LAO 2003-04 Budget Analysis: Education

Legislative Analyst's Office

Analysis of the 2003-04 Budget Bill

Intersegmental: Student Fees

In response to the Governor's proposed mid-year reductions in December 2002, the University of California (UC) and the California State University (CSU) adopted resident student fee increases for the spring 2003 term—the first such increase in eight years. The Governor's budget assumes even steeper fee increases in the budget year. The budget assumes that mandatory resident student fees at UC and CSU will increase by slightly more than one-third over the two years. The Governor's proposal offers no rationale for this level of fee increases. Neither does it indicate expectations concerning fee adjustments beyond the budget year. While we believe student fee increases at UC and CSU are appropriate, we also believe any increases should be moderate and decided within the context of a rational fee policy. In this analysis, we (1) evaluate a recent California Postsecondary Education Commission proposal regarding fees, (2) discuss the need for an explicit student fee policy, (3) recommend the adoption of short-term and long-term fee policies, and (4) recommend the adoption of smaller student fee increases than those assumed by the Governor for the budget year.


In our Analysis of the 2002-03 Budget Bill (see pages E-179 through E-190), we recommended that the Legislature enact in statute a consistent fee policy that provides for an appropriate sharing of educational costs between students and the state, and which preserves student access to higher education. We offered the following basic policy guidelines to serve as the basis of a new fee policy: students should contribute towards their educational cost, fees should change moderately over time, and fees should be adjusted annually. We also provided two options for establishing a new fee policy: (1) setting fees as a fixed percentage of educational costs or (2) setting fees at the average of the segments' national comparison institutions.

While the Legislature did not enact a fee policy in statute when it adopted the 2002-03 budget, the Legislature did adopt supplemental report language directing the California Postsecondary Education Commission (CPEC) to convene various parties to develop long-term student fee policy recommendations for students at UC and CSU. The commission held a series of meetings in the summer and fall of 2002 and adopted recommendations for a long-term resident student fee policy framework in December 2002. We discuss CPEC's fee policy recommendations further below.

Governor's Fee Proposal

Current-Year Fee Increases. To backfill some of the Governor's proposed mid-year reductions to the segments' budgets, the UC and CSU governing boards have implemented mid-year fee increases effective in spring 2003. Figure 1 displays fees at UC and CSU in 2001-02, in 2002-03 (assuming the full-year effect of the spring 2003 increase), and in 2003-04 (assuming the further increase noted in the Governor's budget).

Figure 1

Proposed UC and CSU Systemwide Fees a





2003-04 Proposed

Change From 2001-02
























































a   For UC amounts include educational fee and registration fee. For CSU amounts include systemwide fee. Students also pay campus-based fees.

b   Fee that would result if spring 2003 increases were applied to all quarters/semesters of the academic year.

Governor's Proposal Assumes Significant Fee Increases at UC and CSU in the Budget Year. The Governor's budget assumes additional student fee increases in the budget year. As Figure 1 shows, when combined with current-year fee increases, mandatory resident student fees at UC would increase 35 percent over the two years, rising by $1,200 for undergraduates and $1,260 for graduates. At CSU, the two-year increase in resident systemwide fees would be 38 percent, increasing $540 for undergraduates and $576 for graduates.

Although the Governor's budget assumes specific fee increases, it is not known whether the UC Regents or CSU Trustees will actually implement this level of increases. If the governing boards adopt a lower fee increase, then the segments may need to make additional cuts to their programs beyond those envisioned by the Governor to compensate for the reduced fee revenue.

The Governor's proposal indicates that the additional student fee revenue resulting from the combined fee increases in 2003-04 will be used to partially backfill unallocated General Fund reductions of $214 million for UC and $143 million for CSU. In effect, the Governor proposes what amounts to a substitution of fee revenue for General Fund support, thus reducing General Fund expenses while still providing programmatic support.

CPEC Recommendations for Long-Term Resident Student Fee Policy

In December 2002, CPEC adopted a report with its recommendations for a long-term resident student fee policy as directed by SRL. The document offers policy principles to guide the future setting and adjustment of mandatory systemwide resident student fees at UC and CSU and a framework for implementing the principles. Figures 2 (see next page) and 3 (see page 19) summarize selected policy principles and the framework for implementation from the CPEC report.

