May 2011 To the Board of Trustees Lehigh University This document includes an executive summary of our 2011-12 budget in the context of the University’s strategic plan, a detailed analysis of the operating budget including an overview, historical data and trends, future projections, and summary schedules outlining both the operations and capital budget for the coming fiscal year.

EXECUTIVE SUMMARY Lehigh continues to experience the financial realities facing many higher education institutions still recovering from the economic downturn. With minimal opportunity for increased revenues the overall budget is projected to show little growth in 2011-12. As a result of minimal revenue increases, most areas of the University will again experience flat or declining expense budgets with any additional resources going only to the investments that are necessary in order to advance our mission-critical strategic efforts in key areas. Overall, the operating budget growth is 2.2% CAMPUS PLANNING In order to move forward in the best possible direction for Lehigh and meet our future challenges the University continues with the implementation of the Strategic Plan. Leading these efforts is the work of the four “frontrunner groups” as well as the formation of seven Strategic Plan Implementation Group (SPIG) sub groups created to further develop ways to evaluate campus-wide progress in major areas of the strategic plan. The frontrunner groups are currently focusing on (1) cluster hiring to enable Lehigh to enhance or develop faculty strength in the Grand Challenge and other interdisciplinary areas; (2) implementing a campus-wide first-year experience that integrates curricular and co-curricular activities to develop skills and multiple perspectives needed to apply knowledge gained in academic disciplines to real-world experiences; (3) engaging with South Bethlehem to enhance the quality of life in the neighborhoods surrounding our campus and to provide greater interaction with the community for Lehigh students, staff, and faculty in academic, research, and volunteer activities; and (4) enhancing graduate education by developing ways to make Lehigh graduate education experience distinctive. In addition to the frontrunner group activities seven SPIG subgroups were formed last year to develop and disseminate useful measures of campus-wide progress in major areas of the Strategic Plan. Some highlights of recent activities include: the Globalization sub-group articulating metrics related to international priorities; the Grand Challenge sub-group considering research, education, and facilities/campus-wide initiatives in the Grand Challenges focus areas; the External Community Engagement sub-group focusing

on infrastructure needs and activities, including the Campus Master Planning process; the Promoting Student Success sub-group continuing to enhance the articulation of learning outcomes across the university; the Investing in Faculty and Staff sub-group concentrating in areas of faculty and staff development, as well as attracting and retaining a diverse and talented group of faculty and staff; and lastly, the Budget Integration and Resource Analysis (BIRA) sub-group working to develop a framework to assist in the allocations of resources to support the strategic plan initiatives integrated with the multi-year budget process. OVERALL FINANCIAL ANALYSIS PICTURE The strategic Financial Analysis Model serves as the basis for multi-year projections, from which the annual budget estimates are then extracted. The annual budget plan has two parts. The first is the operating budget, which includes all of Lehigh’s anticipated operating revenue and expenses for each year and the second is the capital budget. Additional information on both of these follows below.

Unrestricted64%Auxiliary

11%

Restricted25%

Lehigh UniversityOperating Expenditure Budget

FY 2011-12

Var iable FacultyComp Fin Aid

BldgMaint

Expense

DebtService

$110 $66 $54 $26 $9

$0

$20

$40

$60

$80

$100

$120(m

illio

ns)

Unrestricted Funds$412,175,180

-------------Fixed---------------

Similar to many private institutions of higher education, Lehigh University’s total revenues are made up of endowment earnings, gifts and contracts that are restricted in their use, auxiliary enterprises that must generate revenues sufficient to cover their expenses, and unrestricted dollars. Of Lehigh’s $412 million budget, $104 million is restricted, $265 million is unrestricted, and $43 million is auxiliary services. Expendable restricted budgets, in which providers designate how their money is spent, are being scrutinized to ensure that they are optimally spent for the purposes for which

they were intended, as well as looking for opportunities to use restricted funds to support costs that have previously been paid for with unrestricted funds. Primary sources of restricted funds include research grants and contracts, gifts for operations, and endowment earnings. The unrestricted expense budget, made up of general funds that can be used for any purpose consistent with supporting the overall purpose of the University, receives significant attention in order to ensure that these dollars are focused carefully on the highest institutional priorities, and to identify any savings that might be available in order to maximize flexibility. As shown in the above pie chart, of the unrestricted budget $155 million is “fixed” as costs for tenured faculty salaries, debt service, financial aid, and plant operations…thus we continue to focus our attention on the “variable” unrestricted budget of $110 million, where changes can be made in shorter time frames. The major sources of funding for unrestricted funds include tuition and fees, unrestricted endowment earnings and short term investments, indirect cost recovery on research grants, and unrestricted annual fund gifts. HIGHLIGHTS OF THE FINANCIAL PLAN:

• Strategic Plan Funding Multi-year budget projections are being used as a basis for ongoing planning. The University is integrating the plan priorities with ongoing activities on campus while reviewing opportunities for reallocation / redistribution based on analysis undertaken during the Strategic Plan Implementation work. Early years of the plan assume more reallocation while later years build toward an environment with additional resources provided by fundraising.

• 2011-12 Operating Budget The operating budget revenues total $412,175,180; expenditures total $410,875,180; with a projected unrestricted surplus of $1,300,000. Projected budgeted revenues are expected to grow 2.2% over the 2010-11 budget. The modest growth reflects a minimal change in tuition and fees, gifts for operations, and endowment spending generated by additional gifts. The major budget operating expense components include $289,147,590 for educational and general expenses, $78,534,370 for financial aid, and $43,193,220 for auxiliary operations. The plant fund budget, which reflects capital expenditures rather than operating items, totals $41,411,640.

• General Expense Increases The development of the 2011-12 operating budget was based on a flat budget with incremental dollars going only to a few critical investments in order to advance strategic efforts in key areas. Thus, individuals units have had to reallocate their existing resources toward higher-priority areas, in order to cover any changes in expense projections.

• Endowment Spending An important element of the university’s revenues is the endowment payout resulting from the endowment spending formula. Because of the significant decline in the financial markets two years ago, and the multi-year basis for the spending calculation, the university’s suspension of the “floor” in the setting of the per share spending, which was used in the construction of the 2010-11 budget, will continue in 2011-12. Therefore, the spending per share will decrease by 0.5% for 2011-12, which is in addition to the 5% per share decrease in 2009-10 and the 3% share decrease in 2010-11.

• Capital Plans We are continuing to subject all capital projects to close examination, with approval provided only to those that have a dedicated funding source, or are required for the arrival of new faculty or staff.

BUDGETARY PRIORITIES

• Expense Categories • Compensation

Continued investment in high performing personnel remains a priority. Therefore, the University continues the ongoing support to employees through merit-based salary increases for 2011-12 while also partnering with employees on benefits costs. In constructing the 2011-12 compensation budget careful attention was paid to the following:

• continuation of the staff position review process to determine when each opening occurs to identify if lower priority work that can be stopped so that positions can be eliminated with the savings dedicated to higher priority needs

• faculty staffing analysis through strategic discussions between the Provost and each Dean

• merit increase setting based on analysis of experienced and anticipated inflation, industry comparisons/projections, turnover/retention statistics and faculty market equity issues

• the continuing benefits allocation review process, with a goal of identifying the highest priority benefits areas within the existing expenditure level for the University

The salary increase allocation for faculty and staff is 2.5% for the annual merit pool process. In addition to the merit allocations, an additional amount is being made available for faculty market adjustments. This is the second year of a multi-year effort to recognize and retain top faculty.

• Financial Aid - Undergraduate

The University continues its commitment to making Lehigh accessible to qualified students regardless of income level. The total projected increase in the undergraduate financial aid budget from institutional sources is 2.6%, which is consistent with the overall cost of attendance increases for financial aid purposes. The undergraduate financial aid program is supported 63% by unrestricted funds, another 30% comes from restricted gifts and endowment, and the final 7% from government support. The following highlights the process used in developing the 2011-12 financial aid plan:

• no significant changes from the current practices of how we allocate financial aid to individual students

• projection for continuing students based on current need, estimated changes based on the external economic environment, requests for adjusted packages, and the amount in unrestricted funds support required for financial aid increases not covered by available endowment and gifts to financial aid

• projection for entering class based on multi-variant analysis, looking at current first year class patterns, national economic patterns, recruitment areas of focus, and any adjustments for the cost of attendance

