The University of California (UC) includes eight general campuses and one health science campus. The budget proposes General Fund expenditures of $2 billion. This is an increase of $124 million, or 6.5 percent, from estimated current-year expenditures. The General Fund increase is primarily for salary, cost, and enrollment increases and additional costs for lease-payment bonds, as shown in Figure 3 of the higher education overview section. The budget estimates that the UC's full-time-equivalent (FTE) enrollment will be roughly 153,500 in 1996-97. It does not anticipate a general fee increase for undergraduate and graduate students, though it would continue an ongoing multiyear plan to phase in fee increases for students in professional schools (such as law or medicine) to the average of fees charged by comparison public universities.
Pursuant to legislative intent, we have reviewed the University of California information on teaching hospital net gains, and find that they are below the 5 percent level we have identified as being needed for hospital equipment and capital outlay purposes. Consequently, we have not identified additional net gains as being available for redirection to the campuses for critical funding needs.
Over the past two years, we have recommended redirecting the amount of UC teaching hospital net gains that exceeded the 5 percent level we identified as being needed for hospital equipment and capital outlay purposes. Specifically, we recommended that the UC reallocate teaching hospital net gains in excess of 5 percent of net operating revenues from the hospitals to the campuses, and dedicate the funds towards critical campus funding needs in the areas of deferred maintenance, instructional equipment replacement (IER), and library materials.
In 1994-95, the Legislature adopted our recommendation and in the Supplemental Report of the 1994 Budget Act provided that $18 million from 1992-93 and 1993-94 be redirected for these purposes in 1994-95. Last year, we identified an additional $9 million in net gains above 5 percent from 1992-93 and 1993-94 that could be redirected for these purposes. The Legislature adopted a compromise that specified legislative intent in the Supplemental Report of the 1995 Budget Act that $5.5 million of the $9 million be redirected to the campuses for deferred maintenance. (The language did not specify legislative intent regarding expenditure of the remaining $3.5 million.)
Later, the final 1995 budget package resulted in a $9.5 million funding shortfall for the UC. The UC Office of the President states that based "on discussions with state representatives, the University had been planning to shift $5.5 million of state support from the hospitals to deferred maintenance on a one-time basis--but that was prior to the development of the budget shortfall. Given the changed circumstances, the hospital funds will be utilized to help meet the shortfall (in 1995-96)."
No Additional Net Gains Above 5 Percent. In the Analysis of the 1995-96 Budget Bill, we noted that the UC's projections for 1994-95 and for several years thereafter indicated that the UC's teaching hospitals will experience financial difficulty due to a variety of factors, including an expected decline in the number of patient days; a decrease in the rate of reimbursements from Medicare, Medi-Cal, and disproportionate provider payments; and changes expected because of the emerging managed care environment. Consequently, the UC's projections indicated that the UC hospitals will not achieve annual net gains above 5 percent in the near future. The Legislature subsequently specified its intent in the Supplemental Report of the 1995 Budget Act that the UC report to the Legislature by December 1, 1995 on the net gains achieved in 1994-95 and that the Legislative Analyst include a review of the University's report in its Analysis of the 1996-97 Budget Bill.
Our review of the UC's report indicates that the UC hospitals realized a net gain of 4.9 percent in 1994-95 and are projected to realize a net gain of 2.2 percent in 1995-96. Consistent with our previous analyses, we therefore have not identified any funds that are available for redirection from this source.
Consistent with legislative intent, the UC has engaged in a consultation process regarding the long-term implications of managed care and other health care changes for support of medical education in teaching hospitals.
In the Analysis of the 1995-96 Budget Bill, we noted that the Legislature needs information on the long-term implications of managed care and potential federal funding changes on the UC teaching hospitals. The Legislature specified its intent in the Supplemental Report of the 1995 Budget Act that the UC, in consultation with other hospitals with a significant medical education component, report at hearings on the proposed 1996-97 budget regarding options for addressing the impact of future changes in the health care environment.
Changes in the Medical Industry Are Already Affecting UC Hospital Practices. Based on our site visits to UC teaching hospitals and our review of various hospital programmatic and funding information, we find the hospitals have significantly reduced costs and changed medical education practices in response to cost-cutting pressures related to managed care. For example, after an extensive medical consultation and review process, one hospital we visited cut the length of hospital stay required for a particular type of heart surgery almost in half, with no reported adverse effect on patient outcomes. Other common changes include providing cost-benefit information on various prescription drugs and medical tests to medical staff to encourage the use of cost-effective medical practices.
Throughout our visits, however, UC officials voiced concerns that potential reductions in federal Medicare support for medical education and cost pressures related to managed care may eventually result in (1) significant unfunded medical education costs and/or (2) reductions in the level of medical education provided at UC teaching hospitals and other hospitals with significant teaching components. The UC indicates that teaching hospitals have a "competitive cost disadvantage" because they need more resources than other hospitals to accomplish their core teaching mission. For example, medical interns and residents need practice in reviewing various tests and observing the relative impact of various procedures. However, providing sufficient levels of practice can be costly.
UC Consulted as Requested. Over the past year, the UC consulted with other educational institutions that operate teaching hospitals (such as Stanford University and the Charles R. Drew University of Medicine and Science) and associations that represent other hospitals with a significant medical education component to address the Legislature's intent. This effort seems timely, given that the U.S. Congress has considered various budget reductions for medical education, particularly in Medicare. (At the time of this analysis, final federal actions on these proposals had not been taken.)
The UC indicates that it will provide a status report on the actions it has taken to address legislative intent and on related federal budget actions during budget hearings. We will comment on the UC's report, as appropriate, during the hearings.
Chapter 776, Statutes of 1993 (SB 506, Hayden) expressed the Legislature's intent that courses required for normal progress to a baccalaureate degree be provided in sufficient numbers at the UC. Chapter 776 requires the Legislative Analyst to review and analyze the annual reports the UC submits on faculty workload. The 1995 report provides trend data indicating that (1) total student credit hours per student increased by 0.8 percent from 1990-91 through 1993-94 and (2) faculty teaching workload, as measured by the number of classes taught and student credit hours per faculty member, increased by 6.5 percent and 6.7 percent, respectively. Compared to historic trends, the change in faculty teaching workload represents a moderate increase in our view.
The report indicates that campus "faculty and administrators believe that the courses necessary for graduation are available to students." The data presented in the report would tend to support this conclusion. The latest available time-to-degree data for the UC (for freshmen entering in Fall 1986 who graduated within six years) indicate that the average time to degree is just over four years--13.4 quarters.
The UC's 1996 faculty workload report was due to the Legislature by February 1, 1996. We will comment on it, as appropriate, during budget hearings.
The California State University (CSU) consists of 22 campuses. The budget proposes General Fund expenditures of $1.8 billion, an increase of $96 million, or 5.7 percent, from estimated current-year expenditures. This increase would support salary, price, and enrollment increases and additional costs for lease-payment bonds as shown in Figure 3 of the higher education overview section. The budget estimates that CSU's full-time-equivalent (FTE) enrollment will be about 254,400 in 1996-97. No general student fee increase is proposed.
We recommend that the Legislature adopt supplemental report language to ensure that a recent contract agreement with the California Faculty Association will not result in a decrease in faculty teaching workload and direct the California State University to report on the actual impact of the contract's faculty workload provisions beginning in 1996-97.
