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

California Community Colleges (6870)

The California Community Colleges (CCC) provide instruction to about 1.7 million adults at 108 campuses operated by 72 locally governed districts throughout the state. The system offers academic and occupational programs at the lower-division (freshman and sophomore) level. Based on agreements with local school districts, some college districts offer a variety of adult education programs—including basic skills education; citizenship instruction; and vocational, avocational, and recreational programs. Finally, pursuant to state law, many colleges have established programs intended to promote regional economic development.

Significant Funding Reductions Proposed. The Governor's budget proposes significant reductions to CCC in the budget year. Figure 1 shows CCC funding from all significant sources for the budget year and the two preceding years. As the figure shows, CCC spending from all sources is proposed to decline by $404 million, or 6.2 percent, from the revised current-year level. Proposition 98 General Fund expenditures would decline by $705 million, or 27 percent. Partially offsetting this reduction are significant assumed budget-year increases in funding from student fees ($150 million) and local property taxes ($178 million).

CCC's Share of Proposition 98. As shown in Figure 1, the Governor's budget includes $4.1 billion in Proposition 98 funding for the community colleges in 2003-04. This is about 66 percent of total community college funding. Proposition 98 provides funding (approximately $44 billion in the budget year) in support of K-12 education, CCC, and several other state agencies (such as the Departments of Mental Health and Developmental Services). As proposed by the Governor, CCC would receive 9.2 percent of total Proposition 98 funding, K-12 education would receive 90.6 percent, and the other state agencies would receive the remaining 0.2 percent. This represents a historical low in CCC's share of Proposition 98 funding. The CCC's share in the current year is 10.3 percent.

Major Budget Changes

Figure 2 shows the changes proposed for community college Proposition 98 spending in the current year and the budget year. Major current-year base reductions include: 

• $80 million from apportionments to reflect the elimination of 20,000 full-time equivalent (FTE) students that were inappropriately claimed for concurrent enrollment of high school students.
• $66.6 million for a 3.66 percent across-the-board reduction in apportionment funding.
• $91.2 million for a 10.8 percent across-the-board reduction to categorical programs.

Major budget-year reductions include:

• $216 million reduction in apportionments due to expected attrition in response to proposed fee increases.
• $150 million as an offset to increased student fee revenue.
• $215 million in targeted reductions to categorical programs.

Proposition 98 Spending by Major Program

Figure 3 shows Proposition 98 expenditures for community college programs. "Apportionment" funding (available for the districts to spend on general purposes) accounts for $3.5 billion in 2003-04, or about 86 percent of total Proposition 98 expenditures. The state General Fund supports about 38 percent of apportionment expenditures, and local property taxes provide the remaining 62 percent.

"Categorical" programs (in which funding is earmarked for a specified purpose) are also shown in Figure 4. These programs support a wide range of activities—from services to disabled students to maintenance and special repairs. The Governor's budget would reduce total funding for categorical programs by about 25 percent from the revised current-year level. Changes to individual categorical programs would range from a 56 percent reduction for the Fund for Student Success to an 11.7 percent increase in financial aid programs.

Student Fees

The Governor proposes that CCC student fees be increased from $11 per unit to $24 per unit. This represents an increase of $13 per unit, or 118 percent. For a student taking the average full-time load of 26 units per year, this would translate into an additional $338 for the academic year. Total student fees for the average full-time load under the Governor's proposal would be $624. 

This would be the first fee increase for community college students in a decade. The last increase was in 1993-94, when the state raised fees from $10 per unit to $13 per unit. Since that time, the CCC fees have been reduced in two steps to its current rate of $11 per unit. Figure 5 shows the changes in fees during this period, both in actual dollars and 1993-94 dollars.

Fee Revenue Permits General Fund Savings. Under current law, the state budget specifies a total amount of apportionment funding that is required for community colleges to operate their programs. Apportionment funding comes from three sources: the state General Fund, local property taxes, and student fee revenue. Local property taxes and student fee revenue are retained by the community college districts that collect this funding and are used to support their programs. The state General Fund provides the additional funding needed to meet each district's apportionment amount. The Governor's proposal anticipates that community colleges will receive an additional $150 million in student fee revenue as a result of the proposed fee increase. Therefore, the General Fund will supply $150 million less funding for apportionments than it otherwise would without a fee increase. 

