Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

California State University (6610)

The California State University (CSU) consists of 23 campuses. The Governor's budget proposes General Fund spending of $2.6 billion for the system in 2003-04. This is a decrease of $97.4 million, or 3.6 percent, from the enacted 2002-03 budget and a decrease of $123.1 million, or 4.5 percent, from the Governor's proposed revision of the 2002-03 budget. For the current year, the Governor proposes a $59.6 million unallocated General Fund reduction that is more than offset by proposed baseline increases. For the budget year, the Governor proposes $153.1 million in General Fund augmentations and $266.4 million in General Fund reductions. Figure 1 indicates changes from the enacted 2002-03 budget to the revised 2002-03 budget. It also describes the Governor's 2003-04 General Fund budget proposals.

Major Budget Proposals

The 2003-04 Governor's Budget includes $5.5 billion for CSU from all fund sources—including General Fund, student fee revenue, and federal and other funds. This is an increase of $63.1 million, or 1.2 percent, from the revised current-year amount. Below, we discuss the major changes in the Governor's budget for CSU.

Enrollment Growth of 7.1 Percent. The Governor's budget provides CSU with $150.9 million from the General Fund for enrollment growth. This would increase CSU's budgeted enrollment by 22,881 full-time equivalent (FTE) students, or 7.1 percent, above the current-year level.

Proposed Reductions. While the Governor's budget proposes a total of $153.1 million in General Fund augmentations (primarily for enrollment growth), it also proposes $266.4 million in General Fund reductions. These reductions consist of: 

• $83.1 million to expand the "unallocated" reduction proposed by the Governor in the current year to $142.8 million. (As we discuss below, increased student fee revenue is expected to essentially backfill the $142.8 million reduction.)
• $58.1 million reduction to academic and institutional support.
• $53.5 million from increasing the student-faculty ratio from 18.9:1 to 19.9:1.
• $53.2 million reduction to student services.
• $12.6 million reduction to CSU's K-12 outreach programs.
• $5.9 million in other program reductions.

Student Fee Increases. The Governor's budget assumes an increase in student fee revenue of $141.5 million in 2003-04 resulting from current-year and budget-year student fee increases. The CSU Board of Trustees approved increases of 10 percent and 15 percent for undergraduates and graduates, respectively, for the spring 2003 term (in the current fiscal year). This is the first fee increase for the segment in eight years. The Governor's budget assumes that the Trustees will approve an additional fee increase for the 2003-04 academic year of 25 percent for undergraduates and 20 percent for graduates. The total proposed fees for the budget year are:

• $2,466 for full-time resident undergraduates.
• $2,580 for full-time resident graduates.
• $10,926 for nonresidents.

The budget presumes that the increased student fee revenue of $141.5 million will essentially backfill the total $142.8 million unallocated General Fund reduction. Thus, nearly all the unallocated reduction would result in a fund shift rather than a true reduction in budgeted resources for CSU.

General Fund Support Per Student

The budget proposes average General Fund support of $7,508 per FTE student in 2003-04. This is $839, or 10.1 percent, less than the average General Fund support provided in the enacted current-year budget. (After accounting for the additional revenue from anticipated fee increases, however, average support for FTE students instead decreases by $428 per FTE student.) For each additional FTE student budgeted in 2003-04, the Governor provides $6,594 in "marginal" General Fund support. This is $106, or 1.6 percent, more than the marginal General Fund support provided in the current year.

LAO Alternative Budget Proposal

In the "Intersegmental" section of this chapter, we propose an alternative to the Governor's higher education budget regarding student fees, budgeted enrollment, and financial aid. Specifically, we recommend (1) a smaller increase in undergraduate fees at the University of California and the California State University, (2) a lower level of budgeted enrollment growth at both segments, and (3) an expansion of student financial aid in the state's student-centered Cal Grant program.