The CSU's primary mission under the Master Plan for Higher Education is undergraduate instruction and graduate instruction through the master's degree. The CSU is also authorized to (1) offer doctoral programs jointly with the University of California and private universities and (2) support research related to its instructional mission.
The Legislature has expressed considerable interest in the amount of time faculty spend teaching. In 1992-93 and 1993-94, the Legislature adopted language in the Supplemental Report of the Budget Act deferring a planned reduction in faculty teaching workload, and expressing legislative intent that courses required for normal progress to a baccalaureate degree not be reduced.
Prior to 1995-96, CSU faculty workload consisted of 12 units of direct instruction and three units of instruction-related responsibilities per semester. Direct instruction is generally defined as four three-unit courses per semester. Instruction-related activities generally include student advising, committee work, and community service.
In October 1995, the CSU trustees and the California Faculty Association (CFA) reached a contract agreement for 1995-96 through 1997-98 that would eliminate the faculty workload standard. The contract instead specifies that each campus department's workload assignments must meet departmental and student needs. The CSU has characterized the change as necessary to give additional flexibility to campus departments to meet student demand for courses. To gauge the impact of this change, the CSU and the CFA have agreed to continue reporting workload in the traditional teaching unit manner.
Some changes in workload standards may be needed to accommodate changes in the way courses are taught. For instance, measuring the teaching workload of distance learning and computer-assisted courses (where the development workload is high) can be difficult.
We have discussed the proposed changes with CSU and it is not clear to us whether the elimination of the teaching unit standards will lead to an increase or a decrease in faculty workload. We are concerned, however, that the contract's workload provisions may result in a decrease in faculty teaching workload. The Legislature has not been presented with the opportunity to review any change in faculty workload and the need for a decrease has not been substantiated. In fact, the CSU Faculty Workload Study indicates that in 1988-89 (the last time this information was collected), the total workload (including teaching and research) at CSU and selected public institutions was roughly comparable, although a greater proportion of the workload at CSU was in teaching rather than research. The CSU's higher teaching workload and lower research workload reflects the CSU's mission under the Master Plan for Higher Education.
To address these concerns, we recommend that the Legislature specify its intent that the recent contract agreement with the CFA not result in a decrease in faculty teaching workload. This is consistent with the Legislature's actions in 1992-93 and 1993-94.
We also recommend the Legislature require CSU to report on the effect of the new contract provisions on faculty workload. This information could be made available by aggregating the workload information that CSU collects from each campus department into systemwide and campus totals. Accordingly, we recommend that the Legislature adopt the following supplemental report language:
We find that the California State University has generally observed legislative intent regarding $20 million in one-time carryover funds that are available in the current year. We recommend that the Legislature adopt supplemental report language specifying its priorities regarding how carryover funds are generated and used in 1996-97.
The proposed budget identifies $20 million (excluding lease-payment bond funds) in one-time carryover funds available in 1995-96. Figure 10 shows CSU's expenditure plan for the funds. Consistent with past practice, the 1995 Budget Act permits CSU to carry over (or "reappropriate") General Fund monies for two years. The language also requires CSU, by September 30 of specified years, to report to the Joint Legislative Budget Committee (JLBC) and the Department of Finance (DOF) on the amounts of funding carried over and the uses of the funds. (The proposed 1996-97 Budget Bill continuesthe carryover authority and reporting language.)
| Figure 10 California State University Expenditure Plan for One-Time Carryover Funds 1995-96a (In Millions) | ||||
|---|---|---|---|---|
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Carryover From |
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| Use | 1993-94 | 1994-95 | Total | |
| Discretionary | $0.6 | $0.5 | $1.1 | |
| Campuses | 7.1 | 7.2 | 14.3 | |
| Systemwide office | 2.3 | 2.2 | 5.5 | |
| Totals | $10.1 | $9.9 | $20.0 | |
| a Detail may not add to totals due to rounding. | ||||
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In our Analysis of the 1995-96 Budget Bill, we raised a number of issues about the particularly high level of one-time funds carried over from prior years ($41 million). Most importantly, we noted that over half of the funds represented "forced savings" that may have been generated by limiting student access. We recommended that the Legislature establish limits on, and priorities for, the use of one-time carryover funds.
The Legislature adopted language in the Supplemental Report of the 1995 Budget Act specifying its intent regarding carryover funds. The language also called for the Legislative Analyst's Office (LAO) to report its findings on whether CSU has observed the Legislature's intent in the Analysis of the 1996-97 Budget Bill.
Below, we discuss the Legislature's intent regarding carryover funds and CSU's proposed expenditure plan for the funds. Then, we assess whether CSU has observed the Legislature's intent.
Legislative Intent. The supplemental report language specifies legislative intent that CSU use its existing internal budget consultation process in determining the use of carryover funds. The language also states the Legislature's intent that carryover funds available in 1995-96 shall not be generated by:
CSU's Proposed Expenditure Plan. As Figure 10 shows, most of the one-time carryover funds that are available in 1995-96 were originally allocated to the campuses and the systemwide office. The CSU advises that these funds were reappropriated back to the campuses and the systemwide office (as has been the historic practice). Only $1.1 million of the $20 million represents "discretionary" funds that were not reserved for a particular purpose. The CSU allocated these funds for enrollment growth at certain campuses.
LAO's Comments. Our analysis shows that, in contrast to last year, the $20 million in one-time carryover funds available in 1995-96 falls within a normal amount of carryover for CSU--that is, the savings do not appear to have been "forced." We also find that, consistent with legislative intent, the carryover did not result from fee increases, reductions in specified enrollment levels, or in the quality of instruction as measured by the student-faculty ratio. (Recent time-to-degree information is not available for analysis.)
It also appears that the use of the "discretionary" portion of the carryover funds was subject to existing internal CSU budget consultation processes. Specifically, CSU staff and a representative of the CFA informed us that the use of these "discretionary" funds was discussed at an October 1995 meeting.
Accordingly, we believe CSU's actions regarding carryover funds have generally been consistent with legislative intent. However, since it is not clear what level of consultation was envisioned by the Legislature, we are unable to assess whether the consultation meeting on the discretionary portion of the carryover funds met the Legislature's expectations.
Recommendation on 1996-97 Carryover Authority. Consistent with legislative actions last year, we recommend the Legislature adopt supplemental report language again for the 1996-97 budget specifying its intent regarding how carryover funds shall be generated. We also recommend the Legislature specify its priorities for the use of the funds. Over the past several years, the Legislature has sought funding for deferred maintenance and instructional equipment replacement at CSU. Given the continuing needs in these areas, we recommend that these priorities be specified by adopting the following supplemental language:
It is the intent of the Legislature that any funds reappropriated by this item shall not be generated by (1) a reduction in the budgeted 1996-97 enrollment level of 254,400, (2) a reduction in the quality of instruction, as measured by the student-faculty ratio and (if available) time-to-degree, or (3) an increase in systemwide fee levels. It is also the intent of the Legislature that the priorities for use of the funds shall be deferred maintenance and instructional equipment replacement. The use of the funds shall continue to be subject to existing internal CSU budget consultation processes. The CSU shall report to the Department of Finance and the Joint Legislative Budget Committee by September 30, 1996 the amount being reappropriated and the purposes for which the funds will be used. It is the intent of the Legislature that the Legislative Analyst report in its Analysis of the 1997-98 Budget Bill if it determines the CSU has not observed legislative intent as stated above.
