LAO Analysis of the 1997-98 Budget Bill
Higher Education Overview

Major Issues
Overview

A 25-Year Look at General Fund Expenditures
Spending by Major Program
Major Budget Changes
Enrollment
Student Fees

Major Issues

Higher Education

Significant Budget-Year Increases for the University of California (UC) and California State University (CSU)

The budget proposes an increase of $126 million, or 6.1 percent, for UC and an increase of $113 million, or 6.4 percent, for CSU. The proposed General Fund increases include funds to avoid the need for student fee increases.

We recommend net budget-year reductions of $28.8 million in UC's funding--of which $19.8 million would be redirected to the Student Aid Commission--and $29.3 million in CSU's funding. (See pages F-19 and F-27)

Funds Not Needed for "Extraordinary" Growth at Community Colleges Should Help Meet K-12 Needs

While we agree with the Governor's 1997-98 spending proposals for the colleges in most program areas, we recommend a reduction of $29.3 million in funding for "extraordinary" enrollment growth to conform funding with the underlying change in the state's college-age population.

We further recommend that, with these savings, the state: (1) provide $8 million of equalization funds to address historic inter-district funding disparities and (2) redirect the net savings of $21.3 million to address pressing needs in K-12 programs. (See page F-35)

Eliminate Deferred Maintenance on Expedited Basis

UC and CSU have growing backlogs of deferred facility maintenance, a major problem that is not adequately addressed by the Governor's budget.

We recommend a $26 million augmentation as part of a comprehensive approach to the system's' maintenance problems--deferred and ongoing--by initiating a state/segment partnership to increase funding for ongoing maintenance and eliminate deferred maintenance backlogs.

Our recommended approach is essentially the same adopted by the Legislature in last year's budget, but vetoed by the Governor. (See page F-15)

Cal Grant Increase Proposed

The budget proposes $10 million to increase the maximum Cal Grant award level for recipients who attend private colleges and universities. The annual cost of this increase will reach $30 million by 2000-01.We recommend approval of this increase.

In addition, we recommend transferring $19.8 million in financial aid from the University of California to the Cal Grant program for additional awards because the transfer would (1) allow recipients greater choice among colleges and universities and (2) ensure the funds would be used for financial aid. (See page F-24)

Overview

Higher Education

The budget proposes a 6.3 percent increase in General Fund expenditures for higher education in 1997-98, and no increase in annual fees for undergraduate students.

The budget proposes total spending for higher education in California of $19.1 billion in 1997-98, which is $524 million, or 2.8 percent, more than estimated expenditures in the current year. This consists of funding from all sources for all activities of the University of California (UC), California State University (CSU), California Community Colleges, Hastings College of the Law, and the California Student Aid Commission. The $19.1 billion includes activities at UC that are not entirely related to instruction, including providing medical care at its hospitals ($1.9 billion) and managing three major U.S. Department of Energy laboratories ($2.3 billion).

As Figure 1 (see page 6) shows, the budget proposes General Fund expenditures of $6.2 billion for higher education in 1997-98. This is $366 million, or 6.3 percent, higher than estimated for the current year. The budget assumes that local property taxes will contribute $1.4 billion for the community colleges in 1997-98, an increase of $47 million, or 3.4 percent. Student fee and tuition revenue at all the higher education segments account for $1.8 billion of proposed expenditures, an increase of $41 million, or 2.3 percent. This revenue increase primarily is due to projected increases in the numbers of enrolled students. Under this budget, the only statewide fee increases would be for various professional schools and nonresident students that were authorized in prior years.

The budget proposes General Fund expenditures for UC of $2.2 billion, which is $126 million, or 6.1 percent, more than estimated General Fund expenditures in the current year. For CSU, the budget proposes a General Fund increase of $68 million, or 3.7 percent. After eliminating $45 million in one-time spending in 1996-97, the actual increase in ongoing General Fund support for CSU is $113 million or 6.4 percent. The combined General Fund, property tax revenue, and other fund amounts for the community colleges total $193 million, or 5.8 percent, above 1996-97 estimated expenditures.