As discussed in an earlier section, we developed an alternative proposal to the Governor's higher education budget regarding student fees, budgeted enrollment, and financial aid. Figure 2 compares our proposal for CSU with the Governor's proposal. Specifically, we recommend:

• Moderate Student Fee Increases. The Governor's budget assumes that the CSU Board of Trustees will approve a fee increase of 25 percent for undergraduates and 20 percent for graduates. Our proposal would reduce the assumed fee increase from 25 percent to 15 percent for undergraduates. It would not alter the Governor's proposal to increase graduate fees by 20 percent.Because we recommend a smaller portion of new fee revenue be earmarked for financial aid than the Governor, our proposal results in more student fee revenue available to CSU to backfill proposed General Fund cuts. 
• Enrollment Growth Closely Aligned to Demographic Projections. The proposed budget provides $150.9 million to fund 7.1 percent enrollment growth. We recommend the Legislature instead provide funding for enrollment growth at a rate of 4 percent, which better matches demographic projections. Accordingly, we recommend a General Fund reduction of $66.2 million for CSU.
• Institutional Financial Aid Augmentation for Enrollment Growth Only. The Governor's budget assumes that one-third of CSU's fee revenue resulting from the proposed fee increase ($71 million) will be directed to CSU's own financial aid program that serves students at CSU campuses. This amounts to a 58 percent increase in funding for that program. We believe that this level of increase is not justified. We note that under the Governor's proposal, the state's Cal Grant program already will increase the size of awards to account for the higher fees at CSU and the University of California (UC). Therefore, we recommend increasing CSU's financial aid program for enrollment growth only (4 percent). In the "Financial Aid" section of this chapter we also recommend adding fee coverage for first-year Cal Grant B students. 

For a detailed discussion on the above recommendations, please refer to the "Intersegmental" section of this chapter. In the sections below, we present additional recommendations regarding the Governor's budget proposal for CSU.

Remedial Education

The California State University (CSU) currently admits many students who are unprepared for college-level writing and mathematics courses and must therefore enroll in and pass precollegiate (commonly known as "remedial" education) courses. The Governor's budget provides CSU with $6,594 for each additional full-time equivalent student, irrespective of whether the student is enrolled in precollegiate courses or college-level courses. The proposed budget for CSU also includes $6.5 million for various outreach programs designed to help prepare K-12 students for college-level studies. In this section, we (1) summarize current remediation policies and practices, (2) identify the proportion of students arriving at college unprepared over the last decade, and (3) present recommendations for increasing CSU's accountability in providing appropriate assistance to students who arrive unprepared. In the next section, we discuss CSU's K-12 outreach programs.

Determining College Preparedness

The CSU evaluates students to determine whether they are prepared for college-level writing and mathematics courses. Figure 3 summarizes the three ways CSU students can demonstrate they are prepared for college-level work. First, students can score above a minimum level on the SAT, American College Testing Assessment (ACT), or Advanced Placement (AP) exams. Second, students can pass the English Placement Test and the Entry-Level Mathematics test (which are both developed by CSU). Third, students who do not score sufficiently high on either college admission or placement exams must enroll in and pass the appropriate precollegiate course.

In a previous report, Improving Academic Preparation for Higher Education (February 2001), we examined the state's public higher education segments' efforts to identify and assist college-bound students who are not yet prepared for college-level work. Figure 4 summarizes the major findings of our report as they relate to CSU. 

Many CSU Students Arrive Unprepared for College-Level Coursework

Almost Half of Regularly Admitted CSU Students Arrive Unprepared for College Writing and Mathematics. The CSU annually reports on the proportion of freshman that arrive unprepared for college-level work. Figure 5 shows the CSU systemwide unpreparedness rate in writing and mathematics for regularly admitted freshmen over the last decade. In fall 1989, 38 percent of regularly admitted freshmen were unprepared for college-level writing and 23 percent were unprepared for college-level mathematics. By fall 2001, the unpreparedness rate in writing had increased to 46 percent. The unpreparedness rate in mathematics also increased sharply between 1989 and 1998—when 54 percent of regularly admitted freshmen arrived unprepared. Over the last three years, however, the unpreparedness rate in mathematics has fallen to 46 percent in fall 2001. 

Most Specially Admitted CSU Students Arrive Unprepared. Some of the students admitted to CSU do not meet CSU's regular admission criteria. These "special admits" either have not yet completed the 15 required college preparatory courses or failed to obtain a sufficiently high grade point average or SAT score. The CSU admits these students because of their skills, ability, and disadvantaged background.

In fall 2001, about 8 percent of CSU freshmen were specially admitted. Of these specially admitted students, about 80 percent were unprepared for college-level writing and about 76 percent were unprepared for college-level mathematics.