Fee Increases Also Proposed at the University of California (UC) and the California State University (CSU). In a preceding intersegmental section of this chapter ("Student Fees"), we note that the Governor's budget assumes 25 percent increases to undergraduate fees at UC and CSU in 2003-04. This would be in addition to 10 percent increases that the segments already imposed in the middle of the current year. While we agree that it is appropriate to raise student fees at UC and CSU, we recommend that the budget-year fee hike be reduced to 15 percent, and that the Legislature adopt a consistent and explicit fee policy to govern further fee adjustments.

The situation surrounding student fees at UC and CSU is different in many ways from fees at community colleges. For example, both student fees and overall educational costs at the state's public universities are much higher than at CCC. In addition, fees at UC and CSU are set by their respective governing boards, while CCC fees are set in statute by the Legislature. Moreover, funding for community colleges is subject to the provisions of Proposition 98, while funding for UC and CSU is not. Finally, state law provides for the waiving of fees for all needy community college students. Still, because the three higher education segments are interconnected through student transfer, competition for state funding, and other reasons, it is appropriate for the Legislature to consider CCC fees partly in the context of fees at the other systems.

In considering the Governor's fee increase proposal, the Legislature encounters three interrelated issues: the share of educational costs that community college students should pay, the size of fee increase that is reasonable in any given year, and how the negative effects of a fee increase can be minimized. We discuss these questions below.

What Share of Their Educational Costs Should Community College Students Pay?

We believe it is important that college students pay some share of their educational costs. When students make a financial investment in their own education, they are more inclined to demand quality services from the college. This increases accountability. In addition, students are more likely to be deliberate in their selection of courses and programs when they have a financial stake. Finally, fees help students to make choices that consider the relative costs of different postsecondary options open to them—for example, choosing between a community college and a state university for completing their lower division coursework.

In 2001-02, community colleges received about $4,635 to educate the average full-time student. A student paying full fees covered about 6.2 percent of that cost. This is considerably lower than UC and CSU, where student fees covered about 18 percent and 22 percent, respectively, of educational costs. The student share at CCC is also considerably lower than the national average for community colleges, which is about 20 percent.

Under the Governor's proposal, student fees (again, for a student paying full fees) would cover 14 percent of educational cost. This percentage, though still relatively small by national standards, seems to us to constitute a more reasonable share of cost to be borne by the student. It ensures greater accountability and student buy-in while still ensuring that the state subsidizes a far larger share—about 86 percent—of the cost.

Currently, California's community college fees are the lowest in the nation. This would still be the case under the Governor's proposal. In 2000-01 (the most recent year for which national comparison data are available), California's community college fee was less than half that of New Mexico ($866), which was the next most affordable public two-year institution. States to which California is often compared—New York and Texas—had annual fees of $2,557 and $931, respectively.

How Large of an Increase Is Appropriate?

While we believe that the actual fee level proposed by the Governor is reasonable when compared with the total cost of education and with fees in other states, there is a separate question of how large an increase students should be expected to absorb in a given year. The Governor's proposal would more than double the current fee. As a percentage, this does not meet the goal of "moderate" fee increases called for in past expressions of legislative intent and in our own recommendation for a UC and CSU fee policy.

Viewed in other ways, however, the proposed increase appears less dramatic. For the average full-time student, the Governor's proposal would cost an additional $338. Part-time students, which constitute the majority of community college students, would of course pay less than this. Compared with a total cost of attendance (including books, housing, transportation, and other costs), the proposed increase is much smaller.

Given the other budgetary choices faced by the Legislature, we believe the dollar amount of the proposed increase is reasonable. Although the percentage increase may have a short-term "sticker shock" effect, we believe this can be mitigated by raising student awareness about the availability of financial aid.

What Can Be Done to Minimize the Negative Effects of a Fee Increase?