The California Community Colleges (CCC) provide instruction to about 1.3 million adults at 107 colleges operated by 71 locally governed districts throughout the state. The system offers academic and occupational programs at the lower-division (freshman and sophomore) level, basic skills education, and citizenship instruction.
The proposed 1996-97 CCC budget is $3.4 billion. This is an increase of $109 million, or 3.3 percent, above the amount provided in the current year. Of the proposed $3.4 billion, $1.6 billion is from the General Fund, $1.4 billion is from local property tax revenues, and the remaining support is from student fees, state lottery funds, and federal funds.
The options facing the Legislature for community college funding are complex. The Legislature must determine spending levels and priorities for both the current and the budget year. Current-year spending is an issue because more Proposition 98 funding is available for K-14 programs than was anticipated in the 1995 Budget Act.
The 1996-97 spending level for community colleges depends on the level of the Proposition 98 minimum funding guarantee assumed by the Legislature. This, in turn, depends on (1) General Fund revenue growth in 1996-97 and (2) whether the Legislature adopts the Governor's proposed tax cut. As we discuss in the K-12 priorities section (see Section E of this Analysis), the Legislative Analyst's Office's (LAO's) estimate of General Fund tax revenue growth--and therefore our estimate of the Proposition 98 minimum funding guarantee--significantly exceeds the budget's estimate.
To assist the Legislature with its deliberations on community college funding priorities, we developed three alternatives to the administration's spending proposals. The proposals are based on three possible scenarios regarding the level of Proposition 98 funding available to the community colleges. These scenarios are based on:
We recommend the Legislature redirect $6.9 million from proposed funding for enrollment growth at new facilities to support growth and cost-of-living adjustment for selected categorical programs.
The budget proposes $942,000 to support growth and COLA for CCC categorical aid for remedial education. The budget, however, proposes no growth and COLA funding for other CCC categorical programs that have been a high legislative priority: Extended Opportunity Programs (services to socioeconomically disadvantaged students), Disabled Students Program and Services, and matriculation (admissions, assessment, advising). Without funding adjustments for increased costs and for increased numbers of students, these programs would be unable to provide the existing level of services to students in 1996-97. The amount necessary to provide growth and COLA for these three additional categorical programs is $6.9 million.
In order to maintain the existing level of services in these categorical programs, we recommend the Legislature redirect $6.9 million from catch-up funding for enrollment growth at new community college centers. The budget proposes $10 million for this purpose in addition to funding general purpose enrollment growth. The new centers were authorized through a statewide planning process to provide access to community college instruction in underserved areas of the state. Due to the fiscal constraints of the past several years, however, the state has not provided the growth funding necessary to support the number of additional students the centers were designed to serve.
We believe that the budget proposal to fund enrollment growth at new centers has merit. Our proposal would leave $3.1 million to be spent for this purpose. Moreover, we recommend additional funding for this purpose under our revenue scenarios (see below). Under the budget revenue assumptions, however, Proposition 98 funds are not sufficient to fund the proposed $10 million for growth at new centers and maintain the existing level of service in important categorical programs. In our view, continuing the current level of service in existing programs with ongoing demand should take priority over program expansion.
This is part of our proposal to provide a permanent solution to the deferred maintenance problem for the public higher education segments. In a later section of this analysis, we discuss the proposal in detail.
Figure 11 displays our recommended alternative spending plans if the Legislature adopts our higher projections of General Fund tax revenues and the Proposition 98 minimum spending requirement in 1996-97. The figure shows scenarios with and without the Governor's tax reduction proposal. In developing these alternatives, we assumed the community colleges would receive around 10 percent of additional Proposition 98 funds that would be available for K-14 programs under our revenue assumptions. This is roughly the share of total Proposition 98 funds proposed for the community colleges in the budget.
| Figure 11
Community College Funding Priorities LAO Recommendations 1996-97 Proposition 98 Funds (In Millions) |
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LAO Compared to Budget | |
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With Tax Cut | With No Tax Cut |
| Fund continuing program costs |
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| Categorical programs Growth and COLA |
$7.6 | $7.7 |
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| Protect investment in facilities and equipment |
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| Instructional materials | 15.0 | 15.0 |
| Deferred maintenance | -8.7 | -8.7 |
| Maintenance and operations | 20.0 | 25.0 |
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| Use existing facilities to capacity |
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| Growth: new centers | 5.0 | 5.0 |
| Growth: other new facilities | 8.0 | 20.0 |
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| Fund program improvement |
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| Equalization | -- | 14.0 |
| Totals | $46.9 | $78.0 |
Our alternatives would add $47 million to the budget's proposed level of CCC spending if the Legislature adopts the Governor's tax cut, and a total of $78 million if it does not. Under our alternatives, we recommend approval of all the 1996-97 budget proposals, except the proposed $8.7 million for deferred maintenance. We also recommend the Legislature adopt the plan we present below for spending these additional funds.
We recommend the Legislature provide up to an additional $7.7 million to support growth and cost-of-living adjustment for selected categorical programs.
As indicated above, we recommend the Legislature fund growth and COLA for CCC categorical programs that have been a high legislative priority. Under the budget revenue assumptions, we recommended an additional $6.9 million for this purpose as discussed earlier. Under the LAO scenarios, we recommend up to an additional $7.7 million. (This amount is slightly larger because other recommendations we make for the use of additional funds would result in a greater number of students.)
We recommend the Legislature provide augmentations of (1) $15 million for replacement of instructional equipment and library materials and (2) up to $16.3 million for maintenance and operation workload.
Instructional Equipment and Library Materials. The budget proposes substantial one-time funding that would partially address existing equipment replacement backlogs. There remains a need, however, to ensure that colleges set aside sufficient funds on an annual basis to adequately address their ongoing needs for repair and maintenance of instructional equipment and library materials.
Recent estimates suggest that the ongoing annual cost of repairing and/or replacing existing CCC instructional equipment and library materials is roughly $100 million. Some of this need is filled by college spending from general purpose funds. There is no definitive information, however, on the amount spent for this purpose statewide. In our visits to colleges--particularly, in our reviews of vocational education programs--funding for this purpose is consistently mentioned as a critical need.
Given the need for replacement of instructional equipment and library materials we have observed in our site visits, we recommend the Legislature provide $15 million in 1996-97 to fund the CCC Instructional Equipment Replacement Program for the ongoing maintenance, replacement, and upgrade of instructional equipment and library materials. We further recommend that the Legislature continue its past practice of requiring districts to match every $3 of state funds provided under this program with $1 of district funds. The $15 million would then fund a $20 million effort.
Maintenance. We recommend the Legislature provide an additional $11.3 million under the tax cut alternative and $16.3 million under the no tax cut alternative to support regular maintenance. This is in addition to redirecting $8.7 million from deferred maintenance to regular maintenance that we recommend above. This is part of our proposal to provide a permanent solution to the deferred maintenance problem for the public higher education segments, which we discuss in a later section of this analysis.
We recommend the Legislature provide an additional $5 million for unfunded enrollment growth in new community college centers, and up to $20 million for unfunded enrollment growth in new regular campus facilities
The budget provides $10 million for unfunded enrollment growth in new community college centers that have opened since 1991-92. The state authorized these centers to provide access to community college instruction in underserved areas. Due to the fiscal constraints of the past several years, however, the state has not provided the growth funding necessary to support the number of new students the centers were designed to serve. State funding of enrollment growth for new facilities on regular college campuses has also lagged.
