LAO 2004 Budget Analysis: Higher Education Introduction

The Governor's budget proposes a $197 million reduction in General Fund expenditures for higher education in 2004-05. This represents a 2.3 percent decrease from the revised 2003-04 amount. However, the Governor's proposal assumes the enactment of student fee increases which, when coupled with changes in all other revenue sources, would increase total higher education funding by $802 million, or 2.6 percent. Pursuant to legislative intent expressed in the 2003-04 budget package, the Governor's proposal includes no funding for enrollment growth and no funding for cost-of-living adjustments at the state's public universities. It does, however, include funding for 3 percent enrollment growth at the California Community Colleges. The budget also proposes various changes to student financial aid programs, including reductions in the size of aid awards and tighter income restrictions on eligibility.

Total Higher Education Budget Proposal

As Figure 1 shows, the 2004-05 budget proposal provides a total of $32.3 billion from all sources for higher education. This amount is $802 million, or 2.5 percent, more than the Governor's revised current-year proposal. The total includes funding for the University of California (UC), the California State University (CSU), the California Community Colleges (CCC), Hastings College of the Law, the California Student Aid Commission (CSAC), and the California Postsecondary Education Commission. Funded activities include instruction, research, and related functions, as well as other activities, such as providing medical care at UC hospitals and managing three major U.S. Department of Energy laboratories. The Governor's current-year estimates include a variety of technical adjustments and assume implementation of various mid-year proposals.

Figure 1 Higher Education Budget Summarya
(Dollars in Millions)
			Change
	Revised 2003‑04	Proposed 2004‑05	Amount	Percent
University of California
General Fund	$2,868.2	$2,670.5	-$197.7	-6.9%
Student fee revenue	1,084.1	1,271.0	186.9	17.2
Federal and other funds	14,068.2	14,498.8	430.6	3.1
Totals	$18,020.5	$18,440.4	$419.9	2.3%
California State University
General Fund	$2,630.1	$2,409.6	-$220.5	-8.4%
Student fee revenue	1,016.5	1,165.6	149.1	14.7
Federal and other funds	2,191.1	2,180.1	-11.0	-0.5
Totals	$5,837.6	$5,755.2	-$82.4	-1.4%
California Community Colleges
General Fund	$2,252.8	$2,423.0	$170.2	7.6%
Local property tax revenue	2,114.8	2,264.4	149.7	7.1
Student fee revenue	265.1	356.1	91.0	34.3
Federal and other funds	1,579.3	1,579.2	-0.1	�
Totals	$6,212.0	$6,622.8	$410.8	6.6%
Student Aid Commission
General Fund	$630.2	$684.0	$53.8	8.5%
Federal and other funds	665.2	664.6	-0.5	-0.1
Totals	$1,295.3	$1,348.6	$53.3	4.1%
Otherb
General Fund	$13.1	$10.1	-$3.0	-22.6%
Student fee revenue	18.5	24.6	6.1	32.9
Federal and other funds	17.2	15.6	-1.6	-9.6
Totals	$48.9	$50.3	$1.5	3.1%
Grand Totals	$31,414.4	$32,217.4	$803.0	2.6%
General Fund	$8,394.4	$8,197.2	-$197.1	-2.3%
Property tax revenue	2,114.8	2,264.4	149.7	7.1
Student fee revenue	2,384.3	2,817.3	433.1	18.2
Federal and other funds	18,520.9	18,938.4	417.4	2.3

a General Fund amounts exclude capital outlay and payments on general obligation bonds (see �Capital Outlay� chapter).
b Includes Hastings College of the Law and the California Postsecondary Education Commission.

Major Funding Sources

The 2004-05 budget proposal provides $8.2 billion in General Fund appropriations for higher education. This amount is $197 million, or 2.3 percent, less than proposed current-year funding. The budget also projects that local property taxes will contribute $2.3 billion for CCC in 2004-05, an increase of $150 million, or 7.1 percent, from the revised current-year amount.

In addition, student fee revenue at all the higher education segments account for $2.8 billion of proposed expenditures. This amount is $433 million, or 18.2 percent, greater than student fee revenue in the current year. This increase is due to proposed fee increases at all three segments, which would backfill roughly half of the proposed General Fund reductions.

Finally, the budget provides $19 billion in other funds—including federal funds, restricted funds, and funds from private sources. The amounts in Figure 1 do not include capital outlay expenditures or the General Fund costs associated with paying off general obligation bonds. These costs are discussed in the "Capital Outlay" chapter of this Analysis.

Funding by Segment

For UC, the budget proposal provides General Fund appropriations of $2.7 billion, which is a net $198 million, or 6.9 percent, less than the Governor's revised current-year estimate. This reduction is almost completely offset by the proposed increase in student fee revenue. When student fees and all other fund sources are considered, UC's budget actually increases by $420 million, or 2.3 percent.