Needy Students Do Not Pay Fees. In considering any fee increase, the Legislature should consider how potential negative effects (primarily a reduction in affordability) could be mitigated or eliminated. For CCC students, affordability is preserved through the Board of Governors' (BOG) fee waiver program. This program is designed to ensure that community college fees will not pose a financial barrier to any California resident. It accomplishes this by waiving the fees for all California residents who demonstrate financial need. By definition, therefore, all needy students (who are residents of the state) will pay no fees, and thus will be unaffected by the proposed fee increase.

How Is Need Defined? There are three ways for students to be eligible for a BOG fee waiver. First, they are eligible if they or their parents are receiving cash assistance from other need-based programs (such as California Work Opportunity and Responsibility to Kids). Second, they are eligible if they or their families have an adjusted gross income below a specified level. (For a family of four, this level is $27,150 in 2003-04). Finally, students from middle-class families are eligible if their federally-defined cost of attendance exceeds their ability to pay by $1 or more. In recent years about 23 percent of all community college students (representing 37 percent of all units taken) have received BOG fee waivers. The Governor's budget assumes this will increase to about 33 percent of all students (or 42 percent of all units taken in 2003-04) primarily as a result of the proposed fee increase.

What About Non-Needy Students? Many of the students who do not qualify for BOG waivers are nevertheless eligible for financial aid that covers all or a portion of their fees. For example, students with family incomes of up to $80,000 are eligible for a federal tax credit equal to their entire fee payment (up to $1,000 per year) for their first two years of college. Therefore, while students would have to pay their fees initially, they would be reimbursed for this cost as a federal income tax offset. In other words, for those students or families with federal tax liabilities, the federal government in effect pays for the entire cost of the fee increase.

In addition to federal programs, the state Cal Grant program pays the full cost of tuition and fees for middle-income students with a high school grade point average of at least 3.0 ("B"). For 2003-04, the income threshold is in the mid-$60,000s. Finally, many students are eligible for low-interest loans to cover their fees and other educational expenses through the Stafford loan program and other programs.

Some students will not qualify for financial aid and thus will have to pay the full fee of $24 per unit. As noted above, in our view this fee level provides for a reasonable sharing of educational cost between the student and the state. However, it is likely that some students who would have enrolled in community college courses at $11 per unit will not enroll when the fee is raised to $24 per unit. Because these students by definition are not financially needy, their decision not to enroll should not be considered a denial of access, but rather a choice they make about the benefit they will receive from community college classes.

Governor's Proposed Fee Increase Is Reasonable

We believe that the increased fee proposed by the Governor reflects a reasonable share of student educational costs, and is affordable for those students who are not exempted from fees altogether. However, we recommend that the Legislature approve an increase $1 higher than the level proposed by the Governor ($25 per unit) to enable needy students to each receive up to $108 in additional federal aid.

As noted above, we believe the Governor's proposal to raise CCC fees is a reasonable one. However, it misses an opportunity to significantly increase federal financial aid to needy students. This could be achieved by raising the per unit fee by $1 more than the Governor's proposal, as we detail below.

Federal Grant Program Serves More Than 213,000 CCC Students Annually. The federal government administers the Pell Grant program, which provides grant aid to financially needy undergraduate students to help cover educational fees and living expenses. In 2001-02, more than 213,000 CCC students received a total of approximately $464 million in Pell Grant assistance. Their Pell Grant awards ranged from $400 to $3,674, with an average grant amount of $2,173.

Students' eligibility for a Pell Grant is based on their "total cost of attendance" (which includes both educational fees and living expenses) and their "expected family contribution" (which accounts for family income, assets, and expenses). The grant amount a student receives is based on a sliding scale. Specifically, Pell Grant award amounts increase as students' cost of attendance goes up or as expected family contribution goes down.

CCC Only System in Nation That Prevents Students From Obtaining Maximum Pell Grant of $4,000. The maximum Pell Grant amount a CCC student currently can receive is $3,674. Under the Governor's fee increase proposal, this would increase to $3,892. Students at all other postsecondary institutions in the nation are eligible for a maximum Pell Grant amount of $4,000. This means students attending UC, CSU, and California's private colleges as well as students attending community colleges in all other states are eligible to receive more in federal assistance than CCC students.