Establish Accountability in Remedial Education

The CSU employs a variety of strategies to help students identified as unprepared to overcome their skill deficiencies. The CSU offers several nondegree-applicable precollegiate courses. Most of these courses are traditional, term-length classes taught by CSU instructors. Several CSU campuses, however, now also offer short workshops for students whose skill deficiencies are less severe. Additionally, CSU uses community college faculty to teach some of its precollegiate courses. (These courses are held on CSU campuses.) 

Although CSU serves a large number of unprepared students, there is currently no mechanism for the state to monitor the quality and cost-effectiveness of CSU's precollegiate services. The lack of rigorous post-assessment procedures and the inadequacy of reporting requirements prevents the Legislature and the public from easily or meaningfully evaluating if CSU is in fact helping unprepared students obtain the skills they need to succeed academically. Furthermore, because of the inconsistency of the state's precollegiate funding policies, the Legislature lacks fiscal leverage to hold CSU accountable for providing cost-effective precollegiate services.

Require CSU to Assess the Effectiveness of Precollegiate Services

We recommend the Legislature require the California State University to assess and routinely report on the effectiveness of its precollegiate services, in order to ensure that at-risk students are provided appropriate and adequate assistance.

Currently, CSU does not require students to pass a standardized proficiency exam upon completion of a precollegiate course. The segment also does not track the future academic success of initially unprepared students. This means CSU cannot evaluate the effectiveness of any of the various precollegiate services it provides students. We therefore recommend CSU:

• Assess Proficiency Both Before and After Precollegiate Courses. If the standardized tests CSU relies on to measure a student's preparedness for college-level studies are valid, then they should also be valid indicators of whether a student has become adequately prepared after taking a precollegiate course. Such post-course assessments would allow faculty to know whether students were indeed prepared for college-level work after completing a precollegiate course. Post-course assessments would also allow administrators to measure the relative effectiveness of different instructional strategies.
• Track Future Academic Success in College. Currently, CSU collects very little information on the future academic performance of initially unprepared students. Periodically assessing the progress of a subset of students—including both those who are initially prepared and unprepared—would provide greater assurances that CSU is meeting students' academic needs. It would also help Legislature evaluate institutional performance and identify the types of programs that best serve students.

Fund Precollegiate Courses at the Community College Credit Rate

We recommend the Legislature fund the California State University's precollegiate writing and mathematics courses at the same rate it funds credit courses at the community colleges. (Reduce Item 6610-001-0001 by $10 million.)

The state currently funds precollegiate services at CSU, UC, and the California Community Colleges (CCC) in widely disparate ways. At the community colleges, the 2003-04 Governor's Budget provides $3,900 per FTE student for all credit courses regardless of whether they are precollegiate or college-level courses. Similarly, the budget provides CSU with $6,594 per additional FTE student for all credit courses regardless of whether they are precollegiate or college-level courses. In contrast, the Governor's budget provides UC with $9,030 per additional FTE student for its college-level courses only. The state provides no funding for precollegiate courses at UC.

Disparate Rates Generate Wrong Incentives. By providing CSU with the same level of funding for unprepared and prepared students, state policy encourages CSU to admit students regardless of their level of academic preparation. If the state funded CSU precollegiate courses at the community college rate, it would reduce this incentive (though it would not prevent CSU from accepting and enrolling all students it believed could succeed). In contrast, by providing UC with no funding for its precollegiate courses, state policy encourages UC to limit such courses and to advise unprepared students to take such courses at the local community college.

LAO Recommendation. In view of the above, we recommend the Legislature fund CSU's precollegiate writing and mathematics courses at the same rate it funds credit courses at the community colleges. We estimate that this action would result in General Fund savings of $10 million.

Funding CSU precollegiate courses at the rate the state currently funds community colleges would have two significant benefits. First, it would provide financial incentives for CSU to adopt the most efficient and effective way to deliver precollegiate services. Second, it would motivate CSU to expand its collaborations with community colleges for delivery of precollegiate services. Several CSU campuses (as well as a few UC campuses) currently contract with community college faculty to teach precollegiate courses on the campuses. Both CSU and UC have indicated that these collaborations are successful.

K-12 Outreach Programs

The Governor's budget provides a total of $6.5 million (General Fund) to CSU for various outreach programs that focus on preparing disadvantaged K-12 students for college. This is a decrease of $12.6 million, or 66 percent, from the current-year level. Under the Governor's proposal, CSU would have full discretion in allocating the $12.6 million reduction across its various programs. Figure 6 summarizes the major state outreach programs currently administered by CSU.