Figure 1

Higher Education Budget Summary
1995-96 Through 1997-98

(In Millions)

Actual
1995-96
Estimated
1996-97
Proposed
1997-98
Change from 1996-97

Amount Percent

University of California

General Fund $1,917.7 $2,060.3 $2,186.0 $125.6 6.1%

Student fee revenue 907.3 949.2 979.7 30.6 3.2

Federal funds 3,353.1 3,419.7 3,556.3 136.6 4.0

Other funds 4,226.4 4,396.4 4,355.1 -41.4 -0.9

Totals $10,404.5 $10,825.6 $11,077.1 $251.4 2.3%

California State University

General Fund $1,629.7 $1,825.4 $1,893.8 $68.4 3.7%

Student fee revenue 568.8 564.1 569.6 5.5 1.0

Federal and other funds 1,085.6 1,356.0 1,330.4 -25.6 -1.9

Totals $3,284.2 $3,745.5 $3,793.7 $48.3 1.3%

California Community Colleges

General Fund $1,472.7 $1,644.8 $1,786.8 $142.0 8.6%

Local property tax revenue 1,348.1 1,369.2 1,415.8 46.6 3.4

Student fee revenue 166.9 171.3 175.4 4.1 2.4

Other funds 186.3 159.2 159.8 0.6 0.4

Totals $3,174.0 $3,344.5 $3,537.8 $193.3 5.8%

Hastings College of the Law

General Fund $12.0 $12.3 $12.3 -- --

Student fee revenue 8.7 12.3 12.6 0.3 2.8%

Other funds 5.6 6.1 5.6 -0.5 -8.9

Totals $26.4 $30.7 $30.5 -$0.2 -0.7%

Student Aid Commission

General Fund $236.8 $264.8 $295.1 $30.3 11.4%

Federal and other funds 499.7 358.4 359.6 1.2 0.3

State Guaranteed Loan
Reserve Fund
150.1 4.9 1.4 -3.5 -72.3

Totals $736.4 $623.2 $654.7 $31.5 5.1%

Total Higher Education $17,625.4 $18,569.4 $19,093.8 $524.3 2.8%

General Fund 5,268.8 5,807.6 6,173.9 366.3 6.3

Property tax revenue 1,348.1 1,369.2 1,415.8 46.6 3.4

Student fee revenue 1,691.4 1,736.4 1,777.1 40.7 2.3

Federal and other funds 9,317.1 9,656.3 9,727.0 70.7 0.7

A 25-Year Look at General Fund Expenditures

There are several perspectives on how General Fund support for higher education has changed over the years. By using the deflator for state and local services to adjust spending for inflation, state expenditures over the past 25 years can be compared directly.

Total Spending. Total budgets for all three segments have increased substantially. Based on the Governor's budget proposal, General Fund expenditures for UC will be $818 million, or 60 percent, greater in 1997-98 than in 1972-73, after adjusting for the effects of inflation. Proposed General Fund expenditures are $567 million, or 43 percent, greater for CSU and $1 billion, or 49 percent, greater for community colleges, after adjusting for the effects of inflation.

Per-Student Spending. Growth in inflation-adjusted General Fund expenditures over the past 25 years can be explained in large part by the increase in students attending college. Figure 2 shows the 25-year history of General Fund and local property tax expenditures for UC, CSU, and the community colleges per full-time-equivalent student (FTE). Measured

this way, proposed General Fund expenditures, after adjusting for inflation, will be $1,332 per student more (10.3 percent) for UC, $1,326 per student more (22 percent) for CSU, and $110 per student more (3 percent) for the community colleges than in 1972-73.

Funding per College Age Population Has Grown Significantly. Funding per FTE incompletely describes the growth in General Fund expenditures for California's colleges. This is because a greater percentage of college-aged students attend college today than 25 years ago. As a consequence, it has taken increasingly more funds to maintain per-student spending. Figure 3 shows that the state spends substantially more today on higher education for each college-age resident in California than it has in the last quarter century. Measured this way, General Fund effort per 18 to 24 year old in the population, after adjusting for inflation, has increased by 55 percent for UC, 39 percent for CSU, and 45 percent for the community colleges since 1972-73.

In conclusion, although outlays for higher education have varied year-to-year since 1972, the amount of inflation-adjusted General Fund and local property tax resources proposed for 1997-98 per FTE is approximately equal to the amount spent in the early 1970s. The budget proposal is 1 percent higher than the average expenditure during the past 25 years. Measured by how much the state is spending for the college-age population, however, the budget is much more generous than at any time in recent history. Because so many more residents are attending higher education, proposed state and local expenditures per college-age resident are 28 percent higher than the average expenditure since 1972, after adjusting for inflation.