CCC Students Are Ineligible for $4,000 Pell Grant Because CCC Fees Are So Low. The CCC students are not eligible for a maximum award of $4,000 because the federal government uses an alternative award scale for systems that charge less than $650 in fees for the average annual full-time load. Currently, no postsecondary institution in the nation except the CCC system is required to use the alternative award scale.The CCC campuses tend to have an annual average full-time load that is approximately 26 units per year. At the current fee rate, the average full-time load costs a student $286 per year—considerably less than $650. At the Governor's proposed fee rate, the average full-time load would be $624—still less than $650. The result is that the Pell Grant amount CCC students are eligible to receive must be determined using the alternative award scale and their maximum award still would be limited to less than $4,000.

Increasing Per Unit Fee $1 Above Governor's Proposal Would Allow CCC Students to Receive Up to $108 More in Federal Financial Aid. The state can help financially needy students by increasing the CCC fee to $25 per unit (or $650 per year for a full-time student). Based upon current federal policies, this would allow CCC students to use the regular award scale and qualify for a maximum Pell Grant award of $4,000, or $108 more than they currently may receive.

Increasing Fee Creates No Additional Out-of-Pocket Expense for Financially Needy Students. Fee increases are not paid by financially needy students because these students qualify for waivers that exempt them from the entire educational fee—whether the fee is $11, $24, or $25 per unit. A higher fee obviously could affect middle-income and high-income students, but these students, by definition, have more ability to pay the higher fee. And, as noted earlier, students eligible for federal higher education tax credits would have this additional cost fully offset by reduced federal taxes.

Even at $25 Per Unit, CCC Fees Would Remain Lowest in Nation. Even if the CCC fee were raised $1 more per unit than proposed by the Governor, the fee still would be considerably lower than the average fee for all other states' public two-year institutions. It also would be lower than any other state in nation.

Enrollment Funding

The budget proposal provides funding for about 62,000 fewer FTE students than in the current year. This is about 5.7 percent of the current-year budgeted enrollment of about 1,095,000 FTE students.

The budget assumes that community colleges will experience reduced enrollment demand in 2003-04 primarily as a result of the proposed fee increases. Specifically, the Governor's proposal assumes that 5.7 percent fewer students will enroll as a direct result of the proposed fee increase. Another 2 percent of FTE enrollment is to be eliminated for high school students that are "concurrently enrolled" in community college classes. (We discuss this proposal in greater detail below.) A further 1 percent of FTE students are expected not to enroll because of categorical reductions that are proposed for Partnership for Excellence (PFE) and other general support programs. The total estimated reduction in enrollment therefore would be 8.7 percent. However, the budget also includes funding for "enrollment growth" of 3 percent, which is supposed to represent new students that will be entering the system due to population growth and other factors. The net result, therefore, is that 5.7 percent fewer FTE students will be funded in 2003-04.

Colleges Provide "Open Access." The state Master Plan for Higher Education calls for the community colleges to be open to all adults "who can benefit from instruction." As a result, campuses generally do not impose admissions requirements as a way to manage enrollment demand, and thus will enroll virtually all students who seek admission. If enrollment exceeds the level assumed in the budget, community colleges will be faced with enrollment demand that they are not funded to serve.

As a matter of practice, many districts already enroll students above their funded level. In the current year, for example, districts have "overenrolled" a total of about 42,000 FTE students, or about 3.8 percent of their budgeted enrollment. Community colleges have absorbed this level of over enrollment within existing resources. After accounting for projected attrition, the Governor's budget assumes about the same level of over enrollment.

What If the Governor Is Wrong? For the most part, the level of enrollment funding proposed for 2003-04 stems from the administration's prediction of how students will respond to fee increases. If the level of attrition projected by the Governor does not materialize, community colleges will be faced with more overenrollment than assumed in the budget. We believe this is a real possibility. We reviewed the enrollment attrition model used for the budget and found that it was based on a number of assumptions that, while logical, could not be validated. Student price sensitivity depends on a number of factors that interact in complicated ways. For example, the Governor's estimates do not account for any enrollment demand that could be shifted from CSU (whose fees are expected to increase 35 percent from last year's level). Moreover, student demand will respond in large part to choices the individual colleges make for 2003-04. The type of courses offered and when they are scheduled have a large effect on student demand. The budget's estimate assumes certain choices in this regard that the colleges may not make.