The Legislature should take steps to ensure that community colleges more fully use the facility capacity that currently exists. The amounts of spending we recommend for this purpose are not sufficient to fully address capacity growth at the CCCs. We are concerned, however, that the colleges would have trouble increasing enrollments to full capacity in a single year. The Legislature could continue to address this enrollment issue in future years as revenues permit. Therefore, we recommend the Legislature:
Under the no tax cut alternative, we recommend that the Legislature provide $14 million from 1996-97 funds to reduce inter-district funding disparities.
Given that the community colleges likely cannot absorb more enrollment growth funding in 1996-97 than we would suggest in previous recommendations, we recommend the Legislature use the $14 million that remains under the no tax cut alternative to fund inter-district equalization. Community college districts did not receive the same equalization funding that was provided to K-12 school districts in the 1980s. Consequently, significant funding disparities still exist between community college districts.
Under community colleges regulations, equalization funding is applied first to the district whose funding per standard unit of workload is lowest, until that district's level of funding matches the level of the next lowest district. Any remaining funding is applied to bringing both of these districts to the funding level of the next lowest remaining district, and so on.
At the writing of this analysis, the Chancellor's Office could not determine how many districts would benefit from the proposed level of equalization funding. We recommend that the Chancellor's Office report at budget hearings on the equalizing effects of this proposal.
Figure 12 shows that the budget proposes $79.4 million in one-time Proposition 98 funding for the community colleges in 1995-96:
| Figure 12
Community College Funding Priorities LAO Recommendations 1995-96 One-Time Funds (In Millions) |
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LAO Recommendations |
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| Budget
Proposals | Budget
Revenues | LAO
Revenues | ||
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| Fund continuing program costs |
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| Backfill property tax shortfall | $9.4 | $9.4 | $9.4 | |
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| Protect investment in facilities and equipment |
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| Deferred maintenance | 17.5 | 25.0 | 25.0 | |
| Block grant | 52.5 | 44.5 | 55.5 | |
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| Fund program improvement |
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| Technology planning | -- | .5 | .5 | |
| Totals | $79.4 | $79.4 | $90.4 | |
| Difference from budget spending level |
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-- | $11.0 | |
Figure 12 also shows our recommended alternative spending plan for 1995-96 Proposition 98 funds under the budget revenue assumptions and our revenue assumptions. Under either set of assumptions, we make the following recommendations (which are fully discussed in later sections of this Analysis):
We recommend the Legislature adopt a new policy toward deferred maintenance by (1) increasing funding for ongoing operations and maintenance and (2) using one-time 1995-96 funds to begin eliminating the backlog of deferred maintenance projects.
The budget proposes $8.7 million for deferred maintenance in 1996-97. The budget also proposes $17.5 million in one-time funds for community college deferred maintenance projects from 1995-96 Proposition 98 settle-up funds. The settle-up monies are funds owed to K-14 education programs in 1995-96 under Proposition 98 due to an increase in the Proposition 98 minimum funding guarantee. These funds would be appropriated in the 1996 education budget trailer bill and, therefore, would not be available to colleges for spending until 1996-97. Thus, a total of $26.2 million in state funds earmarked for community college deferred maintenance projects would be available for spending in 1996-97.
The administration also proposes to waive the local match requirement for the $17.5 million in one-time funds, which would cut in half the program effect of the settle-up funds. (Existing law requires that community college districts provide a dollar-for-dollar match with district funds for any state funds they receive for deferred maintenance.) The budget proposes to keep the local match requirement in place for $8.7 million in ongoing funds.
As we note in our discussion in the higher education crosscutting issues section of this analysis, deferred maintenance has come to be seen as an ongoing program. The community colleges, for example, have received an appropriation for this purpose annually since the early 1980s. However, a deferred maintenance project is one that should have been done earlier under a properly functioning maintenance program. Thus, existence of deferred maintenance really represents a maintenance failure. As a result of this ongoing failure to properly maintain college facilities, the state and the colleges now face higher costs to repair and upgrade facilities.
In our crosscutting issues discussion, we propose a framework for addressing this problem. It involves a state-segment partnership that would:
Below, we use this framework as a basis for recommendations concerning deferred maintenance and ongoing regular maintenance funding for the community colleges.
To prevent further deferral of current maintenance projects, the Legislature should ensure an adequate level of maintenance funding for the CCCs. Although it is very difficult to assess the community colleges' actual level of maintenance spending or need for additional maintenance funding, evidence of underfunding exists. The Chancellor's Office, for example, advises that the colleges add about $20 million in new deferred maintenance projects every year. However, this may not represent the full extent of underfunding. It is possible, for example, that colleges add only their most pressing projects, because deferred maintenance funding provided annually by the state is small compared to the size of the already existing backlog.
An alternative measure of the adequacy of maintenance funding is to compare current levels with an objective standard that is based on an "adequate" level of maintenance. Consequently, we measured CCC maintenance funding with the standard used by UC and CSU. Based on this standard, we estimate the amount of local assistance funding allocated by the Chancellor's Office to colleges for maintenance and operations is about $50 million below the "adequate" level.
As a result, we conclude that a $50 million increase in annual spending for maintenance would move CCC funding for maintenance to the standard used by the UC and CSU and prevent further deferral of projects. In keeping with our principle that adequate maintenance funding is a joint state-segment responsibility, we recommend the Legislature allocate up to $25 million in 1996-97 Proposition 98 funds to increase ongoing annual funding for regular CCC operations and maintenance.
We further recommend the Legislature require a dollar-for-dollar increase in local operations and maintenance effort as a condition of receiving these funds. The local match requirement means that up to $50 million in additional maintenance spending would occur as a result of the proposed $25 million increase in state spending.
Funding Sources. In order to provide funding for the state's $25 million share, we recommend the Legislature first redirect $8.7 million from funds budgeted for CCC deferred maintenance in 1996-97 (eliminate Schedule (o) of Item 6870-101-001 and increase Schedule (a) by $8.7 million) to fund regular ongoing maintenance. The annual $8.7 million appropriation for deferred maintenance--with a local dollar-for-dollar match--gives the wrong incentive to districts. From a district perspective, the local cost of a deferred repair is half the cost of performing the repair as regularly scheduled maintenance. Thus, the current approach gives districts a strong fiscal incentive to add to the backlog.
If the Legislature adopts our higher revenue estimates, we recommend that it also allocate up to $16.3 million in Proposition 98 funds for community colleges operations and maintenance. (Increase Schedule (a) of Item 6870-101-0001 by up to $16.3 million.)
Local Match. We further recommend the Legislature adopt the following budget bill language to control the appropriation of up to $25 million for operations and maintenance:
Of the funds appropriated in Schedule (a) $25,000,000 shall be distributed by the Chancellor's Office to community college districts in proportion to districts' maintenance and operations workload, as defined in Title 5, Division 6, of the California Code of Regulations. As a condition of receiving these funds, a district shall provide to the Chancellor's Office a resolution from the district Board of Trustees indicating that it will increase its operations and maintenance spending from 1995-96 actual levels by the amount of the allocation plus an equal amount to be provided from district discretionary funds. The Chancellor may waive this requirement, case-by-case, based upon a review of a district's financial condition. Compliance with the resolution shall be reviewed under the district annual audit. Any allocation rejected by a district shall be distributed among the remaining districts in proportion to operation and maintenance workload.
