Legislative Analyst's Office
February 22, 1995

Higher Education Four-Year Plan

We recommend that the Legislature review the administration's proposed UC and CSU budget compact, which would absorb an additional $1.1 billion of General Fund resources on a cumulative basis over the next four years, in the context of its overall budget priorities. The Legislature needs to consider whether it wishes to guarantee a portion of the budget a specified rate of growth over a time period when the state's fiscal condition will be tight.

The budget proposes a four-year compact with UC and CSU which includes proposals in five areas--operating and capital outlay funding, student fees and financial aid, enrollment plans, productivity improvements, and budget priorities. The Legislature has already acted in many of these areas to set specific policies. We describe the proposals and provide comments on them below.

Operating and Capital Outlay Funding

The compact calls for operating budget increases averaging four percent over the three-year period beginning in 1996-97. (The budget proposes two percent increases for unspecified general purposes for the UC and CSU in 1995-96.) The administration also states that additional General Fund increases will be provided for debt service costs on lease-payment bonds used to finance capital outlay projects. In addition, the administration proposes to provide annual funding of about $150 million to each of the two four-year segments for new capital outlay over the four-year period beginning 1995-96. Priority would be given to seismic and life safety projects, infrastructure and educational technology. Absent voter approval of a general obligation bond for this purpose, the Legislature would be asked to authorize lease- payment bonds to finance these projects.

Comments. Our review indicates that the administration's proposed UC and CSU budget compact would absorb $1.1 billion on a cumulative basis over the four-year period beginning in 1995-96. To the extent the Legislature commits to a cumulative increase of this magnitude for higher education, its ability to address priorities in other areas of the budget will be limited accordingly. Thus, we believe the Legislature should review the proposed higher education compact in the context of the state's likely tight fiscal condition over this period and the resulting tradeoffs which would be required.

Student Fees and Financial Aid

The administration anticipates that the UC and CSU governing boards will act to raise fees by at least 10 percent, and pledges to support the UC and CSU governing boards' decisions regarding the fee levels they deem appropriate for students attending their institutions. The administration also states that fee increases will include differential fees for UC professional students and CSU graduate students and at least one-third of additional fee revenues will be reserved for financial aid.

For 1995-96, the administration provides funding to the Cal Grants program administered by the Student Aid Commission to cover the anticipated 10 percent fee increases. The Governor's Budget document states that additional funding will be considered if the UC and CSU governing boards adopt larger increases.

Comments. The Legislature will face difficult decisions regarding student fee and financial aid policies over the next several years as it balances the priorities of student access and program quality. Current law specifies that the UC and CSU governing boards shall establish long-term student fee policies that ensure that any necessary fee increases are gradual and moderate. Actual fee increases at the UC and CSU in the 1990's have not been gradual or moderate.

To assist the Legislature in its deliberations regarding fee policies, we have reviewed fee increases over a longer time period--from 1983-84 through 1994-95--to compare actual fee increases at the UC and CSU to what the fee increases would have been during this period if they had increased at a steady rate of 10 percent annually. A 10 percent increase is consistent with the maximum specified by the Legislature in Ch 572/90 (SB 1645, Dills). Figure 7 displays the results of this analysis. As the figure shows, fees were actually rolled back in 1984-85 compared to the previous year. This rollback occurred as the state's economy rebounded after a recession in the early 1980s. Fees increased slowly thereafter throughout the decade. Between 1990-91 and 1994-95, however, fees increased rapidly--by 134 percent at UC and 103 percent at CSU. The fee increases were enacted to partially offset the impact of significant General Fund reductions during this time period.

The figure also shows that if fees had increased by 10 percent annually from 1983-84 through 1994-95, the resulting fee levels in 1994-95 would be roughly equal to the actual fee levels.

As the economy improves, the Legislature may wish to limit student fee increases as it did after the recession of the early 1980's. However, as our analysis shows, gradual and moderate increases over time may avoid the imposition of more rapid fee increases. Ultimately, the Legislature will be faced with balancing fee levels, student access, and program quality.

Enrollment Plans

The administration's compact specifies that the UC and CSU will plan their enrollment so that over the four-year period enrollments will grow by an average of about one percent annually.