What If the Governor Is Right? Assuming the budget's assumptions about attrition are correct, then about 62,000 FTE students who would have attended a community college when fees were $11 per unit would now choose not to attend when fees are raised to $24 per unit. This is a significant decline at a time of weak state and national economic growth, and many adults are seeking job retraining and other skills.

A critical question is which students would choose not to attend as a result of fee increases. As noted above, the ready availability of fee waivers and other financial aid significantly reduces the chance that fees will pose a financial obstacle to enrollment. Therefore, we expect that the majority of decline would come from students who are making a choice about their own priorities, rather than being unable to afford college classes. If this is the case, open access is preserved.

What Is the Appropriate Level of Enrollment Funding? The Governor's proposal is based on assumptions about how enrollment demand will respond to student fee increases. Even if the Governor's assumptions are correct, this does not necessarily mean that the funded level of enrollment is the appropriate level. Demand for higher education is not purely a demographic phenomenon that the state needs to accommodate. Rather, demand is influenced by deliberate state policies about educational cost (such as fees and financial aid), eligibility (such as concurrent enrollment and basic skills), and institutional focus (such as transfer and vocational training). Funding for enrollment growth is another choice made by the state that influences enrollment demand (because as districts will schedule classes to the extent that funding is available). Thus, enrollment growth funding to some extent becomes a self-fulfilling prophesy.

We believe that some reduction in funded enrollment at the community colleges is justified. We believe that the proposed fee increase will indeed have an impact on enrollment that should be accounted for in enrollment budgeting. However, we believe that the magnitude of the decline proposed by the Governor may be too large. The Governor's proposal does not take into account the likely shift of some enrollment demand from CSU and UC to CCC in response to planned fee increases. Moreover, to the extent that the Legislature wishes to fund enrollment growth with the limited resources available to it, it makes sense to focus that enrollment at the lower-cost colleges. In the "K-14 Priorities" section of this chapter, we identify the option of increasing CCC enrollment funding by up to $100 million, which would increase the number of budgeted students by about 25,000 FTE students. Put another way, rather than enrollment declining by 5.7 percent in the budget year, the budget would assume a 3.1 percent decline.

Concurrent Enrollment

As part of his December revision, the Governor proposed reducing funding for the concurrent enrollment of high school students. Statute currently permits community colleges to enroll high school students as "special part-time students." The colleges receive the same funding for these students that they receive for regular students. The funding high schools receive for these students is unaffected. Legislative intent states that this concurrent enrollment is to provide "advanced scholastic or vocational work" as "enrichment opportunities for a limited number of eligible pupils." Each student's participation must be recommended by the high school principal and consented to by the student's parents.

Last year a number of newspaper reports called into question whether legislative intent was being observed. Specifically, the reports revealed that some community colleges were claiming enrollment funding for high school students that were participating in football practice and other physical education classes on the high school campuses. In other words, the community college "class" was a regular high school physical education class on a high school campus. It is difficult to see how these classes provided "advanced scholastic or vocational work" for these students.

Governor Proposes Reduction and Audit. The Governor proposed that an audit be conducted to determine the extent to which concurrent enrollment funding was being improperly claimed. He also proposed that community college apportionment funding be reduced by $80 million, and that the Chancellor be directed to allocate this cut to districts that were found by the audit to have improperly claimed concurrent enrollment funding. At the time this Analysis was being prepared, the Legislature had not taken action to reduce these funds for the current year.

For the budget year, the Governor again proposes the $80 million reduction, along with budget bill language specifying that this is to reflect a permanent reduction of 20,000 FTE students that were improperly claimed as concurrent enrollment. The budget bill language does not mention an audit, but requires the Chancellor to allocate the reduction to districts in proportion to the level of improperly claimed concurrent enrollment. The Governor also proposes legislation to strengthen statutory requirements for the claiming of concurrent enrollment funding. Specifically, the Governor proposes that concurrent enrollment be explicitly limited to academic and vocational courses which are not offered at the pupil's school district; that these may not include recreational, physical education, or personal development classes; that eligible classes must be "designed for and … advertised as open to the general public in the college course catalog"; and that eligible classes may not be offered on high school campuses during regular school hours. 