In our higher education crosscutting issues section, we recommend that the Legislature prohibit the CCCs (along with UC and CSU) from adding new projects to the deferred maintenance backlog. This is because each segment should be held accountable for doing ongoing maintenance--given sufficient funding as proposed above--so that no additional projects are deferred.
In the Crosscutting Issues section, we propose supplemental report language which would require the CCC (along with UC and CSU) to submit their lists of deferred maintenance projects--as they existed on January 1, 1996--to the LAO and the DOF no later than enactment of the 1996 Budget Act. The lists would be reviewed by the LAO, the DOF, and representatives of the segments to determine--based on criteria agreed to by the parties--which projects should be included in the deferred maintenance backlog. The backlog, as defined in this way, would become the target of deferred maintenance funding efforts. The segments would not be permitted to add new projects to this backlog.
The Chancellor's Office advises that the existing CCC deferred maintenance backlog is about $90 million. The Chancellor's Office also indicates that, given sufficient funding, the community colleges probably have the ability to undertake up to about half of this workload in any given year. Consequently, we recommend the Legislature take steps to eliminate this backlog over a two-year period. For 1996-97, we recommend the Legislature eliminate $50 million of the backlog by providing a total of $25 million in 1995-96 one-time funds for deferred maintenance--$7.5 million more than provided in the budget--to be matched by community college districts on a dollar-for-dollar basis.
Local Match. We recommend the Legislature reject the administration's proposal for an across-the-board waiver of the local match requirement for 1995-96 deferred maintenance funding. The state should maintain the local match requirement in order to encourage the colleges to do their part in addressing this backlog. Moreover, existing law already empowers the Community Colleges Board of Governors to waive the requirement on a case-by-case basis if a district is unable to provide the local match due to fiscal problems.
Consequently, we recommend that the Legislature adopt the following trailer bill language to control appropriation of the $25 million:
The funds appropriated in this section shall be distributed by the Chancellor's Office to community college districts on a project-by-project basis based on priority of need for the project. Pursuant to Section 84661 of the Education Code, districts shall provide matching funds, unless the Board of Governors of the California Community Colleges waives this requirement in accordance with law.
We recommend the Legislature redirect $500,000 in one-time funds from the proposed $52.5 million block grant to develop a standard education technology needs assessment and planning guide for use by community colleges.
The budget proposes $70 million in one-time spending from 1995-96 Proposition 98 funds for community colleges. This includes a $52.5 million block grant to the colleges for instructional equipment, library materials, and education technology. Block grant funds would be allocated to community college districts in proportion to enrollment. These funds would be appropriated in the 1996 education budget trailer bill, and would not be available for spending by the colleges until 1996-97.
Education Technology Planning. In our visits to community colleges over the past two years, we have observed wide variations in the use of technology. Some colleges have a very sophisticated strategic planning process, and are well along the way of putting technology in place to meet their priorities. Other colleges have only begun to plan. There is currently no formal process by which colleges that are relatively far along in this process can share what they have learned with colleges that have just begun. We believe that production of a planning guide, made available to all districts would help ensure that the state gets the greatest possible benefit from the funding it provides to the community colleges for technology improvements.
Accordingly, we recommend the Legislature redirect $500,000 from the proposed block grant to fund development of standard technology planning guidelines that could be adapted for use by any college. The guidelines should:
We recommend the Legislature adopt Budget Bill language and supplemental report language to ensure that the CCC Chancellor's Office uses budget-year growth funding to support increased enrollments.
Under the state's Master Plan for Higher Education, the CCC are charged with being the point of access to higher education for the great majority of Californians. For this reason, preserving access to the CCC has been a major priority of the Legislature. Accordingly, the Legislature provided $32 million to fund CCC enrollment growth in 1994-95 and $29 million in 1995-96. Over the two-year period, this $61 million would have supported enrollment growth of about 3.2 percent. At the time this analysis was prepared, however, the CCC had allocated none of this funding to support enrollment growth. In fact, the number of FTES served by the CCC is estimated to have declined by about 9,900, or 1.2 percent during the period 1994-95 through 1995-96.
Growth Funding Diverted to Other Uses or Allocated Late. Instead of allocating these funds to increase enrollments, the Chancellor's Office used them in both years to backfill budget reductions, and has held them in reserve to backfill anticipated shortfalls in local property tax revenues (community college general purpose spending is funded in roughly equal parts by the state General Fund and by local property tax revenues) and student revenues. The Chancellor's Office is able to do this because community college funding regulations treat growth funding as a kind of contingency reserve, to be allocated for increased enrollments only if it is not needed to (1) fund the prior year level of funding and (2) provide a COLA.
The Chancellor's Office now advises that it will allocate about $14 million of 1995-96 growth funding in February, because (1) the gap between actual 1995-96 property tax revenues and the budgeted level of property tax revenues is currently estimated to be less than expected earlier in the fiscal year and (2) the budget proposes to fully backfill any 1995-96 gap from the state General Fund (Proposition 98). It appears unlikely, however, that this mid-year allocation will result in any significant increase in 1995-96 enrollment. This is because colleges will already have begun their spring terms with conservative enrollment targets based on earlier advice from the Chancellor's Office that there would be no growth allocation for 1995-96. They have little flexibility at this time to add staff and expand enrollments. Colleges whose level of enrollment has historically exceeded the level funded by the state will be able to use this allocation to close the gap--without producing any increase in the actual number of students served.
1996-97 Growth Funding Should Be Spent for That Purpose. The budget also provides $37.9 million for regular enrollment growth in 1996-97. In order to ensure that the Chancellor's Office allocates this full amount for growth at the beginning of the fiscal year, we recommend the Legislature prevent the Chancellor's Office from allocating growth funds for another purpose. Specifically, we recommend the following actions:
Notwithstanding any other provision of law, the funds appropriated in Schedule (p) shall be allocated for growth in FTES, on a district-by-district basis as determined by the Chancellor of the California Community Colleges.
We recommend the Chancellor's Office report at budget hearings on reasons for its lack of progress in preparing a proposal for community colleges performance measures and standards, and provide a detailed plan for completing a satisfactory proposal by November 30, 1996.
In the Supplemental Report of the 1995-96 Budget Act, the Legislature expressed its intent that the Chancellor's Office prepare a report identifying specific outcome measures that can be reliably compiled on an annual basis and a set of standards that define a level of performance that can reasonably be expected of individual colleges and the community colleges system as a whole. The report, due by November 30, 1996, must also identify any anticipated costs of compiling and reporting data related to these outcome measures and standards.
With the 16-month period for preparation of the report half gone, the Chancellor's Office has done no significant work on this project. We are now concerned that the report will not be completed on time, or will not fulfill the requirements laid out in the supplemental language. This report is a critical step in ongoing efforts by the Legislature to get an accurate picture of community college performance and to hold the colleges accountable for well-defined educational outcomes. We presented an in-depth review of community college outcome measures and accountability efforts in the Analysis of the 1995-96 Budget Bill, pointing out that the development of performance standards was a crucial first step toward a performance-based budgeting process for the community colleges.
Accordingly, we recommend the Chancellor's Office report at budget hearings on the reasons for its slow start on the report. We also recommend that the Chancellor's Office advise the Legislature of its plan for producing a report that complies with the supplemental language by November 30, 1996. The plan should include an outline of the report, address the level of staff resources devoted to the project, and indicate at what points in the preparation of the report it will consult with the California Postsecondary Education Commission (CPEC) as required by the supplemental report language.
