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Analysis of the 2008-09 Budget Bill: Education

University of California (6440)

The University of California (UC) offers undergraduate, graduate, and professional degree programs across ten campuses. It also serves as the state’s primary public research institution. For 2008‑09, the Governor's budget proposes General Fund support for UC of $3.2 billion. This is $98.5 million, or 3 percent, less than the revised current–year amount. When all fund sources are considered (including student fees, federal funds, and other funds), UC would receive total funding of $18.7 billion—an increase of $635 million, or 3.5 percent.

General Fund Proposals

Figure 1 summarizes the Governor's General Fund proposal for UC. As shown in the figure, the Governor first calculates a “workload budget” that is largely based on a multiyear funding plan (or “compact”) he negotiated with UC in 2004. The major components of this workload budget are a 5 percent base increase and funding for 2.5 percent enrollment growth, as well as various other adjustments. The General Fund workload budget exceeds UC’s revised current–year funding by $233 million (7.1 percent). However, rather than providing the workload level of funding, the Governor's budget reduces this amount by $332 million—roughly 10 percent. As a result, UC would receive $98.5 million less in 2008‑09 than the revised current–year amount.

 

Figure 1

University of California
General Fund Budget Proposal

(Dollars in Millions)

 

 

2007‑08 Budget Act

$3,273.9

Lease-revenue bond adjustments

-$13.2

2007‑08 Revised Budget

$3,260.7

“Workload Budget” Adjustments

 

Base increase (5 percent)

$154.8

Enrollment growth (2.5 percent)

56.4

Lease-revenue adjustment

14.1

Retirement costs

11.1

Expand medical education initiative

1.0

Phase out supplemental UC Merced funding

-4.0

  Subtotal

($233.4)

Governor’s “Workload” Estimate

$3,494.1

“Budget Balancing Reductions”

 

10 percent reduction to institutional support

-$32.3

Unallocated reduction

-299.6

  Subtotal

(-$331.9)

2008‑09 Proposed Budget

$3,162.2

Change From 2007‑08 Revised Budget

 

Amount

-$98.5

Percent

-3.0%

 

 

The $332 million reduction to the workload budget includes two components:

Student Fee Increases

The Governor's workload budget envisions that UC would increase student fees by 7.4 percent for 2008‑09, generating about $125 million in new revenue. However, the budget proposal acknowledges that the university may increase fees above this level to backfill some or all of the unallocated General Fund reduction. The Governor defers the decision on actual fee levels to the Regents.

Intersegmental Issues Involving UC

In the “LAO Alternative Budget” section earlier in this chapter, we describe our recommended alternative to the Governor's higher education budget proposal. Figure 2 summarizes the UC component of this proposal, showing the General Fund impact relative to the Governor's workload funding level.

 

Figure 2

LAO Alternative General Fund Budget
For the University of California

(In Millions)

LAO Recommendations

Change From Governor’s
Workload Budget

1.8 percent enrollment growtha

-$16.4

No cost-of-living adjustment, but provide increases for utilities and other nondiscretionary costs

-105.3

10 percent reduction to administrative support

-32.3

10 percent student fee increaseb

-167.5

Institutional financial aid (increased need due to fee increase)

32.5

    Total LAO Recommendations

-$289.0c

 

a  Uses Legislature's marginal cost methodology.

b  Unlike the Governor's budget, we treat fee revenue as an integral funding source for the segment. As such, a fee increase has the effect of offsetting General Fund costs.

c  By comparison, the Governor proposes reductions of $332 million from the workload budget.

 

 

In developing our alternative UC budget, we gave priority to funding all anticipated enrollment growth, which we estimate at 1.8 percent. Consistent with our approach for most other budgets in our LAO alternative budget, our proposal for UC does not include a cost–of–living adjustment for personnel costs or general base augmentation, but does include a General Fund augmentation (equal to about 1.5 percent of General Fund base support) to cover identified, nondiscretionary cost increases. Our proposal incorporates the Governor's proposed reduction to UC’s administrative support budget. However, unlike the Governor's proposal, our alternative does not include any unallocated reductions, which can undermine budgetary transparency and accountability. Finally, we recommend a student fee increase of 10 percent, as well as an augmentation to financial aid funding to fully cover increased fee charges for students who demonstrate need.

