to meet the University's budget requirements. Higher tuition should be phased in beginning with incoming freshmen, rather than substantial increases for current continuing students. Changes in Tuition Differentials by Campus Location  Differential tuition increases should be considered by campus location and type. The Task Force considered three possible campus groupings for further differentiation of tuition levels, as follows: Option A: There could be two basic undergraduate tuition rates among the various Penn State campuses: (1) the University Park rate; and (2) a lower rate, which would apply to all other campus locations. Option B: There could be two basic undergraduate tuition rates among the various Penn State campuses: (1) a rate for University Park, Erie, and Harrisburg; and (2) a lower rate, which would apply to all other campus locations. Option C: There could be three basic undergraduate tuition rates among the various Penn State campuses: (1) the University Park rate; (2) a somewhat lower rate for Erie, Harrisburg, and perhaps other selected campuses; and (3) a lower rate for other campus locations. Three basic undergraduate tuition rates (Option C) seem to provide the most flexibility for meeting the various needs of the respective campus locations in setting tuition rates. Care must be taken to insure that information that is provided to the public with respect to differential campus tuition levels reflects differing campus cost structures, and does not lead to erroneous impressions of differences in educational quality. Changes in Tuition Differentials by Student Level   The plan developed by the previous University Planning Council (UPC) Working Group on Tuition recommended a differential between lower division and upper division of approximately $600 based on the higher cost of upper division education. Half of that plan was implemented. Therefore, there is room to increase the differential between lower division and upper division and still remain within the earlier proposed plan. The Task Force recommends that the balance of the earlier differential tuition plan between lower division and upper division undergraduate students be implemented. The current differential has grown to $356 as a result of compounding increases over the last several years. The UPC plan recommended that graduate tuition be set somewhat higher than upper division undergraduate tuition. The current differential is $472, which is at about the level originally envisioned in the UPC plan. This differential between upper division undergraduates and graduate students should be maintained. Changes in Tuition Differentials by Residency   As resident tuition increases, especially through higher increases for incoming freshmen, it may not be possible or desirable from a market standpoint to maintain the current differential of 2.1 to 1 between non-resident and resident tuition at University Park and 1.5 to 1 for the Commonwealth College and other campus locations. Consideration should be given to adjusting this ratio depending on the actual cost of instruction, state appropriation, and student demand. Changes in Laboratory and Clinical Surcharges  The laboratory and clinical surcharges should be folded into the basic upper division tuition rate, thereby creating a two-tiered upper division tuition rate schedule. Exceptions would include higher differential tuition for a few selected programs, such as Nursing, IST, and business administration programs. Changes in Mandatory Fees  Penn State should continue its philosophy of limiting mandatory fees. The student activities fee and the information resources and technology fee should continue as the only two fees assessed to all students. Student Aid  Extensive tuition discounting for current or future students, as practiced by many private institutions, is not recommended. If significant tuition increases are implemented, however, additional funds should be budgeted for need-based institutional student aid in order to provide balance and accessibility. The University needs to make students and parents more aware of the benefits of federal tuition tax credit programs. PROSPECTIVE TUITION LEVELS        The budget scenarios reflect estimated annual expense needs over the next five years and the overall tuition income levels necessary to fund them. The recommended tuition model suggests that, in the future, the University further differentiate tuition rates by campus location and student level, and phase in higher tuition increases beginning with incoming freshmen.        To determine prospective tuition levels, the Task Force overlaid the proposed differentials by location and student level on the mid-range budget scenarios. Based on this analysis, the following prospective tuition levels would be required over the next several years:  For 2002-03, all students would receive the same percentage increase. Beginning in 2003-04, tuition differentials would be implemented by student level and by location, such that: Incoming freshmen would receive a higher increase in 2003-04 and again as sophomores in 2004-05. (Note: all incoming freshmen beginning in 2004-05 also would pay the higher rates.) The existing differential for upper division and graduate students would be increased by approximately $360 over two years. University Park students would receive higher increases than students at other campus locations. Prospective differential increases for incoming freshmen in 2003-04: For University Park freshmen, a basic tuition increase plus an additional increase in the range of $400 to $600 in 2003-04 and again in 2004-05. For freshmen at other campus locations, a basic tuition increase plus an additional increase in the range of $50 to $100 in 2003-04 and again in 2004-05. Prospective increases for continuing students, including adjustments by student level, in 2003-04: For continuing students at University Park, a basic tuition increase. Upper division and graduate students would have an additional increase of $180 in 2003-04 and again in 2004-05. For continuing students at other campus locations, a basic tuition increase. Upper division and graduate students would have an additional increase of $180 in 2003-04 and again in 2004-05. The higher increases for incoming freshmen should be announced well in advance so that students can consider the cost of tuition in their admissions decisions. SUMMARY          Over the past several months, the Task Force on Tuition has studied a complex set of variables and