We recently reviewed a contract between the San Joaquin Delta College (Delta College) and the Richard A. McGee Correctional Training Center (the academy) that raises serious issues concerning contract abuses. Specifically, we found that Delta College uses this contract to claim state funding on the basis of instructional services that it does not provide and the academy uses the contract to augment its annual equipment budget without review by the Legislature.
The Academy. The academy provides basic training for the California Department of Corrections (CDC) correctional officer cadets as well as a more limited amount of advanced training for other CDC personnel. The training is provided by senior correctional officers who are temporarily housed at the academy. The CDC General Fund support budget funds the salaries and operational costs of the academy.
During 1994-95, the CDC provided an estimated $28 million in support of academy operations, including $21 million for cadet compensation, $6 million for staff compensation and operating expenses, and nearly $1 million in expenditures for academy equipment. The CDC anticipates the academy budget in 1995-96 will be at a similar level.
The Contract. The Delta College and academy contract allows correctional officer cadets to receive about 12 college credits for courses in the administration of justice that they receive at the academy. The CDC employees who provide the instruction sign individual instructional agreements with Delta College, and therefore the college views them as college employees. The current contract covers the 1994-95 and 1995-96 fiscal years.
The contract creates a fiscal arrangement that mutually benefits the two organizations. Delta Colleolleenefits because it counts the cadets served in basic training as its own students for the purpose of claiming state funds. The academy benefits because the college purchases equipment that is used at the academy.
In 1994-95, the 2,300 cadets trained at the academy generated 1,356 FTES for which the college claimed state funding. We estimate that Delta College realized a $1.8 million net gain from the contract in 1994-95. The 1994-95 gain did not come from a regular general apportionment of state funds because most of the FTES generated at the academy were in excess of the state's apportionment cap. However, because the college had enrollment over its cap--due to contract-generated FTES--it claimed $2.2 million in state categorical funding. From this $2.2 million, the college spent about $427,000 to purchase instructional equipment that was used at the academy.
We recommend that the California Community Colleges Chancellor's Office report at budget hearings concerning administrative or legislative steps necessary to prevent San Joaquin Delta College--or any other college--from using contracts to claim state funding for instructional services it does not provide.
This contract raises three serious issues concerning state oversight of the CDC and community college programs. We discuss these issues in detail below.
Contract Is an Abuse of State Funding System for Community Colleges. The Delta College/academy contract creates the fiction that the academy is an instructional program of the college. The college claims state funds because the students are supervised by the CDC instructors who, the college asserts, are Delta College employees. However, the instructors are paid by the academy, not Delta College. Consequently, Delta College receives substantial state funding (a net $1.8 million in 1994-95) in consideration of instructional services that, in reality, are provided by the academy. The academy gets around the state budget process, significantly increasing its annual equipment budget (by $427,000, or 40 percent, in 1994-95) with no legislative review.
We note with concern that Delta College has contracts of an identical nature with three other state agencies for 1995-96 and 1996-97:
Our review indicates the academy classes fail one, and perhaps both, of these tests. First, the academy funds the salaries and benefits of its instructors, all operating expenses of its instructional program, and the substantial majority of its equipment expenses. Delta College does provide some equipment funding--$427,000 in 1994-95--that technically could be viewed as supporting direct instructional costs of the academy. We could not determine what proportion of this amount could be considered a "direct" education cost. Delta College, however, received state funding of $1.8 million in excess of the equipment funding for work that it did not perform--work that was already funded once by the state through the CDC.
Second, the academy is not open to anyone but the CDC cadets. The CDC basic training classes are technically community college courses and therefore theoretically open to any student in the college's service area, as required by CCC regulations. In practice, however, a CDC cadet must be in residence at the academy to fully participate in basic training. A student may not be in residence at the academy unless selected by the CDC as a cadet. As a result, we conclude the academy is a CDC operation in every practical respect, and the college has no practical control over who attends it.
Contract Circumvents Financial Accountability. The contract provides no assurance that additional equipment purchases made on behalf of the academy are justified or that the prices being paid for this equipment are reasonable. Community college purchases are exempt from review by the Department of General Services and the DOF. Moreover, the Legislature is not given the opportunity to weigh equipment purchases made on behalf of the academy against the equipment and other expenditure needs of other CDC programs and other state programs.
Recommendations. Delta College should not receive state funding on the basis of instructional services that it does not provide. Moreover, it is contrary to sound budgeting and financial practices for the academy to augment its annual equipment budget by 40 percent without review by the Legislature or oversight by state control agencies.
The Legislature has already directed the Bureau of State Audits to review this contract and determine whether similar contracts exist between other community colleges and state agencies. In addition, we recommend:
The Student Aid Commission (SAC) provides financial aid to students through a variety of grant, loan, and work-study programs. The proposed 1996-97 SAC budget is $614 million, which represents a $12 million (1.9 percent) increase compared to estimated current-year expenditures. The commission receives about 60 percent of its funding from federal funds. The General Fund provides most of the remaining funding ($252 million), which primarily supports the Cal Grant Program.
The budget proposes a $10 million augmentation to raise the maximum annual Cal Grant award level for new grant recipients who choose to attend nonpublic institutions. This would raise the maximum Cal Grant A and Cal Grant B award for these students from the current level of $5,250 to about $7,200, an increase of $1,950 or 37 percent. New students who receive this higher grant level in 1996-97 would continue to receive it in future years as they continue their progress toward a degree until, eventually, all Cal Grant recipients at nonpublic institutions would be eligible for the higher maximum award. As a result, by 1999-2000, the annual cost of this proposal would be about $30 million.
The Cal Grant program has three statutory goals for the use of additional funds: (1) increase access to higher education by increasing the annual number of awards, (2) maintain a maximum award level for students at the University of California (UC) and the California State University (CSU) that covers mandatory fees, and (3) increase the degree of choice between public and nonpublic institutions by increasing the maximum award level for students who attend nonpublic institutions. The budget proposes no increase in the number of new Cal Grant awards. In addition it assumes no increase in student fees for UC or CSU, and therefore proposes no increase in the maximum grant level for recipients who attend either segment. Thus, the budget addresses only the last of these goals.
Cal Grants are the primary form of state-funded financial aid for students at postsecondary education institutions in California. In 1995-96, the state will spend an estimated $239 million from the General Fund to benefit about 92,000 college and university students. Cal Grants account for just under 6 percent of all financial aid received by students attending higher education institutions in California. Other major sources of student financial aid include Federal Family Education Loans (45 percent of all aid), various federal grant programs (25 percent), and institution-based aid (24 percent).