Commission's Fee Policy Recommendations Provide a Reasonable Starting Point for the Enactment of a Long-Term Fee Policy. We believe that many of the commission's recommendations on policy principles and implementation framework deserve serious consideration by the Legislature. We agree with CPEC's recommendations that a fee policy should clearly state which entities are responsible for setting fees, provide for an annual adjustment to fees, and state that there shall be no substitution of General Fund support for expected fee increases. In addition, we agree with CPEC's stated policy principles stating that (1) adjustments should be gradual, moderate, and predictable; (2) differential fees (for graduate and professional schools) are appropriate; (3) adequate notice to students should precede any fee increase; and (4) any negative impact on financially needy students should be mitigated. 

Potential Outcome of Proposed Policy Unknown. Under current law, the segments have the authority to set their own student fees. The CPEC's recommendations would have the segments adopt their own explicit methodologies for adjusting fees, albeit in consideration of certain principles. However, the Legislature is responsible for appropriating much of the segments' budgets, and these appropriations assume certain levels of fee revenues. Therefore, we believe that the Legislature should enact a fee policy that specifies a methodology for adjusting fees.

Figure 2

Summary of Selected Policy Principles From CPEC Student Fee Policy


·  Cost a Shared Responsibility. The total cost of a public postsecondary education shall be a shared responsibility of students, families, and the State of California.

·  Gradual, Moderate, Predictable Changes. So that students and their families can better prepare financially for college expenses, any changes in resident student fees should be, to the extent possible, gradual, moderate, and predictable.

·  Consider Total Costs and Ability to Pay. Changes in resident student fees should consider both the total cost of educating a student as well as published indices reflecting families’ ability to pay, such as the percentage change in per capita personal income.

·  Protect Financially Needy Students. As changes in resident student fees and financial aid resources are considered, efforts should be employed to mitigate any negative impact on financially needy students.

·  Differential Fees. Students enrolled in graduate and professional programs may be subject to higher student fees.

We recognize that there are various alternate fee methodologies that could be consistent with the broad principles identified by CPEC. Moreover, the Legislature and the segments may require some time to deliberate on these issues. Given the Governor's fee proposal, it would be timely for the Legislature to lay out its preferences on a longer-term fee policy. We discuss below some of our concerns with current practice of setting fees and provide a context for the Legislature to consider in enacting a future fee policy. 

Implicit Student Fee Policy Has Hidden Costs to State, Difficult for Students

In recent years, the state's implicit "policy" concerning higher education fees has essentially been to avoid fee increases if possible. When the state's fiscal condition deteriorates, however, the state has had to implement significant fee increases to offset a General Fund shortfall. In short, changes to student fee levels have been influenced more by the state's fiscal condition than through an established policy for sharing the cost of higher education between the state and students. In general, fees have been subject to "boom or bust" cycles, growing most rapidly during recessionary periods and declining or staying constant during expansionary periods. For students attending college during the bust periods, they and their parents have had difficulties planning for and dealing with huge increases in fees.

Figure 3

Summary of CPEC’s Proposed Framework For Implementation


·  Segments Responsible for Adjusting Fees. The UC and CSU bear the primary responsibility for adjusting student fees.

·  Adopt Fee Methodology. The UC and CSU shall each develop and adopt a rational fee methodology.

·  Report on Impact of Methodology. Each university system shall annually report on the impact of their student fee methodology on students.

·  Annually Adjust Fees. The UC and CSU shall annually propose an adjustment to their resident student fees.

·  Advance Notice to Students. Each university system governing board shall act upon any proposed changes in student fees by no later than November 30, and shall notify students of the proposed changes to enable students and their families to better plan financially.

·  Avoid General Fund Backfill. The Governor and Legislature should allow student fees to increase or decrease consistent with the board-adopted methodologies. The Governor and Legislature should avoid using limited state revenues to substitute for proposed changes in fee levels.

·  Follow-Up After Enactments of Budget. If fees need to be changed after enactment of the budget, the governing board shall meet in open public session to act upon the proposed fee change.

Ongoing Cost of State's Decision to "Backfill" Fee Increases. From 1995-96 through 2001-02, there was no increase in mandatory resident student fees at UC and CSU. In order to compensate for the reduced buying power of these fixed fees over time, the state has typically provided additional General Fund support in lieu of annual fee increases. The backfill becomes part of the segment's base and grows at the same rate as state support for the segment. As we noted in last year's Analysis, the cumulative total during the period of the General Fund backfill in UC and CSU's base is $518 million. Thus, while the decision to backfill fees in any particular year may appear not to have an ongoing impact on the segment's budget, there is a significant cumulative effect over time.