• Facilities Operations and Maintenance

The facilities total operating budget identified is being reduced by $1,000,000, due to revised utility cost projections being below current budgeted amounts. Major highlights include:

• Utilities expense • stabilization of the price structure of electricity

subsequent to deregulation of electric rates resulted in a portion of the budgeted savings mentioned above. In addition, energy use reduction investments have been made across campus, and open market purchasing strategies have yielded positive rates compared to fixed contracts. It is anticipated that all these factors will be in place in 2011-12 as well

• Other operating costs • incremental funding to plant preservation to support

deferred building maintenance needs as well as campus adaptive reuse projects is being provided through redeployment of utility savings

• Other Expenses The discipline of no general expenditure increases was employed throughout the University. High priority specific investments were then identified for special funding. These investments include:

• investing in resources required for partial support of the new fundraising campaign

• completion of funding of police positions and market equity adjustments

• incremental support for the VP for International Affairs office

• additional funds being made available for support of the research endeavor and library journal costs

• operating support for the ArtsLehigh and Health, Medicine, and Society programs

• funding for the Lehigh Environmental Advisory Group (LEAG) focusing on environmental stewardship

• Revenue Categories • Tuition / Fees and Enrollment

Tuition continues to be the single largest source of income for the University. Lehigh’s per student undergraduate tuition is currently slightly below the average of our comparison institutions and it is projected to continue to remain below the comparison group once all the schools report their 2011-12 tuition. Significant tuition and enrollment information is as follows:

• tuition increase of 3%; second lowest increase in 40 years (2.9% in FY10; 3% in FY11)

• no increase in the technology fee • room increase of 2.6% and board increase of 3.6% • total cost of attendance $51,800; increase of 3%

Enrollments for undergraduates are budgeted at current levels of 4,585 FTE with a first year class target of 1,175 and fall semester transfers at 65. Given the financial aid investment described above, we anticipate a fall/spring undergraduate tuition discount of 33.8%. Graduate levels are projected to maintain the higher enrollment levels we have seen in the past few years.

• Investment Return For the third straight year we are reducing the endowment spending payout in order to protect the long-term value of endowment principal. We are also anticipating that the increases in gifts to endowment will help offset the loss of income due to the reduced spending policy for the endowment as a whole, although

of course for individual funds without new gifts received, there will be a reduction in spending available from current year levels. Finally, we are projecting that short term investment income will show little increase due to low interest rates.

• Gifts The income from non-capital gifts available for general expenditures is projected to increase modestly for the 2011-12 fiscal year. Major considerations in developing the gift projections include:

• continued economic pressures on donors • conservative estimates on the unrestricted Annual

Fund performance and gifts for scholarships based on recent experience

• initial modest impact from incremental investment to support the new fundraising campaign, as these results will be more visible in later years

• Auxiliary Enterprise The Auxiliary Enterprises will continue to maintain their own financial viability while also increasing their contribution to the unrestricted general fund. The major sources of auxiliary income are derived from residential facilities and dining services, which will return $1,126,290 to the operating budget, as well as continue to self-fund maintenance of facilities and equipment. The combined Room and Board revenue increase for 2011-12 is 3.0%.

• Research The outcome of federal budget negotiations is unclear with current estimates anticipating a return to 2008 levels. Overall, we anticipate research income to remain at current levels though 2011-12. This projection is based on an assumption that our current yield rates on federal awards will continue, as well as the growth in proposal submission that has occurred in recent years, and that these will compensate for projected losses in state research funding.

COST SAVINGS In response to the economic downturn the University made material cuts in wage expenditures, adjunct funding, and general expense budgets while also reducing endowment spending. In 2011-12, we will continue to review all staff positions with care, and will direct the faculty hiring opportunities to highest priority areas, based on the University’s strategic plan while also continuing the spending reduction for activities supported by endowment funds. In addition the University continues the practice in recent years of no general expense increase for 2011-12 with the expectation that any general office or departmental expense

needs within an area will be covered by reallocations from lower-priority items to higher-priority items. NEW INVESTMENTS In these times of financial uncertainty, it is nonetheless vital to continue investing in our most important areas, in order to advance our mission-critical strategic efforts. In addition to the financial aid area, where we anticipate increased expenditures, we also are planning targeted additional investment in a few areas which are key for the support of the University’s mission. The President’s budget message to the general university community continued to reinforce the reality of few additional funds being available for programmatic funding due to financial constraints. Therefore central funding requests from vice presidential stems were limited to only the highest priority items and totaled a smaller amount then normal requested of $8.8 million of permanent (continuing) funds. While most of these requests were either denied or funded through reallocation, $1.6 million dollars of new funding were identified in 2011-12.