For CSU, the budget proposes $2.4 billion in General Fund support, which is a net reduction of $221 million, or 8.4 percent, from the Governor's current-year estimate. Proposed increases in student fee revenue would offset two-thirds of this reduction. When all fund sources are considered, CSU's budget decreases by $82 million, or 1.4 percent.

For CCC, the Governor's budget proposes $2.4 billion in General Fund support, which is $170, or 7.6 percent, above the current-year amount. Incorporating local property tax revenue, the budget anticipates $4.7 billion in Proposition 98 funding, which reflects an increase of $320 million, or 7.3 percent. When student fees and all other fund sources are considered, CCC's budget increases by $411 million, or 6.6 percent.

Major Cost Drivers for Higher Education

Annual base adjustments for higher education funding generally arise from three major factors: (1) enrollment, (2) inflation, and (3) student fee levels. Specifically, these factors influence costs in the following ways:

Enrollment Growth Increases Instructional and Other Costs. For UC and CSU, the state uses a "marginal cost" formula that estimates the added cost imposed by enrolling each additional full-time equivalent (FTE) student. This estimate includes instructional costs (such as faculty salaries and teaching assistants), related educational costs (such as instructional materials and libraries), administrative costs, and student services. Because faculty (particularly at UC) spend part of their time performing noninstructional activities such as research, the marginal cost formula "buys" part of these other activities with each additional student enrolled. A similar approach is used for funding enrollment growth at community colleges. As a practical matter, each additional student is funded at the current per FTE apportionment amount.

Inflation. Higher education costs rise with general price increases. For example, inflation increases the costs of supplies, utilities, and services that are purchased by campuses. In addition, price inflation creates pressure to provide cost-of-living adjustments to maintain the buying power of faculty and staff salaries.

Student Fees. Student fees comprise a portion of total revenue available to the segments. When fees are increased, this creates new revenue that can substitute for General Fund revenue. In other words, fee increases can reduce the level of General Fund support required to maintain a given level of services. Conversely, fee reductions (such as those experienced in the late 1990s) make less revenue available and can create cost pressures on the General Fund. Even when fees remain flat from year to year, the state has usually increased General Fund support to compensate for the reduced buying power of those fees.

Major Budget Changes

Although the Governor's higher education proposal provides for a net General Fund savings of $197 million, this results from a combination of reductions to selected programs, the substitution of new student fee revenue for General Fund support, and General Fund augmentations in several areas. Figure 2 shows the major General Fund budget changes proposed by the Governor for the three segments.

Figure 2 Higher Education Proposed Major General Fund Changes

	University of California	Requested:	$2.7 billion
	University of California	Decrease:	$198 million	(-6.9%)

	*Base Budget Reductions:* Total of $360 million in allocated and unallocated reductions, partly offset by a $196 million increase in student fee revenue.
	*Base Budget Augmentations:* Net total of $162 million in base augmentations and adjustments, including $80.5 million to restore an unallocated one-time reduction in 2003‑04 and $34.4 million for increased health costs.
	*Enrollment Reduction:* Assumes a 10 percent reduction in enrollment of new freshmen. These freshmen would be redirected to community colleges.
	*Student Fees:* Increases of 10 percent for undergraduate fees, 40 percent for graduate fees, 20 percent for nonresident tuition, and professional school fee will rise to offset proposed General Fund reductions.

	California State University	Requested:	$2.4 billion
	California State University	Decrease:	$221 million	(-8.4%)

	*Base Budget Reductions:* Total of $299 million in allocated and unallocated base reductions, partly offset by a $102 million increase in student fee revenue.
	*Base Budget Augmentations:* Net total of $78 million in base augmentations and adjustments, including $69.5 million to restore a one-time unallocated cut in 2003‑04.
	*Enrollment Reduction:* Assumes a 10 percent reduction in new freshmen. These students would be redirected to community colleges.
	*Student Fees:* Increases of 10 percent for undergraduate fees, 40 percent for graduate fees, and 20 percent for nonresident tuition.

	California Community Colleges	Requested:	$2.4 billion
	California Community Colleges	Increase:	$170 million	(+7.6%)

	*Base Budget Reductions:* Total of $236 million in base reductions, including $143 million to be backfilled with increased local property tax revenue and $91 million to be backfilled with new student fee revenue.
	*Base Budget Augmentations:* A total of $406 million, including $121 million for enrollment growth, $80 million for equalization, and $200 million to restore a reduction that resulted from the 2003‑04 Proposition 98 deferral.
	*Enrollment Growth:* Funds an increase of 33,120 full-time equivalent students (about 3 percent) from the budgeted 2003‑04 level. In addition, the budget includes $4 million specifically to fund further growth in noncredit enrollment.
	*Student Fees:* Increase in enrollment fee from $18 per unit to $26 per unit (44 percent). Students with baccalaureate degrees would pay a higher fee of $50 per unit.