We believe that the Legislature should examine the Governor's proposed reduction to CSU's outreach programs in the context of the state's overall outreach strategy. (In addition to CSU, various other entities—UC, CCC, the Student Aid Commission, and the State Department of Education (SDE)—also administer K-12 outreach programs.)

State's Overall Outreach Strategy

In our Analysis of the 2002-03 Budget Bill, we reviewed the state's system of K-12 outreach programs and proposed steps for improving its efficiency and effectiveness. Our review identified a number of concerns with the current structure and funding for outreach. We found that:

• Programs Often Overlap and Provide Duplicate Services. Currently, there are multiple K-12 outreach programs with many similar components targeting similar populations. As a result, the same student may be participating in multiple outreach programs that offer essentially the same type of service. We were not able to ascertain the extent to which this occurs. However, we believe that more students could be served if program inefficiencies and duplication were reduced.
• Focus on "Yield" Efforts Is Misplaced. In addition to improving educational opportunities for disadvantaged students, a goal of CSU's K-12 outreach is to improve the yield of already-qualified underrepresented students attending CSU. This approach may work against the state's outreach efforts. This is because rather than increasing preparedness or awareness among disadvantaged students, yield-focused efforts typically work to convince already qualified or eligible students to choose CSU over some other higher education institution.
• Lack of Information of Program Effectiveness. Little is known about the effectiveness of the state's K-12 outreach programs. Without reliable data on program effectives, it is difficult for the Legislature to determine which outreach programs are most successful in achieving the important objectives of increased awareness, preparation, and access to undergraduate education.

Target Proposed Outreach Reductions

We recommend the Legislature approve the Governor's proposal to reduce outreach funding, but target the reductions at programs that (1) provide duplicative services, (2) do not focus on students most in need of additional state help, and (3) are ineffective.

The Governor's budget provides what amounts to an "unallocated" reduction of $12.6 million to CSU's outreach programs. In view of the substantial and rapid expansion of these programs in recent years and the considerable General Fund budget shortfall facing the state, we believe that it is reasonable to reduce overall funding to a pre-expansion level.

We do, however, have concerns about the unallocated nature of the reduction. Specifically, we believe that the unallocated cut would give CSU far too much discretion in determining which programs or types of services are of lower priority. We are concerned that this could result in programmatic reductions that do not match the Legislature's priorities. In contrast, targeting the reductions at specific programs would allow the Legislature to preserve its priorities and exercise oversight. Based on our review of the state's current outreach system, we recommend the Legislature target the reductions at programs that (1) provide duplicative services, (2) do not necessarily focus resources at students most in need of additional state help, and (3) are least effective in improving the academic preparation of disadvantaged students.

For example, the state currently funds two outreach programs—the Precollegiate Academic Development Program ($5.2 million) and the Learning Assistance Program ($4 million)—at CSU that provide tutoring services specifically to K-12 students. Given the duplicative nature of these programs and the availability of other potential tutoring resources available through SDE, the Legislature could consolidate the two tutoring programs to achieve savings while still providing necessary services. Due to the limited data and information available about CSU's various outreach programs, we will work with the segment and provide further advice to the Legislature concerning additional opportunities for consolidation and other program efficiencies at budget hearings.

General Fund Carryover

We recommend the Legislature amend budget bill language to count all unexpended allocations towards the $15 million carryover cap for the California State University, in order to increase legislative oversight. We further recommend that carryover funds be spent only on one-time purposes.

For virtually all General Fund appropriations in the annual budget act, money unspent at the end of the fiscal year reverts to the General Fund. This can create an incentive for some agencies to rapidly (and potentially wastefully) spend down any remaining balances as the end of the fiscal year approaches. To reduce this incentive, recent budget acts have included provisions that permit CSU to "carry over" unexpended funds from one fiscal year to the next. Specifically, General Fund monies provided to CSU but not expended in one fiscal year are reappropriated in the subsequent year.

In some years, the budget act has directed CSU to use the one-time carryover funds for specific purposes. More often, however, the budget has given CSU wide latitude in spending the monies. In such cases, CSU must propose an expenditure plan to the Department of Finance and the Joint Legislative Budget Committee, by September 30, for the balance of unexpended funds from the prior year.