SUMMARY The 2011-12 fiscal year budget is hereby presented to the Board of Trustees. The overall budget is projected to grow 2.2%. As discussed earlier in this document, incremental funding for expenditures went to only the highest priority items. This resulted in a modest growth in expense budgets for compensation, financial aid, and a few departmental budgets. However, those expense increases are being partially offset by cost reductions in general expenditures. Revenue increases are also projected to be modest as the sluggish economy continues to impact the university’s major revenue sources. The comprehensive university operating budget, including Educational and General, Financial Aid, and Auxiliary Enterprises, totals $412,175,180 in revenues and appropriations. Expenditures and appropriations total $410,875,180. The amount of $1,300,000, as required by University policy, is projected as the unrestricted unappropriated balance. The Plant Fund budget is the final component of the composite budget. The Plant Fund supports capital expenditures for the fiscal year. A total plant fund budget of $41,411,640 is projected. Funding will be provided from current fund transfers of $16,334,130 and from gift and other plant fund sources in the amount of $25,077,510. In addition to the University operating budget the related organizations of the University project activity totaling $21,145,220. The related organizations are the Ben Franklin Partners of Northeastern PA (BFTPNE), the Manufacturers Resource Center (MRC), and the Northampton County Revolving Loan Fund (RLF).

We hope that this overview has given you a sense of the size and scope of the 2011-12 budget. On the following pages, we provide additional budget information for an operating budget totaling $412 million and a capital (plant fund) budget totaling $41 million.

Respectfully submitted,

Margaret F. Plympton Vice President for Finance and Administration

Stephen J. Guttman Director of Budget

L E H I G H U N I V E R S I T Y

2 0 1 1 - 1 2

C O M P O S I T E B U D G E T

WITH 2010-11 COMPARISON

2011-12 2010-11

REVENUES EXPENDITURES REVENUES EXPENDITURES

UNRESTRICTED

Educational and General 258,937,500 193,135,490 250,134,050 187,485,540 Financial Aid 3,500,000 53,370,680 4,000,000 52,122,690 Auxiliary Enterprises 43,193,220 43,193,220 42,524,740 42,524,740

Subtotal 305,630,720 289,699,390 296,658,790 282,132,970

Appropriations 2,157,240 16,788,570 1,247,690 14,513,510

TOTAL - UNRESTRICTED 307,787,960 306,487,960 297,906,480 296,646,480

Unappropriated Balance 1,300,000 1,260,000

DESIGNATED

Educational and General 17,003,350 17,003,350 15,032,070 15,032,070 Financial Aid 1,533,250 1,533,250 1,082,400 1,082,400

TOTAL - DESIGNATED 18,536,600 18,536,600 16,114,470 16,114,470

RESTRICTED

Educational and General 62,220,180 62,220,180 65,896,940 65,896,940 Financial Aid 23,630,440 23,630,440 23,469,980 23,469,980

TOTAL - RESTRICTED 85,850,620 85,850,620 89,366,920 89,366,920

COMBINED TOTAL UNRESTRICTED, DESIGNATED, AND RESTRICTED

Educational and General 338,161,030 272,359,020 331,063,060 268,414,550 Financial Aid 28,663,690 78,534,370 28,552,380 76,675,070 Auxiliary Enterprises 43,193,220 43,193,220 42,524,740 42,524,740