Enrollment Growth

In keeping with legislative intent expressed in the 2003-04 budget package, the Governor's proposal provides no new funding for enrollment growth at UC or CSU. In fact, the Governor proposes to reduce new freshman enrollment at UC and CSU by 10 percent, with the foregone enrollment being redirected to CCC. Partly in recognition of this diverted enrollment, the Governor's budget provides funding for enrollment growth of 3 percent at CCC, which is considerably higher than the statutory growth rate of 1.8 percent. Figure 3 shows enrollment changes at the three segments. We discuss proposed enrollment levels in more detail later in this chapter.

Figure 3 Higher Education Enrollment
Full-Time Equivalent (FTE) Students
				Change
	Actual 2002‑03	Budgeted 2003‑04a	Proposed 2004‑05	Amount	Percent
University of California
Undergraduate	152,527	159,242	154,896	-4,346	-2.7%
Graduate	30,531	31,020	32,166	1,146	3.7
Health Sciences	13,130	12,366	12,366	�	�
UC Totals	196,188	202,628	199,428	-3,200	-1.6%
California State University
Undergraduate	276,607	290,665	286,865	-3,800	-1.3%
Graduate/Postbacalaurate	54,746	53,348	53,348	�	�
CSU Totals	331,353	344,013	340,213	-3,800	-1.1%
California Community Colleges	1,128,954	1,104,030	1,137,150	33,120	3.0%b
Hastings College of the Law	1,262	1,250	1,250	�	�
Grand Totals	1,657,757	1,651,921	1,678,041	26,120	1.6%

a These reflect the enrollment levels assumed in the 2003‑04 Budget Act. However, UC and CSU plan to enroll fewer students as they redirected some enrollment funding to offset reductions in other areas.
b In addition to this general growth funding, the Governor�s budget includes $4 million to fund additional noncredit FTE students. With this funding included, the Governor�s budget funds a total enrollment increase of about 35,000 FTE students, or 3.2 percent.

Student Fees

The Governor proposes fee increases at all three segments. For UC and CSU, he proposes fee increases of 10 percent for undergraduate students, 40 percent for graduate students, and 20 percent in the tuition surcharge imposed on nonresident students. The budget reduces General Fund support for professional school students with the expectation that the segments would recoup some or all of these reductions by increasing professional school fees. Although the Governor assumes that professional school fee increases would vary by type of degree, the average fee increase required to backfill the General Fund reduction would be about 34 percent. For CCC, the Governor proposes a 44 percent fee increase (from $18 to $26 per unit) for most students, with a higher fee of $50 per unit charged to students who already possess a bachelor's degree. The combined effect of all these fee increases is expected to offset the budget's unallocated General Fund reductions. Proposed student fees are shown in Figure 4, and are discussed in more detail later in this chapter.

Figure 4 Annual Student Fees Proposed for 2004‑05a
	Residents		Nonresidents
	Systemwide	Totalb	Tuition	Totalb
University of California
Undergraduates	$5,482	$6,028	$16,476	$22,504
Graduates	7,307	8,931	1,4991	23,922
California State University
Undergraduates	$2,250	$2,776	$10,170	$12,946
Graduates	3,156	3,682	10,170	13,852
California Community Collegesc	$624	$624	$4,470	$5,094
Hastings College of the Law	$17,948	$19,828	$12,799	$32,627

a Governor's proposal reduces General Fund support for professional schools by 25 percent. While the budget assumes this reduction would be backfilled by fee increases, it does not specify how the various fees would increase.
b Includes campus-based fees (weighted average for UC and unweighted average for CSU).
c Average full-time course load of 24 units.

The Governor also proposes a new "long-term fee policy," where undergraduate and graduate fees at UC and CSU would be adjusted annually to reflect the change in per-capita personal income. The annual increase could exceed this level "to address unforeseen fiscal needs," but in no event would increase by more than 10 percent in one year. The Governor proposes that the 10 percent threshold immediately be imposed on undergraduate fees, but that graduate fees be exempt from this limit until they reach a target level equal to 150 percent of undergraduate fee levels. The Governor proposes no fee policy for community college fees.

Student Financial Aid

The Governor's budget provides $684 million in General Fund support to CSAC, primarily for the Cal Grant programs. This reflects an increase of $53.8 million from the revised current-year level. The increase in funding is largely due to a projected increase in the number of Cal Grant awards. At the same time, the Governor's proposal includes several cost-saving measures, including (1) reducing the size of the maximum Cal Grant award for students at private institutions by about 44 percent, (2) not increasing Cal Grant awards for students at UC and CSU to reflect proposed fee increases, and (3) reducing the income eligibility threshold by 10 percent for all new Cal Grant recipients.

The Governor's proposal also reduces from 33 percent to 20 percent the amount of new student fee revenue that UC and CSU divert to their own institution-based financial aid programs. As a result of this proposal, UC and CSU would divert $43 million less to institutional financial aid, thus achieving a like amount of General Fund savings.

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

Higher Education Introduction