Accounting for Student Fees. Student fees also have increased substantially since 1972-73. After adjusting for the effects of inflation, annual student fees have increased by $390 (from zero) at the community colleges, by over $1,200 (175 percent) at CSU, and by over $2,000 (99 percent) at UC since 1970. Taking the General Fund, local property tax revenue, and fee revenue together, resources for higher education are among the highest they have been at any time during the previous 25 years, on any basis.

Spending by Major Program

Figure 4 shows the percentage of total resources that UC and CSU spend on instruction, research, public services, and other programs. We have shown auxiliary enterprises--such as campus stores and dormitories--"below the line" because these enterprises are self-supporting and are only tangentially related to the mission of the universities. We also treat similarly UC's teaching hospitals and the three major energy laboratories it manages in the calculations for the same reasons. The laboratories are funded through a contract with the U.S. Department of Energy. The teaching hospitals obtain most of their funding from payments made by hospital patients and their insurers for medical treatments. We do not include community college spending in the figure because funding for local colleges is based on revenues provided to each school, not support for specific costs.

As the figure shows, UC expects to spend 36 percent of its funding directly on instructional programs. The CSU expects to spend 41 percent of its funding directly on instructional programs. Although difficult to determine precisely, substantial portions of the other activities listed in Figure 4 help support directly or indirectly the instructional mission. That UC expects to spend more on research (25 percent) than CSU (0.1 percent) reflects the fact that the state's Master Plan for Higher Education designates UC as the research university for the state.

Figure 4

Proposed Spending in 1997-98
By Major Program
UC and CSU

(Dollars in Millions)

Program University of California Percent ^a California State University Percent ^a

Instruction $2,279.2 36.0% $1,218.7 41.0%

Research 1,583.2 25.0 4.1 0.1

Public services 227.6 3.6 2.2 0.1

Academic support 677.3 11.0 327.3 11.0

Student services 256.7 4.0 252.3 8.5

Institutional support 385.7 6.0 298.3 13.0

Operation and
maintenance of plant
334.7 5.2 327.1 11.0

Student financial aid 406.7 6.3 308.5 10.4

Other 256.0 4.0 127.2 4.3

Subtotals $6,407.1 100.0% $2,965.6 100.0%

Auxiliary enterprises 496.6 828.1

Federal energy
laboratories
2,299.0

Teaching hospitals 1,874.3

Totals $11,077.1 $3,793.7

^a Percent of subtotal, excluding self-supporting auxiliary enterprises and major energy laboratories and hospitals.

Major Budget Changes

Figure 5 describes the major General Fund budget changes proposed by the Governor for UC, CSU, the community colleges, and Student Aid Commission. The largest changes in the UC and CSU budgets reflect increased funding under the third year of the four-year "compact" between the Governor and the universities. The compact called for General Fund increases averaging 4 percent each year for the three-year period starting in 1996-97. The 4 percent increases proposed under the compact are $78.3 million for UC and $68.7 million for CSU. The budget also proposed additional funds ($37 million for UC and $30.4 million for CSU) to avoid fee increases.

Figure 5
Higher Education Proposed Major General Fund Changes for 1997-98

	University of California	Requested:	$2.2 billion
	University of California	Increase:	$126 million	(+6.1%)

	+$109 million for employee compensation and price increases
	+$5.8 million for added debt costs on lease-payment bonds
	+$10.5 million for increased enrollment

	California State University	Requested:	$1.9 billion
	California State University	Increase:	$68 million	(+3.7%)

	+$61 million for employee compensation and price increases
	+$12 million for building maintenance ($8.5 million) and continued campus development ($3.5 million)
	+$14.4 million for increased enrollment
	+$9.5 million for added debt costs on lease-payment bonds

	-$45 million to eliminate one-time carryover funds in 1996-97

	California Community Colleges, Local Assistance	Requested:	$1.8 billion
	California Community Colleges, Local Assistance	Increase:	$142 million	(+8.6%)

	+$80 million for a 2.79 percent COLA
	+$67 million for enrollment growth
	+$21 million for debt costs on lease-payment bonds
	+$53 million for special services for students on welfare

	-$35 million to eliminate one-time 1996-97 spending
	-$55 million offset for property tax and student fee revenues

	Other Programs	Requested:	$295 million
	Other Programs	Increase:	$30 million	(+11%)
	+$10 million to the Student Aid Commission to increase the maximum Cal Grant award for new enrollees at independent and proprietary colleges

Enrollment

As Figure 6 shows, the budget proposes higher education full-time-equivalent student enrollments of 1.4 million, or 1.9 percent over the budgeted enrollments for the current year. The budget projects a 1 percent increase for both UC and CSU, a 2.4 percent increase for CCC, and an 8.3 percent enrollment decline for Hastings.