Overall, our alternative UC budget would increase general purpose funding (General Fund and student fee revenue) by about $167 million (3.1 percent) from the 2007–08 level. This funding level would cover expected increases in enrollment and nondiscretionary cost increases, as well as financial aid to cover increased fee costs for needy students. At the same time, our proposal would reduce General Fund spending by $289 million relative to the Governor's workload budget.

Transportation Research Initiative

We recommend the Legislature reject the proposed augmentation of $5 million from the Public Transportation Account. The proposed use is not fully consistent with the Account’s intended purpose, and the Account’s balance is precarious. (Reduce Item 6440–001–0046 by $5 million.)

The UC maintains an Institute for Transportation Studies (ITS) at three of its campuses. The ITS conducts research on various transportation issues. According to UC, the Institute’s research agenda is largely defined by outside agencies and companies, which contribute about $30 million in annual funding. In addition to this support, the 2007–08 Budget Act includes $250,000 from the General Fund and $980,000 from the Public Transportation Account (PTA).

The Governor's budget proposal would augment PTA funding for ITS by $5 million. This funding would be used to expand research at the three existing ITS campuses, and to expand ITS to all of UC’s nine general campuses. It would also support the development of program proposals to federal and other agencies.

We recommend the Legislature reject this proposal for several reasons. First, the proposal is broadly drawn and we believe that some of the proposed research is inconsistent with the Legislature’s intent that the PTA support transit projects and planning. For example, the proposal would fund the study of tradable carbon caps, telecommunication services, and greenhouse gas emissions on housing permit approval processes. Second, the Institute has been able to attract considerable nonstate funding which has reduced the need for state support. Third, the PTA’s fund balance is precarious. As we discuss in the Transportation chapter of this Analysis, the PTA will require a loan from the Traffic Congestion Relief Fund in 2008‑09 simply to remain solvent. Given these concerns, we think the proposal to augment the ITS appropriation from the PTA is ill advised.

Capital Outlay

The budget proposes $388 million in bond funds for 28 UC capital projects in the budget year. Most of this amount—$336 million—would come from a proposed bond on the November 2008 ballot.

Implementation of Proposition 1D

Proposition 1D, the Kindergarten–University Public Education Facilities Bond Act of 2006, was passed by voters in November 2006. Among the various education segments receiving funding under the bond act, UC was allotted $690 million to construct new buildings and related infrastructure, alter existing buildings, and purchase major equipment for use in these buildings. The bond act also provided UC an additional $200 million for capital projects to expand capacity in the Programs in Medical Education (PRIME) and telemedicine programs. As Figure 3 shows, the majority of these funds have already been committed to specific projects.

 

Figure 3

UC's Proposition 1D Spending

(In Millions)

 

2006‑07

2007‑08

Total

Unspent

General capital outlay projects

$337

$320

$657

$33

PRIMEa/Telemedicine projects

131

131

69

  Totals

$337

$451

$788

$102

 

a  Programs in Medical Education.

 

Capital Outlay Spending. Of the $690 million authorized for general capital outlay projects, approximately $33 million remains uncommitted at this time. The Governor's budget proposes to commit about half of the remaining funds to specific projects in the budget year and reserve the other half for potential augmentations and state administrative costs in subsequent years.

Past appropriations from the general capital outlay portion of Proposition 1D contributed funding to 45 projects. Figure 4 shows that only 27 of the projects funded from Proposition 1D can be completed with appropriations made to date. The remaining 18 projects will require additional appropriations. Since nearly all authorized bond funds for UC are already committed, most of the 18 remaining projects will be dependent upon new capital funding for completion. The total estimated cost to finish the UC projects begun with Proposition 1D funding is $304 million. (The Governor proposes to cover $202 million of this in the budget year with funds from the proposed 2008 bond.)

 

Figure 4

Summary of UC Projects Funded With Proposition 1Da

As of 2007‑08 Budget Act
(Dollars in Millions)

Type of Project

Projects With
Funding Complete

Projects Needing
Additional Funding

Number

State Funds

New buildings

10

10

$108

Replacement buildings

1

1

65

Renovations/modernizations

8

2

22

Seismic improvements

1

2

79

Campus infrastructure

7

3

30

  Totals

27

18

$304

 

a  Excluding Programs in Medical Education/Telemedicine projects.

 

A review of the 45 projects funded by Proposition 1D shows that they cover a wide variety of purposes—new classrooms, teaching labs, and research space; renovation and replacement; campus infrastructure; and seismic–related improvements. As shown in Figure 5, most of the new assigned space resulting from Proposition 1D projects is for faculty offices and research space. Many projects such as renovations, seismic improvements, and campus infrastructure upgrades typically do not add space to a campus.