There are three types of Cal Grants. Figure 13 summarizes the purpose, eligibility, amount of award, and number of new awards granted annually for each type. Generally:
The Legislature has established in statute the following goals for the Cal Grant program:
| Figure 13
Comparison of Cal Grant Programs 1995-96 |
||||
|---|---|---|---|---|
| Cal Grant A | Cal Grant B | Cal Grant C | ||
| Purpose | ||||
| Choice--based on financial need and academic performance | Access--based primarily on financial need, preference for initial attendance at community college | Vocational--based on financial need | ||
| Eligibility | ||||
| Income ceiling: $52,200 for dependent student with five family members | Income ceiling: $32,249 for dependent student with five or more family members | Income ceiling: Same as Cal Grant A | ||
| Asset ceiling: $42,000 | Asset ceiling: $42,000 | Asset ceiling: $42,000 | ||
| Freshman GPA cutoff:
UC/CSU: 3.47 CCC: 3.19 |
Applicants ranked based on family income, family size, GPA, family education background, and marital status of parents | Applicants ranked based on work experience, educational performance, and recommendations | ||
| Plan to enroll at least two years at UC, CSU, or nonpublic institution | Plan to enroll at least one year at a college | Plan to enroll at least four months at community college, independent college, or vocational school | ||
| Average Family Income of New Recipients (1994-95) | ||||
| $28,656 | $9,678 | $23,561 | ||
| Maximum Award |
|
|
||
| Tuition and fees:
Nonpublic: $5,250 UC: $3,799 CSU: $1,584 |
Tuition and fees:
No award in the first year, then same as Cal Grant A |
Tuition and fees:
Nonpublic: $2,360 UC: $2,360 CSU: $1,584 |
||
| Other costs: None | Other costs: Up to $1,410 | Other costs: Up to $350 | ||
| Number of New Awards Annually | ||||
| 17,400 | 12,250 | 1,570 | ||
| Cost (in millions) | ||||
| $165.5 | $71.7 | $1.7 | ||
Figure 14 compares actual numbers and levels of Cal Grant awards to these statutory goals for certain years (1980-81, 1990-91 and 1995-96). The Cal Grant program has never come close to providing the number of first-year awards referenced in the statutory goals. In the current year, the actual number of new awards is about half of the statutory target. Maximum Cal Grant A and B awards, however, have nearly kept up with student fee increases at UC and CSU. Currently, the maximum grant levels cover systemwide student fees at UC and CSU, but not mandatory campus-based fees.
| Figure 14
Cal Grants Statutory Goals Compared to Actual Awards 1980-81, 1990-91, and 1995-96 |
|||
|---|---|---|---|
| 1980-81 | 1990-91 | 1995-96 | |
| Goal: Number of awards | |||
| 25 percent of high school graduates | 60,543 | 58,541 | 65,095 |
| Actual number of new awards | 23,232 | 31,220 | 31,220 |
| Percent of goal | 38% | 53% | 48% |
| Goal: Cover UC and CSU feesa | |||
| UC |
|
|
|
| Weighted average tuition and fees | $776 | $1,820 | $4,123 |
| Maximum award | 774 | 1,820 | 3,799 |
| Percent of goal | 100% | 100% | 92% |
| CSU |
|
|
|
| Weighted average tuition and fees | $226 | $920 | $1,878 |
| Maximum award | 225 | 920 | 1,584 |
| Percent of goal | 100% | 100% | 84% |
|
|
|
|
|
| Goal: Support private institution recipients at level
of
public institution funding | |||
|
|
|
|
|
| Specified costs and fees at public institutions | $3,417 | $6,289 | $8,829 |
| Maximum award | 3,200 | 5,250 | 5,250 |
| Percent of goal | 94% | 83% | 59% |
| a Cal Grant A and B. | |||
Growth in maximum Cal Grant A and B awards for students at nonpublic institutions has not kept pace with growth in the statutory benchmark. Figure 14 shows that the proportion of the statutory goal covered by the maximum award fell from 94 percent in 1980-81 to 59 percent in 1995-96. Figure 15 shows that the proportion of Cal Grant A recipients who attended independent colleges and universities (ICU) decreased as the maximum Cal Grant A award covered a smaller share of ICU tuition and fees. (We use Cal Grant A for this illustration because the program accounts for about 90 percent of Cal Grants used at nonpublic institutions.)
| Figure 15
Cal Grant A Fee Coverage and Use Decline At Independent Colleges and Universities (ICU) |
||||
|---|---|---|---|---|
|
|
1980-81 | 1990-91 | 1995-96 | 1996-97 Proposed |
|
|
|
|
|
|
| ICU weighted average tuition and fees | $4,610 | $11,662 | $15,098 | $15,702 |
| Maximum Cal Grant award | 3,200 | 5,250 | 5,250 | 7,200 |
| Tuition and fees covered by Cal Grant | 69% | 45% | 35% | 46% |
|
|
|
|
|
|
| Proportion of Cal Grants used at ICUs | 43% | 31% | 29% | Unknown |
We recommend the Legislature base its decision on the proposed $10 million augmentation on (1) the need to backfill federal cuts in financial aid and (2) the Legislature's willingness to commit to a $30 million long-term increase in the cost of the Cal Grant program.
The budget proposal would narrow the gap between the maximum Cal Grant award and tuition and fees at California nonpublic postsecondary institutions. We have several concerns about it, however, that we address in detail below.
Funds May Be Needed to Backfill Federal Spending Cuts. The state currently receives $9.7 million in federal funds through the State Student Incentive Grant (SSIG) program. The SAC uses these funds to maintain the Cal Grant program's number and level of awards. The fate of the SSIG program is uncertain, pending completion of federal budget negotiations. It seems likely, however, that program funds will be reduced by at least half (the President's and the Senate's proposal). The House proposes to eliminate the program.
Proposal Will Have Little Influence on Students' Choice of Schools. In the budget year, it is unlikely that the Governor's proposal will influence very many students to attend a private institution instead of a UC or CSU campus. This is because students have already applied to colleges for the fall of 1996, and will have decided where to attend before enactment of the 1996-97 budget. Thus, an increase in Cal Grant award levels would be a one-time windfall either to (1) students who would have attended nonpublic institutions in any case, or (2) non-public institutions, if they adjust their institution-based aid packages lower to offset the Cal Grant increases. We have no data to determine the extent to which the higher Cal Grant awards would offset institutional aid.
We also find it unlikely that the proposal will influence very many students to attend a nonpublic institution in future years. Figure 15 shows that the budget proposal would increase Cal Grant coverage of tuition and fees at ICUs from 35 percent in 1995-96 to 46 percent in 1996-97, which would be about the same percentage as in 1990-91. Over the long-run, we estimate this level of tuition and fee coverage would result in redirection of about 1,100 students from the UC and CSU to ICUs, increasing the number of Cal Grant recipients at ICUs from about 15,000 to about 16,100. Without further increases in the maximum award, however, this effect would erode over time as tuition and fees increase.
Proposal Addresses Only One of the Legislature's Goals. The budget proposal takes a step toward satisfying the statutory goal of using Cal Grants to provide needy students a degree of choice between public and nonpublic institutions. It does not, however, broaden overall student access to Cal Grants by increasing the number of available awards, which has also been a major state goal.