Fee Trends in California Contrary to Regional Trends. According to the Western Interstate Commission for Higher Education (WICHE), between 1997-98 and 2002-03 student fees declined by 8.6 percent at UC and 0.1 percent at CSU. Over the same period, the 15 western states for which WICHE compiles data experienced an average increase of 18.1 percent.

New Financial Aid Guarantee Insulates Needy Students From Fee Increases

The new Cal Grant entitlement program ensures the availability of financial aid to qualified students from low-income families. Cal Grant A awards cover systemwide fees at UC and CSU. The Cal Grant B awards cover the same fees as Cal Grant A (excluding fees for the freshman year of college) and provide recipients with a $1,551 stipend for other expenses for four years of college.

The Cal Grant entitlement and other forms of aid (such as federal Pell Grants) ensure that fees do not pose an obstacle to students from lower income families. Virtually all undergraduate students with parental income below $30,000 (and most with income below $60,000) qualify for Cal Grants or other forms of financial aid. In 2001-02, 37 percent of UC first-time freshmen and 34 percent of CSU first-time freshmen received Cal Grant entitlement awards.

In addition, California's fees are affordable to most upper income students even without financial aid. For example, UC reports that 32 percent of first-time freshmen in 1999 came from families with parental incomes above $90,000. Fee increases are more likely to affect students from middle-income families who do not qualify for the Cal Grants or other financial aid. However, because the Cal Grant A and B programs have a relatively high family-income ceiling ($66,200 for a family of four under Cal Grant A and $34,800 under Cal Grant B), many middle-income students are in fact insulated from the effect of fee increases.

Federal Tax Credits and Deductions Lower Cost of Higher Education for Middle Class. The federal Taxpayer Relief Act of 1997 created the "Hope Scholarship" and "Lifetime Learning" tax credits for higher education fees. Figure 4 displays the key features of these tax credits. These credits lower the after-tax price of higher education fees for most middle-income students (or their parents) by lowering their federal tax liabilities. Unlike deductions, tax credits are subtracted directly from an individual's federal income tax liability on a dollar-for-dollar basis. For example, in the current year, a full-time CSU student would pay about $1,998 in fees. If, however, the student (or their parents) qualified for the full amount of the Hope credit, the after-tax cost of those fee would be $498. In addition to tax credits, there are several tax deductions for tuition expenses and student loans. The existence of various federal tax credits and deductions effectively lowers the cost of higher education for students and their families.

Figure 4

Key Features of Federal Tax Credits for Higher Education


Hope Scholarship

Lifetime Learning


First two years of

postsecondary education.

Any undergraduate, graduate, or professional study.

Enrollment status

Must be at least half-time.

Enrolled in at least one postsecondary course.

Qualifying expenses

Tuition and related fees.

Tuition and related fees.

Credit amount

100 percent of first $1,000 and 50 percent of next $1,000.

20 percent of qualified expenses up to $10,000.b

Maximum credit or deduction amount

$1,500 per student.

$2,000 per family.b

Income limits

Single filer:a $41,000 to $51,000 Joint return: $82,000 to $102,000

Single filer:a $41,000 to $51,000 Joint return: $82,000 to $102,000

a  Amount of credit is gradually phased-out within these income levels. The income phase-out amounts are indexed to inflation.

b  Effective 2003.

Students and Families Pay Only a Small Share of Costs

Although UC and CSU fees have increased from their levels in the 1980s, they still cover only a small portion of the costs the state incurs to provide educational services to undergraduate and graduate students. Moreover, student fees remain well below the national average.

Student Fee Revenue a Relatively Small Share of State Support. Student fees at UC and CSU cover a small portion of the costs the state incurs to provide educational services to students. In the current year total student fee revenue at UC constitutes less than 18 percent of instruction-related funding. At CSU, it constitutes approximately 22 percent. Under the Governor's proposal, this percentage would grow to 22 percent for UC and 27 percent for CSU in the budget year.

Fees Are Well Below the Segment's National Comparison Institutions. As Figure 5 shows, total student fees at UC and CSU are substantially lower than the average of the public and private institutions to which UC and CSU are compared when evaluating faculty salaries. The average resident student fee at UC's four public comparison institutions in 2002-03 is $6,074, which is almost one-third greater than UC's. The UC fee is well below the $27,563average of fees charged by its four comparison private institutions—Yale, Harvard, Massachusetts Institute of Technology, and Stanford. At CSU's 15 public comparison institutions, the average student fee of $4,584 is more than double CSU's 2002-03 fee of $1,998. 