Comments. Based on the most recent enrollment projections by the Department of Finance (DOF), it appears that planning for enrollment growth of about one percent annually over the four-year period is reasonable for UC given anticipated enrollment demand. For the CSU, this would be slightly less growth over the four-year period than the DOF enrollment projections indicate. The Legislature will need updated projections each year, however, to ensure that planned enrollment increases are adequate. This is because the DOF's long-term enrollment projections have changed significantly in recent years. For example, the DOF's combined UC and CSU projections for 2005-06 were revised downward by more than 10 percent from fall 1989 through fall 1994.

The administration's compact is silent on a related enrollment budgeting issue-- the need to hold the segments accountable for meeting planned enrollment levels, thereby maintaining the integrity of the budget process. Based on our recommendation last year, the Legislature established target enrollment levels for the UC and CSU in the Supplemental Report of the 1994 Budget Act. The Legislature also readopted Budget Bill language from the 1991 budget to adjust the UC and CSU budgets if actual enrollments varied from the targets by more than 2 percent. The Governor vetoed the language stating that funding for the UC and CSU should be addressed through additional legislative action when compared to other essential financial needs. We believe the issue of accountability for planned enrollments should be addressed during consideration of the 1995-96 budget and make specific recommendations on this issue in our analysis of the UC and CSU budgets.

Productivity Improvements

The administration notes that while UC and CSU have achieved dramatic increases in productivity necessitated by recent budgetary reductions there will be a continued need for additional unspecified productivity improvements to save $10 million annually at each segment over the four-year period. The administration specifies that priority will be given to reducing administration costs, increasing management efficiency, and utilizing cost-effective instructional technology. Under the proposed compact, the systems apparently would be allowed to achieve and spend these savings in whatever way they wanted. It is also not clear under the administration's proposal whether the $10 million in annual productivity improvements would be needed to balance the UC and CSU budgets or whether the internal savings would be used at their discretion for their own priorities.

Comments. Over the past three years, the Legislature has taken specific actions to improve productivity at the UC and CSU. Beginning in the current year, for example, the Legislature increased the budgeted student-faculty ratio (SFR) at the UC from the traditional 17.6 to 18.7 over a two-year period. Our review indicates that this action will ultimately save the state about $55 million annually. The Legislature has also specified its intent that a planned teaching workload reduction at the CSU be deferred. The CSU has deferred the proposal indefinitely. The administration's general emphasis on productivity improvements is in line with the Legislature's previous actions to increase productivity at the UC and CSU. However, the Legislature lacks information on the specific details of the proposal that it will need to determine how particular productivity improvements would mesh with the Legislature's priorities.

Budget Priorities

The administration's plan calls for the UC and CSU to place high priority on providing needed classes so that full-time students are able to graduate in four years or less, and that part-time students can graduate in as few years as possible . The plan also calls for the UC and CSU to give high priority to restoring faculty salaries to competitive levels over the four-year period, with an emphasis on merit-based increases, to recruit and retain high caliber faculty.

Comments. The Legislature adopted supplemental report language to the 1994 Budget Act specifying legislative intent that the UC and CSU adopt four-year pledge programs (and other similar programs) on each UC and CSU campus by 1995-96 to encourage the campuses to improve, on their own, the management of faculty workload. Under such programs, the campus pledges to provide specialized advice to students and guarantees that students in the program will be able to take the courses they need to graduate in four years. The students, in turn, agree to meet with the advisors and to follow the agreed upon courses of study. It is not clear how the administration's proposal regarding improvements in students' time to degree go beyond the actions already taken by the Legislature.

The Legislature has also (within the limits of budget constraints) provided merit salary adjustments and general faculty salary increases at the four- year segments to improve the competitiveness of UC and CSU faculty salaries in comparison to the UC's eight and the CSU's twenty salary comparison institutions. In our analysis of the proposed 1995-96 UC and CSU budgets, we recommend that additional funds be provided for merit salary adjustments and general faculty salary increases. (We address a related issue--the faculty salary comparison institution methodology--in the next section.)


We recommend that the Legislature review the administration's proposed UC and CSU budget compact in the context of its overall priorities for funding various programs, including higher education. The Legislature needs to consider whether it wishes to guarantee a portion of the budget a specified rate of growth over a time period when the state's fiscal condition will be tight. With regard to other aspects of the proposed compact, we note that the Legislature has already acted to (1) allocate funding for specific enrollment increases, (2) require specific increases in productivity, and (3) ensure that four-year degree pledge programs and other programs designed to improve students' time to degree are established at all UC and CSU campuses.

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