 

Figure 5

Net Changes in Space Resulting From Proposition 1D Projectsa

(Assignable Square Feet)

 

 

Classroom Space

 

Lecture space

45,317

Teaching lab space

124,392

  Subtotal

(169,709)

Noninstructional Space

 

Office and research space

732,009

Other space

264,035

  Subtotal

(996,044)

    Total Increase

1,165,753

 

a  Excluding telemedicine projects.

 

PRIME and Telemedicine Spending. Of the $200 million authorized to implement a systemwide telemedicine program and expand medical school enrollments, approximately $69 million remains uncommitted. The Governor's 2008‑09 proposal includes $29 million to finish one project and UC plans to request the remaining amount in 2009–10. Including the Governor's proposal, committed funds from Proposition 1D have funded construction of new facilities at UC Davis, UC Irvine, and UC San Diego; renovation of space at UC San Francisco; and acquisition of telemedicine equipment and minor renovations at UC Los Angeles and UC Riverside.  

The Governor's 2008‑09 Proposal

The budget proposes to spend $388 million from various existing and anticipated bond funds on 28 UC capital projects. The proposal relies heavily on the proposed 2008 education bond, with 24 projects receiving at least partial funding from this source. The proposed funding would support new phases of 14 projects previously funded by the state and 14 new projects.

The 2008 Bond Proposal. The Governor's proposal for the 2008 education bond would provide UC with about $2 billion in funding for capital projects over five years. This amounts to $395 million per year, or $50 million more than the annual funding UC received from Proposition 1D. The UC has suggested that the additional $50 million will be directed toward expanding capacity in the health sciences, but cautioned that specific decisions on the spending allocations of the proposed 2008 bond depend upon many factors—including enrollment trends.

Governor's Proposal Potentially Worsens Funding Shortfall. Rather than prioritize the completion of previously approved projects, the Governor's proposal allocates existing bond funds to new projects. As described above, the available balance of authorized bonds is insufficient to finish all previously funded UC projects and, regardless of budgeting choices, some will be dependent upon a new source of funding (such as a 2008 bond) for completion. However, by funding new projects with available bond balances—rather than focusing on the completion of existing projects—the Governor's budget commits the state to even more projects without a guaranteed source of funding for completion. For example, the budget proposal will commit state funds to seven new projects even if the 2008 bond is not approved. Although existing funds would start these seven new projects, the state would not have the $254 million needed to complete them. In total, the Governor's proposal—by not prioritizing the completion of projects and relying so heavily on approval of a 2008 bond proposal—will result in 26 projects that lack a guaranteed source for completion. The total amount necessary to complete these projects from another source would be approximately $541 million.

Use Remaining Bond Funds to Finish Existing Projects

We recommend that the Legislature budget higher education capital outlay in a way that minimizes the undertaking of capital projects that are dependent on future bonds. Specifically, we recommend that existing bond funds be used exclusively to complete nine projects already approved by the Legislature. We further recommend that the balance of continuing projects and the new projects included in the budget be funded from the proposed 2008 bond.

Under the Governor’s proposal, existing bond funds would be directed toward phases of projects for which sufficient funding for completion is uncertain (due to their reliance on the proposed 2008 bond). We recommend that existing bond funds instead be redirected to complete funding for previously approved projects. Redirecting existing bond funds in 2008–09 and 2009–10 to the projects shown in Figure 6 would maximize the number of projects guaranteed funding for completion.

Even with these changes, some previously funded projects will still lack guaranteed funds for completion. Their later phases would need to be funded by the proposed 2008 bond or—if the 2008 bond is not approved—by another source, at a cost of approximately $304 million. Also, in order to free up previously authorized bond funds to complete the projects shown in Figure 6, we recommend that each new state funded project proposed in the Governor's budget be funded exclusively with the proposed 2008 bond. Making new projects contingent on the approval of the 2008 bond limits the number of projects started without guaranteed funding for completion. In other words, if the 2008 bond is not approved, the projects do not start.

