Scholarshare Investment Board

Summary

The Scholarshare Investment Board (SIB) administers the California Kids Investment and Development Savings (CalKIDS) program, through which it opens college savings accounts for children and makes deposits on their behalf. This program includes two components—one that provides deposits of at least $25 to all newborns and another that provides deposits of $500 to low-income first graders. The Governor has two CalKIDS spending proposals. First, he proposes to increase deposits for all newborns from $25 to $100. This action would be supported by $30 million ongoing General Fund redirected from first-grader deposits, as the cost estimate for that program component has been revised downward. Given the state budget condition and the proposal’s unknown impact on college access, we recommend rejecting the proposal and instead aligning CalKIDS spending with the lower revised cost estimate. Second, the Governor proposes to provide $1 million one-time General Fund for additional CalKIDS marketing and outreach efforts. We recommend rejecting this proposal because funding provided for this purpose in 2022-23 remains largely unspent and the state does not yet know whether additional funding is needed or what activities it would support.

Introduction

Post Focuses on SIB’s CalKIDS Program. SIB administers the state’s college savings account programs. The state has a long-standing Scholarshare 529 program, which allows an individual to open a college savings account and make contributions on behalf of a student. More recently, the state created the CalKIDS program. Under this program, SIB opens college savings accounts for children and makes deposits on their behalf. In this post, we analyze two Governor’s budget proposals related to the CalKIDS program. The first section covers a proposal to increase seed deposits for newborns, and the second section covers a proposal to provide additional funding for program marketing.

CalKIDS Seed Deposits

In this section, we first provide background on the CalKIDS program, including the deposits the state makes for newborns and first graders. Then, we describe the Governor’s proposal to increase deposits for newborns, assess that proposal, and make an associated recommendation.

Background

CalKIDS Program Provides College Savings Accounts to Children. The state created the CalKIDS program in the 2019-20 budget package. Under the program, SIB opens college savings accounts and makes deposits for eligible children. The deposits are invested so they have the potential to grow over time. (Parents cannot contribute to these accounts, but they may open a Scholarshare 529 account to save their own funds.) To access funds in a CalKIDS account, a family must register on SIB’s online portal. Once the child goes to college, the funds in their CalKIDS account can be spent on qualified higher education expenses—generally tuition and fees, books and supplies, computer equipment, and room and board costs. The funds can be spent at any higher education institution eligible for federal financial aid as well as registered apprenticeship programs. If the funds are not spent by the time the beneficiary reaches age 26, the funds revert to the CalKIDS program.

All Newborns Receive Seed Deposits. The CalKIDS program has two main components. Under the first component, SIB is to open a college savings account for every child born in California and provide a seed deposit of at least $25 in each account. This component is universal, meaning all newborns receive seed deposits regardless of their financial need. The state is providing $15 million ongoing General Fund to support seed deposits for children born on or after July 1, 2022.

Low-Income First Graders Receive Additional Deposits. Under the second component of the CalKIDS program, SIB is to provide a deposit of $500 to each first grader who is low-income (as defined under the Local Control Funding Formula). First graders qualify for an additional $500 deposit if they are foster youth and an additional $500 deposit if they are homeless, leading to a maximum deposit of $1,500. SIB is to add these deposits to the existing CalKIDS accounts of any first graders who had an account created as a newborn, while creating new accounts for any first graders who do not already have one. The state is providing $170 million ongoing General Fund to support deposits for low-income first graders beginning in 2022-23. (Previously, the 2021-22 Budget Act provided $1.8 billion one time for deposits to low-income students enrolled in grades 1 through 12 in that year.)

First-Grader Deposits Are Costing Less Than Originally Budgeted. As of the Governor’s budget, the administration projects there are about 255,000 low-income first graders annually. The administration estimates it would cost approximately $140 million annually to provide $500 deposits to each of these students, including larger deposits for students who are foster youth or homeless. This revised cost estimate is approximately $30 million lower than the enacted funding level. The downward adjustment is due to a decrease in the projected number of low-income first graders, likely reflecting recent declines in school enrollment.

Proposal

Governor Proposes to Increase Newborn Deposits, Using Savings From First-Grader Deposits. Given the revised cost estimate of providing deposits to first graders, the Governor proposes to redirect $30 million ongoing General Fund from that program component toward the newborn component beginning in 2023-24. This would bring the total funding level for the newborn component to $45 million. At this funding level, the administration projects the state could provide a $100 seed deposit to all of the approximately 450,000 newborns annually. Accordingly, the Governor proposes trailer bill language increasing the seed deposit for all newborns from $25 to $100.

Assessment

Administration’s Cost Estimates Are Reasonable. We concur with the administration that total CalKIDS funding under the Governor’s budget is likely sufficient to support the proposed seed deposits for newborns while maintaining the current deposits for first graders in 2023-24. In addition, under the most recent demographic projections, we do not anticipate costs in either program component will increase much, if any, in the out-years. Between 2023-24 and 2026-27, the Department of Finance projects the number of births will remain about flat, while the number of first graders will decline by about 10 percent. (The share of students who are low income has been relatively steady in recent years.)

Proposal Would Expand Program Component Amid State Budget Deficits. Typically, when the state adjusts caseload estimates downward in a given program, it reflects the lower associated spending level in the budget. The Governor’s proposal, however, takes a different approach. Instead of aligning CalKIDS spending with the lower revised cost estimate for the first-grader component, the Governor proposes to use the identified savings to expand the newborn component. This approach warrants careful consideration in light of the state’s budget condition. As we discuss in The 2023-24 Budget: Overview of the Governor’s Budget, the state faces a budget problem in 2023-24, in addition to projected out-year operating deficits under the Governor’s budget.