Audit Might Not Be Complete Until Next Budget Cycle. Although the Governor called for an audit of concurrent enrollment practices in the December revision, he has not offered details about who would conduct the audit, how it would be structured, or when it would be completed. Neither is it clear whether the $80 million estimate of the problem would in fact be validated by the audit. The Chancellor's office indicated during mid-year budget hearings that an audit would be a somewhat complicated endeavor that could take a year to complete. At the time this Analysis was being prepared, the Chancellor's office and the administration were still negotiating over the terms of the audit.

LAO Recommendation—Approve $80 Million Reduction, Modify Concurrent Enrollment Statute

We recommend that the Legislature approve the $80 million reduction for concurrent enrollment. This represents about 35 percent of the amount CCC received for concurrently enrolled students in 2001-02. It is also about equal to the amount CCC receives for students concurrently enrolled in physical education classes on high school campuses. We believe that this represents a conservative estimate of concurrent enrollment that likely does not meet legislative intent.

Reduction Is Justified as a Policy Decision. During mid-year budget hearings, the Legislature considered whether it was reasonable to "take back" $80 million in current-year funding for concurrent enrollment prior to the completion of an audit that justified this amount. While there was a general consensus that any funding that was clearly proved to be illegal should be recaptured, there was a similar consensus that this was a high burden of proof that could not be met in a matter of weeks or months.

The Legislature now faces the question of how much concurrent enrollment to fund in the budget year. Because this funding decision is prospective and districts are able to accommodate it as they plan for the 2003-04 years, we believe that time is of the essence and the Legislature can simply reduce the amount as a policy decision. Specifically, the Legislature could choose to reduce funding for concurrent enrollment as a way to implement its stated intent that concurrent enrollment be restricted to "a limited number of pupils." We recommend that the budget bill language proposed by the Governor be modified to reflect this approach.

Statute Should Be Clarified. Some community college districts argue that the statute governing concurrent enrollment is too vague. The Chancellor's office has tried to suggest to districts how they should interpret the statute, but this has not resulted in consistent practices among districts. We therefore recommend that the Legislature clearly define in statute the circumstances under which concurrent enrollment is appropriate. We believe that the legislation suggested by the Governor provides a good starting place for discussion. The Legislature may wish to impose further restrictions. For example, it may wish to impose a limit on the percentage of budgeted FTE students that could be claimed as concurrent enrollment. Alternatively, it may wish to limit the percentage of students in any one course that are concurrently enrolled. We believe these discussions would be appropriate both in budget subcommittee and policy committee hearings.

Partnership for Excellence

The Governor's budget would provide $164.5 million for PFE. This is a reduction of $135.5 million, or 45 percent, from the enacted 2002-03 budget.

Now in its fifth year, the PFE provides supplementary funding to community colleges in exchange for their commitment to improve student outcomes in specified areas. As we noted in last year's Analysis (please see pages E-241 through E-249), the PFE has resulted in only marginal improvement in the specified areas. Moreover, we found that the program lacked accountability. We recommended that the Legislature either terminate the PFE experiment early (it is scheduled to sunset at the end of 2004) or consider significant modifications to create a more meaningful link between funding and performance.

Withhold Recommendation Pending CCC Report.

We withhold recommendation on the proposed $164.5 million funding level for the Partnership for Excellence (PFE), pending receipt of the 2003 annual report on PFE performance.

Statute requires that the Chancellor's office annually provide the Legislature and Governor with a report on the expenditure of PFE funds and progress on meeting PFE performance targets. The next report is due April 15, 2003. This report should help the Legislature to determine the worth of the $300 million annual investment the state has been making in the PFE for the past several years. We will review that report and provide our assessment of it at budget hearings. Until that time, we withhold recommendation on the $164.5 million in proposed funding.