 

Figure 6

Recommended Projects for Allocation of
Existing Bond Fundsa

(In Millions)

Campus

Project

Funds Needed
For Completion

2008‑09

 

 

Irvine

Social and Behavioral Sciences Building

$2.8

Riverside

Materials Science and Engineering Building

4.6

Riverside

Student Academic Support Services Building

0.9

Santa Barbara

Education and Social Sciences Building

2.6

2009‑10

 

Irvine

Humanities Building

$2.1

Irvine

Arts Building

2.6

Merced

Social Sciences and Management Building

1.9

San Diego

Structural and Materials Engineering Building

3.1

Santa Cruz

Biomedical Sciences Facility

2.1

  Total

 

$22.7

 

a  Excluding 2006 bond funds directed for Programs in Medical Education/Telemedicine programs.

 

Overall, realigning bond funds as outlined above would reduce the state’s risk as it relates to the uncertainty of the 2008 bond proposal. As shown in Figure 7, our recommendations would increase the number of projects with funds for completion while simultaneously reducing the number of projects in need of future funds. By making all new projects contingent on passage of the 2008 bond, our recommendation would eliminate the risk of starting new projects without a secure source of funding. At the same time, if the 2008 bond is approved, our proposal implements the same projects as the Governor's budget.

 

Figure 7

Status of UC Capital Projects if the
2008 Bond Proposal Is Not Approved

(Dollars in Millions)

 

Governor's
Budget

LAO
Proposal

Projects with sufficient funds for completion

2

9

New projects started in 2008‑09

7

Total projects without funding for completion

26

12

Total cost to complete projects

$541

$304

 

Authorized Amount of the 2008 Bond Should Match State’s Commitments

We recommend that the 2008 bond measure be of sufficient size to complete all the University of California (UC) projects approved by the Legislature—plus any amount that the Legislature wishes to reserve for new projects in subsequent years. If the Legislature approves all of the projects in the Governor's 2008‑09 proposal, the 2008 bond’s allocation to UC should be at least $795 million.  

If it were to approve all of the projects in the proposed budget (whether under the Governor's proposal or the LAO proposal), the Legislature would commit to over $795 million in spending from the 2008 bond to finish UC projects—$336 million in 2008‑09 and approximately $459 million in subsequent years. (This amount is greater than the amount shown in Figure 7 because it includes new projects that would begin with funding from the 2008 bond.) The Governor's proposal for the 2008 bond would provide sufficient funds to cover these projects. However, if the Legislature elects to authorize a different amount to UC in a 2008 bond, we recommend it include sufficient money to cover the future funding requirement for UC projects. For example, pending legislation to authorize a 2008 education bond (AB 100, Mullin) allocates $690 million, which would be insufficient to cover the projects in the 2008‑09 budget proposal. An even higher amount would be required if the Legislature wishes to commit 2008 bond funds to new projects in subsequent years.

Four Projects Initiated Without Legislature’s Review and Approval

In view of the University of California’s (UC’s) decision to use nonstate funds to proceed with the preliminary plans phase of four projects without the Legislature’s approval, we recommend UC report to the Legislature on any upcoming projects which it intends to initiate with nonstate funds.

The proposed budget includes funds for four projects at UC Los Angeles initiated by UC using nonstate funding sources. These projects include an update of the electrical infrastructure, improved fire safety in a high–rise building, and two seismic renovations. The university used its own funds to prepare the preliminary plans for the projects. Because of this approach, the Legislature has not had an opportunity to review and consider the need for the projects or how they fit with the Legislature’s statewide priorities for spending limited bond funds. A department’s request for preliminary plans money is the most important part of the planning process for the Legislature’s involvement since this is when it evaluates the programmatic needs for each project and assesses its scope and cost. The UC’s practice puts the Legislature in the awkward position of stopping a project in mid–stream if it has concerns about it. While UC should be encouraged to obtain nonstate funding to assist in meeting its capital outlay needs, we believe any projects that would eventually require state funding should be undertaken only with the explicit consent of the Legislature.

We recommend that the Legislature provide the same level of scrutiny to projects initiated with nonstate funds and deny projects that do not meet the state’s needs and priorities. Our review indicates that the four projects proposed for additional phases in the budget year are reasonable, and we do not take issue with their inclusion in the Governor's proposal. However, we also recommend that the Legislature ask UC to report at budget hearings on any upcoming projects which it intends to initiate with nonstate funds. The university identifies all future projects in its five–year plan and should be able to report on these projects in advance. This would allow the Legislature to review the proposed scope of the projects prior to their being initiated and presented as a fait accompli in a subsequent budget cycle.


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