Subtotal 410,017,940 394,086,610 402,140,180 387,614,360

Appropriations 2,157,240 16,788,570 1,247,690 14,513,510

TOTAL - UNRESTRICTED, DESIGNATED, AND RESTRICTED 412,175,180 410,875,180 403,387,870 402,127,870

Unappropriated Balance 1,300,000 1,260,000

LEHIGH UNIVERSITYSources of Operating Revenue

2011 - 12

Gifts 3.7%

ResearchGrants & Contracts

8.6%

Indirect Cost Recovery

2.1%

Financial AidGovernment

1.1%

Other3.4%

$412,175,180

Other InvestmentReturns

2.6%

Tuition & Fees54.1%

Room &Board7.9%

OtherSources

2.6%

Endowment Earnings 13.9%

Auxiliary

Appropriations4 1%

By Functional Areas

Operating Expenditure Distribution2011 - 12

Salary & Wages34.7%

EmployeeBenefits 11.2%

General Expenses

23.6%

Facilities -Operations and Maintenance

9.1%

Unrestricted Support for Debt Service

2.3%

Financial Aid 19.1%

$410,875,180By Expense Areas

Facilities Operations and Maintenance salaries/eb's are included in the Salary/Wage and EB categories

Academic Total43.0%

4.1%

Auxiliary Enterprises

10.5%

Financial Aid19.1%

Facilities Services 7.2%

Finance -Administration

2.3% StudentServices

7.2%

Advancement3.1% Other 3.5%

L E H I G H U N I V E R S I T Y

B U D G E T S U M M A R I E S U N R E S T R I C T E D A N D R E S T R I C T E D C O M P O S I T E B U D G E T

2011-12 2010-11

% of % of Amount Total Amount Total

REVENUE AND APPROPRIATIONS

Tuition and Fees 222,795,040 54.1 213,842,070 53.0 Auxiliary - Room and Board 32,421,930 7.9 32,079,310 8.0 Auxiliary - Other Sources 10,771,290 2.6 10,445,430 2.6 Endowment Earnings 57,195,360 13.9 56,656,770 14.1 Other Investment Returns 10,800,000 2.6 10,632,000 2.6 Gifts and Grants 15,100,000 3.7 14,700,000 3.6 Grants and Contracts 35,532,650 8.6 39,666,430 9.8 Financial Aid - Government 4,707,030 1.1 4,898,370 1.2 Indirect Cost Recovery 8,571,840 2.1 8,933,570 2.2 Other 12,122,800 2.9 10,286,230 2.6 Appropriations 2,157,240 0.5 1,247,690 0.3

TOTAL-REVENUE AND APPROPRIATIONS 412,175,180 100.0 403,387,870 100.0

EXPENDITURES AND APPROPRIATIONS

Salaries and Wages 142,724,420 34.7 140,534,630 35.0 Employee Benefits 45,855,610 11.2 44,002,070 10.9

Total Compensation 188,580,030 45.9 184,536,700 45.9

General Expenses 97,100,900 23.6 93,857,310 23.3 Financial Aid 78,534,370 19.1 76,675,070 19.1 Facilities - Operations and Maintenance 37,321,080 9.1 37,719,990 9.4 Unrestricted Support for Debt Service 9,338,800 2.3 9,338,800 2.3

TOTAL - EXPENDITURES AND APPROPRIATIONS 410,875,180 100.0 402,127,870 100.0

Unappropriated Balance 1,300,000 1,260,000

TOTAL 412,175,180 403,387,870

F I N A N C I A L A I D B U D G E T UNRESTRICTED AND RESTRICTED

2011-12 2010-11

% of % of Amount Total Amount Total

REVENUE

Endowment Earnings 19,353,210 24.6 18,476,160 24.1 Gifts and Grants 4,603,450 5.9 5,177,850 6.7 Government Support 4,707,030 6.0 4,898,370 6.4 Unrestricted Educational Budget 49,870,680 63.5 48,122,690 62.8

TOTAL - REVENUE 78,534,370 100.0 76,675,070 100.0

EXPENDITURES

Undergraduates

University Sources 63,585,850 81.0 61,988,280 80.8 Government Sources 4,707,030 6.0 4,898,370 6.4

TOTAL - UNDERGRADUATES 68,292,880 87.0 66,886,650 87.2

GRADUATES 10,113,260 12.9 9,659,590 12.6

PRIZES 128,230 0.1 128,830 0.2

TOTAL - EXPENDITURES 78,534,370 100.0 76,675,070 100.0

P L A N T F U N D B U D G E T

2011-12

Amount

SOURCES OF REVENUES

Plant Preservation 8,505,250

General 7,757,080

Debt Service 18,679,310

Gifts 6,470,000

TOTAL - SOURCES 41,411,640

USES

Building Construction and Renovations 21,792,530 Land Improvements 939,800 Debt Amortization 18,679,310