Figure 6
Higher Education Full-Time Equivalent Students 1995-96 Through 1997-98

	Actual 1995-96	Budgeted 1996-97	Proposed 1997-98	Percent Change Over 1996-97

University of California
Undergraduate	115,765	113,000	114,200	1.1%
Postbaccalaureate	411	400	400	--
Graduate	25,346	26,100	26,400	1.1
Health sciences	12,619	12,000	12,000	--
UC Totals	154,141	151,500	153,000	1.0%
California State University
Undergraduate	218,980	220,635	222,793	1.0%
Postbaccalaureate	14,321	13,710	13,844	1.0
Graduate	20,526	21,156	21,363	1.0
CSU Totals	253,827	255,501	258,000	1.0%
California Community Colleges	870,357	922,578	944,536	2.4%
Hastings College of the Law	1,216	1,308	1,200	-8.3%
Grand Totals	1,315,616	1,324,849	1,354,267	2.2%

The proposed increases for UC and CSU are comparable to growth in the college-age population. The proposed CCC enrollment increase is significantly higher. From 1996 to 1997, for example, the number of 18- to 24-year-old Californians increased by 1.4 percent. Although higher education draws from a larger population, this age cohort accounts for over half of enrollments and is a good predictor of student enrollments from one year to the next.

The budget includes $10.5 million for UC, $14.4 million for CSU, and $67 million for the community colleges, for instruction and other operational costs to accommodate the additional students.

Student Fees

Figure 7 (see page 14) shows student fee levels in public higher education. The budget proposes to maintain undergraduate and graduate fees at the same level for the fourth consecutive year at UC and CSU, and for the fifth consecutive year at the community colleges. The budget proposes to continue increasing fees for various professional schools at UC and Hastings.

We compared the fee levels for CSU and UC with the public institutions the universities use to compare faculty salaries. It shows that UC undergraduate fees are $717, or 15 percent, lower than student fees at its "comparison" institutions. Undergraduate student fees at CSU are $1,360, or 41 percent, lower than fees at its comparison institutions. Community colleges do not have a similar comparison group. However, California community college fees--$390 a year for a full-time student--are the nation's lowest and about one-fourth of the national average for public two-year institutions.

Figure 7

Student Fees
1995-96 Through 1997-98

1995-96 1996-97 Proposed
1997-98
Percent Change

University of California

Undergraduate/graduate $3,799 $3,799 $3,799 --

Professional Students:

Law^a $8,175 $10,175 $10,175 --

Business^a 7,799 9,799 9,799 --

Medicine^a 7,175 8,175 9,175 12
%

Dentistry^a 6,799 7,799 8,799 13

Pharmacy^a 3,799 5,799 6,799 17

Veterinary medicine^a 6,799 7,799 7,799 --

Additional fees, all students:

Undergraduate $340 $367 $367 --

Graduate 836 868 868 --

Additional fee, nonresidents 7,699 8,394 8,984 7

California State University

Undergraduates/graduates $1,584 $1,548 $1,548 --

Additional campus fees 307 351 351 --

Additional fee nonresidents 7,380 7,380 7,380 --

California Community
Colleges^b
$390 $390 $390 --

Hastings College of the Law --

Education and registration fees^a $8,175 $10,175 $10,175 --

Other fees^c 1,033 997 997 --

Additional fee nonresidents 7,699 8,392 8,392 --

^a Fee increases charged to new students. Special phasing arrangements have been made for selected business schools.

^b Based on two 15-credit semesters at $13 per credit unit. Fees waived for students meeting income eligibility requirements.

^c Includes an insurance fee of $738 which can be waived with proof of insurance.

