WORCESTER While facing a $54 million budget shortfall for next fiscal year, the University of Massachusetts last month hiked the salary of medical school chancellor Michael F. Collins by more than $60,000 a year, almost a 12 percent raise.

The three-year contract signed Feb. 14 by Collins and outgoing University of Massachusetts president Jack Wilson raises the chancellors annual base salary and deferred compensation from $524,300 to $585,290.

Under the deal, Collins will no longer get a separate $32,000-a-year housing allowance and is required to live rent-free in the furnished and remodeled Grenon House on Flagg Street. The five-bedroom, four-bathroom home has an assessed value of $736,600 and is owned by the University of Massachusetts Foundation, city property records show.

University officials said the chancellors new base salary takes into account the loss of his housing allowance and the tax liability created by the free housing arrangement. The Internal Revenue Service considers such an arrangement taxable income. Medical school officials have declined to disclose the value of the housing arrangement.

Edward Keohane, a medical school spokesman, said Collinss take-home pay did not change under the new contract when considering the loss of his cash housing allowance and the tax implications of getting a house in which to live.

Collins had not received a pay raise since university trustees elected him chancellor in September 2008, Keohane said.

The chancellors pay increase stands in contrast to 2 percent raises negotiated late last year with some union workers at the medical school and with a previous salary freeze for all university employees earning $120,000 a year or more.

In announcing that pay freeze two years ago, Wilson noted, We are living at a time when few people are seeing their financial circumstances improve and most are happy to preserve what they have as we ride out the current fiscal and economic storm.

The university president was unavailable for comment, said spokesman Robert P. Connolly.

Our main point is that, during this time of transition, the university believed it was important to ensure Dr. Collinss continued leadership at UMass Medical School, Connolly said. Robert L. Caret, president of Towson University in Maryland, is to take over for Wilson in July.

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UMass medical school chancellor gets pay increase of nearly 12%