Impact of Increasing Seed Deposits for Newborns Is Not Known. Evaluations of college savings account pilot programs in other states have found that these programs have benefits in the short term, such as increasing parents’ educational expectations for their children. However, because the children enrolled in these programs are still young, evidence of their eventual impact on college access is limited. Although some research suggests children with college savings are more likely to enroll in and graduate from college, we do not at this time have evidence that providing a $100 seed deposit has a larger effect on these outcomes than providing a $25 seed deposit. A $100 seed deposit would provide more savings for college (particularly after accounting for potential investment earnings), but the amount would remain small relative to the cost of college attendance. Moreover, because the deposits are universal, some of the funds would go toward high-income children who already have a relatively high likelihood of enrolling in and graduating from college. Low-income children, meanwhile, are already under current law eligible for a significantly larger deposit (generally $500) upon entering first grade. Upon entering college, many students are also eligible for assistance with tuition and living costs through other financial aid programs, including the state’s Cal Grant and Middle Class Scholarship programs as well as the federal Pell Grant program.

Program Likely Has Unspent Funds From Previous Years. Beyond the $30 million the Governor is proposing to redirect from the first-grader component beginning in 2023-24, there are likely additional potential savings in the CalKIDS program. First, based on recent school enrollment projections, the amount budgeted for first-grader deposits in 2022-23 is likely also too high. Second, some of the funding the state provided in previous years for the newborn component likely remains unspent. This is because the state provided funding (a combined $39 million) for the newborn component in 2019-20 and 2021-22, whereas SIB did not launch this component until 2022-23. As of this writing, we are working with the administration to gather more information on these potential savings.

Recommendation

Recommend Rejecting Proposal. Given the state budget condition and the unknown impact of increasing seed deposits for all newborns, we recommend the Legislature reject the Governor’s proposal. We recommend the Legislature instead align CalKIDS ongoing spending in 2023-24 with the administration’s revised cost estimates—essentially treating this as a typical caseload adjustment. This would generate $30 million in additional budget solution for 2023-24 and help address projected out-year operating deficits. Furthermore, we recommend the Legislature sweep any unspent CalKIDS funds from 2019-20 through 2022-23 that are not needed to cover program costs those years as additional one-time budget solution.

Marketing and Outreach

In this section, we provide background on CalKIDS marketing and outreach efforts, describe the Governor’s proposal to provide additional one-time funding for this purpose, assess that proposal, and make an associated recommendation.

Background

State Funded Several CalKIDS Marketing and Outreach Efforts in 2022-23. The 2022-23 Budget Act provided the following General Fund augmentations to SIB for CalKIDS marketing and outreach:

$5 million ongoing for financial literacy outreach to CalKIDS participants and their families.
$5 million one time for contracts with local college savings account programs to conduct outreach and coordinate with the CalKIDS program.
$3.1 million one time and $900,000 ongoing to send notification letters informing participants’ families of their accounts.
$1 million one time for a marketing campaign to increase awareness of the CalKIDS program.

In addition to these state funds, SIB receives marketing support from the Scholarshare 529 program manager (who, through a contract with SIB, also provides investment services, customer service, and other administrative support). SIB reports the program manager has committed to spending $1 million annually on CalKIDS marketing as part of their current contract, which extends through November 2026.

Proposal

Governor Proposes Additional One-Time Funding for Marketing. The Governor’s budget provides $1 million one-time General Fund to SIB for marketing and outreach expenses for the CalKIDS program. The proposal would extend the marketing activities funded in 2022-23, with the goal of increasing families’ awareness of the CalKIDS program as well as encouraging them to register their accounts and potentially open a Scholarshare 529 account to save their own funds.

Assessment

Awareness Is Needed for CalKIDS Program to Meet Its Objectives. In order for the CalKIDS program to expand college access, participants and their families need to know about the funds the state has deposited into their account and how they can be used. Accordingly, it is reasonable for the state to provide some continued support for program marketing and outreach. To this end, the state provided ongoing augmentations last year for SIB to send notification letters to participants’ families as well as provide financial literacy outreach.

Marketing and Outreach Funds Provided in 2022-23 Are Largely Unspent. SIB began sending notification letters to participants’ families in November 2022. As of January 2023, however, it has not yet begun to spend the other marketing and outreach funds provided in 2022-23. SIB is currently developing requests for proposals for the funds for financial literacy outreach, outreach and coordination with local college savings account programs, and the marketing campaign. Given that SIB is still determining how to spend the funds provided last year, it is too soon to assess whether further augmentations are needed this year.

Key Details of New Marketing Proposal Are Still Being Determined. SIB indicates the proposed funds for 2023-24 could potentially be used for various marketing activities, including, but not limited to, videos, radio announcements, and online advertising. At this time, the specific activities have not yet been determined. SIB intends to make these determinations after it has spent the marketing funds provided in 2022-23 and analyzed the results.

Recommendation

Recommend Rejecting Proposal. We recommend the Legislature reject the Governor’s proposal to provide $1 million one-time General Fund for CalKIDS marketing in 2023-24, given that it does not yet know whether additional funding is needed for this purpose or what activities those funds would support. Rejecting this proposal would provide additional budget solution in 2023-24.