Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Intersegmental: LAO Alternative Budget Proposal

The Governor's higher education proposal would increase total higher education funding from all fund sources by $447 million (1.5 percent) from the revised 2002-03 level. For General Fund appropriations only, it would reduce funding by about $890 million (9.8 percent). It also would backfill about two-fifths of this reduction with revenue from student fee increases. Given the state's fiscal situation, we believe that the proposed level of General Fund reductions is appropriate. However, we believe that the same level of General Fund savings could be achieved in a way that provides better outcomes for students, the segments, and the state. In this section we outline the main features of an alternative that accomplishes this for the University of California, the California State University, and the Student Aid Commission. Details of the proposal appear in subsequent sections of this chapter. (We address the Governor's proposal for California Community Colleges, whose funding is subject to Proposition 98, in a separate section of this chapter.)

The Governor's budget for higher education involves a number of interrelated components. Among these are student fees, budgeted enrollment levels, and financial aid. The main features of these components are shown in Figure 1. 

Student Fees

Student Fees Expected to Backfill Most of "Unallocated" General Fund Reductions. As shown in Figure 1, the Governor's proposal would make unallocated General Fund reductions totaling $356.7 million to the University of California (UC) and the California State University (CSU). The Governor's budget assumes that most of these reductions would be backfilled with student fee revenue generated by anticipated fee increases.

Specifically, the Governor has proposed unallocated reductions at UC and CSU of $213 million and $143 million, respectively, from the 2002-03 enacted budget. However, these cuts would exceed the anticipated new fee revenue of $291 million (available after diversion of one-third for financial aid) by about $66 million. The Governor assumes that the segments will accommodate this remaining unallocated cut by diverting resources from other, unspecified areas.

Although student fees at UC and CSU are set by their governing boards, the Governor's budget assumes that they will adopt increases of about 25 percent for most students. The proposed increases would begin in fall 2003, and would be in addition to already enacted increases of 10 percent to 15 percent that take effect in the spring 2003 term. Two-thirds of the revenue from the proposed fee increases would substitute for most of the lost General Fund revenue at the segments. The remaining one-third of the new fee revenue would augment the segments' campus-based financial aid programs.

Enrollment

Budgeted Enrollment to Increase. The Governor's budget proposes increases in budgeted enrollment of 6.9 percent for UC and 7.1 percent for CSU. The proposed enrollment growth at UC and CSU is approximately four times the estimated increase in the college-age population (18 through 24 year olds). It is also almost twice the administration's planning estimates for increases in enrollment demand and about 50 percent more than was requested by the two segments.

Enrollment Growth Is Not "Access." The Governor asserts that the proposed level of enrollment growth at UC and CSU is necessary to minimize the effect of proposed fee increases upon higher education access. However, we believe that access is best promoted by addressing financial and other barriers to higher education, such as the cost of attendance and inadequate academic preparation. Providing additional funding for enrollment in excess of projected demand does little to improve access.

Financial Aid

Financial Aid to Increase. The Governor's proposal assumes that the value of Cal Grant awards for UC and CSU students will be increased to cover the higher fees. In this way, Cal Grant recipients at UC and CSU would not experience any out of pocket expense from the proposed fee increases. The Governor's budget, however, reduces the value of Cal Grant awards by 9 percent for students attending private colleges. As noted earlier, the budget proposal assumes UC and CSU would augment their own financial aid programs by $165 million (using part of the new student fee revenue) to provide their students with additional financial aid support.

LAO Alternative  

We believe that the Governor's proposal properly recognizes the interdependence of these three components of higher education funding. However, we believe that the proposal (1) expects budget-year increases in UC and CSU student fees that are too high, (2) provides an unjustified level of enrollment growth funding, and (3) allocates too much new financial aid funding to UC and CSU.

We offer an alternative budget that addresses these three points while maintaining the same level of General Fund savings proposed by the Governor. The main components of our proposal are outlined in Figure 2 and summarized below. We discuss our proposal briefly below, and in further detail in subsequent sections in this chapter.

Student Fee Increases Should Be Moderate. Our proposal would reduce the magnitude of the assumed student fee increase in the budget year from 25 percent to 15 percent for undergraduates at UC and CSU. It would also reduce the graduate fee increase from 25 percent to 20 percent at UC. Our proposal would not alter the Governor's proposal to increase CSU graduate fees by 20 percent. We believe additional moderate fee increases in subsequent years may be necessary to gradually achieve a more appropriate fee base. At the end of this transition period, fees should be adjusted annually to account for inflation or other changes to cost.

Our proposal would be easier for students and their families to absorb, and is more in line with past expressions of legislative intent that fee increases be gradual. We recommend that the Legislature adopt a clear policy for future fee increases that results in students paying a reasonable share of educational costs and which results in annual adjustments that are moderate and predictable.

Enrollment Growth Should Match Demand. Our proposal would provide UC and CSU with funding for enrollment growth of 4 percent. This is about equal to the administration's own estimates of enrollment demand at the segments, and is only slightly less than what the UC Regents and CSU Trustees approved in their own 2003-04 budget proposals. It is also well above projected growth in the college-age population.

Financial Aid Should Be Adjusted for Fee Increases. Similar to the Governor, we recommend increasing Cal Grant funding to compensate for student fee increases. However, we recommend against the diversion of one-third of new student fee revenue to UC and CSU for their own financial aid programs. Instead, we recommend that the segments only divert the amount necessary to compensate for 4 percent enrollment growth. We also recommend (1) increasing the value of Cal Grant B awards to cover fees for first-year students and (2) maintaining the existing value of Cal Grant awards for students at private colleges. In these ways, our proposal would significantly increase access for needy students.

LAO Proposal Preserves Instructional Programs and Promotes Access

Figure 3 compares the fiscal impact of our proposal with the Governor's. It requires no General Fund resources beyond the Governor's proposed level. Overall, our proposal has the following features that provide additional resources to improve student access, while avoiding additional reductions to instructional programs:

• Provides Lower Student Fees. Our proposal would reduce the 2003-04 undergraduate fee increase from 25 percent to 15 percent. This would be easier for students and their families to accommodate on fairly short notice (fall 2003).
• Funds a Reasonable Level of Enrollment Growth. Our proposal ensures that UC and CSU would receive enough funding to increase budgeted enrollment growth by 4 percent. This is more than twice the projected growth in the college-age population, and is consistent with Department of Finance planning estimates.
• Provides More Flexible, Accountable Financial Aid. Our proposal increases financial aid at the state's Cal Grant program, which is open to all higher education students. This is preferable to providing a similar level of increase at the segments' institutional financial aid programs, which are limited to students in the respective systems. (Our proposal does, however, increase institutional aid budgets to accommodate enrollment growth.)
• Avoids Further Reductions to Instructional Programs. The Governor's proposal makes unallocated General Fund reductions which are partially backfilled by student fee revenue. Our proposal would make $30 million more fee revenue available to backfill the General Fund reductions.

We expand on these recommendations in the following sections.