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Figure 1
Higher Education Budget Summary 1995-96 Through 1997-98
(In Millions)
	Actual 1995-96	Estimated 1996-97	Proposed 1997-98	Change from 1996-97
	Actual 1995-96	Estimated 1996-97	Proposed 1997-98	Amount	Percent

University of California
General Fund	$1,917.7	$2,060.3	$2,186.0	$125.6	6.1%
Student fee revenue	907.3	949.2	979.7	30.6	3.2
Federal funds	3,353.1	3,419.7	3,556.3	136.6	4.0
Other funds	4,226.4	4,396.4	4,355.1	-41.4	-0.9
Totals	$10,404.5	$10,825.6	$11,077.1	$251.4	2.3%
California State University
General Fund	$1,629.7	$1,825.4	$1,893.8	$68.4	3.7%
Student fee revenue	568.8	564.1	569.6	5.5	1.0
Federal and other funds	1,085.6	1,356.0	1,330.4	-25.6	-1.9
Totals	$3,284.2	$3,745.5	$3,793.7	$48.3	1.3%
California Community Colleges
General Fund	$1,472.7	$1,644.8	$1,786.8	$142.0	8.6%
Local property tax revenue	1,348.1	1,369.2	1,415.8	46.6	3.4
Student fee revenue	166.9	171.3	175.4	4.1	2.4
Other funds	186.3	159.2	159.8	0.6	0.4
Totals	$3,174.0	$3,344.5	$3,537.8	$193.3	5.8%
Hastings College of the Law
General Fund	$12.0	$12.3	$12.3	--	--
Student fee revenue	8.7	12.3	12.6	0.3	2.8%
Other funds	5.6	6.1	5.6	-0.5	-8.9
Totals	$26.4	$30.7	$30.5	-$0.2	-0.7%
Student Aid Commission
General Fund	$236.8	$264.8	$295.1	$30.3	11.4%
Federal and other funds	499.7	358.4	359.6	1.2	0.3
State Guaranteed Loan Reserve Fund	150.1	4.9	1.4	-3.5	-72.3
Totals	$736.4	$623.2	$654.7	$31.5	5.1%
Total Higher Education	$17,625.4	$18,569.4	$19,093.8	$524.3	2.8%
General Fund	5,268.8	5,807.6	6,173.9	366.3	6.3
Property tax revenue	1,348.1	1,369.2	1,415.8	46.6	3.4
Student fee revenue	1,691.4	1,736.4	1,777.1	40.7	2.3
Federal and other funds	9,317.1	9,656.3	9,727.0	70.7	0.7

Figure 4
Proposed Spending in 1997-98 By Major Program UC and CSU
(Dollars in Millions)
Program	University of California	Percent ^a	California State University	Percent ^a

Instruction	$2,279.2	36.0%	$1,218.7	41.0%
Research	1,583.2	25.0	4.1	0.1
Public services	227.6	3.6	2.2	0.1
Academic support	677.3	11.0	327.3	11.0
Student services	256.7	4.0	252.3	8.5
Institutional support	385.7	6.0	298.3	13.0
Operation and maintenance of plant	334.7	5.2	327.1	11.0
Student financial aid	406.7	6.3	308.5	10.4
Other	256.0	4.0	127.2	4.3
Subtotals	$6,407.1	100.0%	$2,965.6	100.0%
Auxiliary enterprises	496.6		828.1
Federal energy laboratories	2,299.0
Teaching hospitals	1,874.3
Totals	$11,077.1		$3,793.7

^a Percent of subtotal, excluding self-supporting auxiliary enterprises and major energy laboratories and hospitals.

Figure 7
Student Fees 1995-96 Through 1997-98

	1995-96	1996-97	Proposed 1997-98	Percent Change

University of California
Undergraduate/graduate	$3,799	$3,799	$3,799	--
Professional Students:
Law^a	$8,175	$10,175	$10,175	--
Business^a	7,799	9,799	9,799	--
Medicine^a	7,175	8,175	9,175	12 %
Dentistry^a	6,799	7,799	8,799	13
Pharmacy^a	3,799	5,799	6,799	17
Veterinary medicine^a	6,799	7,799	7,799	--
Additional fees, all students:
Undergraduate	$340	$367	$367	--
Graduate	836	868	868	--
Additional fee, nonresidents	7,699	8,394	8,984	7
California State University
Undergraduates/graduates	$1,584	$1,548	$1,548	--
Additional campus fees	307	351	351	--
Additional fee nonresidents	7,380	7,380	7,380	--
California Community Colleges^b	$390	$390	$390	--
Hastings College of the Law				--
Education and registration fees^a	$8,175	$10,175	$10,175	--
Other fees^c	1,033	997	997	--
Additional fee nonresidents	7,699	8,392	8,392	--

^a Fee increases charged to new students. Special phasing arrangements have been made for selected business schools.
^b Based on two 15-credit semesters at $13 per credit unit. Fees waived for students meeting income eligibility requirements.
^c Includes an insurance fee of $738 which can be waived with proof of insurance.

LAO Analysis of the 1997-98 Budget Bill Higher Education Overview