Given these concerns, we recommend the Legislature consider alternative ways of spending the proposed $10 million increase. Figure 16 shows estimates of the long-term effect of the budget proposal and some alternative budget-year strategies for the Cal Grant program. These options illustrate the consequences of different policies that the Legislature may wish to consider concerning (1) long-term spending increases for Cal Grants and (2) the balance of access and choice. The first set of options in Figure 16 shows three alternatives with a long-run annual cost of about $10 million--the same amount as proposed for 1996-97. The second set of options assume a long-term cost of about $30 million--the long-term cost of the budget proposal.
| Figure 16
Cal Grant Augmentation Options |
||
|---|---|---|
| Option | Maximum
Nonpublic Award |
Number of New Awards |
| Long-Run Annual Cost of $10 Million | ||
|
|
|
|
| Backfill SSIG cut (if needed) | No change | No change |
| Spend $9.7 million and maintain current service level | ||
|
|
|
|
| Emphasize choice | +$660 (13%) | No change |
| Spend $10 million to increase award (all recipients) | ||
|
|
|
|
| Emphasize access | No change | +1,150 (4%) |
| Spend $3 million to increase number of new awards | ||
| Long-Run Annual Cost of $30 Million | ||
|
|
|
|
| Emphasize choice (budget proposal) | +$1,950 (37%) | No change |
| Spend $10 million to increase award level only (new recipients only) | ||
|
|
|
|
| Emphasize access | No change | +4,660 (15%) |
| Spend $10 million to increase number of new awards only | ||
|
|
|
|
| Balance choice and access | +$960 (18%) | +2,130 (7%) |
| Spend $5 million to increase award level (new recipients only) | ||
| Spend $5 million to increase number of new awards | ||
Limit Long-Run Annual Cost to $10 Million. Figure 16 shows that the Legislature can make modest progress toward the Cal Grant programs statutory goals for access or choice if it limits the ongoing annual cost of the 1996-97 augmentation to $10 million. It could use this amount to:
Our recommendation concerning the proposed $10 million increase in Cal Grant funding depends on (1) federal action on the SSIG program and (2) the level of long-run spending increases the Legislature is willing to make for the Cal Grant program:
We withhold recommendation on proposed augmentations of $138,000 from the General Fund and $2,707,000 from the State Guaranteed Loan Reserve Fund (59.7 personnel years), until ongoing administrative reviews of the SAC's operating structure are complete and any resulting budget revisions have been submitted by the administration.
The budget proposes to augment SAC operations by 59.7 personnel years in 1996-97 at a cost of $2.8 million--$138,000 from the General Fund and $2,707,000 from the loan fund. The budget also advises that the administration is reviewing the administrative structure of the SAC. When the review is concluded, the administration may propose additional resources for the SAC. The SAC itself has recently completed a revised statement of goals and strategies and will soon publish a work plan to implement them.
The SAC Operating Structure Is Ripe for Review. We see these reviews of SAC's operating structure as positive developments, given the numerous management problems within SAC that have been identified by various state, federal, and private agencies. (The problems have been discussed by various legislative committees over the past two years and are summarized in our Analysis of the 1995-96 Budget Bill.)
Moreover, the environment in which the SAC pursues its student loan processing business has become significantly more uncertain and competitive during the last five years. In 1990-91, SAC processed about 87 percent of new guaranteed student loans in California. Competing loan guarantors accounted for the remaining 13 percent. In 1995-96, SAC staff estimate that SAC will process only about 54 percent of all new guaranteed student loans in California. The remaining 46 percent of new student loans will be handled by competing guarantee agencies (20 percent) and through direct lending by colleges and universities (26 percent). While the future of direct lending is the subject of ongoing federal budget negotiations, SAC staff anticipate that competition from out-of-state loan guarantee agencies will continue to sharpen.
Given this newly competitive environment, we believe that the Legislature should consider the following major policy issues as it evaluates the future of the SAC.
We recommend that the Student Aid Commission explain at budget hearings why it did not comply with the requirements of the 1995 Budget Act regarding its automated Financial Aid Processing System.
The automated Financial Aid Processing System (FAPS) has been in operation since May 1990 for the Cal Grants Program and since January 1992 for the federal loan programs. The system is intended to fully automate Cal Grant and federal loan processing through a single state-operated system. It has so far cost about $18 million to develop and currently costs about $11 million annually to operate. Significant problems with FAPS have been major concerns of the Legislature. The Legislature also has expressed concern that a private contractor--Electronic Data Systems (EDS)--retained to operate and maintain FAPS on an "interim" basis in 1990 continues to do so through a series of contract extensions that have occurred without a competitive bidding process.
State Auditor's Report: FAPS Problems Continue. In September 1994, an independent report by Deloitte and Touche identified several major shortcomings of FAPS. It suggested short-term strategies for addressing some of these shortcomings. For the long-term, however, the report indicated that SAC should partially, if not entirely, replace FAPS.
In the 1995 Budget Act, the Legislature directed the Bureau of State Audits to review the extent to which SAC had addressed the concerns and implemented the recommendations of the Deloitte study. The bureau reported on its review of FAPS in December 1995. The report concluded that, while SAC has made some improvements in FAPS, it has not yet addressed fundamental design deficiencies of the system. As a result, FAPS continues to run inefficiently, and still cannot adequately perform significant accounting functions.
Reprocurement of FAPS Contract Delayed--EDS Contract Extended Again. In mid-1995, SAC hired a new executive director. The new director and his management team adopted a FAPS strategy that departs significantly from the plan represented to the Legislature by SAC during spring 1995 budget hearings. Under the prior management, the SAC had decided to stick with FAPS for the short-run, while working on upgrades to improve the system. After several delays, it was set to establish in September 1995 a new contract by competitive bid--referred to as "reprocurement"--for the ongoing operation and maintenance of FAPS.
The new management team, not convinced that continuation of FAPS is the most cost-effective solution to SAC's loan and grant processing problems, cancelled the reprocurement. Instead, SAC extended its existing contract with EDS to operate and maintain FAPS through June 1996 while it completes an analysis of several alternative long-term solutions. The analysis will address at least the following alternatives:
Recommendation. The Legislature has expressed considerable interest in the problems of FAPS because the success of FAPS is directly related to the ability of SAC to remain a viable guarantor of federal student loans. Moreover, the Legislature adopted language in the 1995 Budget Act requiring competitive bidding of contracts for operation and maintenance of FAPS. Specifically, the language required the SAC to (1) contract with the Bureau of State Audits to ensure that reprocurement of system maintenance provides for competition and (2) ask the vendor community to propose the best ultimate solution to the commission's loan and grant processing needs. By extending the EDS contracts, SAC has ignored the Budget Act language on competitive bidding. Accordingly, we recommend that SAC explain why it did not comply with this requirement. In addition, we recommend SAC report at budget hearings on its progress in determining the future of FAPS and what steps it is taking to ensure that any future reprocurement of FAPS or procurement of an alternative system is fully competitive.
We recommend that the Student Aid Commission report at budget hearings on its progress in resolving significant issues raised in a series of federal audits.
In a series of audits conducted over the last five years, the U.S. Department of Education (USDE) concluded that SAC owed up to $220 million to the federal government based on various audit findings. Generally, these findings indicate that SAC did not provide sufficient oversight of loans in default or process lender claims and payments to lenders in a timely manner. The SAC has appealed all of these findings, maintaining that the USDE findings are based on small and statistically invalid samples. Moreover, while the SAC acknowledges lapses in its processing of defaulted loans and delays in paying lenders' claims, it argues that lenders and the federal government did not suffer any net monetary losses as a result.
In 1994, USDE rejected SAC's appeal for about $62 million of the total SAC audit liability and requested immediate payment of this amount from the SAC's loan fund. The SAC filed suit in U.S. District Court to prevent the transfer of funds. At the time of this Analysis, SAC staff advised that SAC and USDE continue to negotiate over the settlement of the lawsuit and remaining audit findings. They could not share specific information on the nature of the negotiations as a result of confidentiality surrounding the lawsuit. They expressed optimism, however, that the lawsuit and the remaining audits might soon be settled.
We recommend that the SAC report at budget hearings concerning the progress of its negotiations with USDE.
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