Low Fees Can Hinder Informed Choices and System Accountability. As noted above, student fees cover only about one-fifth of UC's and CSU's cost of providing educational services. This level of subsidy can distort decision-making. For example, fees that are too low encourage some students to choose to attend that particular public university over other options, such as attending a private institution or enrolling in lower division courses at a community college. This is problematic because the state effectively subsidizes students who would have attended college without the subsidy. Low fees may also result in students' willingness to tolerate a lower level of service from the segments (such as poor quality instruction or inappropriately large class size). As a result, the segments' accountability is diminished.

LAO Alternative to Governor's Fee Increase

The budget proposes increasing resident student fees at the segments by about 35 percent within one calendar year. The Governor's fee proposal continues the boom and bust cycle where changes to student fees are influenced by the availability of state funds in any given year rather than through a deliberate, explicit policy for sharing the costs of higher education between the state and students. Without such a policy, the state loses the ability to promote state objectives and facilitate planning in higher education.

Given the significant increases in financial aid (state and federal) over recent years, we believe it is appropriate for the state to reexamine and make adjustments to the fee levels at UC and CSU. We also believe, however, that increases should be considered in the context of an ongoing fee policy, in addition to being moderate, predictable, and gradual.

LAO Budget-Year Proposal. We propose a budget-year fee increase that is more moderate than the Governor's proposal. Specifically, we recommend that the Legislature increase mandatory resident student fees at UC and CSU for undergraduates by 15 percent, rather than 25 percent, in the budget year. In addition, we propose a 20 percent increase in graduate fees at UC rather than the Governor's proposed 25 percent. Our proposal accepts the Governor's proposal to increase CSU graduate fees by 20 percent. While the increases for graduate students are higher than those for undergraduates, we feel that this is justified for two reasons. First, the cost of providing graduate education is typically higher than undergraduate education. Second, the economic returns to graduate education are usually higher than undergraduate education.

Our lower level of fee increases would be easier for students and their families to accommodate in the coming fall. At the same time, it would provide UC and CSU with about the same amount of fee revenue for backfilling proposed General Fund reductions. This is because we recommend that the segments direct a much smaller amount of new fee revenue to institutional financial aid than the amount assumed by the Governor. (We discuss this recommendation in detail in the "Financial Aid" section of this chapter.)

Fee Adjustments Beyond the Budget Year. In addition to budget-year fee increases, we recommend that the Legislature adopt an explicit long-term fee policy that sets a specified target level. One of the most important issues for the Legislature and the segments to resolve is the basis for the target level. In last year's Analysis, we provided two options: (1) setting fees as a fixed percentage of educational costs or (2) setting fees at the average of the segments' national comparison institutions. We continue to believe that either option is appropriate.

In order to help students and their families plan, we recommend that the Legislature specify future fee increases in advance. For example, the Legislature could adopt a fee policy that increased UC and CSU undergraduate fees by 10 percent, and UC and CSU graduate fees by 15 percent each in 2004-05 and 2005-06. Under such a policy, fees would increase gradually and predictably, without compromising affordability. 

Adjust Fees Annually. After reaching the target fee level, we recommend adjusting fees annually to reflect changing costs or inflationary effects. For example, fees could be linked to an inflationary index such as the change in per capita income or the state and local deflator. This would ensure that fees retain their buying power for the segments, and would ensure students of gradual, predictable, and moderate increases.

Another alternative is to adjust fees at the same rate as the growth of the General Fund portion of the segment's budget. For example, if the budget proposed a 7 percent increase for UC, it would also have to raise fees by 7 percent. This approach would give students and their families a strong stake in the process, helping to hold the segments more accountable for delivering services in a cost-effective way.


There is no one correct fee policy; the Legislature has many reasonable options from which to choose. However, we believe that controversy about the specific mechanics of a policy has prevented the state from adopting and maintaining a consistent rational fee policy. We recommend (1) more moderate fee increases in the budget year, (2) further adjustments in future years to either make fees more comparable to the segments' national comparison institutions or represent a larger share of support for postsecondary education, and (3) specifying a mechanism for annual adjustments once a reasonable target fee level is reached.

In conclusion, we believe our recommendation would help students and the segments to plan in the budget year and beyond by providing moderate and predictable fee increases. We also believe that UC and CSU would continue to be affordable under our fee proposal. Financially needy students would be unaffected by the increases under our proposal because their fees are typically covered through financial aid, such as Cal Grants.

Return to Education Table of Contents, 2003-04 Budget Analysis