issues surrounding tuition policies and practices at Penn State and our peer academic institutions. The Task Force has developed an extensive set of financial models to estimate future tuition levels under different scenarios of state appropriations and University expenditures, and to reconcile expenditures and revenues under alternative tuition strategies. The following points represent a summary and the major conclusions of our analysis:   Penn State is seriously underfunded, operating with fewer dollars per student than its peer institutions in Pennsylvania and in the Big 10. Although this measure is often used to express the efficiency of the University, the comparative lack of resources reflects unfavorably on the University's academic quality relative to other institutions, both public and private. Benchmarking indicates that, in virtually every administrative area, Penn State ranks at the top of its peer group in administrative efficiency, delivering the same or greater services for less cost. Penn State has, out of necessity, undertaken a major program of internal budget recycling and reallocation for the past decade. There is little flexibility remaining to generate internal funds without major reductions in programs and services provided by the University and adverse impacts on the quality of academic programs. The Grand Destiny Campaign has been extraordinarily successful, but private support does not provide funds for basic operating costs. Rather, it provides funds for the margin of excellence in the University's academic programs and vital support for its students. Because of state budget constraints, Commonwealth appropriations now represent only 14.6 percent of Penn State's total budget and less than one-third of the general funds budget. It is unlikely that state appropriations will increase at a sufficient rate to provide the necessary resources to support its educational mission in the future. Thus, Penn State will be forced to rely to an even greater extent on tuition revenue to improve – or even to maintain – its academic quality. Competition for students among Pennsylvania colleges and universities will undoubtedly intensify in the coming years. Nonetheless, the demand for a Penn State education will continue to be robust, and it should be possible to sustain enrollments with tuition increases in the range of most magnitudes considered in this report. The University's current and future efforts to enhance the quality of its teaching, research, and service missions will depend largely upon the ability to secure sufficient financial resources. Program investment funds are required to hire additional faculty; to modernize classroom and laboratory facilities; to address growing deferred maintenance needs; to sustain the University's critical academic and administrative support programs and systems; to further develop library resources; to provide necessary technology improvements; and to enhance student life and learning experiences. Additional salary funds are required to stop the slippage in Penn State's faculty salary rankings and begin to recover lost ground. A strategy should be adopted that provides sufficient funding from tuition to permit the University to enhance its academic quality and reputation in the coming years. Peer public institutions are planning significant increases in their tuition rates over the next several years to support major academic quality enhancement initiatives. Holding tuition increases at Penn State to levels below the mid-range scenarios provided in this report would almost certainly result in an erosion of the academic quality and reputation of the University. Questions concerning the rollout and impact of significant tuition increases are critically important, and the Task Force recommends consideration of a plan involving larger increases for entering students over a two-year period with relatively lower increases than might ordinarily be the case for incumbent students. The Task Force believes that an emphasis on greater tuition differentials among campuses, programs, and student level (lower division, upper division, and graduate) is justified based on the costs of educational programming and other relevant considerations. Such differentials would permit Penn State campuses across the Commonwealth to compete effectively in regional markets while permitting the University Park campus to secure the financial resources necessary to support the unique aspects of its educational mission. Tuition levels for non-Pennsylvania residents should be set at or above the costs of education while being sensitive to the competition from private and other elite public universities. A Penn State education remains an excellent investment for students even with significantly higher tuition rates. The Task Force analysis indicates that a large share of Penn State students receive financial aid from state and federal grant programs, scholarship endowments, and other internal University resources. Loan indebtedness of Penn State students upon graduation is only slightly higher than the national average for public universities. Nonetheless, additional need-based financial aid must be budgeted by the University under almost any tuition increase scenario, and a well-rounded strategy to assist students and their families to secure the maximum amount of grants and tax credits will become even more critical in the next five years and beyond. Finally, Penn State's network of campuses across the Commonwealth can continue to provide points of access to higher education at relatively lower costs to students. To assure the greatest return to all who invest in the University, Penn State must continue its strategy of cost containment and continuous quality improvement, budget reallocation to address changing priorities, and the critical assessment of strengths, needs, and special opportunities.        Penn State is at a critical juncture in its evolution as a world-class university. Additional financial resources will be required to support Penn State's continued competitiveness and its development as a premier academic institution. While no one likes a solution which raises tuition, the Task Force has concluded that there appears to be no reasonable alternative if the University's goals are to be achieved. Therefore, the Tuition Task Force endorses the tuition strategy outlined in this report as a balanced and fair way to generate the needed resources over the next five years.   Exhibits Table of Contents