The Student Aid Commission (SAC) provides financial aid to students through a variety of grant, loan, and work-study programs. The proposed 1995-96 SAC budget is $624 million, which represents a $16 million (2.6 percent) increase compared to estimated current-year expenditures. The commission receives about 60 percent of its funding from federal funds. Most of the remaining funding is from the General Fund, of which the vast majority is for the Cal Grants Program.
We recommend approval of the proposed $11.5 million General Fund increase for Cal Grants to conform to the fee recommendations in our proposed budgets for UC and CSU. The budget provides $242 million from the General Fund to the SAC for local assistance. This represents a $16 million, or 7 percent, increase compared to estimated current-year expenditures.
Of the increased amount, $3 million is to fund changes in the mix of Cal Grant students and $1.4 million is to backfill a loss of federal funds. The remaining $11.5 million is to offset 10 percent fee increases for Cal Grant recipients who attend the UC and the CSU. The budget indicates that fees "are anticipated to increase by at least 10 percent, which is the basis for the amount proposed. If fees increase by a larger amount, additional funding will be considered."
We recommend approval of the $4.4 million proposed to fund changes in the mix of Cal Grant students and backfill the loss of federal funds. Since we recommend a fee increase of 10 percent for undergraduates at UC and CSU (please see our analysis of this issue in the UC and CSU items), we also recommend approval of the $11.5 million proposed increase to offset the effect of those fee increases.
During various legislative policy and budget hearings in spring 1994, the SAC was requested to keep the Legislature informed about key issues relating to a major federal audit, FAPS, and SAC management. We provide brief updates on these issues below.
Federal Audit. In 1993-94, the U.S. Department of Education (USDE) concluded that the SAC owed at least $49 million from the loan fund to the federal government related to various audit exceptions. Specifically, the USDE found that the SAC did not provide sufficient oversight on some loan claims and did not process claims and pay lenders for defaulted loans in a timely manner. In our Analysis of the 1994-95 Budget Bill, we noted that the SAC was appealing the USDE's findings. Most importantly, the SAC claimed that much of the at least $49 million figure was based on projections from inadequately small and statistically invalid samples. The SAC reported at budget hearings on the progress of its appeal, per our recommendation.
In August 1994, the USDE rejected the SAC's appeals and requested the repayment of $62.6 million from the loan fund within a month. In response, the SAC filed suit in the northern California U.S. District Court requesting that the court stop the USDE's request from being implemented. While the SAC acknowledged that it was late in paying lenders' claims, the SAC (in addition to repeating the claims cited above) alleged that the lenders and the federal government did not suffer any net monetary losses as a result.
In late October 1994, the Chair of the SAC reported that "discussions (with the USDE) have been very fruitful to date." At the time of this analysis, SAC staff indicated that discussions between the SAC and USDE were continuing, but that information on the exact nature of the discussions could not be shared as a result of the confidentiality surrounding the lawsuit.
FAPS Implementation Problems. The automated FAPS system has been in operation since May 1990 for the Cal Grants program and since January 1993 for the federal loan programs. In June 1994, the Department of Finance's Office of Information Technology indicated that the system's total costs were $51 million-- $18 million for development and $33 million for ongoing operation.
In early 1994, a draft independent report by Deloitt & Touche raised several significant concerns about FAPS. Major short-term concerns included the lack of documentation of the FAPS computer programs and the faulty method for determining some loan repayment refunds and liabilities. The major longer-term issue identified was the need for "at least partial, if not total, replacement" of FAPS. (The final report, issued in September 1994, contained no significant changes to the draft report's findings.)
The Legislature adopted supplemental language to the 1994 Budget Act, per our recommendation, requesting that the SAC report by March 1, 1995 on its progress in addressing each of the report's major issues and recommendations. SAC staff advise us that most of the short-term issues have been addressed. At the time of this analysis, the SAC had not determined how to address the longer-term issue of FAPS replacement and in fact was proceeding with "re-procurement" plans to continue the current system for at least another two to three years.
Management Issues. In spring 1994, an independent report by MGT Associates identified numerous management problems within the SAC, including communications problems between the SAC, schools, and lenders. The report found that the SAC "must address and fix shortcomings of FAPS as soon as possible in order to restore the confidence of its staff and customers in the agency's short-term and long-term capability to provide excellent services."
The Legislature adopted supplemental language to the 1994 Budget Act, per our recommendation, requesting that the SAC report by March 1, 1995 on its progress in addressing each of the report's major issues and recommendations. At the time of this analysis, the SAC staff indicated that many recommendations had been addressed and that action will not be taken on others (primarily the creation of high level financial and information services positions) until a new Executive Director is hired.
Recommendation. The Legislature has expressed considerable interest in the issues identified above. The SAC indicates that additional information will be available on these issues this spring. Accordingly, we recommend that the SAC report at budget hearings on its progress in addressing the significant concerns raised by the federal audit and independent reports on FAPS and the SAC's administration, including the SAC's plans regarding the replacement and reprocurement of FAPS.
The Governor's Budget proposes $500,000 to fund student financial aid counseling services through the K-12 budget. The funds would be used to expand services that are currently provided through the SAC-administered California Student Opportunity and Access Program (Cal-SOAP). Please see our analysis of intersegmental issues in the "K-12 Budget Priorities" section.
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