The past six budget acts limited CSU's carryover funds to $15 million. They required that any unexpended funds in excess of this amount revert to the General Fund. Budget language has also specified that the $15 million cap only applies to funds generated from CSU's "systemwide" allocations. This means that the cap did not apply to unexpended funds that CSU had allocated to specific campuses or to the Chancellor's Office.

Previous Carryover Amounts and Uses

For multiple reasons, including the size of CSU's overall appropriation and spending choices, the amount of funds that CSU has carried forward has varied considerably from year to year. Figure 7 shows carryover amounts from 1996-97 (the first year of the $15 million systemwide-carryover limit) through 2001-02. During these years, the total carryover amount ranged from $10.8 million to $35.8 million. In the current year, CSU has $17.1 million available from funds originally appropriated in the 2001-02 Budget Act. All of these unspent funds are from campus/Chancellor's Office allocations and thus are not subject to the cap. The CSU reports no carryover from systemwide allocations.

At the time the Legislature first placed a limit on carryover from CSU's systemwide allocations, the amount of unexpended funds that CSU had allocated to campuses and the Chancellor's Office was relatively small. However, as indicated in Figure 7, the level of carryover from campus/Chancellor's Office allocations has grown in recent years from $1.9 million in 1996-97 to $27.4 million in 2000-01 and $17.1 million in 2001-02. Moreover, the percentage of campus/Chancellor's Office carryover compared to CSU's total carryover amount for a given fiscal year also has increased.

The CSU has used one-time carryover funds for a variety of purposes. Systemwide funds have been used for technology initiatives, special repairs, new campus start-up costs, unexpected needs, and other purposes. Carryover funds allocated to campuses and the Chancellor's Office have been used for one-time expenditures, including campus-initiated projects, technology upgrades, and acquisition of library books and materials. However, in the current year, CSU plans to use all of its available carryover ($17.1 million) for faculty compensation. We have serious concerns about the out-year implications of using one-time funds for ongoing initiatives.

Carryover Language Weakens Legislative Oversight

As with recent budget acts, the proposed budget bill contains language that would allow CSU to carry over up to $15 million in unexpended systemwide funds from the 2002-03 Budget Act. The budget does not place a limit on carryover from allocations made to individual campuses and the Chancellor's Office. The proposed language does not direct CSU to spend the one-time carryover funds for specific purposes. As in past years, the proposed language imposes reporting standards and time frames similar to those described above.

Given recent trends in the composition of CSU's unexpended balances, we believe that the Legislature should reexamine CSU's authority to carry over an unlimited amount of funds from campus/Chancellor's Office allocations. Because CSU is able to move funds freely between the systemwide and the campus/Chancellor's Office allocations, distinctions between these allocations are not meaningful. The CSU can easily circumvent the cap by allocating amounts over $15 million to the campuses and the Chancellor's Office. By counting all unexpended allocations toward the $15 million cap, the Legislature would create a meaningful limit on carryover funds that CSU could spend without legislative oversight. (We note that this would be consistent with current budget act language regarding UC's carryover funds.) Accordingly, this would allow the Legislature to strengthen its budgeting flexibility to use fund balances in excess of $15 million on any of its budget priorities. Depending on the Legislature's assessment of state needs in a given year, this could include CSU-related initiatives or not. We also believe that the Legislature should prevent CSU from allocating carryover funds to ongoing programs, in order to avoid cost pressures in the out years.

In view of the above, we recommend the Legislature amend Provision 1 of Item 6610-490 to read:

Of the funds reappropriated in this item from Item 6610-001-0001, Budget Act of 2002 (Ch. 379, Stats. 2002), up to $15,000,000 shall be available for one-time projects to the general support of the California State University. This $15,000,000 limitation applies to reappropriations generated from systemwide allocations. As of June 30, 2003, the balance in excess of $15,000,000 shall revert to the General Fund.

We believe that our proposal strikes a balance between budget flexibility and legislative oversight. First, it would continue to provide CSU with some level of carryover authority. Such authority reduces the incentive for CSU to spend the funds quickly prior to the end of the fiscal year in which the funds were originally budgeted. In addition, our proposal prevents CSU from (1) carrying over high fund balances to address selected priorities without legislative oversight and (2) using one-time carryover funds for ongoing expenses.