TOTAL - USES 41,411,640

E D U C A T I O N A L A N D G E N E R A L B U D G E T UNRESTRICTED AND RESTRICTED

2011-12 2010-11

% of % of Amount Total Amount Total

REVENUE

Tuition and Fees 222,795,040 65.5 213,842,070 64.3 Grants and Contracts 35,532,650 10.4 39,666,430 11.9 Gifts and Grants 10,496,550 3.1 9,522,150 2.9 Endowment Earnings and Other Investment Returns 48,642,150 14.3 48,812,610 14.7 Related Activities 6,316,880 1.9 5,605,590 1.7 Indirect Cost Recovery 8,571,840 2.5 8,933,570 2.7 Other Sources 5,805,920 1.7 4,680,640 1.4 Appropriations 2,157,240 0.6 1,247,690 0.4

TOTAL - REVENUE 340,318,270 100.0 332,310,750 100.0

`EXPENDITURES

Arts and Sciences 46,588,260 16.1 45,595,850 16.1 Business and Economics 21,311,990 7.4 20,987,100 7.4 Education 10,101,900 3.5 9,547,960 3.4 Engineering & Applied Science 34,618,430 12.0 32,868,650 11.6 Research and Graduate Student Life 35,701,760 12.3 40,723,140 14.4 Library and Technology Services 22,094,810 7.6 21,752,870 7.7

Provost-Other Provost Other 6,262,9706,262,970 2.22.2 4,935,2104,935,210 1.71.7 Total Academic 176,680,120 61.1 176,410,780 62.3

Student Services 29,484,160 10.2 27,774,450 9.8 International Affairs 7,621,600 2.6 6,998,410 2.5 Advancement 12,661,810 4.4 10,644,190 3.8 University Communications 3,032,850 1.0 2,962,210 1.1 General 3,645,070 1.3 4,053,420 1.4

Financial-Administrative 9,505,380 3.3 8,947,560 3.2 Facilities Services 29,728,030 10.3 30,623,530 10.8 Total Finance/Administration 39,233,410 13.6 39,571,090 14.0

Appropriations 16,788,570 5.8 14,513,510 5.1

TOTAL - EXPENDITURES 289,147,590 100.0 282,928,060 100.0

Transfer to Financial Aid Budget 49,870,680 48,122,690 Unappropriated 1,300,000 1,260,000

TOTAL 340,318,270 332,310,750

A U X I L I A R Y E N T E R P R I S E S B U D G E T UNRESTRICTED

2011-12 2010-11

% of % of Amount Total Amount Total

REVENUE

Room and Board

Residence Services* 21,977,310 50.9 21,988,970 51.7 Food Services 10,444,620 24.2 10,090,340 23.7

Total - Room and Board 32,421,930 75.1 32,079,310 75.4

Other Sources

Residence Services 534,000 1.2 524,000 1.2 Residence Halls Association 156,000 0.4 156,000 0.4 Food Service** 4,622,220 10.7 4,255,350 10.0 Bookstore** 4,891,300 11.3 4,963,310 11.7 Telecommunications 0.1 300 0.1 Child Care Center 492,100 1.0 469,740 1.0 Debit Card Services 75,670 0.2 76,730 0.2

Total - Other Sources 10,771,290 24.9 10,445,430 24.6

TOTAL - REVENUE 43,193,220 100.0 42,524,740 100.0

EXPENDITURES

Residence Services* 22,511,310 52.1 22,512,970 52.8 Residence Halls Association 156,000 0.4 156,000 0.4 Food Service** 15,066,840 34.9 14,345,690 33.7 Bookstore** 4,891,300 11.3 4,963,310 11.7 Telecommunications 300 0.1 Child Care Center 492,100 1.1 469,740 1.1 Debit Card Services 75,670 0.2 76,730 0.2

TOTAL - EXPENDITURES 43,193,220 100.0 42,524,740 100.0

* Residence Services includes Residence Halls, Fraternities and Sororities** Food Services is operated by Sodexo and Bookstore is operated by Barnes & Noble